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Good morning. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to Héroux-Devtek's Fiscal 2022 Fourth Quarter and Fiscal Year Results Conference Call. [Operator Instructions]. Before turning the meeting over to management, please be advised that this conference call will contain statements that are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. We refer you to Slide 2 of the accompanying presentation available on the company's website for the complete forward-looking statements. I would like to remind everyone that this conference call is being recorded today, Thursday, May 19, 2022, at 8:30 a.m. Eastern Time. I will now turn the conference over to Mr. Martin Brassard, President and Chief Executive Officer; and Mr. Stéphane Arsenault, Vice President and Chief Financial Officer of Héroux-Devtek. Mr. Brassard, please go ahead.
[Foreign Language] Good morning, everyone. On behalf of all of us here in Longueuil, welcome to our fourth quarter and year-end earnings conference call for fiscal 2022. As usual, I invite you to follow along by referring to the financial statements, MD&A, press release and presentation, which can be found in the Investors section of our website. In many aspects, Q4 was somewhat similar to the 7 prior quarters since the outset of the pandemic. Civil production rates remained lower, in particular for the twin-aisle programs. Supply chains continue to be challenging, and the virus wave of COVID required flexibility and adaptability to maintain throughput despite absenteeism and disruption.
Yet in other aspects, Q4 was also very different. As we were collectively beginning to live and cope with COVID, new factors precipitated the aerospace industry back to a more uncertain environment. The war in Ukraine and the rapid rise of inflation added more pressure on an already fragile industry-wide production system. I believe that these new dynamics will call for the same approach we have applied for the past 2 years: agility, lower fixed cost structure, discipline and resilience will be required to continue to deliver strong results. If this approach has worked well so far and will continue to be the cornerstone of our strategy, it is mainly because of 4 critical factors. First, our diversification. About 60% of our revenue come from the United States, 25% from Europe and 15% from Canada and other countries. This testifies a strong customer base. As well, we have a broad exposure to each of the civil and defense markets and submarkets. The second critical factor is the strength of our balance sheet and our working capital management. Third, our close relationship with our customers. And finally, our culture of dedication at all levels of the organization, from our leadership team to our entire group of employees. We take none of these strengths and attributes for granted and could not be more focused on continuing to nurture them.
I would like to take this opportunity to thank our employees for their relentless commitment. Their dedication and hard work allowed us to achieve good results for fiscal 2022. Now on to our detailed financial results. Stéphane?
Thank you, Martin, and good morning, everyone. As usual, please be aware that we will be referring to certain non-IFRS measures during the call, including adjusted EBITDA, adjusted net income and adjusted EPS. All non-IFRS measures are defined and reconciled in the MD&A issued earlier today. In Q4, consolidated sales decreased 4.9% to $147.5 million from $155 million last year. Defense sales were up 2.1% from $107.3 million to $109.5 million, while civil sales were down $9.7 million to $37.9 million, mainly driven by lower deliveries for large commercial programs. For the full year, sales were down 6.1% to $536.1 million from $570.7 million last year, in part due to the $21.9 million negative impact of foreign exchange representing 3.8% of sales. Excluding this factor, defense sales were up 6.6% for the year, reaching $386.7 million, accounting for 72% of our consolidated sales, while civil sales decreased $37.7 million to $149.4 million. In Q4, gross profit increased slightly from $25.2 million to $25.9 million, while for fiscal '22, gross profit decreased to $91.1 million from $94.9 million last year. As a percentage of sales, gross profit for Q4 rose from 16.2% to 17.6% and grew for the year from 16.6% to 17%. The increase in gross profit as a percentage of sales for the quarter and the year was mainly driven by the positive effect of our early restructuring initiatives, including lower depreciation as well as a positive sales mix. These positive elements were partly offset by the effect of lower throughput and higher quality-related costs. For the quarter, operating income decreased to $11.5 million from $12.2 million due to higher nonrecurring items. Adjusted EBITDA stood at $22.1 million or 15% of sales compared with $25 million or 16.1% of sales a year ago due to the $1.4 million negative year-over-year impact of foreign exchange representing 1% of sales and to lower throughput caused by the current difficult environment. For the full year, operating income rose to $44.8 million from $34.1 million, mainly due to lower depreciation and nonrecurring items. Adjusted EBITDA stood at $83 million compared with $88.2 million, in line with the prior year as a percentage of sales at 15.5%. And finally, earnings per share grew to $0.33 in Q4, up from $0.24 last year. Excluding onetime charges, adjusted EPS reached $0.38, up $0.10 from $0.28 last year. For the full year, diluted earnings per share grew sharply from $0.55 to $0.90, while adjusted EPS increased to $0.95 from $0.80 recorded in fiscal '21.
