MDA Ltd

TSX:MDA

Earnings Call Transcript 2023-Q1

[Operator]

Good morning, ladies and gentlemen. Welcome to MDA's conference call and webcast. This call is being recorded on May 12, 2023, at 8:30 a.m. Eastern Time. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has difficulties during the conference, [Operator Instructions]. I'd now like to turn the call over to Shereen Zahawi, Senior Director of Investor Relations at MDA.

[Shereen Zahawi, executive]

Thank you, operator. Good morning, and welcome to MDA's Q1 2023 Earnings Call. Mike Greenley, our CEO; and Vito Culmone, our CFO, will lead today's call and share some prepared remarks before taking your questions. Before we begin, I would like to remind you that today's call will include estimates and other forward-looking information, which may differ from actual results. Please review the cautionary language in today's press release and public filings regarding various factors, assumptions and risks that could cause actual results to differ. In addition, during this call, we will refer to certain non-IFRS financial measures. Although we believe these measures provide useful supplemental information about our financial performance, these measures do not have any standardized meaning under IFRS, and our approach in calculating these measures may differ from that of other issuers and therefore, may not be directly comparable. Please see the company's quarterly report and other public filings for more information about these measures, including reconciliations to the nearest IFRS measures. And with that, it's my pleasure to turn the call over to Mike.

[Mike Greenley, executive]

