Q2 2024 CAE Inc Earnings Call

Yeah.

Okay.

Speaker 1: Good day, ladies.

Good day, ladies and gentlemen, welcome to D. C E second quarter conference call. Please.

Speaker 2: Welcome to the CAE second quarter conference call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Mr. Andrew Aronowitz. You may now proceed Mr. Aronowitz.

Please be advised that this call is being recorded.

I would now like to turn the meeting over to Mr. Andrew <unk>.

You May now proceed Mr. Horowitz.

Yeah.

Speaker 3: Good afternoon everyone and thank you for joining us before we begin. I'd like to remind you that today's remarks, including management's outlook and answers to questions contain forward looking state.

Good afternoon, everyone and thank you for joining us before we begin I'd like to remind you that today's remarks, including management's outlook and answers to questions contain forward looking statements.

Speaker 3: These forward-looking statements represent our expectations as of today, November the 14th, 2023, and accordingly are subject to change. Such statements are based on assumptions that may not materialize and are subject to risks and uncertainties.

Forward looking statements represent our expectations as of today November 14, 2023, and accordingly are subject to change.

Such statements are based on assumptions that may not materialize and are subject to risks and uncertainties.

Speaker 3: Actual results may differ materially and listeners are cautioned not to place undue reliance on these forward looking states.

Actual results may differ materially and listeners are cautioned not to place undue reliance on these forward looking statements.

Speaker 3: The description of the risks, factors, and assumptions that may affect future results is contained in C's annual MVNA available on our corporate website and in our filings with the Canadian Securities Administrators on CDAR Plus and the U.S. Securities and Exchange Commission.

A description of the risks factors and assumptions that may affect future results is contained in Cae's annual MD&A available on our corporate website and in our filings with the Canadian Securities administrators on SEDAR plus <unk>.

And the U S Securities and Exchange Commission on Edgar.

Speaker 3: On the call with me this afternoon, our Mark Peron sees President and Chief Executive Officer and Sonia Bronco, our Chief Financial Officer.

On the call with me this afternoon are Mark <unk>.

He is president and Chief Executive Officer, and Sonya Branco, our Chief Financial Officer.

Speaker 3: After remarks from Mark and Sonia, we'll open the call to questions from financial analysts. And at the end of that segment, we'll open the line to members of the media. Should there be any questions? Let me now turn to the audience.

After remarks from Marc and Sonya, we'll open the call to questions from financial analysts and at the end of that segment will open the line to members of the media should there be any questions. Let me now turn the call over to Mark.

Thank you Andrew and good afternoon to everyone joining us on the call.

Speaker 3: Thank you, Andrew, and good afternoon to everyone joining us on the call.

Speaker 3: We delivered a good performance overall in the second quarter with double-digit top and bottom line growth driven mainly by continued strong momentum in civil and higher contributions in defense compared to the second quarter last year.

We delivered a good performance overall in the second quarter with double digit top and bottom line growth driven mainly by continued strong momentum in civil and higher contribution from defense compared to the second quarter of last year.

Speaker 3: We made excellent progress to secure CE's future with nearly $1.2 billion in total adjusted order intake, for a record $11.8 billion of adjusted backlog.

We made excellent progress the securities future with nearly $1 2 billion.

In total adjusted order intake for a record $11 8 billion of adjusted backlog.

Speaker 3: We further bolstered our financial position on the path to meeting our short-term leverage target.

We further bolstered our financial position on a path to meeting our short term leverage target.

In civil.

Speaker 3: In civil, we had another quarter of excellent performance with demand for our training in flight operations solutions continued to be robust across all regions. Notably in Asia, which has lagged in the global recovery in air travel.

We had another quarter of excellent performance with demand for our training and flight operation solutions continue to be robust across all regions, notably in Asia, which has lagged in the global recovery in air travel.

We booked $618 million of orders with customers worldwide for our one <unk>.

Speaker 3: We booked $618 million of orders with customers worldwide for a 1.08 times book to sales ratio.

Times book to sales ratio.

Speaker 3: We received orders for 15 full flight simulators, including a multi-year purchase of 8 new Boeing 737 MAX simulators for Ryanair and 2 Airbus A320 simulators to the United Airlines.

We received orders for 15 full flight simulators, including a multiyear purchase of eight new Boeing Boeing.

Boeing 737, Max simulators for Ryan here, and two Airbus <unk> hundred 20 simulators to United Airlines.

Speaker 3: In commercial aviation training, we signed a multi-year training agreement with Delta Airlines and in business aviation training.

In commercial aviation training, we signed a multiyear training agreement with Delta Airlines and in business aviation.

Speaker 3: We signed a multi-year agreement with Windrow Air Jet Charter.

We signed a multiyear agreement with when Rolling Air Charter.

Our flight operations, we signed long term next generation solutions agreement with Air and Air India.

Speaker 3: In flight operations, we find long-term next-generation solutions agreements with Air and Air India.

Speaker 3: We delivered 11 full flight simulators to customers during the quarter and our average training center utilization was 71%.

We delivered 11 full flight simulators to customers during the quarter and our average training center utilization was 71%.

Speaker 3: which is up nicely from 66% last year.

Which is up nicely from 66% last year.

Speaker 3: The year-over-year increase points to the strength of the underlying commercial and business aviation training demand across all regions.

The year over year increase points to the strength of the underlying commercial and business aviation training demand across all regions.

Speaker 3: Anyone who's travelled by air this summer will know just how busy the airlines have been trying to meet passenger demand.

Anyone who has traveled by air this several well known just how busy the airlines have been trying to meet passenger demand.

Speaker 3: The sequential decrease in training center utilization that we experienced during the summer is a direct reflection of the seasonality we typically see as pilots are actively flying during that period.

The sequential decrease in training center utilization that we experienced during the summer is a direct reflection of the seasonality we expect we typically see.

Tayo attractively flying during that period.

Speaker 3: In defense, performance was a bit lower in the first quarter, but still higher than the second quarter last year.

In defence performance was a bit lower to the first quarter, but still higher than the second quarter last year.

Speaker 3: We booked orders for $527 million for a 1.1 time book to sales ratio, giving us a record $5.9 billion of adjusted defense backlog.

We booked orders for $527 million for a one one times book to sales ratio.

Giving us a record $5 9 billion of adjusted Defense backlog.

Speaker 3: They include strategic opportunities like the formalization of our contract with Beltexton as part of Team Valor to provide simulation training solutions for the all-important D-280 tiltrotor, the platform for the next generation U.S. Army Future Long Range Assault Aircraft Program.

They include strategic opportunities like the formalization of our contract with Bell Textron as part of team.

To provide simulation and training solutions for the all important <unk> hundred 80 tilt rotor.

That form for the next generation U S Army future long range assault aircraft program.

Other notable wins include includes the previously announced simulation based training contract for the U S. Army's key next generation Airborne ISR system, which we call the high accuracy detection exploitation of system or <unk>, which is based on the Bombardier global $6 6500 business jet.

Speaker 3: Other notable wins include the previously announced simulation-based training contract for the U.S. Army's key next-generation airborne ISR system, which is called the High Accuracy Detection Exploitation System, or HADES, which is based on the Bombardier Global 6,000 6,500 business jet.

Speaker 3: Defense also received an order to provide the US Army with support services for the Advanced Helicopter Flight Training Support Services contract for aircrew and non-aircrew personnel.

Defence also received in order to provide the U S Army with support services for the advanced helicopter flight training support services contract, where aircrew and non air cool personnel.

Speaker 3: Additionally, defense was awarded contracts for modification and maintenance of F-16 training devices for the United States Air Force, as well as for the upgrade of various training devices.

Additionally, defense was awarded contracts for modification and maintenance of F 16 training devices for United States Air Force as well as for the upgrade of various training devices.

Speaker 4: With that, I'll now turn the call over to Sonia to provide additional details about our financial performance. Sonia? Thank you, Mark, and good afternoon, everyone.

With that I'll now turn the call over Stoney I'll provide additional details about our financial performance.

Thank you Mark and good afternoon, everyone can.

Speaker 4: Consolidated revenue of $1.09 billion was 10% higher compared to the second quarter last year, and adjusted segment operating income was $138.5 million compared to $124.7 million in the second quarter last year.

Consolidated revenue of $1 9 billion was 10% higher compared to the second quarter last year and adjusted segment operating income was $138 5 million compared to $124 7 million in the second quarter last year, our quarterly adjusted EPS was <unk> 27, compared to 19% in the second quarter last.

Speaker 4: Our quarterly adjusted EPS was 27 cents compared to 19 cents in the second quarter last year.

Year.

Speaker 4: We incurred restructuring integration acquisition costs of $37.9 million during the quarter relating to the Air Centre and the L3Harris Military Training Act.

We incurred restructuring integration and acquisition costs of $37 $9 million during the quarter relating to the air Centre and the Ultra Harriss military training acquisition.

Speaker 4: Net cash from operating activities this quarter was $180.2 million compared to $138 million in the second quarter of fiscal 2026.

