(Montreal) CAE shareholders will have to wait a few more quarters before its old fixed-price military contracts stop eating into its margins. Investors reacted poorly to the news, with the stock losing nearly 10%.
The Montreal company revealed more details on Wednesday on the headwinds it has been facing for several quarters in the defense sector. For the first time, CAE revealed that eight contracts signed before the pandemic were responsible for the difficulties.
These contracts have a fixed price structure, which, in an inflationary context, puts pressure on margins, explains the president and CEO, Marc Parent, in an interview on the sidelines of the unveiling of the company’s quarterly results.
“That means we don’t have indexing,” he replies. Even if our costs increase, we will not have more [d’argent] for the contract. So obviously, that involves profitability issues, even losses on some of the contracts.
Although this represents only a small portion of our total defense contracts – at any given time, we are executing literally hundreds of defense projects – these eight separate contracts have a disproportionate impact on our overall profitability in the sector. of the defense.
Marc Parent, CEO of CAE
CAE estimates that these contracts eat away the equivalent of 2 percentage points of its defense margins. Taking into account certain fixed costs, such as research and development costs as well as administration costs for these eight projects, the effect is 3 percentage points in total, specifies the chief financial officer, Sonya Branco.
In the third quarter ended December 31, operating margins in the defense sector reached 4.4%, compared to 5.5% in the same period last year. Defense operating profit was 20.6 million compared to 24.9 million last year.
CAE expects “most” contracts to expire over the next two fiscal years, or six to eight quarters.
The company will try to find ways “to reduce its financial risks as quickly as possible”, but this will have to be done through negotiation. “We would never stop delivering to our customers because obviously we have an essential mission in defense. »
It is not impossible that CAE agrees to modify the schedule of certain contracts and that it pays a penalty in exchange, replies Mr. Parent. “If we had penalties, that would be a choice we would make because paying the penalty would be less costly than continuing to perform on the contract and incurring costs or risks that would be higher. »
National Bank Financial analyst Cameron Doerksen welcomes the revelation of more details on the difficulties in the defense sector. “But it seems that the difficulties will last longer than we expected. »
Mr. Doerksen, however, remains optimistic about the defense sector in the long term. He points out that, even once defense margins cross the 10% threshold, the civil sector would still represent 75% of operating profit. “The context is favorable for demand in the defense sector. We believe margins in the division will eventually improve. »
During a conference with analysts, Mr. Parent assured that he remained optimistic about the prospects of the defense sector. He mentioned that demand was strong, the order book was well filled and it was possible to conclude contracts with good margins. “It’s not an activity that is broken,” he emphasizes. It’s a growing sector. »
CAE revealed a net profit of 56.5 million, down 28% compared to the same period last year. Adjusted diluted earnings per share were 24 cents. Revenues, for their part, increased by 13%, to 1.1 billion.
Before the results were released, analysts expected a profit of 26 cents and revenue of 1.1 billion, according to financial data firm Refinitiv.
CAE shares lost $2.78, or 9.8%, to $25.60 at the end of the Toronto Stock Exchange session.