Let's now turn to our financial position. The corporation's net debt position remained relatively stable throughout the fiscal year, closing at $152.1 million as free cash flow generation offset the $43 million allocated to the NCIB. As a result, our net debt to adjusted EBITDA ratio remained stable at 1.8x as at March 31. We also extended our $250 million Revolving Facility to 1 year to a maturity in June 2027. Finally, let me say a word on the Normal Course Issuer Bid. A few weeks ago, we completed the NCIB announced in May 2021, having repurchased $2.4 million of shares for a total consideration of $43 million. Today, we are announcing a new NCIB to repurchase for cancellation up to 1.9 million outstanding shares. We believe that this flexible tool can allow us to pursue our objective to optimize capital allocation while enabling us to continue to seize opportunities, both organic and acquisition-related.
Back to you, Martin.
Well, thank you, Stéphane. Looking into the future, we do expect a challenging year, but the management team and myself believe that we are in a strong position to deliver strong results for fiscal 2023. As stated a few minutes ago, we are well diversified geographically and we have good contracts in the civil and defense markets. We will continue to work closely with our employees and our suppliers with the objective of delivering on time and on budget. We have a strong balance sheet, which allow us to implement a new NCIB whilst continuing to invest in our company and also look at potential acquisitions. In concluding, the future is very hard to predict. The agility of our people, our great customer base and our financial stability lead us to believe we will have a positive fiscal 2023. Sylvie, we are now ready to answer questions.
[Operator Instructions] And your first question will be from Konark Gupta at Scotiabank.
My first question, perhaps on margin. So a good quarter, I guess, margin very stable at 15% throughout Q3, Q4 and 16% before. Now looking ahead, Stéphane and Martin, where does the margin -- how do you see the margin profile from here considering the inflationary pressures you're seeing across raw materials and labor? And can you remind us how do you mitigate those inflationary pressures usually through your contracts?
Okay. Yes. Okay. So I'll take this question. So there is cost pressure, right? So to achieve that 15% margin, you can imagine with the disruption that we had in December, January, so we had to -- as Martin said in his quote, we had to deliver the quarter in 2 months, so -- which is really amazing from our teams. And obviously, this was done with higher costs, right? So that's why the margin is lower at 15%. So we don't see this changing in the coming quarters. So I believe we'll still be challenged on that side, on the cost side because of the higher utilities cost that we are incurring in some country like Spain. And this cost pressure, we don't anticipate this will be -- it will stay for the next quarter or so. So for us, we're still navigating to maintain the margin. And to your question, how do we, do, we have different contracts with our customers. So it's -- Martin can better explain this part.
Yes. So Konark, you know that our contracts that we have, our [ IP ] contracts, these are life of the program contracts. Those are normally with escalation formula. So we're applying these escalation formula to benefit -- not to benefit but to adjust the price in relation with the current environment. Then we do have a contract in the aftermarket, which is on PO to PO basis. So we honor our PO and the repeat orders. We can adjust the price according to the new cost structure or the inflation. And that's how we adjust our price into this mechanism. But obviously, to cope with inflation, we need to drive efficiency in our production system. We need to look out there for supply chain source, competitive supply chain, supplies. So that's how we go -- we found good surprises. Some people are increasing costs, some of them that wants to do business with us. So it's a big -- it's everywhere that we need to attack every cost needs to be put on the table, and that's what we're doing. After the closure of Alta, if you remember, Konark, we closed Alta. We said in this call that we will relocate production into other facility. We don't do popcorn. So it's -- so we had to transfer machine, transfer tooling, transfer methods and programming, do first article. So that's what we've done. So this is complete. Now it's the face of reoptimize those contracts in reducing the cost by automation. And also our current programs, that we're actively pursuing automation in order to cope with the inflation that could cause into our labor. So different aspects. So all the team is committed. So we have people traveling in the world. We have people that are focusing and improving the current production system. So that's our intent to -- and adjust and making sure that our price reflects the current market. So there's a lot of work to be done, and we're committed to make it happen. So does that answer your question, Konark?
