(Montreal) CAE management remains optimistic about the performance of its defense division over the coming months after it went through some turbulence. Current geopolitical tensions could work in the company’s favor.
The boss of the flight simulator manufacturer, Marc Parent, admitted Tuesday that defense activities had not met his expectations and those of investors in terms of profitability until now.
But the Montreal company’s strategy “remains solid,” he said during a conference call with analysts on the financial results for the fourth quarter and the 2024 fiscal year.
As proof, the adjusted order backlog for defense has grown by 20% over the last two years, noted the President and CEO.
The market is entering an upward cycle with the increase in military budgets of NATO countries in a context of growing geopolitical tensions, reiterated Mr. Parent.
“We are currently negotiating major multi-year programs which should soon significantly increase our order book,” he said.
“Beyond our selection on transformational defense contracts in Canada, we are well positioned for next year on several strategic programs in the Indo-Pacific regions, Europe and the United States,” continued Mr. Parent.
The pilot training specialist forecasts an adjusted sector operating margin of between 6 and 7% for this sector in fiscal 2025.
Renegotiated contracts
CAE’s defense operations generated revenues of $425.5 million in the fourth quarter of 2024, down 21% from the same period last year.
The division also recorded a negative operating result of 680 million, compared to a positive result of 29 million a year earlier.
These figures reflect what was previously announced by the company regarding eight former fixed-price military contracts signed before the pandemic. They have eaten into its margins in an inflationary context.
Although few in number, these contracts “have had a disproportionate impact on the overall profitability of the defense sector,” the company said.
CAE warned last week when publishing preliminary results that it would post a non-cash loss of 568 million in the fourth quarter for its defense activities.
The scope and timing of previous contracts have been reviewed with customers and suppliers.
“What we’ve done is worked extremely hard to renegotiate with our customers to determine exactly the remaining scope of these programs, how long it will take us to execute these contracts, the cost it will take us to these contracts,” said Mr. Parent.
The conclusion of these negotiations resulted in additional charges of 90 million, he said.
Following the presentation of preliminary results, the company also announced a restructuring of senior management. It includes the appointment of Nick Leontidis to a new role as Chief Operating Officer, who will oversee the civil aviation and defense business.
It will attempt to bring synergy between the two business units.
Civil aviation in good shape
In terms of civil aviation activities, the picture appears rosier than that of defense.
CAE reported revenues of 700 million for this division in the fourth quarter, up 6% compared to the same date in 2023. Operating income stood at 147 million, compared to 149.3 million a year earlier.
Demand for aviation training solutions remains attractive, according to the company.
For the next fiscal year, it expects double-digit growth in adjusted segment operating income, as well as an annual adjusted segment operating margin of around 23%.
Despite the performance of the civil division, CAE as a whole recorded a fourth quarter net loss of 504.7 million, due to the difficulties of the defense sector. This compares to an operating profit of 178.3 million in the fourth quarter of 2023.
Its loss per share was $1.58, compared with earnings per share of 29 cents a year earlier.
CAE shares fell 1.52%, or $0.39, to end Tuesday’s session at $25.32.