Q4 2023 CAE Inc. Earnings Call
Paul.
Please be advised that this call is being recorded I would now like to turn the meeting over to Mr. Andrew <unk>.
Please proceed.
Good afternoon, everyone and thank you for joining us today before we begin I would like to remind you that today's remarks, including management's outlook for fiscal year 'twenty four and answers to questions contain forward looking statements.
Forward looking statements represent our expectations as of today May 31, 2023, and accordingly are subject to change such statements are based on assumptions that may not materialize and are subject to risks and uncertainties.
Results may differ materially and listeners are cautioned not to place undue reliance on these forward looking statements.
A description of the risks factors and assumptions that may affect future results is contained in fees annual MD&A available on our corporate website and on our <unk>.
Fillings with the Canadian Securities administrators on SEDAR, and the U S Securities and Exchange Commission on Edgar.
On the call with me. This afternoon are markdown cease president and Chief Executive Officer, and Sonya Branco, our Chief Financial Officer.
After remarks from market Sonya will open the call to questions from financial analysts.
At the conclusion of that segment, we will open the lines to members of the media let.
Let me now turn the call over to Mark.
Thank you Andrew and good afternoon to everyone joining us on our call.
I am pleased with huge accomplishments in fiscal 2023, having seized opportunities to expand our position in growing markets with our digitally immersive training and operational support solutions.
We did so while navigating a strong some macroeconomic and legacy related challenges and over the course of the year, we delivered sequentially stronger quarterly results, we had an excellent fourth quarter with over 40% adjusted segment operating income growth, leading to 23% growth for the year as a whole.
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As a testament to quality, we generated strong free cash flow with 120% conversion of annual adjusted net income.
We also expanded our global reach and secured future growth with a record $5 billion in annual orders for a record 10 $8 billion of adjusted backlog.
In civil.
We launched several new training centers and deployed 23 full flight simulators during the year to our global network to support the major customer outsourcing agreements with secured and the U S Europe and Australia.
And we increased pilot training demand across all segments of aviation.
Exemplifying our more efficient cost structure.
Cliffs prior peak civil margins, even before the market fully recovers to pre pandemic levels in key regions like Asia.
We also booked a record $2 $8 billion in annual civil orders for a one three times book to sales ratio demonstrating the sustained high demand for pilot training solutions.
And our next generation digital flight services.
These included comprehensive long term training agreements with airlines and business jet operators worldwide.
And a total of 62 full flight simulator sales for the year.
We also made excellent progress expanding our reach and digital flight services with the ongoing integration of Air Centre.
And the adoption of our next generation solutions by a longstanding airline customers.
Civil concluded the year with a record adjusted backlog of $5 7 billion.
Hi.
Among the more notable developments for several of the quarter with the announcement of our joint venture with ADM Greece's largest airline.
New center is expected to begin pilot and cabin crew training by the end of 2023.
We will be the most advanced flight training hub in southeastern Europe .
By Green energy.
Since the end of the quarter, we inaugurated our Las Vegas business Aviation Training Center, and we announced plans for another new business Aviation training facility. This time in Vienna is a base in central Europe slated to open in the second half of calendar 2024.
Fourth quarter average training center utilization was strong at 78%.
Which is up from 69% from the same period last year.
For the year utilization was 72%, which is up from 60% the year prior.
Trading demand in the Middle East was the strongest in the quarter, followed by the Americas and Europe .
Asia has been recovering rapidly since the start of fiscal year with Q4 training center utilization substantially improved in that region.
In business Aviation training demand was also strong reflecting a high level of training demand in pilot turnover in that segment.
In products, we deliver we delivered 17 civil full flight simulators in the quarter at <unk> 46 for the year compared to 30 deliveries in the prior year.
In defense.
We made good progress fueling our multiyear transformation with a record $2 billion of annual adjusted order intake.
Evolving training and simulation solutions for one.
One times book to sales ratio.
This contributed to a $5 1 billion of adjusted Defense backlog.
In the quarter, we had orders totaling $565 million, including a U S. Navy foreign military sales to Korea for Amy 60, RF tactical operational flight trainers as well as extensions and expansions with the U S Army for fixed wing flight training at the CE Dolton training Center.
And with the U S Air Force for initial flight training at this level of training Center.
We also delivered our entered a new agreement for comprehensive training and support services.
Under the Australian Defense Force.
Program.
A few more recent wins since the end of the quarter really serves to underscore the progress.