Thank you, Shereen. Good morning, and thank you to those joining us today to discuss our first quarter 2023 financial results. We are off to a solid start in 2023. The team delivered another strong quarter performance in the first quarter with double-digit growth in revenue and EBITDA as we convert our backlog and continue to meet customer commitments. I'd like to thank and acknowledge the hard work of our employees and their dedication and commitment, which drove these impressive results. With our backlog at a healthy level, following a strong year of contract awards in 2022, the team is laser-focused on execution. We continue to see a significant growth pipeline across our businesses and solid market demand and interest in space technology with both government and commercial customers increasingly recognizing and funding civil and defense programs, which sets us up well given our diversified and differentiated technology portfolio and market exposure. Today, we are reaffirming our full year 2023 revenue guidance of $750 million to $800 million, which represents robust year-over-year growth of approximately 20% at the midpoint of guidance. And our adjusted EBITDA guidance of $145 million to $155 million, representing approximately 19% to 20% adjusted EBITDA margin. For the full year, we expect capital expenditures to be $220 million to $240 million, primarily reflecting growth investments to support CHORUS, our next-generation earth observation constellation and a number of other growth initiatives across our 3 business areas. From a strategy perspective, we remain focused on executing on the priorities we've outlined for our 3 business areas to capitalize on the growth opportunities we see in our end markets. In Satellite Systems, we are investing in new technologies and capabilities to accelerate our transition from analog to digital payloads and building up our high-volume satellite manufacturing capacity to strengthen our position as more low earth orbit or LEO constellation opportunities come to market. Some notable wins there include the Globalstar Award, where MDA was selected as a prime contractor for 17 LEO satellites to support satellite direct to handset functionality, and our work to support the U.S. space development agencies, LEO constellations, both showcase our strategy in action. In robotics and space operations, we are leveraging our global leadership in space robotics innovation and long history of success with Canadarm to win follow-on space agency work, most notably securing the award to develop the Canadarm3 robotic arm, which is destined for NASA's Gateway, a Lunar Orbertine International Space Station. We're also engaging with a full slate of new and exciting commercial opportunities as they emerge to provide both proven technology solutions and on-orbit operational services. And in our Geo Intelligence business, we continue to see robust demand for our Earth Observation data and analytics and are advancing work on MDA's next-generation earth observation constellation, CHORUS, which will provide even greater imaging capabilities and actionable insights for our customers. I'll now quickly step through the financial highlights for the quarter, give you a view on the industry and update on MDA's 3 business areas and then pass it to Vito for a deep dive on the financials. For the first quarter, MDA delivered revenues of $202 million, up 57% year-over-year. Our backlog at quarter end stood at $1.2 billion, a healthy level for the company driven by sizable awards in 2022. Adjusted EBITDA was $48.9 million, representing a solid EBITDA margin of 24%. We generated $46 million in operating cash flow, which was reinvested in the business to drive current and future growth. We ended the quarter with a healthy balance sheet, which gives us the financial flexibility to run the business and invest in our strategic initiatives. This was another strong quarter, directly attributable to the dedication of our team, which has done a tremendous job of supporting our customers and capitalizing on market opportunities as they emerge. Next, I'd like to update you on developments within the broader space market and the opportunity we see for MDA as we look ahead. Following the strong 2022, which saw the global space market expand to USD 424 billion, we saw a continued momentum in the first quarter. Taking our customary tour around the world, there's a few items worth highlighting. Starting in Canada, the Canadian federal government recently announced a series of new space investments and initiatives. In January 2023, the government announced strategic support for the development of domestic commercial space launch capabilities. That was followed up in March as part of budget 2023 with 2 sizable commitments, $1.1 billion over 14 years starting in 2023, '24. And to develop -- sorry, with that, to continue Canada's participation in the International Space Station and $1.2 billion over 13 years, starting in 24.25 to develop and contribute a lunar utility vehicle to assist astronauts on the moon.These back-to-back commitments signal not only speed of the market opportunity before us, but the growing importance of the space economy on a national level. We look forward to working with the Canadian Space Agency and other organizations to realize these new missions. South of the border, we saw meaningful increases in funding requests from both NASA and the Pentagon to fund space programs with the combined civil and defense space budgets now exceeding $60 billion. On the defense side, Pentagon's budget request for USD 30 billion for the U.S. base force represents a 14% year-over-year growth. This reinforces the increased recognition of the vital role that space plays in securing national defense interests. We are seeing greater integration of space-based capability as a routine component of defense and military budgets driven by geopolitical tensions and demand for space-based surveillance and detection systems. In terms of space infrastructure, spacecraft launch activity continued to unfold at a record pace. In Q1 of this year, a total of 869 spacecraft launch globally, an increase of approximately 40% versus the same period last year, with 94% of those speeds craft operated