Q2 2024 CAE Inc Earnings Call

Speaker 1: An adjusted segment operating income was $138.5 million compared to $124.7 million in the second quarter last year.

With $138 5 million compared to $124 7 million in the second quarter last year, our quarterly adjusted EPS was 27% compared to 19 in the second quarter last year we.

Speaker 1: Our quarterly adjusted EPS was 27 cents compared to 19 cents in the second quarter last year.

Speaker 1: We incurred restructuring integration acquisition costs of $37.9 million during the quarter relating to the Air Centre and the L3 Harris Milk Dairy Training Act.

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

Speaker 1: Net cash from operating activities this quarter was $180.2 million compared to $138 million in the second quarter of fiscal 2020.

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

Speaker 1: Pre-cash flow was $147.5 million compared to $108.4 million in the second quarter last year.

Free 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 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'm pleased that we've already begun to see a reversal in that in the <unk>.

Speaker 1: 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 year.

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

Speaker 1: We continue to target 100% conversion of adjusted net income to free cash flow for the next

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

Speaker 1: 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 1: Income tax recovery this quarter was $8.5 million for an effective tax rate of negative

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 assets, which had an approximate five positive EPS impact this quarter.

Speaker 1: the adjusted effective income tax rate was nil, which includes the recognition of previously unrecognized deferred tax assets, which had an approximate 5 cents positive EPS impact.

Speaker 1: 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.

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 1: 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 health care 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 1: A decision which better positions CAE to efficiently allocate capital and resources to the

Decision, which better positions CAE to efficiently allocate capital and resources to secure growth opportunities in our large core simulation and training market.

Speaker 1: your growth opportunities in our large core simulation and training.

Speaker 1: We tend to apply a significant portion of the net proceeds to reduce debt.

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

Speaker 1: transaction is expected to close before the end of the current fiscal year, subject to closing conditions, including customary regulatory requirements.

Transaction is expected to close before the end of the current fiscal year subject to closing conditions, including customary regulatory approvals.

Speaker 1: with leverage having decreased to a ratio of approximately three times.

With leverage having decrease to a ratio of approximately three times.

Speaker 1: We will consider reinstating capital returns to shareholders following the closing of the health care.

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

Speaker 1: 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.

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.

Now turning to our segmented performance.

Speaker 1: In simple, second quarter revenue was up 13% to $572.6 million compared to the second quarter last year.

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.

Speaker 1: and adjusted segment operating income was up 9% to 140.

Speaker 1: point three million dollars for the second quarter last year for a margin of twenty

$3 million versus second quarter last year for a margin of 20%.

Speaker 1: both solid improvements over last year and as Mark referenced CA's second quarter is normally seasonally softer with respect to training center utilization which typically has

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 1: 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.

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 1: 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 1: The FED's 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.

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

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 for an adjusted segment operating income margin of seven 5%. This is up nicely from Q2 of last year.

Speaker 1: And in health care, 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, but 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.

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

Thanks Tanya.

Speaker 2: 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.

Yes.

Speaker 2: Our strong momentum is translating to robust order flow and a record backlog, which portend an excellent future for C8, and our core civil

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

For 10 and excellent future C.

And our core civil and defense markets are.

Speaker 2: our customers increasingly require innovative training and operational support solutions to perform at their best in mission-critical environments.

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

Speaker 2: 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 in the graph that we anticipate by leveraging our global market position.

As well, our technological expertise and the straightforward one she culture portends for optimism.

Speaker 2: As well, our technological expertise and the strength of a one-seat customer portends for optimism.

In civil we expect to continue growing at an above market rate driven by the broker recovery in air travel.

Speaker 2: In simple, 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, and a sustained high level of demand for pilot and pilot training across all segments of aviation.

Greece penetration of your existing addressable market for training and flight services solution and a sustained high level of demand for pilots and pilot training across all segments with aviation.

Speaker 2: 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.

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

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

Speaker 2: 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.

Highly regulated aviation training market.

In addition to continuing to grow our share of aviation training market and expanding our position in digital flight services, we expect to maintain our leading share of full flight simulator sales.

Speaker 2: 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 per year. Approximately half of those deliveries are slated for the fourth quarter.

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.