Thats being made to renew our defence backlog with larger and more profitable program. As an example of our continued growth and capabilities and conducted in connection with U S. Army Aviation Defense was awarded a contract to support flight School training support services.
At Port <unk>, Alabama.
The FTE assess FSC.
<unk> contract is the second.
Worlds largest helicopter simulator training program.
And our $450 million U S.
Training contract is for training and simulation capabilities that we used to prepare initial entry level and graduate level Rotary wing flight training.
By leveraging our expertise from our civil aviation training outsourcing business model, we will be building and deploying <unk> full flight simulators over the contract term for the CH 47, and <unk> 60 and platforms to meet the U S. Army aviation centres of excellence Rotary wing stimulation services requirement.
Also building.
Building on our prominent flight training position and lower Alabama.
Hence with competitively awarded a U S Air Force's Rotary wing introductory introductory flight training contract with a maximum of approximately U S $100 million of $111 million over the total contract term.
Under the FTR contract will be leveraging our existing training centre in Dothan, Alabama.
Another favorable development that supports future growth.
The affirmation in early April .
Bell V 280, valor and selection for the U S Army's future long range assault aircraft Aclara.
This is noteworthy because te's part of team Valor and is a key partner in the provision of training and simulation solutions for this next gen platform.
These program awards and developments demonstrate our expanded market reach with national defense departments and OEM.
We were able to achieve this by leveraging defenses enhanced capabilities of scale vertically and by drawing technology processes and people laterally across the whole enterprise.
These are prime examples of the kinds of larger and more differentiated programs that will drive the multiyear defense transformation. That's currently underway.
Turning now to healthcare.
We gained share in the simulation market and continued to deliver double digit revenue growth with our dynamic team and highly innovative solutions.
Here too we've been harnessing the power of our one CAE mindset.
He joined civil and health care presentation.
The parallels between aviation and healthcare training elevate quality and safety.
Our teams recently collaborated at the industry's largest simulation event the international meeting of simulation in health care and it's a great demonstration of <unk> unique culture.
Before turning the call over to Sonya I want to highlight a notable development on the technology application front, which is a real World example of what we mean when we say that we're revolutionizing aviation aviation training at civil and defense markets.
We conducted a field study with the Japan Air Self Defense Force.
To validate the potential for more effective training.
By leveraging Cae's latest virtual reality and artificial intelligence enabled digital solutions.
The study revealed a near full rate of proficiency score improvement across all GSS.
Participants.
Our innovative training solutions incorporated key arise, which we originally conceived for civil aviation to provide more effective training to realtime objective assessment.
It also included.
<unk> patented biometric feedback technology.
Enabling structures to modulate complexity based on students stress engagement and cognitive workload levels.
These data driven and AI enabled technologies are important building blocks that will drive greater levels of training.
Efficacy and safety.
We do see innovations, we expect to further widened.
Widen our competitive moat unlocking a greater share of our addressable markets and developing new revenue streams.
With that I'll now turn the call over to Sonya, who will provide a detailed look at our financial performance and I'll return at the end of the call to comment on our outlook. So again.
Thank you Mark and good afternoon, everyone.
Looking at our results on a consolidated basis revenue of $1 $3 billion was up 32% compared to the fourth quarter last year. Adjusted segment operating income was $201 9 million compared to $142 7 million last year.
Quarterly adjusted net income was $110 9 million or <unk> 35 per share compared to 2009 in.
In the fourth quarter last year for the year consolidated revenue was up 25 percentage of $4 2 billion.
Adjusted segment operating income was up 23% to $548 1 million.
And annual adjusted net income was $279 2 million or <unk> 88 per share compared to 84 last year.
We incurred restructuring integration and acquisition costs of $15 3 million during the quarter related mainly to the integration of our center acquired last year.
Net cash provided by operating activities was $186 million for the quarter compared to $206 8 million in the fourth quarter last year and for the year, we generated $408 4 million from operating activities compared to $419 $2 million last year, we had strong free cash flow in the quarter of 172 million.
And $335 7 million for the year for an annual cash conversion rate of 120%.
We continue to target an average of 100% conversion rate selling forward.
Uses of cash involved funding capital expenditures of $62 9 million in the fourth quarter and $268 $8 million for the year driven mainly by the expansion of our civil Aviation training network, and Mark Beck, which secures customer demand.
These opportunities translate that some of our best returns is our stimulators assets ramp up within the first few years of their deployment with a record order backlog and a large number of agreements we announced over the last year to picture airline outsourcing and training network expansions in commercial and business aviation, we are expecting a higher level of organic growth invest.