by commercial players and the majority comprised of communication satellites. The higher activity levels are driven primarily by growth in commercial low-Earth orbit constellations. With the spring trade show season in full swing now, we have recently been busy presenting that satellite 2023 in Washington and attending a record conference for the National Space Symposium in Colorado Springs. These industry events continue to demonstrate the robustness of the space industry with significant new program starts and advancements across both government and commercial missions. MDA continues to be in high demand with the customer mission community to discuss how we can provide advanced technology and services to future missions in addition to discussing a wide range of broader partnership opportunities for future on-orbit activity. The surge in lunar interest has been particularly active as of late with a Canadian astronaut officially announced as part of the Artemis 2 mission to the moon in 2024. -- engagement events in both Ottawa and Washington have increased in intensity as a result. All of this activity bodes well for MDA and our future opportunity funnel, which we would characterize as very healthy. Now I'll turn to our 3 business areas. In Satellite Systems, our teams continue to advance multiple requests for communication satellite solutions and for a growing number of Constellation projects, particularly in the low earth orbit segment of the market. Our opportunity funnel remains strong, and we are seeing good activity level from our customers. In terms of notable programs, the team continues to make good progress on advancing the detailed design phase for the Globalstar program, following the successful completion of the preliminary design review for the legal constellation earlier this year. Following a thorough competitive process, MDA was selected as the prime contractor to enhance Global Starlee Constellation through the addition of 17 satellites. This program award is aligned with our strategy to expand our offerings, move up the value chain and to position our company as a prime integrator for Leo Constellations, providing advanced payload capabilities and systems engineering as well as high-volume manufacturing. Moving to our Geo intelligence business. Customer demand for our Earth Observation offering remains robust, and we are seeing increased recognition of the role that commercial earth observation satellites can play to provide near real-time data and analytics to government and private enterprise. We continue to advance work on our next-generation Earth Observation constellation CHORUS, which will include a fourth-generation MDA-built C-band synthetic aperture radar satellite in addition to an expand satellite. Following the conclusion of the mission critical design review in Q4 of last year, the team is currently advancing unit and subsystem level work, including development, test and deliveries, building the ground segment subsystems and detailing Constellation operation plans and processes. Work on the Canadian Surface Combatant program, or CSC, one of our long-term government programs continues to progress in line with the cadence we saw in the previous quarters. MDA is responsible for the design and integration of the electronic warfare system for the ships, which comprises a suite of sensors, including laser warning and electronic systems technologies used to detect aerial threats to help protect the men and women of the rural Canadian Navy. Moving to our Robotics and space operations business. We are seeing good traction and activity levels on both government and commercial fronts. On the government side, we continue to advance the design work on Phase B of the Canadarm3 contract, which MDA was awarded in early 2022. That will see us completing the preliminary design review of Canadarm3 robotic system to be used aboard the NASA Edge Lunar Gateway. The team is making good progress, successfully closing out the systems definition review in Q1. Recent announcement from the government of Canada to allocate incremental funding of $1.1 billion over 14 years to continue Canada's participation in the International Space Station means that Canadarm2 and Dexter, the robotic arms, which MDA built and Canada's contribution to the ISS, we'll continue to be -- to lend a helping hand in supporting multiple tasks and maintenance functions on board the ISS. In terms of future opportunities, Canada's $1.2 billion commitment to develop and contribute a linear utility vehicle to assist astronauts on the moon as part of the country's contribution to NASA's Artemis program, in addition to providing Canadarm3 and NASA's Lunar Gateway signals Canada intent to support human lunar activity. Our team is looking forward to leveraging MDA's long and successful track record to play a meaningful role on all of these missions. Shifting to operations. To support the anticipated revenue ramp-up, we added more than 800 new hires over the last year. Today, more than 2,700 highly skilled MDA staff are powering our growth and giving us the scope and scale to execute on the market opportunities we see emerging. We are also vigilant when it comes to our supply chain, keeping a close eye for potential business disruptions. And so far, these have been manageable. We continue to deploy a number of proactive measures that have served us well. These include designing around known shortages, finding alternatives that are more readily available, ordering materials as early as possible and building up inventory for some components. For new programs, we are ensuring that our supply chain organization has full visibility early in the process to ensure orders are placed promptly and monitor constantly to mitigate delay risks. To recap, we are pleased with our performance this quarter. With momentum building across our operations, our team is energized and we remain laser-focused on our priorities, strong focus on execution, converting opportunities in our funnel and expanding our leadership in core markets while maintaining strong profitability and a healthy balance sheet to help us fund our growth initiatives. With that, I'll hand it over to Vito to walk us through the detailed financials.