Speaker 2: Turning to defense, we expect to continue making good progress transforming our business by replenishing our backlog with more profitable programs.

We expect to continue making good progress transforming our business.

By replenishing, our backlog with more profitable program.

Speaker 2: and by retiring low-margin legacy contracts, which we expect to culminate in a substantially bigger and more profitable business.

And by retiring low margin legacy contract, which we expect to culminate in a substantially bigger and more profitable business.

Speaker 2: 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, which strategic and generational wins, including next gen platforms.

Speaker 2: giving us a record $5.9 billion adjusted backlog.

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

Together with a record $95 billion pipeline of bids and proposals outstanding.

Speaker 2: Together with a record $9.5 billion pipeline of bids and proposals outstanding.

Speaker 2: 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 of the transformation underway.

And as we look at the remainder of fiscal 2024.

The positive inflection.

Speaker 2: we expected this year in defence has been delayed because of impacts associated with the retirement of our low 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 2: 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 the business and does not reflect its underlying potential.

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

It does not reflect its underlying potential.

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

Speaker 2: The essential trend lines of replenishing our backlog with larger and more profitable programs while simultaneously retiring legacy contracts remain positive.

Speaker 2: However, the prevailing U.S. government budget appropriation uncertainty 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've 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 2: 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 2: We expect to see defense segment performance improvements materialize 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 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 or margin pressures associated with them.

Speaker 2: We're firmly focused on retiring legacy contracts as soon as possible and mitigating the margin pressures associated with them.

Speaker 2: We remain pleased with the accretive margin profile on our newly awarded contract, which should be the best indication of where the future performance of the defense is headed.

We remain pleased with the accretive margin profile on a newly awarded contracts, which should be 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 2: 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.

Lastly on healthcare.

I wanted to thank Jeff Evans, and the entire health care team.

Speaker 2: I want to thank Jeff Evans and the entire healthcare team for their dedication and excellent performance.

Their dedication and excellent performance.

Speaker 2: 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 the significant contribution to patient safety that she health care has made and I believe that Madison industries with the right home to take the business to the next level.

Speaker 2: 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 simulation to drive patient safety and quality outcomes.

But overall, we continue to be highly encouraged by the secular tailwind that all segments and the growth that we expect.

Speaker 2: 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 one CAE. With that, I thank you for your attention and we're now ready.

Harnessing a global market and technology leadership and the power of one seat.

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

Operator, we'll now take questions from financial analysts.

Speaker 3: Operator will now take questions from financial analysts.

Thank you.

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

Speaker 4: 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.

You will hear a <unk> pump technology a request.

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One moment please for the first question.

Our first question comes from fatty Schamel with BMO. Please proceed.

Speaker 4: Our first question comes from Fadi Chamoun with BMO, please proceed.

Speaker 5: Yeah, good afternoon, everyone. Thanks for taking my question. So first question I have is, is the mid 20%

Yeah. Good afternoon, everyone and thanks for taking my question.

So first question I have is.

It is the mid 20%.

Speaker 5: EPS growth guidance that you reaffirmed.

EPS growth guidance that you reaffirmed.

Take into account to be a expected divestment of healthcare and.

Speaker 5: take into account the expected divestment of health care, and secondly, I guess

Secondly, I guess.

Speaker 5: I'm just trying to square off the pushback and the defense margin inflection point.

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

Speaker 5: and the maintaining of the guidance for fiscal 2025 effectively.

And the maintaining of the guidance for fiscal 2025 effectively.

Speaker 5: So, are you still expecting defense margin to bounce back?

Like V.

Sure. So so are you still expecting defense margin to bounce back.

Speaker 5: kind of in 2025 and to what level are you still thinking the double digit is achievable, kind of in the back hops 2025 just trying to square it off. The maintenance of this guidance in the context of the divestment of healthcare and the weaker results in defense.

Kind of in 2025 and to what level are you still thinking of them.

Digital is achievable kind of in the back half. So I was just saying squared off maintain this August.

This guidance in the context of the divestment of health care and the weaker results and in defense.

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

Speaker 2: OK, yeah, thanks. Thanks for the question, Patty, look.

Speaker 2: Look, our three-year guidance continues to be our target.

Look at our three year guidance continues to be our target.