That answers my question. And maybe my last one before I turn it over. Boeing is having a lot of issues with several commercial programs here, like that's out there in the media, obviously. How is that impacting the recovery in your civil segment?
So you're talking about the 777X delay? Is what you're referring to, Konark?
Mostly 777X delays, and then like, I think, there was some chart about 787, I know you have small exposure there. But like Boeing in general is having issues in their programs. Does that hinder your ability to recover the civil business? Or it's kind of unaffected given your contracts?
No. So it's an indirect impact, I would say. 777, the delay of 777, 777X, Boeing made it public. So they will replace those production rates in the short term, the units that were to be produced on the X by Freighter -- 200 Freighter. So they want to keep their production rate somewhat slightly up compared to this year. So that's the intent.
But again, it's a different dynamic. So we're ready to increase our production rate on the 777 and we're ready to meet the demand of Boeing. Now Boeing needs to make sure that all of its supply chain will follow. So with -- to adjust it. So then 787, we have limited exposure, so I don't have any opinion there. So -- and it's still fragile. The twin aisle market is still a market that is somewhat fragile. So we're looking forward to have the 777X in service. It's a fantastic airplane. And there's a lot of airplanes in the backlog. So we're looking forward to have a production rate increase in that airplane in service. So that will increase our top line, that's for sure. But again, Konark, the strength of our company, we showed it. We want new contract in a solid market, which is the military market with F-18, F-15, MQ-25 and CH-53K. And we have the business aircraft also, Dassault. We'll enter in service the Dassault Falcon 6X. The other one, the 10X will enter in service in 3 years from now, I believe. So the thing is the orders. The orders are there. We're not -- we believe it's the way to make these orders and to produce them efficiently, that's our main concern for the year -- for the fourth quarter to come, right? Stéphane, do you agree with that?
Yes. Absolutely, yes.
Next question will be from Benoit Poirier at Desjardins.
Just to come back on the 777, 777X program. Is it fair to say that Boeing is still looking to increase the rate from 2 per month to 3 per month in calendar year 2022 despite the 777 delay?
It's really fair to say that.
Okay. Perfect, perfect. Okay. That's great. And Stéphane, when we look at your EBITDA in the quarter, it seems that there was -- could you confirm whether the government assistance positively impacted EBITDA by about $2.5 million in the quarter? And what we should expect in terms of government assistance or the cues for fiscal year '22?
Well, the issues ended at the end of December. So there was not much benefit on the Canadian side on that part. So there's a program that ended at the end of March in the U.S., but it's not that significant, but it's really R&D tax credit for us, that we have a lot of activities right throughout the company, developing new product for our customers either in Canada, in Spain or in the U.K. So that's mainly the favorable impact in the quarter on that side.
Okay Which is about $2.5 million, Stéphane, right?
Yes, yes. Slightly below $2 million because there's a portion, like I said, is west wind.
Okay. Perfect. In terms of overall government assistance. And would it be fair to expect still some contribution in the fiscal year '23?
Well, we always have R&D tax credit. So these are programs that are in place with the different authorities across the world, I mentioned, where we operate. So this will continue in the coming year.
Okay. Perfect, perfect. That's great. And when we look at the overall defense spending, obviously, we've seen -- with the unfortunate war we've seen the response from the U.S. in terms of defense spending, the NATO countries. I'm just wondering, now when you look at your bidding pipeline, whether you've seen an increased momentum, increased interest on the bidding activity?