[Vito Culmone, executive]

Thank you, Mike, and good morning, everyone. As Mike has alluded to, Q1 was a strong quarter for MDA, and we're quite pleased with how the team is executing. The quarter, we saw strong revenue growth with revenues up 57% year-over-year, slightly ahead of our guidance for the quarter. Adjusted EBITDA margin of 24.2% exceeded our 19% to 20% guidance range and backlog at the end of the quarter stood at a healthy $1.2 billion. Total revenues for the first quarter were $201.9 million. This represents a $74 million increase over the same period last year. The year-over-year increase is driven by higher revenues across all of our businesses with strong contributions from our satellite systems and robotics and space operations business. By business area, revenues in our geo-intelligence business of $51.3 million represented an increase of $2.4 million or 5% compared to Q1 of 2022. That reflected slightly higher work volume related to the CSC program. In Robotics and Space operations, we saw healthy year-over-year growth revenues with revenues of $62.9 million in the latest quarter, and that represented a $20.5 million increase of 48% versus Q1 of the last year. This growth is largely attributable to higher work volume performed on the Canadarm3 program and Arm3program, excuse me. Revenues in Satellite Systems of $87.7 million in the first quarter were $50.6 million or 136% higher compared to the same quarter in 2022. The strong showing was driven by higher levels of activity on a number of programs, including the Global Start program, which was awarded in Q1 of 2022. Gross profit. And as a reminder, gross profit represents our revenues, less our cost of revenue, which includes material labor, allocated overhead, SRED credits and depreciation. For Q1, gross profit was $67.2 million, representing a $5.5 million or a 9% increase over the same period last year. Gross margin in Q1 of 2023 was 33% compared to 35% for the same period in 2022 after excluding the impact of ITCs recorded in Q1 of 2022 related to the resolution of historical claims. This is in line with our expectations as the company's program mix evolves. As discussed in previous quarters, we do anticipate the mix of programs in 2023 to cause a slight drop in gross margins as we make our way through the year. Q1 operating expenses of $40.7 million were in line with last year's metric of $38.4 million, reflecting disciplined cost control and a steady pace of R&D investment as we advance our development work on CHORUS, our next-generation earth observation constellation and other proprietary technology initiatives. In the latest quarter, SG&A expenses represented 8% of revenues compared to 11% in Q1 of '22 due to higher absorption -- overhead absorption. Adjusted EBITDA in the in the latest quarter of $48.9 million compared to $44.5 million in Q1 of 2022, reflect, of course, higher work volumes across all of the businesses. Adjusted EBITDA margin was 24.2% in Q1 of 2023 compared to 21.6% in the same period last year after excluding for that historical ITC claims resolution that I described earlier. The increase in adjusted EBITDA margin reflects healthy operations and disciplined SG&A cost control. Backlog, we ended the quarter with $1.2 million in backlog, a healthy level for the company following a strong year of contract awards in 2022, with approximately 85% of this year's revenue currently in backlog, we have good revenue visibility as our teams continue to execute. Turning to capital expenditures. We remain focused on making the right investments in the business to support our strategic growth initiatives. Q1 of 2023, we spent $41 million on gross capital expenditures, up from $37 million last year as we continue our development work on course and other growth initiatives. Growth CapEx for the quarter was $36 million compared to $35 million in Q1 2022. Cash from operations during the quarter was a very healthy $46 million compared to $15 million in Q1 of 2022. This year-over-year increase was driven by higher net income and positive working capital contributions in Q1 of 2023 versus the prior quarter. Free cash flow was $5 million in the latest quarter. Free cash flow after adjusting for our growth CapEx was $42 million in Q1 of 2023.  Moving on to our balance sheet. We ended the quarter with a strong financial position. Mike has alluded to this, our net debt at the end of the quarter stood at $201 million. We have available liquidity of over $300 million, and our net debt to trailing 12-month adjusted EBITDA ratio was 1.2x, -- very healthy balance sheet. In summary, this was another strong quarter of execution directly attributable to our team's hard work and dedication. Turning to outlook quickly. As Mike noted in his remarks, we're reaffirming our 2023 revenue target of $750 million to $800 million, which represents year-over-year growth of approximately 20% at the midpoint. We continue to expect full year adjusted EBITDA to be $145 million to $155 million, representing approximately 19% to 20% adjusted EBITDA margins. We are reaffirming our expectations that CapEx will be $220 million to $240 million in 2023, primarily reflecting growth investments that support CHORUS and the previously outlined growth initiatives across our 3 business areas. In terms of Q2 of 2023, we expect revenue to grow by approximately 25% compared to prior year levels as we continue to execute on our backlog. With a number of large programs now in backlog, our book of business is strong. We remain focused on executing well on our customer commitments and leveraging our capabilities and technology to grow profitably in core and emerging markets in line with our long-term plan. Mike, I think with that, I'll turn it back to you.

[Mike Greenley, executive]

Thank you, Vito. With that, we'll open it up to questions.

[Operator]

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Doug Taylor from Canaccord Genuity.

[Doug Taylor, analyst]

Congrats to a strong start to 2023. The quarter was ahead of guidance on the top line. Q2 guidance is also a bit ahead of expectations. And you spoke to a relatively smooth cadence in terms of the quarterly linearity over the course of the year last quarter. So my question is, has there been any work pulled forward this year? Or are you building in a degree of conservatism versus this current run rate and your expectations for the back half of the year?

[Mike Greenley, executive]

I think right now, we're just like -- we're leaving it in and executing on the projects as we've indicated. There was a bit of activity in nonlabor where you're dealing with materials and subcontracting activities that caused a bit of a burst earlier in the year at the moment. And so we're just -- it's just the first quarter. So we'll let this kind of settle out here as we go through the first and second quarter and then see what the rest of the year looks like.

[Doug Taylor, analyst]

Fair enough. You characterized this year as kind of a year of harvesting the backlog you built last year. You've also got quite an opportunity funnel in a couple of different areas that you mentioned in your prepared remarks. Can you speak to your expectations on ability to start converting that into backlog replenishment towards the second half of this year as we start to think about your ability to demonstrate further growth in '24 and beyond?

[Mike Greenley, executive]

Yes. Certainly, that's going to be the -- it's always going to be the goal, and we're working hard on that in terms of the activity in our pipeline. The first part of that discussion, which is we absolutely are leveraging our backlog to have a solid, predictable year, a very, very high percentage of our revenues for the year. It currently exists in backlog or recurring customer contracts. So we're -- as you can tell from our tone, I think, we're very comfortable with the outlook for the year. We are very busy in our pipeline and look forward to future order opportunities, obviously. The pace of those is always based on customer behavior in terms of -- with commercial customers when they get things organized to award and announce and with government customers taking opportunity through their processes. So the timing is a customer-controlled event, but it would be our absolute objective as we go through the second half of the year to be working towards some -- I forget your word, but anyway, backlog regeneration or backlog continued buildup.

[Doug Taylor, analyst]

Okay. Maybe one more question for -- about that on me. You mentioned a number of Canadian space agency or Canadian government programs and projects, including the Lunar Rover for which the awards have not yet been made. I mean can you speak a little bit more about your aspirations about your -- I think you said meaningful roles, but where you expect MDA's place in those projects could or should be aspirationally? And when you might expect some announcements towards to that effect?

[Vito Culmone, executive]

Yes, sure. Yes, that's fair. There's 2 things that I talked about there, that was in the budget '23. One was the sort of $1 billion on continued operation of the international space station. So there, we have annual recurring revenue that we've been receiving for 20 years, typically. -- to be able to provide operations and maintenance support to the robotic systems on the International Space Station. So these conversations firm not up for the next decade. So our teams will be busy working on proposals to extend our contractual frameworks. I would expect that to be a next year thing. I'd expect we'd work on proposals this year and then maybe next year get a top-up to contracts to keep us going for several more years in line with that commitment of Canada to the international space station. On the Rover, that's a new concept. That's just been announced. And so there's lots to learn about what does the scope of that look like, what are people thinking? Certainly, the space agency has committed to consulting with industry to get inputs and ideas. -- in addition to working with their international partners for inputs and ideas. So that will all be fleshed out here in the coming months, both in terms of scope and in terms of timing, which we don't have any detailed information on. The intent of MDA, to answer the last part of your question or our ambition, our ambitions are always strong on large Canadian-based programs. And so we would be looking to find a leadership role for ourselves in a program of that nature. That's our going in ambition as we embark on learning more about it.

[Operator]

Your next question comes from the line of Ken Herbek from RBC.

[Kenneth Herbert, analyst]

Maybe Mike or Vito, -- was there anything unusual or any specific benefits as we think about the margins in the first quarter. It sounds like as you think about the progression of the second quarter and through the rest of the year that the margins may be compressed to get down to the guidance range. But with the top line growth expected in the second quarter, a little better than initially thought, how do margins sequentially move into the second quarter? And was there anything unusual in the first quarter we should keep in mind?

[Mike Greenley, executive]

Ken, definitely nothing unusual. Otherwise, we would have called that out. So those margins in Q1 stand on their own quite cleanly. As we move forward, you're absolutely right. We're guiding to 19% to 20% on a full year basis. and that's really largely mix-driven, program mix business, particularly as CSC takes a larger percentage of business into the back half of the year, still relatively small relative to our overall sort of revenue mix for 2023, but that would be the highest component of that. I would also say that our operations continue to perform extremely well relative to our expectations. And there's 2 components to that, that I would draw out. And the expectation is that maybe Q1 overperformed relative to the back half of the year, but we'll need to obviously continue to monitor that. And that's in the area of 2 things. First of all, the overall cost performance and overall profitability, really, really, really solid. And thank you to the teams for continue to deliver on the commitments in line with our cost expectations. And the second component I'll draw to is just overhead absorption. So given the robustness of the portfolio here, our utilization in Q1 was quite strong relative to perhaps our plan and our full year expectations. So those will be big drivers of the EBITDA margin as our year continues. We expect those to moderate a little bit in addition to the mix impact. So hopefully, I've given you some color. But we look forward to the quarter and Q2 and providing a more robust update on EBITDA margins as we move forward. But very pleased with Q1 and the full year outlook at this point.

[Kenneth Herbert, analyst]

That's great. And if I could, on your comment regarding cost performance, I'm guessing that's maybe largely supply chain, but are there any other aspects on the cost side where you're seeing a benefit? Or can you provide any more granularity around that?

[Mike Greenley, executive]

Yes. No, that's prudent cost management. That's a great performance by our subcontractors. That's performance across all aspects of estimated cost of completion. FX been a little bit favorable as well relative to our expectations. So nothing other than just the DNA of this organization and the legacy built over several years, several decades is obviously the heritage but also strong performance on an operational perspective. We're midway through some of these large programs, and we're very pleased with the performance and the outlook as we continue to complete these programs.

[Kenneth Herbert, analyst]

Great. And if I could just squeeze in one more. On the Global Star, can you contract, can you provide an update on just where you are on that and maybe some of the next major milestones we should be thinking about as we go through the rest of '23?

[Vito Culmone, executive]

Yes. So we've completed a preliminary sign review last year. We're in the detailed design now will come up to the final design reviews on that just in terms of key milestones in '23.

[Mike Greenley, executive]

Ken, in respect to, obviously, payments and what not totally current now with Globalstar, so no issue whatsoever.

[Operator]

Your next question comes from the line of Thanos Moschopoulos from BMO Capital Markets.

[Thanos Moschopoulos, analyst]

Congratulations on the strong margin performance. Mike, could you expand on how the commercial pipeline for satellite systems has evolved over the past quarter? I mean you mentioned that you're seeing a strong pipeline, new opportunities. How have things evolved just over the last few weeks in terms of how some of those opportunities are progressing?

[Mike Greenley, executive]

Yes. So I think in terms of the pipeline in general over the quarter, we continue to talk about it as very healthy. I would say that we haven't lost anything out of that pipeline, and we have added some new opportunities. So there's been, I believe, well, at least a couple new LEO constellation opportunities that come into the conversation as we've gone through the last 4 to 6 months. So that's good. It's keeping everybody quite busy.

[Thanos Moschopoulos, analyst]

Great. Regarding the CSP program, you mentioned it's ramping into the back half of the year. Just remind us how long before that program reaches full run rate? Is that still another year or 2 out? Or when should we expect that?

[Mike Greenley, executive]

Yes. we continue to ramp up with 23%. So we have probably like 18 to 20 months out before it's like it's sort of in its stride heading towards production towards those first ship sets, which would happen in the mid-2020s. So that's correct.

[Thanos Moschopoulos, analyst]

Vito, on cash flow, obviously, a strong quarter this quarter. As we look out through the rest of the year, any expected working capital swings we should think of? Or should it align pretty closely with your EBITDA?

[Vito Culmone, executive]

Yes, Thanos, thank you for the question. We generate strong cash from operations. And if you look at Q1, the conversion rate on cash from operations, pre-interest vis-a-vis the EBITDA was a very, very strong quality of earnings. -- quarter. The shred add-back was minimal at $7 million, and our working capital contribution was only $7 million. So the strong operating cash flow in Q1 was largely driven by just strictly by the quality of earnings. As we look forward to the balance of the year, your question was specifically around working capital. I don't expect any major swings and/or requirements. In fact, any time you're looking at working capital, you can obviously have some swings intra-quarter or quarter-over-quarter. But our working capital over the last -- on the trailing 12 months, including Q1, so the trailing 12 months through the end of March 2023, basically flat from requirements or a use or a proceeds perspective. So you've got a business that's grown 50% in that time period on revenue with an EBITDA that's grown essentially 15% on a trailing 12-month basis. with a working capital that's essentially flat. So I know that's a question we get a lot, and I'm very pleased with that working capital performance over, and we expect that to continue looking out into the next 12 months. And that's driven by, again, disciplined cash management and contractual sort of arrangements with our customers.

[Operator]

Your next question comes from the line of Kristine Liwag from Morgan Stanley.

[Kristine Liwag, analyst]

Mike, Vito, I appreciate that bookings can be lumpy quarter-to-quarter, and it's helpful from your commentary that 85% of revenues for the full year are already in the backlog. For the remaining 15% that you need, can you update on the opportunity pipeline? Is there a large contract or there's a series of small ones that you're expecting?

[Mike Greenley, executive]

For that $15 million that you're talking about, that typically comes from the geo-intelligence business in terms of just the normal blocking and tackling that occurs through the years with recurring orders that come from customers for imagery and/or analytics products. So those have often with in-year sales order and delivery cycle. And that's where that comes from.

[Kristine Liwag, analyst]

I see. And then on CHORUS, can you provide more color on where you are on the program? And what milestones are coming up for the development efforts given the macro backdrop, how much flexibility do you have to potentially moderate CapEx spend if need be? And what are the flex points we should watch out for?

[Mike Greenley, executive]

As it relates to CHORUS, we're past our mission critical design review, like we said in Q4, which means we're in unit design and build now. It's kind of cool to be honest, to go into the factory in Montreal right now and see the units, the pieces of core is starting to come on to the assembly floor and starting to see things coming together. So that's pretty nifty. So now we'll go in through the production cycle of that. So in terms of through '23 and '24, it will be continued production. That's an entirely internal project, obviously, to ask -- to answer your question on pace of spend. So it's a discretionary investment that we're making and leaning in to get that project done. Our posture on that is full steam ahead. It is a highly important development in our business to get CHORUS completed and launched and our customer community is very excited about it. So we're leaning into it.

[Vito Culmone, executive]

The only thing I'd add to that, Christine, is we're quickly approaching the halfway mark of our anticipated cost for CHORUS from a capital perspective. And as Mike has alluded to, that's priority #1 from a capital perspective and the profitability that, that business drives and the rate of investment and the rate of return on this investment is very, very favorable from a value creation perspective. So priority #1 for us.

[Kristine Liwag, analyst]

Great. And if I could sneak a third one in. So with the Lunar lander or the one utility vehicle, it's a $1.2 billion contract over 13 years is what the Canadian government had announced. So with the leadership position that you're planning to take, does that mean you plan to bid as a prime and the entire $1.2 billion is addressable to you?

[Mike Greenley, executive]

I think we would need to learn a little bit more before I got too committed on that. It's generally our intent on programs of that magnitude in the Canadian market to take that position, yes. But I wouldn't want to go 100% on that until I learn a little bit more about exactly what this is going to look like. But that would be our typical intent.

[Operator]

There are no further questions at this time. I'd now like to turn the call back over to Mr. Mike Greenley for any closing remarks.

[Mike Greenley, executive]

Okay. Thank you for your time this morning. Thanks, everybody. We look forward to updating you on our progress during the next earning call in August. Thanks very much, and have a great day. It's a nice weather out there. All right. See you. Bye-bye. Bye-bye.

[Operator]

Thank you so much, presenters. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day