CAE Inc. expects defense spending in the U.S. to ramp up under President Donald Trump, which should drive demand for the company’s flight simulators and training services.
“The United States will be looking to increase their force readiness,” chief executive officer Marc Parent said. “It’s going to happen fast, just like everything else is happening pretty fast. There’s no doubt in my mind.”
Trump not only has promised to increase the U.S. defense budget, he publicly has pressured fellow members of the North Atlantic Treaty Organization to fulfill promises of spending at least two per cent of gross domestic product on defense. Altogether, 19 of NATO’s 28 members have boosted military budgets in the past 18 months, according to a Bank of America Merrill Lynch report.
“The military business, for us, will be a growth business for years to come,” Parent, 56, said in an interview at company headquarters near Montreal’s Pierre Elliott Trudeau International Airport.
“For the first time since the Cold War, you have a level of global uncertainty that’s going to drive an increase in defense expenditures pretty much everywhere we see. For us, it stimulates more potential for bids.”
The defense and security unit accounts for about 40 per cent of company revenue. On Monday, CAE won an 11-year contract from Airbus Group SE valued at more than $200 million to support the Royal Canadian Air Force’s Fixed-Wing Search and Rescue program. Last month, CAE announced more than $1 billion in training services contracts with the U.S. Army and the Royal Canadian Air Force.
“We’re bidding for much bigger contracts these days in defense,” Parent said. “We used to bid on simulators. Today we bid as a training services integrator.”
CAE wants to hire at least 400 engineers in North America, about half of which would work in the U.S., the company’s largest market at more than one-third of revenue, the CEO said. The five per cent increase in CAE’s workforce of 8,000 worldwide will handle a growing backlog of more than $7.4 billion of work.
“If you know some software engineers, we are hiring,” said Parent, a former Bombardier Inc. executive who has been CEO since 2009. “We will hire them as soon as we can get them. All this work that we have won, we need to execute it.”
On Tuesday, CAE reported adjusted earnings of 26 cents a share for the fiscal third quarter, beating the 23-cent average of analysts’ estimates compiled by Bloomberg. Revenue rose to $682.7 million, topping the $667.3 million anticipated by analysts.
The company shares rose less than one per cent to close at $18.82 in Toronto on Monday. CAE has gained 37 per cent in the past 12 months, exceeding the 27 per cent advance of Canada’s benchmark S&P/TSX Composite Index.
“The military business, for us, will be a growth business for years to come”
CAE expanded beyond building simulators starting by offering services such as training starting in 2001. Those extras, which made up about 15 per cent of revenue in 2001, now account for about 60 per cent of sales — offering a recurring m stream of income as global regulations compel pilots to undergo training at regular intervals.
With global airlines facing an expected shortage of pilots, CAE has high hopes for its civil aviation business, which generated about 57 per cent of 2016 revenue. Parent estimated CAE controls about a quarter of the global civil training market. The company runs 67 schools and training centers worldwide.
CAE’s revenue from civil aviation is poised to climb about 5 percent a year through 2020, according to Fadi Chamoun, a BMO Capital Markets analyst in Toronto.
“Many airlines do the training themselves, so we have room to grow in the civil market,” Parent said. “There is head space, and the market is very large. We want to convince more people to do their training with us.”