Yes, we will see, Benoit, We will see some interest. We're seeing the first sign of it. So when we have an airplane flying, you have aftermarket, but it takes some time to reflect it in our numbers, right? So -- but of course, what is happening will make this defense market expecting bigger. So yes.
Okay. Perfect. And looking at the Canadian Fighter Program, obviously leaning towards the F-35. Any thoughts on the opportunities for able to increase your content given the IRB is in place?
Well, this is not a contract with IRB, I believe, right? F-35 Canada decided to join the program back in the '90s, and that is the reason why we have some content on the F-35. But of course, we use that to get some additional business with Lockheed, and Lockheed is very satisfied with our performance. So we never know -- we never know that helps somewhat. We never know if we could increase or offer more service and get a better share on the F-35, that's for sure.
Okay. And for fiscal '23, Stéphane, could you maybe talk about the levers that could impact organic growth for commercial and military? What are the puts and takes to -- what kind of organic growth we might expect from both segments looking at fiscal year '23?
So the -- on the large commercial side, really this fiscal '22 was the adjustment from the lower rate on 777; but also, if you recall, the repatriation of the business from Tier 1, Tier 2 -- Tier 1 customers, sorry. So that's really finished now on that side. So really, the business jet, as Martin said, we're looking at delivering success, continue to increase the rate on that part. So this is positive, right? And on the large commercial side, that Boeing is increasing the rate to 3 a month will be also positive. So I think it should be a plus on the civil side and on the defense. So really, what will make the difference in the next fiscal year, we're very busy on the aftermarket side in the U.K. for both MRO and spares. But we also have the Boeing F-15 that is starting this year. So we had no sales in the last fiscal year, so it's going to be positive. So for us, it's really -- it's not a question of having the order in the business. It's more a question of the execution in the current environment. I think this is where we are facing our challenge.
Okay. And last one for me, Stéphane. Could you mention some color about the CapEx expectation? And given the growth prospects for fiscal '23, whether there will be some investment required in the working cap?
CapEx side, the range remain about the same, right, around the $25 million mark. I know this year, we finished at $19 million. So it's really around the $25 million mark, so plus or minus for the capital expenditures. And on the working cap, as the business is -- the top line is increasing, right, it will eat some working cap. We'll need some working cap for the sales growth.
Next question will be from Tim James at TD Securities.
A quick question here on just looking at your total defense revenue. Is it possible to give us a bit of a sense, in percentage terms, I guess, what proportion of your defense revenue, as you've kind of exited fiscal '22, what proportion of it is based on legacy or sort of steady state volume programs? And I would maybe go on the aftermarket in there. And then what -- the balance being sort of new programs for Héroux that are ramping up, such as F-18, CH-53K, the F-15 this year. If you could just give us a bit of a sense for the breakdown between those 2 buckets of revenue just within your defense business.
Okay. So I'll -- F-18, it's going to be a growth again in this year, fiscal '23. F-15, as I said to Benoit, we're starting delivery, so in fiscal '23. So we have started delivering our first gear to the customer in this quarter. And so that's -- those are the 2 main programs. Where we see a phaseout, we have completed our contract with AAR. So right now, we are phasing out this contract as expected. So this is being completed this fiscal year. And as I said, the aftermarket is very strong in the U.K. So on the defense side, again, a lot of business on the MRO side. And on the spare side, so far it's a good opportunity. The risk remains on executing all these orders. That's what I explained to Benoit. So for us, it's really a risk of execution right now.
Maybe just a follow-on from that. If we think about your major -- or your more significant defense programs that are ramping here, F-18, CH-53, F-15 or sort of the MQ-25 in there, when should those programs hit a steady state in terms of volume? Like what fiscal year will those -- will the growth on those sort of hit full rate for you?