Net cash from operating activities this quarter was $182 million compared to $138 million in the second quarter of fiscal 2023.

Speaker 4: Pre-cash flow was $147.5 million compared to $108.4 million in the second quarter last year. The increase was mainly due to a higher contribution from non-cash working capital. We usually see a higher investment in non-cash working capital accounts in the first half of the fiscal year. This year, I'm pleased that we've already begun to see a reversal in the second quarter, and we expect that positive trend to continue into the back half of the fiscal year.

Free cash flow was $127 5 million compared to $108 4 million in the second quarter last year. The increase was mainly due to a higher contribution from noncash working capital, we usually see a higher investment in noncash working capital accounts in the first half of the fiscal year. This year I am pleased that we've already begun to see a reversal in that in the <unk>.

Quarter, and we expect that positive trend to continue into the back half of the fiscal year.

Speaker 4: We continue to target 100% conversion of adjusted net income to free cash flow for the year.

We continue to target a 100% conversion of adjusted net income to free cash flow for the year.

Speaker 4: Capital expenditures totaled $61.9 million this quarter, with approximately 60% invested in growth to specifically add capacity to our civil global training network to deliver on the long-term training contract in our backlog.

Capital expenditures totaled $61 $9 million this quarter with approximately 60% invested in growth specifically add capacity to our civil global training network to deliver on our long term training contracts in our backlog.

Speaker 4: Income tax recovery this quarter was $8.5 million for an effective tax rate of negative 16%. The adjusted effective income tax rate was nil, which includes the recognition of previously unrecognized upper tax assets, which had an approximate 5 cent positive EPS impact this quarter.

Income tax recovery this quarter was $8 5 million for an effective tax rate of negative 16%. The adjusted effective income tax rate was nil, which includes the recognition of previously unrecognized deferred tax asset, which had an approximate <unk> <unk> positive EPS impact this quarter net.

Speaker 4: Net finance expense this quarter amounted to $48 million, which is down from $54.1 million in the preceding quarter and up from $41.3 million in the second quarter last month.

Net finance expense this quarter amounted to $48 million, which is down from $54 $1 million in the preceding quarter and up from $41 3 million in the second quarter last year.

Speaker 4: Our net debt position at the end of the quarter was approximately $3.2 billion for net debt to adjusted EBITDA of 3.16 times at the end of the quarter. Following the end of the quarter, we announced a definitive agreement to sell healthcare for an enterprise value of $311 million.

Our net debt position at the end of the quarter was approximately $3 2 billion for a net debt to adjusted EBITDA of $3. One six times at the end of the quarter.

Following the end of the quarter, we announced a definitive agreement to sell health care for an enterprise value of $311 million.

Speaker 4: A decision which better positioned CAE to efficiently allocate capital and resources to secure growth opportunities in our large core simulation and training market.

A decision, which better positions CAE to efficiently allocate capital and resources to secure growth opportunities in our large course stimulation and training market, we intend to apply a significant portion of the net proceeds to reduce debt.

Speaker 4: We intend to apply a significant portion of the net proceeds to reduce debt.

Speaker 4: The transaction is expected to close before the end of the current fiscal year, subject to closing conditions, including customary regulatory approval.

The transaction is expected to close before the end of the current fiscal year subject to closing conditions, including customary regulatory approvals with leverage having decrease to a ratio of approximately three times.

Speaker 4: with leverage having decreased to a ratio of approximately three times.

Speaker 4: We will consider reinstating capital returns to shareholders following the closing of the healthcare sale transaction.

We will consider reinstating capital returned to shareholders. Following the closing of the healthcare sale transaction.

Speaker 4: We are prioritizing a balanced approach to capital allocation, including funding accretive growth, continuing to strengthen our financial position commensurate with our investment grade profile, and returning capital to shareholders. Turning to our slide-

We are prioritizing our balanced approach to capital allocation, including funding accretive growth continuing to strengthen our financial position commensurate with our investment grade profile and returning capital to shareholders now turning to our segmented performance.

Speaker 4: In civil, second quarter revenue was up 13% to $572.6 million compared to the second quarter last year. And adjusted segment operating income was up 9% to $114.3 million versus second quarter last year. For a margin of 20%

In civil second quarter revenue was up 13% to $572 6 million compared to the second quarter last year and adjusted segment operating income was up 9% to 114.

$3 million versus second quarter last year for a margin of 20% both solid improvements over last year and as Mark referenced Ta second quarter is normally seasonally softer with respect to training center utilization, which typically has some impact on business mix.

Speaker 4: Both solid improvements over last year and as Mark referenced, DA's second quarter is normally seasonally softer with respect to training center utilization, which typically has some impact on business.

Speaker 4: In defense, second quarter performance was better than the same period last year with revenue up 8% to $477.4 million and adjusted segment operating income up 16% to $21.3 million, giving us an adjustment, adjusted segment operating income margin of 4.5%.

In Defence second quarter performance was better than the same period last year with revenue up 8% to $477 4 million.

And adjusted segment operating income up 16% to $21 3 million.

Giving us an adjustment.

Adjusted segment operating income margin of four 5%.

Speaker 4: The year-over-year growth came mainly from a higher level of activity on programs, partially offset by higher SG&A expenses from higher bid and proposal costs associated with the pursuit of larger pipeline of defense program opportunities.

The year over year growth came mainly from a higher level of activity on programs, partially offset by higher SG&A expenses from higher bid and proposal costs associated with the pursuit of larger pipeline of defense program opportunities.

Speaker 4: The Fence performance was lower than the preceding quarter as we managed through the ongoing retirement of legacy programs from backlog. We also had lower revenue than we expected from newer and more profitable programs due to recent funding and award delays.

Defence performance was lower than the preceding quarter as we manage through the ongoing retirement of legacy programs from backlog.

Also had lower revenue than we expected from newer and more profitable programs due to recent funding and award delays.

Speaker 4: And in healthcare, second quarter revenue was $38.5 million, down from $43.6 million in 2.2 last year. Adjusted segment operating income was $2.9 million in the quarter for an adjusted segment operating income margin of 7.5%. This is up nicely from 2.2 of last year. With that, I'll ask Mark to discuss the way forward.

And in healthcare second quarter revenue was $38 $5 million down from $43 $6 million in Q2 last year. Adjusted segment operating income was $2 9 million in the quarter and an adjusted segment operating income margin of seven 5%. This is up nicely from Q2 of last year.

With that I'll ask Marc to discuss the way forward.

Thanks Tanya.

Speaker 3: Our outlook for CE continues to be positive for the fiscal year and beyond.

Our outlook for fee continues to be positive for the fiscal year and beyond.

Speaker 3: Our strong momentum is translating to robust order flow and a record backlog which portend an excellent future for CA.

Our strong momentum is translating to robust over order flow and a record backlog.

For 10 and excellent future CE.

And our core civil and defense markets are.

Speaker 3: Our customers increasingly require innovative training and operational support solutions to perform at their best in mission-critical environments.

Our customers increasingly require innovative training and operational support solutions to perform at their best in mission critical environments.

Speaker 3: And as we look ahead, we remain highly encouraged by the favorable secular trends that we see and in the growth that we anticipate by leveraging our global market position.

And as we look ahead.

We remain highly encouraged by the favorable secular trends that we see and then the growth that we anticipate by leveraging our global market position.

Speaker 3: As well, our technological expertise and the strength of a 1C culture portends to offer the best.

As well <unk>.

Our technological expertise and the strength of one chief culture portends for optimism.

In civil we expect to continue growing at above market rate driven by the growth in our recovery in air travel increased penetration of the existing addressable market for training and flight services solution.

Speaker 3: In civil, we expect to continue growing at an above market rate driven by the growth in recovery and air travel, increased penetration of the existing addressable market for training and flight services solutions.

Speaker 3: and to sustain high level of demand for pilots and pilot training across all segments of aviation.

And a sustained high level of demand for pilots and pilot training across all segments with aviation.

Speaker 3: For the current fiscal year, we now expect CIVIL to deliver growth in the mid to high teens percentage range of adjusted segment operating.

For the current fiscal year, we now expect civil to deliver growth in the mid to high teens percentage range of adjusted segment operating income.

Speaker 3: and given a profile of our plan simulator deliveries and the normal seasonality of training demand, performance will be mostly weighted to the fourth quarter.

And given our profile of our planned simulator deliveries and the normal seasonality of training demand performance will be mostly weighted to the fourth quarter.

Speaker 3: The higher expected annual growth is based on our strong performance year to date and the visibility that we have in a highly regulated aviation training market.

The higher expected annual growth is based on our strong performance year to date and the visibility that we have in a highly regulated aviation training market.

In addition to continuing to grow our share of the aviation training market and expanding our position in digital flight services.

Speaker 3: In addition to continue to grow our share of the aviation training market and expanding our position in digital flight services, we expect to maintain our leading share of full flight simulator sales and to deliver approximately 50 full flight simulators for the year. Approximately half of those deliveries are slated for the fourth quarter.

We expect to maintain our leading share of full flight simulator sales and to deliver approximately 50 full flight simulators for the year.