<unk> in fiscal 2024.
We currently expect total capex to be approximately $50 million higher than last year, mainly in support of these accretive investments.
Our net debt position at the end of the quarter with $3 billion for net debt to adjusted EBITDA of three four times. This compares to net debt of $3 1 billion and $2 seven times net debt to adjusted EBITDA at the end of the preceding quarter.
Our leverage ratio has been improving rapidly since the middle of fiscal 2023, and we continue to expect it to be below three times by mid fiscal 2024, taking into consideration, our expanding EBITDA and ongoing funding of accretive organic growth investments.
Income tax expense this quarter was $33 3 million, representing an effective tax rate, 25% compared to 6% for the fourth quarter of fiscal 2020 to normalize the effective tax rate would have been 24% this quarter and 15% in the fourth quarter last year on the same basis, the effective tax rate for the year was 22.
<unk>, which we continue to expect going forward.
Net finance expense this quarter amounted to $51 4 million.
Which is up from $48 $8 million in the preceding quarter and $32 5 million in the fourth quarter last year, consistent with our growth investment priorities and noncash working capital seasonality patterns for fiscal 2024, we expect quarterly finance expense run rate of approximately $50 million at least for the firm.
First half of the fiscal year.
Now to briefly recap our segmented performance.
In civil fourth quarter revenue was up 53% year over year to $661 4 million and adjusted segment operating income was up 69% year over year to $162 9 million.
From a margin of 24, 6%.
For the year Civil revenue was up 34% to $2 2 billion and adjusted segment operating income was up 54% to $485 3 million for a record annual margin of 22, 4%.
The higher revenue for both periods was driven by higher trading volume and a higher number.
<unk> deliveries compared to the prior year period.
We achieved a record margin for the year, despite as mark referenced not having fully recover to 2019 levels in all regions.
That's because of the excellent work that was done over the last couple of years to lower our recurring cost base and we're also benefiting from some mix improvements from the structural expansion of business aviation and a greater proportion of revenue coming from training services overall.
In defence fourth quarter revenue of $536 million was up 14% over Q4 last year adjust.
Adjusted segment operating income was down 17% over last year to $35 million for an operating margin of five 7%.
For the year Defence revenue was up 15% to $1 8 billion.
And adjusted segment operating income was down 55% to $53 1 million, representing a margin of two 9%.
Over the course of the year, we had sequentially stronger quarterly results as a function of execution on legacy contract cost mitigation as some gradual improvements in economic headwinds that we've been facing.
And in healthcare fourth quarter revenue was $59 1 million up 12% compared to last year. Adjusted segment operating income was $8 $5 million in the quarter compared to $9 6 million in Q4 of last year.
For the year healthcare revenue was $192 7 million up 27% and adjusted segment operating income was $9 7 million for a margin of 5%.
With that I'll ask Marc to discuss the way forward.
Thanks Sonya.
We continue to have a highly positive outlook for fiscal 2020 forward beyond notwithstanding some of the macro level turbulence in the general economy.
We see clearly defined secular trends that are highly favorable across all of <unk> business segments.
In civil we've shown over the last year that there is indeed, a growing desire by airlines to Entrusts CAE with their critical training and digital operational support a crew bandwidth needs.
Demand for Air travel continues to thrive and our business is driven primarily by the regulated training required to maintain the pilots and crews who operate the global in service fleet of commercial and business aircraft.
As an additional secular driver.
We expect to sustain a high level of pilot movements from the growth and replacement of the active pilot populations.
According to our estimates over half the commercial and business jet pilots, who will be active in a decade from now have yet to even begin their training.
Given that backdrop, we expect our civil business to continue growing at above market rates.
Driven by the remaining stages of cyclical recovery, primarily in Asia, and a sustained high level demand for pilots and pilot training across all segments facilities.
In fiscal 2024, we expect low to mid teen percentage annual growth in civil adjusted.
Segment operating income generated that the current higher margin level, and driven by higher training and product volumes and the ongoing simulator deployments to expand our global training network.
We expect to see a more typical seasonal pattern for train demand this fiscal year weighted more heavily this second half.
We also expect about three quarters of our approximately 50 annual full flight simulator deliveries to occur in the second half.
Turning to defense. This sector is already in the early stages of an extended up cycle driven by increased commitments by governments to divest modernisation and readiness and support and in response to geopolitical tension.
Secular tailwind that favor our business include the increased focus on near peer threats and a greater need for the kinds of digital immersion based synthetic solutions that draw from <unk> advances in civil aviation simulation and training.
Our defense segment is in a process of a multiyear transformation, which we expect to culminate in a substantially bigger and more profitable business.
It has already become the world's leading pure play platform independent training and simulation business, providing solutions across all five domains air land sea space with fiber.
We are uniquely positioned to draw on Steve's innovations in commercial aviation.
To transform training with the application of advanced analytics, and leading edge technology.
This expected to bring potential to capture business around the world accelerated by an expanded capability and customers of that.
<unk>.
Wins in a record adjusted backlog of $9 $3 billion pipeline of bids and proposals outstanding and trailing 12 month book to sales ratio demonstrates that our strategy is bearing fruit.
In fiscal 2024, we expect defense to continue renewing its backlog with larger and more profitable program.
While simultaneously working its way through a critical mass of our low margin legacy contracts.
We're highly focused on execution and for the fiscal year.
We expect defense to drive continued year over year quarterly performance improvements with a heavier weighting to the second half consistent with its historical seasonality.
And finally in healthcare, we see potential to accelerate value creation as we gained share in the healthcare simulation training market and continued to build on our top and bottom line growth momentum.
In summary, I continue to be excited about our future I am pleased with the important progress that we made last year expect to continue making excellent progress in the year ahead and beyond.
We're on a clear path to an even bigger stronger and more profitable CA in the future and we remain well on track to our targeted three year EPS compound growth rate in the mid 20% range.
With that I. Thank you for your attention and we're now ready for your question.
Thanks, Mark Operator would you now please open the call to questions from financial analysts.
Thank you.
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One moment please for the first question.
Our first question comes from <unk> <unk> with BMO.
Please proceed.
Thank you.
Good afternoon.
A couple on the defense.
Segment.
The 'twenty 'twenty four outlook.
Improving quarterly results year on year.
I'm guessing that's based on the $82 million, which is corrected for kind of the contract.
<unk>.
Write offs in the first quarter of last year.
I'm not not but I think what I'd tell you by defense up might be able to let the students.
It might be in after but let's say that is.
Well, there's no doubt we're going to have strong growth in defense for the year and Thats really when we talk about continued year over year.
Each quarter of this year, it's exactly that.
We feel very good path to that.
As youll recall it.
It's all about working through the existing backlog of lower margin legacy contracts.
We executed during the time of.
With still some.
The effects of.
Manpower shortage parts shortages and delayed orders due to your crane, I mean, thats working as sell through with quite a well through it.
At the same time refilling, the backlog with larger and more profitable contracts. It takes phasing takes time, we're early in the year.
Again, I am quite confident in that strong growth. This year I think as I've said many times before this business liquidity or look at the orders that you see the orders have been strong we had another year of one one book to Bill and since the end of the quarter.
I can tell you I'm very excited about the contracts that we've announced.
And I think.
One tidbit I'll give you now is that with the recent order that we won that with the air force on the <unk>.
<unk> contract with a U S Army.
Fpss contract.
Which is as I mentioned our largest.
Stimulation contracted world for helicopter training with the U S Army.
No exaggeration, we touch all 43000 U S military pilots at some point in your career I think thats pretty exciting going forward.
While on the lung cancer I look you want add anything.
Perfect.
Okay.
Maybe a couple of <unk>.
Hello.
On this.
The EPS CAGR guidance for 2025.
In the context that civil growth is now luckily in somewhere in that low double digit to mid teens that implies defense.
Very significant ramp up in profitability of defense going into 2025 to somewhere near 200 million EBIT contribution I just want to understand is this a framework that we're thinking about and maybe what is the cadence of that improvement is it more weighted to 2025, when you look at kind of the backlog and how that.
You will of the P&L and overcoming some of these legacy.
Contract margin issues that you have right now is it more 2025 weighted kind.
Kind of model that out.
Okay.
Linda.
Linear fashion.
This improvement going into the next couple of years and what else. One last point is on the on the contract you announced yesterday, which it's a great contract comes out on that by the way.
What is the Capex total capex that is required to invest towards that $455 million revenue that you expect.
I'll start by the first part of that question, there I think that when I look at.
It will basically going back with every number you said the defense look what we're going to see here.
We will see.
Again strong growth with the best will see more revenue improvement towards the second half in terms of margins. The defense will start seeing a bigger inflection in the absolute margins themselves.
As we get into fiscal 'twenty, five, but thats, what we will see but inevitably.
That's quite to support the EPS guidance that we have as you outlined with regards to Capex on an FX TSS look we can't go into too much in terms of the contractual details.