Speaker 2: You know, we continue to see strong growth and profit improvements across the portfolio. You know, I think it's safe to say, obviously, that as you point out, that we see incremental risk in defense related to the factors 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 pointed out that we see incremental risks and defense related to the factors, we 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 that it is I'd say specifically.

Speaker 2: But, you know, as I mentioned, we're very focused on closing up at 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 2: So, you know, I'm not giving guidance today about fiscal 25, but, you know, as we get closer to fiscal 25, if there's more color to provide on that, we'll do so. But, you know, the target's the same. And with regards to healthcare, I would say that, you know, the impact, you know, 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.

Giving guidance today about fiscal 'twenty, five, but you know as we get closer to fiscal <unk>.

But if there's more color to provide on that will do so, but it's hard to the same and with.

With regards to the health care I would say that.

The impact yeah, I mean, it's not it's not nothing but it's relatively minimal in terms of its impact to the guidance that we.

So we've given and the results coming out of the cell.

Okay, and maybe one follow up like I think we're on the same kind of be.

Speaker 5: Okay, and maybe one follow up, like, I think we understand kind of the

Our budgetary issues and some of the ramp up on the new business that you have been I can't like the backlog, obviously you've been growing your.

Speaker 5: budgetary issues and some of the ramp up on the new business that you have been, I can't like, you know, the backlog obviously growing, you reported a few quarters of increasing backlog and, you know, outlook for defense quite positive, but

Reported few quarter, though.

Well, it's increasing backlog and the outlook for defense quite positive but.

Speaker 5: If we put aside this budgetary issue and potential for ongoing delays, how...

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

How 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.

Speaker 5: kind of understand what is the margin impact today from these legacy contracts that are eventually going to move out of the P&L, or whether that happens next year or the year after. But is this 300 basis points, 200 basis points, just trying to kind of understand what is the core profitability kind of run rate of defense.

Next year it'll be your offshore but is this 300 basis points 200 basis point, just trying to kind of understand what is the core processor lowly profitability kind of run grade up defense and.

Speaker 5: uh, notwithstanding whatever delays are happening on the, uh, on the ramp up of new.

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

Speaker 2: Let me try to answer 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 some of the factors and hopefully we get there. The first of all when we talk about these lower margin drag programs.

Speaker 2: We're talking about a relatively 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 it's important to note as well that none of those contracts are recent awards. In fact, you know, I look at the whole list of these, you know, finite programs and they were all awarded before COVID.

We're talking about a really small number.

But a relatively small number of contracts here a fraction a small fraction of our overall backlog.

I think there's I think it's important to note as well.

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. So.

Speaker 2: So we can well imagine that the impacts that we see, although it's a small number of programs.

Well imagine that.

The impact that we see although it's a small number of programs the impacts of inflation you know what were some of the inflation that 2% escalation clearly we're seeing inflation that yeah, 10 10, 15%.

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

Compounded.

Speaker 2: has an impact. Staffing shortages have an impact. Those are the programs that were most impacted by those factors as well as, you know, manpower shortages that we have.

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

Speaker 2: Those programs are more profoundly affected and those are the ones that are weighing on the profitability of the business.

Speaker 2: And, you know, at the same time, there's other factors, you know, we.

And you know at the same time, there's other factors.

Speaker 2: that we see the impact of this inflationary environment. And part of it is some of those programs.

We see the impact of this inflationary environment and part of it is is some of those programs. We have very very strong business cases to be reimbursed for actually egregious cost increases that we've seen within this kind of environment. There is no appetite for any.

But you know very well, we've been competitive or very small portion of what we think we should be.

Speaker 2: 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 of defense budget, we haven't seen this quarter.

<unk>.

As well and 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 plenty of defense budget, we haven't seen this corner so.

Speaker 2: I mean, that's what's kind of happening with these dry programs. When I think about the new programs coming up, first of all, and what we call our transformational programs, the ones that we talk about in releases, your programs like FTSS, like FA, like Hades.

I mean, that's what's kind of happening with at these times.

Dry program 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 F TSS lifestyle like Haiti.

I think I.

Speaker 2: I think a no wording 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 2: 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.

3% of that was in our revenues for this quarter for 3% of those transformational programs were in the quarter, but yet they make up 20% of our backlog and those proven who constantly transformational programs.