Approximately half of those deliveries are slated for the fourth quarter.

Turning to defense, we expect to continue making good progress transforming our business bye.

Speaker 3: Turning to defense, we expect to continue making good progress transforming our business.

Speaker 3: by replenishing our backlog with more profitable programs.

By replenishing, our backlog with more profitable program.

Speaker 3: and by retiring low margin legacy contracts, which we expect to culminate in a substantially bigger and more profitable business.

By retiring low margin legacy contracts, which we expect to culminate in a substantially bigger and more profitable business.

Speaker 3: We strengthen our future position in recent quarters with strategic and generational wins, including next gen platforms.

We strengthened our future positioning in recent quarters with strategic and generational wins, including next Gen platforms.

Speaker 3: giving us a record $5.9 billion adjusted backlog.

Giving us a record $5 9 billion adjusted backlog.

Speaker 3: together with a record $9.5 billion pipeline of bids and proposals outstanding.

Together with a record $9 5 billion pipeline of bids and proposals outstanding.

Speaker 3: we continue to see positive signs of the transformation underway. And as we look at the remainder of Fiscal 2024,

We continue to see positive signs from the transformation underway.

And as we look at the remainder of fiscal 2024.

The positive inflection.

Speaker 5: We expected this year in defence has been delayed because of impacts associated with the retirement of our lower margin legacy contracts, specifically those awarded prior to COVID and current new program delays.

We expected this year in defense has been delayed because of impacts associated with the retirement of our low margin legacy contracts.

Typically those awarded prior to Covid and current new program delays.

Speaker 5: And while their inflationary impacts on these contracts are known and finite in nature, they continue to be the most significant factor contributing to the current low margin performance of business and does not reflect its underlying potential.

And whether inflationary impacts on these contracts are known and finite in nature. They continue to be the most significant factor contributing to the current low margin performance of the business.

It does not reflect its underlying potential.

Speaker 5: The essential treadlines of replenishing our backlog with larger and more profitable programs, while simultaneously retiring legacy contracts remain positive.

The essential trend lines of replenishing, our backlog with larger and more profitable programs, while Simon simultaneously retiring legacy contracts remain positive. However.

Speaker 5: However, the prevailing U.S. government's budget appropriation on CERTI is slowing the ramp-up of the new and higher-margin defense programs that we've been awarded. This is also impacting the conversion of our bid pipeline to orders that we expected to generate higher-margin revenue for this fiscal year.

However, the prevailing U S government budget appropriation uncertainty is slowing the ramp up of the new and higher margin defense programs that we have been awarded this is also impacting impacting the conversion of our bid pipeline into orders that we expected to generate higher margin revenue for this fiscal year.

Speaker 5: As a result, we now expect second half defense adjusted segment operating income margins to remain in the current single digit percentage range.

As a result, we now expect second half defense adjusted segment operating income margins to remain in the current single digit percentage range.

Speaker 5: We expect to see defense segment performance improvements materialized next fiscal year, but this will ultimately depend on the duration and magnitude of delays to new programs in the current environment.

We expect to see defense segment performance improvements materialize next fiscal year, but this it will ultimately depend on the duration and magnitude of delays to new programs in the current environment.

We are firmly focused on retiring legacy contract as soon as possible and mitigating our margin pressures associated with them.

Speaker 5: We're firmly focused on retiring legacy contracts as soon as possible and mitigating the margin pressures associated with them.

Speaker 5: We remain pleased with the accretive margin profile on our newly awarded contracts, which to me is the best indication of where the future performance of defence is headed.

We remain pleased with the accretive margin profile on a newly awarded contracts, which could we have the best indication of where the future performance of defense is headed.

We maintain our conviction that the ongoing retirement of legacy programs and a new order backlog growth will result in a low double digit percentage margin business at a steady state.

Speaker 5: we maintain our conviction that the ongoing retirement of legacy programs and the new order backlog growth will result in a low double digit percentage margin business at a steady state.

Lastly on healthcare.

Speaker 5: I want to thank Jeff Evans and the entire healthcare team for their dedication and excellent performance.

I wanted to thank Jeff Evans, and the entire healthcare team for their dedication and excellent performance.

Speaker 5: We're proud of the significant contribution to patient safety that CA Healthcare has made, and I believe that Madison Industries is the right home to take the business to the next level.

We're proud of this significant contribution to patient safety that see healthcare has made and I believe that Madison industries as the right home to take the business to the next level.

Speaker 5: Like CE, Madison's mission is rooted in making the world safer, and I believe it will be ideally positioned to support the future growth of the business, which will continue to focus on evolving simulation to drive patient safety and quality outcomes.

Like see Madison is mission is rooted in making the world safer and I believe it will be ideally positioned to support the future growth of the business, which will continue to focus on evolving stimulation to drive patient safety and quality outcomes.

Speaker 5: For CAE overall, we continue to be highly encouraged by the secular tailwinds at all segments and the growth that we expect by harnessing our global market and technology leadership and the power of 1 CAE.

Overall, we continue to be highly encouraged by the secular tailwind that all segments and the growth that we expect by harnessing our global market and technology leadership and the power of <unk>.

Speaker 3: With that, I thank you for your attention and we're now ready to answer your questions. Operator will now take questions from...

With that I. Thank you for your attention and we're now ready to answer your question.

Operator, we will now take questions from financial analysts.

Thank you.

Speaker 2: If you are a financial analyst and would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. One moment please for the first question.

If you are a financial analyst and would like to register a question. Please press the one followed by the four on your telephone.

You will hear at <unk> from technology a request.

For your question has been answered and you would like to withdraw your registration. Please press. The one followed by the three one moment. Please for the first question.

Our first question comes from <unk> <unk> with BMO.

Speaker 2: Our first question comes from Fadi Shamoun with BMO. Please proceed.

Please proceed.

Yes.

Speaker 6: Yeah, good afternoon everyone. Thanks for taking my question. So 1st question I have is is the mid 20%.

Yes, good afternoon, everyone and thanks for taking my question. So first question I have is.

Is the mid 20%.

Speaker 6: EPS growth guidance that you reaffirmed.

EPS growth guidance at Joliet firmed.

Speaker 6: take into account the expected divestment of health care and

Taken to account to the.

Expected divestment of healthcare and.

Speaker 6: Secondly, I guess I'm just trying to square off the pushback in the defense margin inflection point and the maintaining of the guidance for fiscal 2025 effective.

Secondly, I guess.

I'm just trying to square off the pushback in the defense margin inflection point.

And the maintaining of the guidance for fiscal 2025 effectively.

Speaker 6: Like the, so are you still expecting defense margin to bounce back kind of in 2025? And to what level are you still thinking the double digit is achievable kind of in the back half of 2025, just trying to square off the maintenance of this guidance in the context of the divestment of health care and the weaker results in defense?

Like the.

Yes.

So you are still expecting defense margin to bounce back.

In 2025 and to what level are you still thinking double digits.

<unk> kind of in the back half. So I was just trying to square off the maintained.

Yes.

This guidance in the context of the divestment of health care.

The weaker results than in defense.

Speaker 5: Okay, yeah, thanks for the question, Fady.

Okay. Yeah. Thanks, Thanks for the question the fatty look.

Speaker 5: Look, our three-year guidance continues to be our target.

Hello.

Our three year guidance continues to be our target.

Speaker 3: We continue to see strong growth and profit improvements across the portfolio. I think it's safe to say, obviously, that as you point out, that we see incremental risk in defense related to the fact that we talked about new program wraps up, the timing of risk environment, the environment that we're in in terms of the budgetary issues that we see in the United States specifically.

We continue to see strong growth and profit improvements across the portfolio.

I think it's safe to say, obviously as you point out that we see incremental risk in defense related to the factors, we've talked about new program ramps up the timing of risk environment.

The environment that we're in in terms of the budgetary issues that we see the EDI United States specifically.

Speaker 3: But you know, as I mentioned, we're very focused on closing up the work on legacy contract as soon as we can.

But as I mentioned, we're very focused on closing out that work on legacy contract as soon as we can so.

Speaker 5: So, you know, I'm not giving guidance today about fiscal 25, but, you know, as we get closer fiscal 25, if there's more color to provide on that, we'll do so. But, you know, the target is the same. And with regards to healthcare, I would say that, you know, the impact, I mean, it's not nothing, but it's relatively minimal in terms of its impact to the guidance that we've given and the results coming out of the sale.

Not giving guidance today about fiscal 'twenty, five, but as we get closer to fiscal <unk>.

If there's more color to provide on that we will do so but target is the same and with.

Of course, the health care I would say that the.

Impact yes.

It's not nothing but it's relatively minimal in terms of its impact to the guidance that we've given and the results coming out of the sale.

Okay.

Speaker 6: Okay, and maybe one follow-up. I think we understand kind of the...

And maybe one follow up like I think we understand kind of the.

Speaker 6: budgetary issues and some of the ramp up on the new business that you have been acute like you know the backlog obviously has been growing you reported a few quarters of of of increasing backlog and you know outlook for the fence quite positive

Our budgetary issues and some of the ramp up on the new business that you have been.