For a few reasons.
Yes.
I'm extremely excited about dot com that contract I think it's important to note that it's got a similar financial profile towards civil training business.
With respect to investment will start to make investments later this year, but it's going to be spread over multiple multiple euro over the 12 year contract it kind of looks like an airline training contract.
That's what I would tell you at the moment.
Okay. Thank you that's helpful.
Our next question comes from <unk> Gupta with Scotiabank. Please proceed.
Thanks, operator, good afternoon, everyone.
Just wanted to maybe follow up quickly on defense segment.
We saw the continuation of the Soi.
Rebound sequentially in the fourth quarter, but what's really kept the margins.
In fact up 5.7% if it wasn't a huge improvement from the previous quarter sequentially and how do you see that margin to your point Mark.
As you see growth.
An inflection point do you see margin defense higher in fiscal 'twenty four.
Well as I said, I think we'll get a bit more of a bigger inflection in the actual margin performance percentage margin as we get closer to the end of this year at the fiscal 'twenty, but what I do see it.
Obviously, we will see growth year over year in absolute numbers, so it quarter over quarter year over year yogurt achieved growth I mean, it will be March March themselves I would see depreciation I can be precise to you because there's a lot of timing to this I would tell you the timing of ramp up of new programs and wind down of once we have so it will be a crossover point, but yes.
For me to be more precise than that right at this moment in time.
Right.
My question on the Q4 margin not improving much whats the same legacy issues still continuing or was there any improvement.
Yes, I mean, it's.
Essentially the same issues.
As we said before there's no surprises that we as I said before they're not going to be.
We're continuing to executing on the programs that we have.
<unk>.
Those are legacy programs that are being gradually replaced with the ones that we see as accretive to the larger objective that we have.
Okay. Thanks, and just a quick follow up on civil.
You guys are expecting a pretty decent growth here in fiscal 'twenty four on.
Soi for civil low to mid teens.
Also seeing the same time the percentage margin is going to be steady ish relatively at high levels, where you are right now.
Is there any change in mix that you anticipate in fiscal 'twenty for like business jet training is kind of maybe not growing as fast and submitted our sales are growing and is there any change we should be mindful of expected mix.
Well it definitely has stopped because business aircraft is not growing as fast as I can tell you that.
Quite confident about that it's really a question about the ramp up of new simulator deployment as.
As you saw we deployed I think it's 23 full flight simulators last year, we opened up our new training centers for example in Las Vegas very successful but.
Inevitably.
They create great incremental margins within two three years, but initially they are low margins as we ramp them up so thats really what youre seeing right now.
There is room, there is room for margins to go.
Beyond that that's for sure, but I think margin margin, 22% ranges, but I think in the range that we would expect at.
At the moment.
That's it for me thanks for the color.
Okay.
Our next question comes from James Mcgarrigle with RBC capital markets. Please proceed.
Hey, Thanks for taking my question.
So just wanted to ask a question on the <unk> outlook.
And our quarter came in great.
The fiscal 2024 outlook was a very strong as well, but I wanted to ask a question about the longer term our strategy.
Where you potentially see some growth there post 2025 and more specifically on your position in India. What's your position in that country. If you can talk about some of the relationships you have with the countries.
Major airlines and any color on your strategy there.
Well I can tell you have a very strong position in India.
We.
We have training centers in multiple locations there.
Yes.
Pretty sure that I'm correct in saying, we have strong relationship with every carrier that is in India of course of a long term partnership with Indigo Airlines zero, where we provide not only.
Training for all of their AB initio cadets.
Just right Derek to go with like 50% of the lift in India. For example, and so I feel very comfortable in terms of the long term there's going to be.
A need for pilots just to fuel the growth in civil aviation.
Bolton.
Would it be an airline traffic in business aircraft for years to come and with the dominant position that we have enough market then.
The relationships that we have with the worlds airlines.
ICF has very good growth potential and I'd put on top of that that I am very happy with what we're seeing is the growth of our flight services business, which remember that.
There is a flight services business, our training business as these huge amount north of 90% customer overlap and as airlines seek.
Seek to modernize their infrastructure, whether it be on a crew management quite planning.
Those kind of <unk>.
Infrastructure needs I think we're invested in that business at the right time.
No I appreciate the color and just kind of a longer term question on the defense side as well.
One of the things that come out of Ukraine or is the need for some common common standard excuse me, which NATO for potentially all helped set for.
For example, I know you guys don't produce ammunition, but we have a British tanks with certain types of guns and they can't fire ammunition.