F-18 15 this year . F-15, 20 is going to be a growth that will continue over the next couple of fiscal years. MQ-25 is -- you know that they're in the [ FDD ] phase. So that I don't know, in 2, 3, 4, 5 years from now, depending on how many. We're still working and developing -- in the R&D group with Lockheed Martin, defense programs. So that's another good sign. Over in Europe, you have the FCAS, you have the Eurodrone. Those are good opportunities also. We're pursuing actively new business and expanding, like I said in previous calls. So when you have a platform, it's really important for us to maximize the revenue on this platform by offering not only the OE business, but also the spares and then the MRO, so we could fully serve our customer, and that's our strategy, to continue developing our business portfolio. So it's really important for us to be able to offer customers the full suite of services. So that's our strategy. Does that answer your question, Tim?
Yes. Yes. Martin, that's very helpful. And then just my last one. It actually kind of returns to the theme of a question asked earlier. Just kind of thinking about your margin profile in the future, you're currently dealing with a number of challenges that are a drag on your margins, and your performance, I think, is exceptional really given the conditions, but a lot of inefficiencies there. As you look forward over the next couple of years, do you feel that as these inefficiencies sort of move out of the system, you price -- reprice contracts and POs to -- as you're able to, that the inflation as you see it as you look forward over the next couple of years and your higher costs. Do you think you're sort of levers on the revenue side and the inefficiencies you can get out of the system are significant enough to still drive margin expansion?
Well, Tim, you're long term, right? So the line of sight is very short. If you tell me that everything will be back to normal, you're then right. You're right on the spot. That's for sure. That's our goal with efficiencies and improve our margin, right?
And the volume, obviously.
The volume.
Volume is...
Just think about 777 back to, let's say, only 70 a year, right?
Next question will be from Nauman Satti at Laurentian Bank.
So I think you guys alluded to in your prepared comments and in some of the answers that execution and sort of supply chain, those are some of the challenges that you have upfront. I'm just wondering if you can provide a little more color, that -- is there something that sort of worries you that there may be a timing issue or there are some contracts that you may not be able to sort of complete in the budget that you have? So any color on what those execution risks are? Is it just labor-driven? And if it's like supply chain, what are some of the components that you're not getting your hands on? Any color there would be appreciated.
Yes. So yes, I know that it's tough when you are the fourth one to ask the question. So I guess you need to put you in line first, right? But Nauman, [indiscernible] _10:12___ It's coming. This is why I focus so much on agility. To pinpoint right now a single factor is very difficult. So what we're asking our people to do is to eye -- to have eyes all around their head to mitigate those risks. So we're supplying. And just imagine, so we're supplying landing gear that requires 1,000 parts, right? And you have Boeing also that has -- or Airbus or Bombardier that are producing aircraft with millions of parts. So you got to be close to your supply chain. You've got to be close to your employees. You have to have -- to evaluate the risk. And once you see those risks or you see those threats, you got to make decision rapidly. You got to make decision rapidly and get the product in, so we can deliver the assembly. So agility, resilience, those are the quality that you need in this type of environment. And I believe that we have proved it during the last 2 years. The last quarter was a good example, and we're going to continue to do so.
Okay. And just a second one on the M&A side. if -- I know you guys have been looking for it, given how strong your balance sheet is, you spent quite a bit on buyback as well. Is there -- are the prices too elevated? Or is it just that the environment is such that it's difficult to sort of do the due diligence? Or is just that matter of time, that you just couldn't find the right fit so far on that front?
That's right. That's -- so I think the strength of the balance sheet in today's environment is a strength. We want to bring an accretive transaction. So it will be a very important to identify the synergies, and the synergy needs to be there to make the transaction accretive, not to eliminate the impact of inflation on the potential profitability of the target. So we're looking at all that. We don't want to put in this type of environment also abnormal leverage, debt leverage on the company. So -- but we have, again, a list of targets. We're traveling. And once we have the right one, we'll be ready to announce it. So in today's environment, I believe that the strength of our financial situation, our project to improve efficiencies and to improve costs, cope with the inflation, are very important to manage the business in the long term. And once the right acquisition that complements our offer is there, we'll do it. That's for sure.
Okay. That's great. And just one last one from my end. I think in your MD&A, you've mentioned that you did not reduce the debt because of the optimal capital structure. I'm just wondering that for this year, if you don't find any M&A, and given your ability to generate that FCF, like down the line, can you expand that buyback? Or potentially, there could be a dividend? Or how are you thinking about that capital allocation in absence of M&A?