The backlog, obviously has been growing.

We reported Q quarter, though.

While increasing backlog in them.

Outlook for defense quite positive but.

Speaker 6: If we put aside this budgetary issue and potential for ongoing delay.

If we put aside the budgetary issue and potential for ongoing delays.

Speaker 6: how can we kind of understand what is the margin impact today from these legacy contracts that are eventually going to move out of the P&L, whether that happens next year or the year after. But is this 300 basis point, 200 basis point, just trying to kind of understand what is the core profitability kind of run rate of defense.

How can we kind of understand what the margin impact to date from these legacy contracts that are eventually.

Going to move out of the P&L.

Happens next year over year after but is this 300 basis points.

200, <unk> just trying to.

<unk> got to understand what is the core profitable profitability kind of run rate up defense and.

Speaker 6: and notwithstanding whatever delays are happening on the ramp up of new...

Notwithstanding whatever delays all happening on the on the ramp up of new business.

Speaker 5: Okay, well let me try to get to the answer to your question by pointing out some of the factors and hopefully we get there. First of all, when we talk about these lower margin drag programs.

Okay, well, let me try to get to <unk> to answer your question by pointing out sort of factors and hopefully we get there.

First of all when we talk about these lower margin drag programs.

Speaker 5: We're talking about a relatively small number of contracts here, a fraction, a small fraction of our overall backlog. And I think it's important to note as well that none of those contracts are recent awards. In fact, I look at the whole list of these finite programs and they were all awarded before COVID.

We're talking about a really small number we're talking about a relatively small number of contracts here a fraction a small fraction of our overall backlog.

And I think as I think it is important to note as well that.

None of those contracts are recent awards in fact.

I look at the whole list of these finite programs and they were all awarded before Covid.

Speaker 5: So we can well imagine that the impacts that we see, although it is a small number of programs.

So you can well imagine that the impact that we see although it's a small number of programs the impact of inflation, we assigned inflation, 2% escalation clearly, we're seeing inflation that 10 10, 15%.

Speaker 5: the impacts of inflation, you know, what we're finding inflation that, you know, 2% escalation, clearly we're seeing inflation that, you know, 10, 15% and compounded.

Compounded.

Speaker 5: Uh, has an impact staffing shortage has an impact and those are the programs that were most impacted by those factors as well as the manpower that we have. So.

How does it impact staffing shortages and impact and those are the programs that were most impacted by those factors as well as youll manpower shortage that we have so those programs are more profoundly affected and those are the ones that are weighing on the profitability of the business.

Speaker 5: those programs are more profoundly affected and those are the ones that are weighing on the profit of their business. And you know at the same time there's other factors you know we

And at the same time there is other factors.

Speaker 5: that we see the impact of this inflationary environment. And part of it is some of those programs, we have very, very strong business cases to be reimbursed for the actually egregious cost increase that we've seen. But in this kind of environment, there is no.

We see the impact of this inflationary environment.

Part of this is some of those programs, we have very very strong business cases to be reimbursed for actually egregious cost increase that we've seen but in this kind of environment. There is no appetite for anything but very.

Speaker 5: for anything but we've been compensated for a very small portion of what we think we should be. I mean, as well, not to pile on, but in this kind of budgetary environment that we see where we have a normal kind of end of budget year, what we call sweep up money from the defense budget, we haven't seen this quarter.

We've been compensating for very small portion of what we think we should be.

<unk>.

As well if not to pile on but in this kind of budgetary environment that we see where we have a normal kind of in the budget year, what we call sweep money from defense budget, we haven't seen this quarter. So.

Speaker 5: I mean that's what's kind of happening with these drag programs. When I think about the new programs coming up, first of all, what we call our transformational programs, the ones that we talk about in releases, programs like FTSS, like FACT, like Hades.

I mean, thats whats kind of happening with disease.

Drag progress when I think about the new programs coming up first of all.

What we call our transformational programs the ones that we've talked about in the releases youll programs like Fpss lifestyle like Haiti.

I think I.

Speaker 5: I think a noteworthy point to make when you think about the profitably impact and when that they start impacting is that if I look at Q2

I think.

Noteworthy point to make when you think about the profitably impact of when that they start impacting is that if I look at Q2.

Speaker 5: You know, those, when I think about the revenue coming from those transformational programs, only 3% of that was in our revenues for this quarter. So 3% of those transformational programs were in the quarter, but yet, they make up 20% of our backlog. And those transformational programs are at very creative margins that basically give us strong confidence.

When I think about the revenue coming from those transformational programs only 3% of that was in our revenues for this quarter. So 3% of those transformational programs were in the quarter, but yet they make up 20% of our backlog in those.

Program, who tragically passed transformational programs.

It is very accretive larger that basically gives us strong confidence in.

Speaker 5: in the targets that we put to our business, which is low double-gift profitability. So those are the elements that are at play here.

The targets that we put through a business, which is low double digit profitability. So those are the elements that are at play here.

Okay I appreciate the color. Thanks.

Our next question comes from Tim James with TD Cowen. Please proceed.

Speaker 2: Our next question comes from Tim James with TD Cowan. Please proceed.

Speaker 7: Thanks very much. I just have one question here and I'm just wondering if you could give us an update on the progress with Air Centre, how it's performing versus expectations and sort of year-over-year comparisons. I know there was some integration costs in the quarter, maybe just some details on what those costs were around and what that provides for the business going forward.

Thanks very much.

Just had one question here and I'm just wondering if you could give us an update on.

Progress with Air Centre, how it's performing versus expectations and sort of year over year comparisons I know there was some integration costs in the quarter, maybe just some details on on what those costs were around and what that provides for the business going forward.

Speaker 5: Well, look, yeah, I think the first thing I'd say, thanks for the question, Tim. What I would tell you, I'm very happy with the business, the progress that we're making. Especially when I think about the success we're having in the market.

Well look I think first of all thanks for the question, Kevin What I would tell you that I'm very happy with the business the progress that we're making.

We are especially when I think about the success, we're having in the market.

Speaker 5: You look at, I mean you've seen that going back to the Paris Air Show, the strong, very strong orders that came out for example of airlines in India, that specifically saw Air India. Well we just signed a major contract with Air India with our Air Center suite of products.

You look at that <unk> seen that going back to the Paris Air show. The strong very strong orders that came out for example of airlines in India at the specific you saw air India, While we just signed a major contract with Air India.

With our air centers suite of products.

Speaker 5: Considering that IRRIDIA is bringing together a number of airlines together as part of Air India Group...

And considering.

Considering that iridium is bring together a number of airlines together as part of their in your group that is very very promising in terms of the business as well I was just recently in Budapest in Italy, the CEO and his team.

Speaker 5: That is very, very promising in terms of the business. As well, I was just recently in Budapest with the CEO and his team at Wizz Air, and they've selected us for our...

Are there and they've selected us for our center suites, So and that's just a couple so for business, a finance standpoint, im quite happy with the business.

Speaker 3: And that's just a couple. So from a business, a front end standpoint, I'm quite happy with the business. And I should say that's the only thing I'm satisfied with. I'm very, very happy with the impact that we're making.

I would say that's the only thing I am satisfied with I'm very very happy with the impact that we're making.

Speaker 3: with our customers with regards to how they see CAE, which is something you see as the natural owner of this business. So it will take time to recognize revenue because this is software as a service. Well, remember that we bought Air Center at seven times.

With our customers with regards to how base TCE, which is something you see as the natural owner of this business.

It will take time to recognize revenue because this is software as a service.

Remember that we bought are center at seven times.

Speaker 5: you know, EBITDA. So, you know, when I think about that and the money we're spending, we are making the investments that we wanted to make at the rate we want to make to develop that business. And look, we're attracted to where we want it to be. And it's contributing positively to this quarter.

EBITDA so.

When I think about that and the money. We're spending we are making the investments that we wanted to make at the rate we want to make to develop that business is look we're on track to where we wanted to be and is contributing positively to this quarter.

Speaker 7: Okay, thanks, Mark. That's really helpful. I will just actually ask one more question if I could. The working capital in the quarter was great, really impressive. Just wondering maybe if you can talk a little bit about were there surprises in there, what drove that, is that kind of been more indicative of what second quarters might look like going forward. Just any details on that strong performance?

Okay. Thanks, Mark Thats really helpful. I will actually ask one more question if I could the working capital in the quarter was great really impressive I'm. Just wondering maybe if you can talk a little bit about where their surprises in there what drove that is that and kind of be more indicative of what second quarters might look like going forward just any details.

On that on that strong performance.

Speaker 4: Hi Tim, thanks for the question. Yeah, no, I like I said in the remarks very pleased to see a strong reversal in working capital in the quarter and and really it's not a surprise. This is really the outcome of continued focus on optimizing capital and our metrics. So we saw good improvements across the board whether it's on our day sales outstanding, contract assets and deposits on contracts and so these all contributed.

Hi, Tim Thanks for the question, Yes, no I like I said in the remarks very pleased to see.

A strong reversal in working capital in the quarter and and really there is not a surprise us is really the outcome of continued.

Our focus on optimizing.

Capital and our metrics so we saw.

Good improvements across the board, whether it's on our days sales outstanding contract assets and.

And deposits on contracts and so these all contributed to.

Speaker 4: to the positive reversal of working capital. We expect that to continue, that momentum to continue in the second half as it usually does.

To the positive reversal in working capital, we expect that to continue that momentum to continue in the second half as it usually does.

Great. Thank you.

Speaker 2: Our next question comes from Cameron Dirksen with National Bank Financial. Please proceed.

Our next question comes from Kamran Derksen with National Bank Financial Please proceed.

Speaker 8: Yeah, thanks. Good afternoon. Just a couple of questions on the restructuring activity. You know, we see that ongoing in Q2. Can you just maybe update us on where we are in that restructuring program and how much of that at this point is reflected in your cost?

Yes, thanks, good afternoon.

Just a couple of questions on the restructuring activity, we see that ongoing in Q2 could you just maybe update us on where we are in that restructuring program.

And how much of that at this point is reflected in your cost base.

So.

Speaker 4: So I want to thank the camera. I wouldn't necessarily call it a restructuring program anymore. The restructuring program we closed out last year. This is really continued integration of the two acquisitions. So the flight services one, Mark just spoke of it. We bought this at...

I wanted to thank Kevin I wouldn't necessarily call. It a restructuring program in your mind the restructuring program. We closed out last year. This is really.

Continued integration of the two acquisitions so.

The flight services one.

Mark just spoke of that we bought this at seven times EBITDA and knowing that there would be investments to harmonizing a monitor anything the structure and what we're seeing is.

Speaker 4: 7 times EBITDA knowing that there would be investments to harmonizing and modernizing the structure. And what we're seeing is investments in our more modernized IT infrastructure and migration of customers, which we expect to complete by mid next year.

Investments in our.

We're modernizing it infrastructure and migration of customers, which we expect to complete by mid next year on the Alpha Harris our military training. This is really a second phase of our integration which was.

Speaker 4: On the Altree Harris military training, this is really a second phase of our integration, which was which we had as a callous was a major ERP implementation to harmonize all of those businesses, the legacy and the new businesses together. So this triggered a second phase of further planned integration and synergies on that side and that's relatively towards it then.

Which we had as a catalyst was a major ERP implementation to harmonize.

All of those businesses the legacy and the new businesses together. So this triggered a second phase of further planned integration end to end synergies on that side and that's it.

Relatively towards that end.

Speaker 8: Okay, so we should expect, I guess, so the outcome of these sort of integration activity to have maybe a more meaningful impact on margins as we look ahead to 2025. Is that fair?

Okay. So should we should expect I guess, so the outcome of these sort of an accretion activity to have maybe.

Maybe a more meaningful impact on our margins as we look ahead to 2025 is that fair.

Sure Yeah.

Okay.

Speaker 8: Okay, maybe just secondly, just wondering if you can maybe talk about, I guess, what you're seeing as far as opportunities to deploy additional capital into the training network. What are you seeing on outsourcing opportunities, JV opportunities?

Secondly, just wondering if you could maybe talk about I guess, what youre seeing as far as opportunities to deploy additional capital into the training network.

What are you seeing on outsourcing opportunities JV opportunities.

Speaker 5: Lots of opportunities out there, Cameron. And you've seen what we've done. I think we've, you know, from the outset, you know, we, we, we came into this with a lot of dry powder. I mean, when we think about what we did, we'll back a little bit through the, through COVID.

Lots of opportunities out there camera.

You've seen what we've done what I think we've from the outset.

We came into this with a lot of dry powder.

When we think about what we did pull back a little bit through the through Covid.

Speaker 5: We didn't reduce the asset size, we put it at the right place.

We didn't we reduce the asset size, we put it at the right place and in doing so we took a lot.

Speaker 5: And in doing so, we took a lot of structural costs back in the neighborhood of 70 million, structural hard costs out of business, and we're seeing a lot of that.

Structural costs go back in.

Neighborhood of $70 million is struck structural heart cost out of business and we're seeing a lot of that come to fore today. Since then we've seen we've been seizing the opportunities of the market gives us and you've seen that in the business aviation training centers that we have.

Speaker 5: come to fore today. Since then, we've been seizing the opportunity that the market gives us. You've seen that in the business aviation training centers that we've deployed. We had Singapore, we're opening up in Savannah very soon. We open up Las Vegas, which has been very successful thus far. We have Orlando together with SimCom opening up and we've announced it in Vienna next year. The outsourcing is...

Deployed.

Singapore, we're opening up the Savannah very soon we opened up Las Vegas, which has been very successful.

Thus far we have Orlando together with Sim combo opening up what we've announced in Vienna next year al.

Sure things look.

I can tell you is yes.

Speaker 5: The progress is pretty much as I indicated in the past, I'm very happy for Ousina. We talked about Qantas before, was that...

Progress is pretty much has.

Indicated in the past I'm very happy what we have seen here, we've talked about Qantas before.

Does that.

Speaker 5: I was just in last month, I was in Athens with the CEO and his team at AGN, and you know, they're the largest carrier in Greece, and you know, we've done the deal with them. There's other deals that I can't really talk about right now, but I can, suffice to say that we're traveling a lot, we're meeting a lot of customers.

I was just in the last month I was in Athens, with the debt with the CEO and his team met at AGM.

We're the largest carrier in Greece, and we have done the deal with them.

Other deals that I can't really talk about right now, but I can.

Say that you were traveling a lot with me a lot of customers.

Speaker 5: we see opportunities to continue to grow and efficiently deploy capital, particularly in the civil network, which as you know is very creative margins.

We see opportunities to continue to grow.

And efficiently deploy capital.

Particularly in the civil network, which.

As you know is very accretive to margins.

Great. Okay I appreciate the color thanks very much.

Thank you.

Speaker 2: Our next question comes from Kevin Chang with CIBC.

Our next question comes from Kevin Chiang with CIBC.

Please proceed.

Speaker 9: Hi, good afternoon. Thanks for taking my questions here. Maybe just turning back to defense, maybe if I look at a high level and I know this math is overly simplistic but if I just look at your run rate, I guess adjusted segmented operating income and I look at the capital employed into defense, your returns there are kind of 3%, 4%. I believe if margins double or a little bit more than double you'll get high single digit returns on that capital employed. That still fuels.

Yes.

Hi, good afternoon. Thanks for taking my questions sure maybe just turning back to the.

Maybe if I look at it at a high level.

And I know this math is overly simplistic, but if I just look at your run rate I.

I guess adjusted segmented operating income and I look at the capital employed into defense.

Your returns are our kind of three 4%.

I believe with margins double or a little bit more than double youll get.

High single digit returns on that capital employed that's still fuels like relatively low to me just thinking about the margin cadence you've kind of laid out over the medium term just wondering.

Speaker 9: like relatively low to me, just thinking about the margin cadence you've kind of laid out over the medium term. Just wondering, how do you think about driving that return higher? Is it kind of being able to grow revenue while keeping that capital employed relatively static? Do margins need to actually get closer to the mid-teens over time to maybe drive better returns? Just trying to think of the cadence of these returns, the returns on capital here over maybe over a longer period of time.

How do you think about driving that return higher or is it kind of being able to grow revenue, while keeping the top of the employed relatively static.

Q2 margins need to actually get closer to the mid teens over time to.

Maybe drive better returns just just trying to think of the cadence of these returns the returns on capital here over maybe maybe over a longer period of time.

Speaker 5: Well, as I said, over a long period of time, we feel very comfortable about this business and, you know, in achieving the target that we've given of low double margins. And, you know, look, it's clear that, you know, we're not where we want to be today. We'd rather not be here. But it's finite, it's temporary, it's not reflected of the long term potential business. And again, there's the same factors are at play here. I mean, really, the two overall factors that are work. Number one, it's on risk-

Well as I said over a long period of time, we feel very comfortable but this business.

And achieving the target that we've given a low double digit margins then.

Look it's clear that we.

We're not where we want to be to date, we'd rather not be here, but it's finite is temporary it's not reflective of the long term potential business.

And again the same factors are at play here.

The two overall factors that are worth <unk>.

Number one is on risk retirement and risk retirement on what we call these drag programs.

Speaker 5: and you know, it risks retirement on what we call these drag programs and we're making progress. In some cases, we're actually moving to accelerate it. I can tell you, like in this past quarter, there are a few programs that we've shifted to seven-day work weeks to basically accelerate the schedule and get these behind us. Obviously, when we do that, we encourage the cost, but you know, I think it's worth it to make sure that we, you know, exercise, you know, contractual opportunity, obligation to meet the schedule on those contracts.

We're making progress in some cases, we're actually moving to accelerated I can tell you like in this past quarter as a few programs that we've shifted the seven day work weeks.

Basically accelerate the schedule and get this behind US obviously, when we do that we encourage to cost, but I think it's worth it to make sure that we.

Exercise.

Cash flow opportunity obligations to meet schedules on those contracts.

Speaker 5: you know, in the case of new programs, as I talked about during my remarks.

In the case of new programs and as I talked about in Germany My remarks.

Speaker 5: We remain very bullish about the profitability of those new programs they're winning for all kinds of reasons. Such as some that I've talked about on previous calls, like being able to leverage and exercise what we call commercial rates on government contracts.

We remain very bullish about the profitability of those new programs are winning for all kinds of reasons.

Such as some of that I've talked about on previous calls like being able to leverage.

Exercise, what we call commercial.

Rates on government contracts and Thats.

Speaker 5: And that's, you know, it's going to be a mix of programs, but in aggregate, you know, those possibly of those new programs that we're winning, you know, are very, you know, they were, they're very creative to the margin obligation that we did. So that's, that's really what's happening here. And as I said, you know, where we are today, of those transformations.

So it is going to be a mix of programs, but in aggregate those Pos.

<unk> new programs that we're winning.

Our very.

They they are very accretive to the margins obligation that we get so that's really what's happening here and as I said.

Where we are today.

Of those transformational programs.

Speaker 5: Again, in the second half, they make only 3% of our revenue. Next year,

Again in the second half they make only 3% of our revenue next year, that's probably going to be about 15% and obviously accelerating as we go through the year as you get into the end of the year Youre going to have more all basically the revenue is being driven throughout the business that's going to be from those transformational program and at the same time.

Speaker 5: That's probably going to be about 15%. And obviously accelerating as we go through the year, as you get into the end of the year, you're going to have more of, basically the revenue that's being driven throughout the business, that's going to be from those transformational programs. And at the same time, we'll be substantially down the curve of retiring the risk on the drag program. So that's what's at play here. And of course, what's affecting those who trendline.

We will be substantially down on the curve of retaining the risk on the dry program. So that's what's at play here and of course, what's affecting those two trend lines.

Speaker 5: are some of the factors I talked about. Basically, contracts moving to the right in terms of us being able to execute on contract.

Some of the factors I talked about it.

<unk> contract moving to the right in terms of us being able to execute on contract.

Speaker 5: In a lot of cases, no fault of our own if I should say, in some cases we've been selected for training contracts but we've been delayed as much as six months because the customer is not getting the airplanes on time because the OEMs have been themselves affected by supply chain challenges and are not able to meet the production rates. These announcements cake up a lot of thexi Kardinali mippon to an industry license allow for bits and b?? between only, you know, patients.

And a lot of cases, no fault of our own if I should say like in some cases, we've been selected for training contracts, while we have been delaying as much as six months because the customer is not getting the airplanes.

Because the Oems have been themselves affected by supply chain challenges that are not able to meet the production rates and of course that means delays for us.

Speaker 5: So all of those factors are at play here, but again, from a long-term standpoint, they're very comfortable about the business.

So all of those factors at play here, but again from a long term standpoint feel very comfortable about this.

Speaker 9: I appreciate the color there, Mark. Maybe just turning to civil, you know, we've been reading more, you know, obviously there's a pilot shortage and airlines are doing all they can to fill that backlog here. But, you know, one of the things we've been reading about is just the advancements of pilots, you know, pilots are moving first officer to captain much faster. And I'm just wondering, does that create...

I appreciate the color there Mark maybe just turning to civil.

We've been reading more.

Obviously, there's a pilot shortage and airlines are doing all they can to filled up for that.

But.

Backlog here.

One of the things we've been reading about is just just the investments of pilots.

Pilots are moving first officer to captain much faster.

And I'm just wondering.

Does that create.

Speaker 9: more training opportunities for you? Does that shift how you think about?

More training opportunities for you does that shift how you think about wet versus dry hours like if an individual can kind of move through their career faster than maybe what it looked like pre pandemic does that does that impact maybe the mix of of that commercial revenue between wet and dry or even the number of events are typically seeing.

Speaker 9: wet versus dry hours? Like if an individual can kind of move through their career faster than maybe what it looked like pre-pandemic, does that impact maybe the mix of that commercial revenue between wet and dry or even the number of events you're typically seeing over a one year period with an airline or with a specific pilot?

Over a one year period with an airline or with a specific pilot.

Well I think it does a few things I think first of all to your question about.

Speaker 5: Well, I think it does a few things. I think, first of all, to your question about when anything that causes a pilot to change airplanes or change the position, you know, from being a first officer to being a captain, by necessity and by regulation, and that's on a global basis, requires retraining.

Well anything that causes a pilot to change airplanes or changed that position yet.

In the first half start to be a captain.

By necessity by regulation and that's on a global basis requires retrans and our business is trending and where the.

Speaker 10: And you know, our business is training and we're the by far largest in the world. So obviously that's going to be a first order catalyst for us. So, you know, for us, you know, it's, it's a positive catalyst for our business. There is no doubt about that. The other component about

By far largest the world. So obviously, that's going to be a first order a catalyst for us so for us.

As a positive catalyst for our business there is no doubt about that the other component about this.

Is that.

Speaker 10: you know, we this the growth, you know, everyone is focused, as you would, would expect to make sure that we do that safely.

This the growth everyone is focused as you would expect to make sure that we do that safely.

Speaker 10: That everything is on the same page. That basically plays to see strength. Because no one trains more pilots.

Everything associated with that in.

That basically place to see strengths because no one's trains more pilots in the world than we do and that's where you see for example agreements that we have with for example, we announced last quarter with Boeing that we signed at the Paris Air show with and we're immensely proud of the partnership with Boeing.

Speaker 10: in the world than we do. And that's where you see, for example, you know, agreements that we have with, for example, when we announced last quarter with Boeing that we signed at the Paris Air Show with, and we were immensely proud of the partnership with Boeing because that partnership is all about Boeing selecting.

Because that partnership is all about boy selecting us to deliver their competency based training program, starting what we announced in Boeing announces starting in India.

Speaker 10: to deliver their competency-based training program, starting the one we announced and Boeing announced is starting in India, you know? And to me

And to me so less.

Speaker 10: You know, that's the PCC bringing technology to bear, bringing the sheer spice.

UCC, bringing technology to bear, bringing the sheer size.

Speaker 10: of the footprint that we have, the amount of training hours that we do, the technology that we bring to be able to give objective database insights to OEMs such as Boeing and Duke airlines across the world.

The the footprint that we have the amount of training hours redo the technology, we bring to be able to give objective database insights to Oems such as <unk> and <unk> airlines across the world.

To make sure that they can efficiently basically bring on pilots new pilots move pass through different positions that earlier age while still maintaining the safety of the sky that we enjoyed.

Speaker 10: new pilots move pilots to different positions at an earlier age, while still maintaining the safety of the skies that we enjoy. That's what we do.

That's what we do.

Thank you for taking my questions.

Our next question comes from.

Our next question comes from Cristina <unk> with Morgan Stanley. Please proceed.

Hey, good morning, everyone or good afternoon.

Speaker 11: Hey, good morning, everyone. Or good afternoon. Good morning. Good afternoon.

Alright, great.

Good afternoon.

Speaker 12: Mark, Sonia, maybe going back to the healthcare business, you know, the past few quarters we've finally seen it to be profitable. Can you just give us a little background of why now for the sale? And then also the follow on, I mean, the healthcare business was supposed to be.

Mark Sonya, maybe going back to the to the health care business P&L.

Past few quarters, we've finally seen it to be profitable can you just give us a.

A little background of why now for the sale and then also as a follow on I mean, the health care business was supposed to be.

Speaker 12: an industry in which you had low market share, that you had an opportunity for growth. Now that you won't have healthcare anymore, are you thinking about another potential leg to the business as a strategic area for growth?

An industry in which you have no market share that you have the opportunity for growth now that you won't have health care anymore.

Are you thinking about another potential leg to the business as a strategic area for growth.

Speaker 10: Well, let me start with healthcare. Look, together in concert with the board, obviously, we're always looking at portfolios to make sure that we're maximizing the value. And that's value to all stakeholders. And so in a specific case of healthcare, we find ourselves in a place today.

Well, let me start with healthcare.

Together in concert with the board obviously, we're always looking at the portfolio to make sure that we're maximizing the value.

The value to all stakeholders in this specific case of health care.

We find ourselves in a place today.

Speaker 10: You know, and you know, we've been looking at this for, you know, not overnight, obviously, but.

And we've been looking at this firm not overnight obviously, but.

Speaker 10: that the next wave of investment that's going to be required for this business.

But the next wave of investment that's going to be required for this business is probably best made by new capital providers. So that we can drive more focused investment in synergy in our core so.

Speaker 10: is probably best made by new capital providers so that we as CE can drive more focused investment and synergy in our core.

Speaker 10: So we think now is the right time and I absolutely am convinced that Madison Industries is 100% the right owner for this business.

So we think now is the right time and I, absolutely convinced that Madison industries is 100%.

<unk> order for this business.

Speaker 10: You know, I've had opportunities to talk with the CEO a couple of times, our shared values and our similar cultures to me make this transaction a perfect fit again for all stakeholders.

I have had opportunity to talk with the CEO. It in a couple of times in our shared values and our similar cultures to me make this transaction a perfect fit again for all stakeholders.

Speaker 10: So that's really how I see that. With regards to another leg, I mean, what you've seen is we've already done the other leg and that's software. So to a certain extent here, we're changing healthcare for software.

So that's really how I see things with regards to another leg I mean, what you've seen as we've already done the other leg and that software so to a certain extent here were changing.

Health care for software.

Thank you Mark really appreciate it.

Speaker 2: Our next question comes from James McGaracle with RBC Capital Markets. Please proceed.

Our next question comes from James Mcgarrigle with RBC capital markets. Please proceed.

Hey, good afternoon, and thanks for taking my question.

Welcome.

Speaker 13: So I just wanted to ask another question on the defense margins, you know, with regards to that low margin business.

So I just wanted to ask another question on the defense margins.

With regards to that low margin business rolling off so I'm, just trying to better understand how these contracts get retired as.

Speaker 13: So I'm just trying to better understand how these contracts get retired. You know, is it as simple as that on a specific date, these contracts come off the books and then the day after that, the margin profile improves by a certain percentage basis, or is there, you know, a little bit more nuanced than that because, you know, I'm just trying to get a better understand how these contracts get retired and then what visibility I guess that you guys have into margin improvement on the backs of these contracts coming off the books.

Is it as simple as on a specific date these contracts come off the books and then after that the margin profile improves by a certain percentage basis or is there a little bit more nuanced than that because I'm just trying to get a better understand how these contracts get retired and then what visibility I guess you guys have into margin improve.

Ben on the backs of these contracts coming off the books.

Speaker 3: It's really a question of finishing the contract. Is there a number of contracts?

It's really a question of finishing the contracts there are a number of contracts.

Speaker 10: that we're executing that are to deliver products and services to specific customers without getting the specific nature of each one. Each one has a contractual end date and there's assumptions on our part with regards to the cost it's going to take us to be able to complete those programs and deliver what we promised to the customers on time.

And that were executing that.

To deliver products and services to specific customers without getting the specific nature of each one each one has a contractual end date and there are some assumptions on our part with regards to the cost is going to take us to be able to complete those programs and deliver what we promise to our customers on time so.

Speaker 10: So, and you know, literally on a weekly basis, we manage that to make sure that we basically can achieve what we said we were gonna do, complete on time at the schedule, and cost that we assume. And that's really what we're talking about.

And.

It literally on a weekly basis, we manage that to make sure that we basically can achieve what we said we were going to do complete on time at the schedule.

And costs.

We assume and that's really what we're talking about.

Speaker 10: You know, with regard to the assumptions we've made without that, you know, for us to be able to do that port 10, you know, the outlook that would be.

With regards to the assumptions we've made.

For us to be able to do that portends the outlook that we've given.

Speaker 13: Okay, and are you able to provide some color on those dates when those are going to be coming off the books?

Okay and are you able to provide some color on those dates when those are going to be coming off the books.

Look I think that to me.

Speaker 10: Look, I think that, you know, to me, it's again, in aggregate, it's the trend lines are, you know, what, you know, or what we've said, look, I think

Again in aggregate.

<unk> lines or what.

What we've said look I think if.

Speaker 5: If I look at overall the programs that we have, I think it's safe to say that we'll be substantially complete with those in totality by the end of next year. Obviously, they will close not all at the same time, but again, substantially complete by the end of next year.

If I look at overall the programs that we have I think it's safe to say that will be substantially complete.

With those in aggregate in totality by the end of next year, that's one of the obviously.

We'll close.

On.

Not all at the same time, but again substantially complete by the end of next fiscal year.

Speaker 13: Okay, and then just turning to the to the civil side of the business and I'm not asking for, you know, a fiscal 2025 guide.

Okay, and then just turning to the to the civil side of the business and I'm not asking for fiscal 2025 guide, but more so thinking about how much room. There is to recover to pre pandemic levels of activity and just looking at the most recent IHS data so as passenger kilometers down 10% in Asia.

Speaker 13: but more so thinking about how much room there is to recover to pre-pandemic levels of activity. And just looking at the most recent IATA data, still has passenger kilometres down 10% in Asia, down 4% in Europe , international travel still down 7%.

Down 4% in Europe International travel is still down 7%.

Speaker 13: versus pre-pandemic. So on a high level basis is the right way to think about growth in fiscal 2025, whatever we assume that the base business can do in civil, in a normal environment.

Versus pre pandemic.

On a high level basis is the right way to think about growth in fiscal 2025, whatever we assume that the base business can do in civil in a normal environment plus then a continued recovery to pre pandemic levels in Asia, Europe and international travel.

Speaker 13: plus then a continued recovery to pre-pandemic levels in Asia, Europe and international travel.

Speaker 10: I think, well, it's for sure that we're going to write it above pre-pandemic levels. No doubt about that. And again, as I was saying a while ago, when you think about the cost savings that we've taken out of the business, just by itself, even at pre-pandemic levels would mean a higher margin, which you're already seeing in the results.

I think it's for sure that we were going to rise above pre pandemic levels no doubt about that.

Again, as I was saying a while ago. When you think about the cost savings that was taken out of the business.

By itself even at.

At pre pandemic levels would mean a higher margin.

You're already seeing in the results.

Speaker 10: A couple onto that, there's, you know, business aviation is very, very strong.

Onto that there is business aviation is very very strong and thats.

Speaker 5: And that's a very good part of our business from a profit-a-wee standpoint. You saw the outsource things that we're making. There's more coming down that path.

Very good part of our business from a profitability standpoint, you saw the outsourcing is that we're making there is low coming down on that Bob So.

Speaker 10: I'm quite comfortable with it as well as a very strong demand environment that we're seeing across the whole business.

I'm quite comfortable with it as well as the very strong demand environment that we're seeing across the whole business.

Speaker 10: So, you know, we don't have a target today for margins, except they're going to go higher.

So we don't have a target today for margins, if theyre going to go higher.

Thank you very much I'll turn it over.

Yes.

Speaker 2: Our next question comes from Benoit Poirier with Dijal D'Ain Capital Markets. Please proceed.

Our next question comes from Bruno <unk> with <unk> capital markets. Please proceed.

Speaker 14: Yeah, good afternoon. Just to come back on the transformational program that you were awarded, Mark, you mentioned that there was only 3% contribution in the quarter, and this will go up to about 15% next year. Could you maybe provide some color about the profitability early days for those transformational programs? Just wondering about the accretion early days, whether they still contribute at a good profitability level, or it takes two or three years before ramping up at a good profitability level.

Yes, good afternoon.

Just to come back on the transformational programs that you were awarded the Mark you mentioned that there was only 3% contribution in the quarter and this will go up to about 15% next year could you maybe provide some color about the crops to duty early days for those transformational program.

Just wondering about the accretion early days.

Other still contribute good profitable level or it takes two or three years before ramping up.

The profitability level.

Speaker 10: It depends on the program. Because it's a service contract, typically it will take longer because obviously it delivers service over time. Rather than products which tends to turn into revenue faster. In both cases, they're going to be accretive to the double-digit goals that we have. That will happen right from the get-go, right from the start.

It depends on the program okay.

Because it's the service contract typically they will they will it will take longer to do because obviously, we're delivering service over time.

<unk> products, which tends to do it tends to turn into revenue faster in.

In both cases, theyre going to be accretive to the double digit goals that we have so in that sort of rate of right from the get go right from the start.

Speaker 10: So you won't have to wait long for that to start being accretive to the numbers that we see.

So you won't have to wait long for that to start being accretive to the numbers that we see.

Speaker 14: Okay. And just based on the comments made earlier about the pace for the legacy programs to ramp down, you mentioned mostly completed at the end of fiscal year 25. Consensus is currently expecting defense margin to high single digit next year, almost pretty close to double digit. Is that fair to say that it might be difficult to achieve based on the comments made earlier?

Okay, and just on the comments earlier about the pace for the legacy programs due to ramp so you mentioned.

We completed at the end of fiscal year 'twenty five.

Consensus is currently expecting defense margin to high single digit next year, almost pretty close to double digits.

Is that fair to say that it might be difficult to achieve based on the comments made earlier.

Speaker 10: Well, as I said, we're not giving guidance of fiscal 25 today, so I'll keep it, you know, what we say, you know, throughout the presentation here. Not not any new guidance from what I've said.

Well as I said, we're not giving guidance on fiscal 'twenty five today, so I'll keep it to what we see.

Throughout the presentation here not not any new guidance from what I've said.

Speaker 14: Okay, okay. And last one for me capital deployment. Sonia, you made great color about reinstating returns to shareholders. In in the opening remarks, you mentioned the focus on growth, debt repayment, investment grade and then return to shareholders. Are there any optimal ratio you would like to operate going forward?

Okay, Okay and last one for me capital deployment, Sonia you made great color about reinstating returns to shareholders.

In the opening remarks, you mentioned the focus on growth.

Payment investment grade and then returned to shareholders or Darren the optimal ratio you would like to operate going forward.