For a smooth, Florida, chairman or American tank.
Tank, but I think this is really highlighting some of the growing importance of data and weaponry potentially.
Potentially from our open architecture software.
Potentially allows them a plug and play kit so.
So could you just share your thoughts on this opportunities.
For CAE, if nito countries potentially move to to more common standards and how your business is.
Set up to compete if that were to be the case.
Well I think what I would say it at the.
The aggregate level is that the fees, we got a long history of supporting Allied forces and and.
And that IRR supports training and Thats, what we do and when you think about what <unk> military as do when they're not in operations.
They trained that's I'll leave you with a training for conducting our visions and accomplishing what we see as part of our noble mission is making sure that the men and women in uniform.
We're able to execute their missions and return home safely that's what we do we do it across.
A host of platforms in the aviation.
In the army on the naval side, there is that at all five.
<unk> and then <unk>.
<unk> to a broader.
To your question is that the nature of warfare is a lot more complex.
It involves warfare contested environment and you need to be able to train.
Very realistic manner and there is no better more realistic way is the only real way to be able do it involving all five battlespace debate than virtually and for us being the dominant.
Virtual training provider in the world.
I think we're in very good position to support our growth in years to come.
Thank you and I'll turn the line over.
Our next question comes from Tim James with TD Securities. Please proceed.
Thank you very much and good afternoon, everyone.
Maybe a question here for Sonya I suppose.
Thinking about the investment that the company has been making an intangible asset and thats been kind of ramping up with company growth over the last four or five quarters I'm. Just wondering how we should think about the cash requirements for intangibles in in fiscal 'twenty, four and beyond and sort of what that those investments will be focused on.
Hey, Tim.
We have seen a bit of a ramp up and that was expected. It came along with our commitment to develop on the civil flight services. So as you remember we bought it at quite.
And interesting multiple knowing that we would develop and take an advanced the technology on that front. So that's been the driver and I expect that to be similar this year.
Okay. Thank you my second question, just thinking about and I'm not sure you can parse it out this way, but let me ask the question.
Could you talk about your exposure to regional aircraft training really where I think the pilot shortages is maybe most acute or maybe most evident.
Are you.
That drive that initial enrollment sort of kind of.
Demand throughout your business, where you can kind of point, specifically to that part of the market.
I can take it.
The questions were very strong in in training.
The regional Airlines.
I think.
We are by far the largest provider of training for.
The regionals in the United States.
All of them.
And as well very very strong on the flight services side, you've seen US just recently the last few days signed a landmark agreement with Skywest.
And that was on top of.
The deal that we signed a few months ago with frontier, which not a regional airline, but they gave the point so look.
If I could if I could tell you if I could have another a couple of CRE J simulators are ready today, let's put them in right now.
The moderate demand is quite unprecedented and I can tell you our training center supporting.
Regional staff are very busy and yes to your point that that is driving activity from an <unk> standpoint flight training organization, who have initiatives.
Great. Thank you very much.
Our next question comes from Christine will walk with Morgan Stanley . Please proceed.
Hey.
And Mark maybe going back to defense and security margins.
<unk> been very clear about <unk> been filling the defence backlog with more profitable contracts, but can you help us quantify.
How much of do you saw that the composition of the fiscal year 'twenty four revenue will be how much of that is from legacy of less profitable contracts firsthand.
The more profitable ones that you've been booking is that 50% more or less that would really help us understand the bridge and then also any indication of what that looks like for fiscal 'twenty five would be really helpful.
Well, it's all of it is getting much much more in fiscal 'twenty five as weak.
Certain programs that we call drag programs that were executed years ago that.
There are.
Quite low margins. So it's offsetting itself over the next 12 months.
Being more precise view.
Exactly where does that happen how much of percentage look I would hazard a guess at 50 50, 50, and why I say, yes. It is a pretty educated guess.
As I look at that but I think look at margins.
Start getting towards our target as we get into the latter end of the year.
Thanks, Mark and if I could ask another one on civil and last quarter, you mentioned that their favorite <unk> was about 10% of civil revenue what was it this quarter and then also how should we think about the margin composition for Air Center versus the overall civil business is that accretive or dilutive.
To the segment margin.
So I would stick around at around 10%.
Christine so holding on around that and as we said before it's accretive to the civil margins as well.
Great. Thanks, Mark Thanks Sonya.
Our next question comes from Ron Epstein with Bank of America. Please proceed.
Okay.
Hey, good afternoon guys.
Just maybe a bigger picture question looking out longer term driver.
How should we think about.
Growth.
In fiscal 'twenty four.
Looking for mid to low teens growth in the civil segment.
But then the longer term growth for the business Youre looking out in the twenties.
So does that mean, we're seeing kind of the growth is going to be kind of rear end loaded how should we be thinking about that transition from.
Fiscal 'twenty four to your longer term guide.
I don't see it backend loaded.
Ron.
Alrighty derived that conclusion, but we definitely is backend loaded.
Now it's going to be.
Progression in margins now in that three year guidance.
Civil margins would expand but it's also about that with all of these agreements.
And outsourcing and the additional organic capex.
If higher margins on higher volume.
So both take you there.
So that gets you to that kind of mid 20 gross or wherever.
Cost growth.
Yes.
Okay, great. Thank you that's all.
Thank you.
Our next question comes from Michael Kay with Desjardin capital markets. Please proceed.
Yes, Hi, and thank you for taking my question maybe in defense.
The active bids and proposals jump from $7 3 billion to $9 3 billion over the last quarter. Let me just any additional color on that the bidding pipeline and maybe any delay expectations related to the current U S budget negotiations that are ongoing.
Look.
I'm going to answer the last part of your question to one.
I always like to say is that the day that the.
She is defense business as a proxy to U S government budget I'll be very happy.
Having said that look you can always you can.
The only concern who would have that that might be short term is it something dramatic happens that stops new orders from happening I don't see that.
Just the timing of short term.
To me.
To me this division we have in the market is very strong.
The backlog.
That we see in terms of actually the bids outstanding. It's just basically the fact that with our position in the market, we see opportunities to bid.
Larger group of business and that's right in our sweet spot.
As I've said many times before we don't prepared bids to our newest early periods or any military contract unless we think that we have a pretty good chance to win because.
Portfolios basis third manpower passive is very labor intensive and costly.
No.
So if we believe if we bid on them is because as I said, we think the probability of win is high and it's just a reflection of what it looks like post the <unk> Harris Act.
Acquisitions were.
We've really transformed this business.
To become the largest that number too.
Our OEM independent training provider in the world for simulation. So the scale. The scale that we have is really unprecedented and the number of platforms.
<unk> platform and platforms of all segments are much higher than they were at any time before it again all of that contributes to the amount of business.
That we can go out after with a reasonable and high level of probability of win.
Thank you that's very helpful and maybe just a quick one on the flight operating solution contract you signed with Skywest. There has been a matter of airlines in the U S better budgeting large budgets for IC overhauls.
Do you see anything picking up in that space as maybe government regulation on cancellation service salaries increases or is it still a steady state as usual.
While we're seeing a lot of activity and we have a lot of discussions with airlines as they want to renew and modernize their infrastructure.
They all are they all has to do with they all realize that we have in order to keep up with the enhanced demand that there is out there.
They are having to modernize their platform. So that's what we're seeing so.
To me I see.
Lots of potential for growth in this in this sector and we are doing well and it sounds like quite pleased our setup in automotive result, where we arent integration and the timing of our investment in flight service.
That's very helpful. Thank you.
Our next question comes from Noah <unk> with Goldman Sachs. Please proceed.
Hello Rod.
I know.
Mark can you answer.
Prior question.
The mix of defense this upcoming year.
High margin programs versus.
What do you call it drag programs. Thank you.
Two.
50 50.
Are you, saying that half of the defense business.
David.
Call It drag program.
No.
They're not a drag program is gone or is rolling off.
Sorry, sorry.
No.
Really not.
Our our drag failures.
No.
No not at all no.
So you're saying half of what's been a drag is rolling off.
Or what is what it is 50 50 and in that context, yes.
I'm going to bring you back to what it was.
Outlook is in defense and there was that what were going to see a strong growth in the year defense, we're going to have continued year over year improvement.
In the amount of Soi that we generate every quarter relative to the same quarter a year before and Thats. We have a very good path on that and that's why I'm comfortable guiding to that today, even though it's pretty early days.
In the year and in terms of the margin margin itself as you programs come on replacing the other ones that are dragging and dragging doesn't mean zero necessarily just dragging two marriages.
We're targeting to do for the margin inflection starts happening later in the year and certainly as we begin in fiscal 'twenty five.
How many programs in defense.
<unk>, what you call a drag program.
I won't get into that.
Because they don't have to define for you what exactly is a drag program, we executed literally probably in the region of five or 600 program does that at once and defense at any given time, that's about the number that we have that we're executing at this at this moment in time.
They will leave it at that Noah.