Yes. Capital allocation is in the heart of our discussion. We have those discussions at the Board level, very good question, but I cannot share any detail. We're not ready to share any detail yet.
You know that we have announced the NCIB, right, this morning. So there's a new NCIB that's been announced this morning as well.
Yes. And that, we believe, that is a very good tool, it's a flexible tool. We used it. And if we need the money to do an acquisition or to improve or to invest in a new program, we still -- that gives us still the flexibility to do so.
[Operator Instructions] And your next question will be from Cameron Doerksen at National Bank.
So I guess I just want to come back to the, I guess, have the same question everybody else has asked here, and it's really, I guess, around the outlook. I mean, it does sound to me like you fully expect to have revenue growth. But if I'm reading you right, the caution here is just around concerns around things that maybe you don't know as far as supply chain inflation, things like that. But let's assume that there isn't any sort of major changes to where the supply chain is today over the next 12 months. I mean, would your expectation be that you would be able to grow the bottom line as well as the top line?
Yes.
If the profit is higher?
Exactly. I mean, I understand there's your caution because there's things you just don't know and it's an uncertain world, But if you're going to grow revenue, you've done a pretty good job in the past of being able to maintain margins. I mean, the assumption -- my assumption would be that you'd still be able to grow the bottom line in that environment, absent any major additional disruptions beyond what we're seeing today.
Yes. Yes, we expect that. Yes.
We're cautious because just as an example, utility costs increased 5x in 1 year, right? If you tell me that we block this inflation, this is in the results, right? 5x. This is in Q4 results. So we don't know where it's going, right? So it's difficult to guide you and to be more -- let's say, it's difficult to tell you more than what we told you today, right?
So, that's fair enough. On -- I guess, may be, a couple of questions just around some specific programs. I mean, you've got this actuation program with Boeing. Can you just again remind us when we -- how that ramps up this year?
Yes. So a very good question. Cameron, very good question. So yes, we have delivered. We have a team to deliver it. We have delivered and proved out industrialize the first 4. Now we're ramping up. By the end of the year calendar, we should have all the product industrialized. Now it's so full year revenue in fiscal 2024, and it will depend on the rates that Boeing will have. So we have some 787 in there, we have 767, we have 747 and 777. So then it will become a rate expectation.
Right. Okay. So full run rate, next fiscal year, but some contribution sort of growing through the year?
That's right.
Got it. Okay. And what about business jets? I mean, you mentioned the 6X. I guess we're going to see increased deliveries in the next few years on that program. But what about, I guess, the existing -- the Embraer business jets? I mean, the backdrop for business jets is pretty positive. It sounds like Embraer is getting a lot of order activity. Can you discuss rate expectations on those programs?
Yes. I encourage you to go and see the Embraer. I don't know if you -- you probably haven't done it yet. So it's -- you look at the delivery on the business jet there, it's a very nice product. Of course, they want to increase production rate. So it's a very nice product. It looks like it's selling well. Like I know -- but you know that they're very secured on the backlog. So now it's a great company. And yes, there are some -- so that's an area, like I said before, at the beginning of the pandemic, it was somewhat concerning. And that company and Embraer performed very well with the Legacy 450 product or the Praetor product. So it's pretty resilient I can say, Cameron.
Okay. Good. And maybe just a final question just for Stéphane, Your expectation for tax rate in the coming fiscal year?
Yes. Typically, we have a tax rate at about 25%, right, of income before taxes. This quarter, we had a favorable adjustment from a deferred tax asset recorded following the repurchase of the Tekalia minority interest essentially. So we still expect, based on what we've seen this year, is around 25% if we take into account the special item we had in the quarter.
And at this time, Mr. Brassard, we have no further questions. Please proceed with closing remarks.
Well, thank you very much, everyone, for having joined us today this morning as well as for the quality of our discussions. So thank you very much for your interest and support towards our company, and we're committed to make a stronger company. So thank you very much, and have a great day.
Ladies and gentlemen, this does conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines.