MONTREAL – CAE Inc. reported better margins than expected in its defence segment, as it waits for less profitable contracts to expire. Analysts also favourably received the arrival of new board members, including the co-founder of activist investor Browning West, who will have a say in the company’s search for its next CEO.
Investors were pleased with the announcements, sending the company’s stock on the TSX almost 14 per cent higher on Friday.
The company, which specializes in flight simulators and pilot training, announced that operating margins for its defence sector were 8.3 per cent in its third quarter ended Dec. 31, compared with 4.4 per cent during the same quarter a year earlier.
“In defence, performance tracked ahead of our expectations as we made more progress toward becoming a low double digit margin business (10 per cent or higher),” said CEO Marc Parent on a call with analysts Friday to discuss the quarterly results.
CAE is encumbered with older military contracts signed before the COVID-19 pandemic. The profitability of these eight fixed-price contracts suffered from the high inflation that followed the pandemic. In the third quarter, these contracts ate into margins by 0.7 percentage points.
Management said two of the eight contracts ended during the third quarter, while another should be done by the end of the fiscal year.
“At the moment, I don’t see any issues,” said chief operating officer Nick Leontidis.
“Some of them are out next year or the year after, but I mean, they roll off as planned.”
For RBC Capital Markets analyst James McGarragle, the defence sector margins were the “key standout” from the quarter.
“Defense margins remain an important driver of sentiment in CAE shares and today’s results did not disappoint,” he said in a note Thursday after the results were released.
In the civil aviation sector, CAE said it expects more modest growth than previously expected due to supply issues at subcontractors of airplane manufacturers. These headwinds are slowing equipment deliveries, having a temporary negative effect on demand for pilot training.
The airlines increased pilot hiring substantially in recent years, said Parent.
“Now, basically they have … for a short amount of time, too many people, too many pilots hired,” he said.
CAE expects the situation to be temporary. It gave the example of manufacturer Boeing, which delivered 45 airplanes in January, the highest level since 2023.
“There’s renewed optimism here,” said Parent.
A victory for Browning West
CAE also announced the nomination of four new directors to its board. Peter Lee, co-founder and partner at Browning West, is one of them. He will be part of the committee searching for the company’s next CEO.
Browning West, which holds 4.3 per cent ownership in CAE, signalled last December its intention to be consulted in the choice of who would succeed Parent, who is leaving in August.
The California-based firm made waves in the Quebec industry last year with its moves that forced Montreal-based Gildan to reinstate founder Glenn Chamandy as chief executive.
Benoit Poirier, an analyst with Desjardins Capital Markets, sees Lee’s nomination as a positive step.
It’s “positive for investors as it de-risks the eventual selection,” he wrote in a note.
Previous Air Canada CEO Calin Rovinescu was nominated as chair of the board. The businessman was a solid leader during Air Canada’s turnaround, wrote McGarragle.
“We believe his strategic insights and experience will complement CAE’s mission and could lend a steady hand to the company’s ongoing initiatives in aviation training and defence,” he said.
Katherine A. Lehman, chair of Stella Jones Inc., was also nominated.
The Caisse de dépôt et placement du Québec, which is the company’s biggest shareholder at almost 10 per cent of share ownership, nominated Louis Têtu. He is the chair and CEO of technology company Coveo Solutions Inc.
The Caisse said that the changes show CAE’s commitment to renew its governance.
“We do not hesitate to get involved when necessary to support champions of the Quebec economy, like CAE,” said CDPQ executive vice-president and head of Québec Kim Thomassin in a French-language press release.
The board will remain at 13 seats as four directors are leaving: previous chair Alan MacGibbon, as well as Margaret Billson, François Olivier and David Perkins.
In the third quarter CAE revenues were $1.2 billion, compared with $1.1 billion a year earlier. Net earnings were up 198 per cent at $168.6 million. The adjusted earnings per share were 29 cents.
Before the results were posted, analysts were expecting earnings per share of 29 cents and revenues of $1.2 billion, according to financial data firm Refinitiv.
This report by The Canadian Press was first published Feb. 14, 2025.
Companies in this story: (TSX:CAE)