Okay.
I mean, it's.
It's been asked about a bunch I don't want to keep asking the same question but.
Tom.
My understanding of what happened there was you acquired the business realize there were just a handful of contracts written.
I would just need to roll off.
I appreciate the reasons you wouldn't want to get into all the details thus far on this call.
But at the same time.
If I kind of reluctance to defer specifics here I think.
Sure.
He's still confused as to exactly what's going on in auto.
And Brian it looks better.
Other than just kind of taking those the high level of workload.
Sure.
As such as the business, we acquired don't forget that we have been winning contract will be executing program both on legacy CAE.
Would it be U S and international as well as at Elk Creek.
Harriss contract under an environment, where we had just like the rest of the industry pretty significant.
Parts shortages issues manpower shortages and delays in orders, which we expected to get that we're literally delayed because of your focus on Ukrainian work, which in a longer term, obviously drives budgetary pressures higher which is a good thing but in the short term certainly affected.
The amount of.
The amount of contracts that were worked on that we could translate into revenue for US is we just got delays in orders.
Turning to specifics.
Drag programs as you might want to think about it are very very low profitability. That's a very small number of contracts.
Okay.
Okay.
Helpful.
The capital the capital expenditure increase this year.
Four.
And then should we be thinking of that as a new base. Thank you.
And then grow off of Jan beyond 'twenty, four or is there a sort of onetime step up this year.
A lot of it has to do with the success that we've had in convincing airlines to convert.
More of their training to us.
If you look at for example, four out of four to five major airlines in the U S are now training with us.
That's a big step up and once we do that I've never seen it go the other way at the same time, you see us deploy new centers for business aircraft, which are highly accretive very good margin performance.
In a market with Ics structurally higher going forward Thats really what youre seeing right now I'm not going to get beyond this year, but that's really the bulk of it.
Okay.
Great. Thank you so much.
No.
Yeah.
Our next question comes from <unk> Lee with <unk> Brown. Please proceed.
Thank you.
Mark I guess, a couple of questions on civil aviation.
Utilization rate this quarter was 78%.
Asia has been fully recovered.
I'm just wondering in terms of how should we be thinking about where the utilization could settle in under a more I guess call it normal.
Utilization in Asia.
Well I think there's room to grow still in Asia.
Has been recovering.
Rapidly since the start of fiscal year <unk>.
<unk>.
Q4 utilization in Asia, with certainly substantially approved versus the start of the year. So there's still room gas in that tank, if I should say on that one I mean utilization is not a perfect number I would say because don't forget.
As we ramp up new simulators, we've ramped up a lot of simulators that will kind of surface.
Surf with depressed utilization of short term because obviously if the rapid use training center argue simulator up it's not going to be a full utilization rate up right off the bat. So.
And maybe just Asia Pacific.
In terms of China would add debt.
That's mainly a simulator market for us.
We kept it Lee.
<unk>, maybe six to eight full flight simulators, a year to China over the last couple of years, we've only sold three in total, but we're definitely seeing a pickup in that sales related activity in China.
Okay.
So in terms of light.
I know, there's some noise on the simulators by in terms of like the utilization rate on a more normalized longer term basis.
It sounds like the scope for it to go up maybe in the $80 is that kind of the way to think about maybe mid eighties and maximum or.
On and let them go ahead.
It certainly can.
We're operating at a very high level now if you look at the global fleet.
What kind of level, but we are printing centers that operate at north of 100%.
Yes.
I mean practically to operate the whole the whole fleet. The 300 odd simulators at that level, you would not be tenable, because you have to have time to maintain them that kind of that kind of thing but.
You definitely could see it go up above 70% Thats definitely possible and don't forget we always work on making sure that we get we get the best returns out of utilization yet.
Okay, and just to follow up on in the.
Guidance, you mentioned that civil kind of continue growing in it.
Above market rate unquote.
Curious what I know you gave guidance on the.
The Soi and where do you think thats going but I'm just wondering what is that market rate that youre talking about.
While we're talking about the underlying rate of growth.
Mainly airline passenger travel RP case.
Okay got it thank you.
Operator, I think that's all we have four members of the analyst community. We will now open the line to members of the media if there any questions there.
If you're a part of the media and we'd like to Register a question. Please press star one four on your telephone.
We have a question from Stefan <unk>.
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Okay, operator, no further questions.
Yes. Thank you.
I want to thank all participants today are financial analysts and members of the media for joining the call and remind you that a transcript of today's discussion can be found on <unk> website.
Thank you.