Speaker 4: I think like we mentioned in the past, the three times was not necessarily the goal, but a waypoint. So really what we're seeing is that we continue on the balance.

I think I think like we mentioned in the past the three times was not necessarily the goal, but a waypoint. So so really what we're seeing is that we continue on the balance.

Speaker 4: capital deployment with deploying accretive capital, especially in the civil network, whether it's the training centers and the simulators to address demand. And these are highly accretive within 24 to 36 months, as we've seen in the past.

Capital deployment with the plane accretive capital, especially in the civil network, whether it's the training centers and that stimulates to address demand and these are highly accretive within.

24% to 36 months as we've seen in the past.

Speaker 4: And we'll continue to de-lever to kind of remain very comfortably investment grade.

And we will continue to Delever too.

Remain very comfortably investment grade so ultimately, it's a balance of those and and non.

Speaker 4: So ultimately it's a balance of those and an ongoing conversation with the board on potential capital returns, shareholder returns.

Ongoing conversation with the with the board on.

On potential capital returns shareholder returns.

Okay. Thanks, very much for the time.

Yes.

Speaker 2: Our next question comes from Ronald Epstein with Bank of America. Please proceed.

Our next question comes from Ronald Epstein with Bank of America. Please proceed.

Now I'll turn on your Atlanta, Mariana Perez Mora for Ron today.

Speaker 15: not turn on anyone to keep my data but it's not a problem today.

So my first question is about utilization rates you have been growing a lot in penetrating in the civil training market and with all these training centers and utilization rate is up to 71%.

Speaker 15: So my third question is about utilization rates. You have been growing a lot and penetrating in the civil training market and with all these training centers and utilization rate is up to 71%.

Speaker 15: but you keep opening new sites. What is the SWIT utilization rate spot when you think about both profitability, but also being able to capture these opportunities? And when do you think you could achieve those type of peak utilization SWIT spot rates?

You keep opening like new sites what is.

Fleet utilization, great sounds like spot when you think about both profitability, but also being able to capture these opportunities and when do you think you could achieve those type of like peak utilization sits spot.

Right.

Well look.

Speaker 10: I think basically it's tough to answer your question specifically because you know you could I mean we can theoretically go up to 100% utilization and higher on any individual training center and you know what we actually do that today on the number of training center. But you can't maintain it there you know for the complete as a whole because obviously you got to spend time for maintenance things like that and I would say that 100%

I think basically it's tough to answer your question, specifically because you can I mean, we could theoretically go up to 100% utilization a higher on any of the digital training Center and you know what we actually do that today on the number of training centers, but you can't you can maintain it there for the for the coal fleet as a whole because.

Obviously, you've got to spend time for maintenance things like that and I would say that 100%.

Speaker 10: It's not like every hour of a year. I mean, in terms of our commercial aviation training, it's about 6,000 hours a year. Our business aviation training centers, 4,500 hours a year, which is more effective.

It's not like every hour of a year I mean in terms of our commercial AG to China is about $6000 a year our business aviation training centers.

4500 hours.

Hours, a year, which is more reflective of that.

Speaker 10: kind of schedules we can do with business aircraft. But look, our utilization here is going higher on average. We've got seasonality.

Schedules, we can do with business aircraft, but our utilization here is going higher on average if we saw seasonality in Q2, because airlines are flying a lot if I looked at Europe. This summer it was they were.

Speaker 5: in Q2 because airlines have been flying a lot. If I looked at Europe this summer, they were

Speaker 5: It was very very busy and our utilization was substantially low in New York this summer.

It was very very busy in our utilization was substantially low in Europe. This summer, but that's that's that.

Yes.

That's actually normal we're back to seasonal rates and that's bled a little bit onto Q3, as we look forward that is recovering at a quite substantial weight. So our focus is on maximizing mousing utilization.

And with the demand is there for us to be able to do that so I think watch for increased utilization and the last thing I would say is.

Speaker 5: While we're opening up these new training centers and deploying a number of simulators, obviously they're taking time to ramp up. So that's affecting the utilization that you see because they may be half empty or a quarter empty or not full at all yet. So that will affect the overall utilization that you see.

While we're opening up these new training centers and deploying a number of simulators, obviously, they're taking time to ramp up so that's affecting utilization that you see because.

They may be half empty or quarter empty or not it's not full at all yet so that will affect the overall utilization.

Speaker 15: And is it fair to think about 80% kind of level whenever you get to this normalized ramp up?

And if it's fair to think you know about 80% kind of level whenever you get to these like normalized ramp up.

Speaker 10: but we can achieve 80%. We've done it in the past. So we don't have a target to stop. We'll maximize the utilization and there really is no sweet spot. We're continuing, all training centers are different, different whether it's business aircraft or commercial aircraft. Again, for us, it's about, you know, meeting the unmet demand that's out there and ramping up to satisfy it.

Well, we can achieve 80% we've done it in the past.

We don't have a target to stop it will maximize the.

The utilization there is there really is no sweet spots and we're continuing all training centers are different different whether it is business aircraft or commercial aircrafts.

Again for us it's about.

Meeting the unmet demand that's out there and ramping up to satisfy it.

And.

Speaker 10: You know, we are deploying a lot of efforts and a lot of resources, voice financial and human resources, as part of our digital transformation, to improve the efficiency and the return that we get and maximize the schedules on the simulators in those training centers, so we can increase the amount of training we do and increase the returns on those assets. That's part of what we're doing.

We are deploying a lot of effort and a lot of resources, both financial and human resources to as part of our digital transformation to improve the efficiency and the return that we get and maximize.

The schedules on the escalators.

Learning centers. So we can increase the amount of training, we do and increase the returns on those assets. That's part of what we're doing here.

Okay. Thank you and then I'll I'll dig a little bit deeper on capital deployment and shareholder friendly capital deployment.

Speaker 15: Okay, thank you. And then I'll dig a little bit deeper on capital deployment and shareholder friendly capital deployment. Getting to these like net leverage targets, how are you thinking about this? Like are you thinking about a regular dividend again or more opportunistic kind of like special dividends or share buybacks?

Getting to these like net leverage targets, how you're thinking about this like are you thinking about the regular dividend again or more opportunistic that looked like special dividends or share buybacks.

So we haven't come out with with that view yet.

Speaker 4: So we haven't come out with that view yet. We're on ongoing discussions and so won't necessarily get ahead of our board today. But I can assure you that we're focused on, first of all, closing the transaction, the sale transaction, continuing to generate cash. As a result, we'll continue that discussion and come back with quantum and vehicle in the future.

Ongoing discussions until that wont necessarily get ahead of our forward today, but I can assure you that we're focused on first of all closing that transaction the sale transaction continuing to generate cash as a result, we will continue that discussion and come back with the quantum.

Quantum in vehicle and.

The future.

Alright, Thank you very much.

Yes.

Speaker 2: Our next question comes from Connor Gupta with Scotiabank. Please proceed.

Our next question comes from <unk> Gupta with Scotiabank. Please proceed.

Thanks, operator, good afternoon, everyone just stick to one question.

Speaker 16: Thanks, operator. Good afternoon, everyone. Just stick to one question. A lot of U.S. airlines are talking about their domestic demand is kind of plateauing or coming down, but they are kind of, you know, reallocating some capacity to wide-body aircraft for international travel. I'm curious if you are seeing any significant changes in reassignment training with pilots, especially with respect to your North American customers.

There are a lot of U S Airlines are talking about their domestic demand is kind of plateauing or coming down, but they are kind of reallocating some capacity to wide body aircraft for international travel I'm curious if you're seeing any significant changes in re assignment training pilot.

Pilots, especially with respect to your North American customers.

Speaker 10: No, all of those factors are just adding to what I talked about, in terms of what we call the turn. Turn pilots moving from either narrow bodies to wide bodies, or pilot to pilot, or from one plane to another, from regional to... Anything like that triggers demand for training. And I can tell you, there's a lot of unmet demand out there, both in commercial aviation and business aviation.

And now all of those factors.

Adding to what I talked about in terms of the what we call the churn churn pilots moving.

Either narrow buys to wide bodies pulp as a pilot.

One plane with to another from a regional <unk>.

Anything like that triggers.

And for training and I can tell you there's a lot of unmet demand out there both in commercial aviation and business aviation.

Speaker 10: As I said before, we're ramping up the satisfying it, and that is part of what really gives me the optimism for the future and basically the reality of what I see that leads me to raise the outlook that we have for civil in the back half of the year.

As I said before we're ramping up the SaaS flying it than that.

As part of what really gives me the optimism.

For the future and basically the reality of what we see that leads me to raise the outlook that we have for civil in the back half of the year.

Thank you.

Mr. Arnold Sternal further questions at this time.

Thank you operator, I want to thank all participants on the call today and remind you the transcript of the call can be found later on today's website. Thank.

Speaker 3: Thank you operator. I want to thank all participants on the call today and remind you the transcript of the call can be found later on the website. Thank you. Good afternoon.

Thank you and good afternoon.

Yes.

Speaker 2: That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Thank you.

That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect. Your line. Thank you.

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