We're at very accretive larger that basically gives us strong confidence in.

Speaker 2: in the targets that we put to our business, which is lower double digits profitability. So those are the elements that are at play here.

In 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. Appreciate the color. Thanks.

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

Speaker 4: Our next question comes from Tim James with TD Cowan. Please proceed.

Thanks, very much just had one question here and I'm just wondering if you could give us an update on the.

Speaker 6: 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.

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

Speaker 6: on what those costs were around and what that provides for the business.

Speaker 2: 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. We are, you know, especially when I think about the success we're having in the market.

Well look I think the person out there. Thanks for the question, Kevin What I would tell you 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.

If 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 airlines in India specific he saw air India, While we just signed a major contract with Air India.

Speaker 2: 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, specifically you saw Air India. Well, we just signed a major contract with Air India, with our air center suite of products.

With with our air centers suite of products and.

Speaker 2: Considering that Air India is bringing together a number of airlines together as part of the Air India group.

Considering that <unk> is bringing together a number of airlines together as part of the group that is very very promising in terms of the business as well I was just recently in Budapest, and seal and and his team.

Speaker 2: And 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.

Speaker 2: and they've selected us, you know, for our center suite. So, 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.

And they selected us for our center suites, So and that's just a couple so for late business finance standpoint, I'm quite happy with the business.

And I should say, that's the only thing I'm I'm satisfied with I'm very very happy with the impact that we're making.

Speaker 2: And, you know, with our customers, with regards to how they see CAE, which is something, CAE as the national owner of this business, look, it's taking, it will take time to recognize revenue because this is software as a service. Well, remember that, you know, we bought Air Center at seven times.

With our customers with regards to how they ceased E which is something you see as the natural owner of this business look it's taking it will take time to recognize revenue because this is software as a service rig.

Remember that we bought are centered at seven times.

Speaker 2: 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.

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 and look at where attractive where we want it to be and it's contributing positively to this quarter.

Speaker 2: develop that business and look I will attract where we want it to be and it's contributing positively to the

Okay. Thanks, Marc 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 I'm. Just wondering maybe if you can talk a little bit about where their surprises in there what drove that is that going to be more indicative of what second quarters might look like going forward just any day.

Speaker 6: 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?

Speaker 6: of what you know second quarters might look like going forward just any details on that.

Sales on that on that strong performance.

Speaker 1: Hi, Tim, thanks for the question. Yeah, no, like I said in the remark, very pleased.

Oh, hi, Thanks, Tim Thanks for the question Yeah, No I I like I said in the remarks very pleased to see.

Speaker 1: a strong reversal in working capital in the quarter, and really it's not a surprise, this is really the outcome of a 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.

A strong reversal in working capital in the quarter and and really this is not a surprise. This is really the outcome of that continued.

Our focus on optimizing our capital and our metrics. So we saw a good.

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 two.

Speaker 7: to the positive reversal of working capital. We expect that to continue, that momentum to continue in the second half as it usually does. Great, thank you.

To the positive reversal in the working capital we expect that to continue that momentum to continue in the second half I think you said that.

Great. Thank you.

Okay.

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

Yes. Thanks, good afternoon, just a couple of questions on the restructuring activity.

In Q2 could you just maybe update us on where we are in that that restructuring program.

Speaker 8: Just maybe update us on where we are in that restructuring program and how much of that at this point.

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

So I would I think that 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.

Speaker 1: So I wouldn't necessarily call it a restructuring program anymore. The restructuring program, we closed out last.

Speaker 1: This is really continued integration of the two acquisitions. So the flight services one, you know, Mark just spoke of it. You know, we bought this at, you know, seven times, but not knowing that there would be investments to harmonizing and modernizing the structure. And what we're seeing is, you know, investments in our, you know, more modernized IT infrastructure and migration of customers, which we expect to complete by midnight.

Mark just spoke of it you know we bought this at seven times EBITDA and knowing that there would be investments to harmonizing them on or anything in the structure.

What we're seeing is.

<unk> and our you know more modernized it infrastructure and migration of customers, which we expect to complete by mid next year.

Speaker 1: On the Altrey-Harris military training, this is really a second phase of our integration, which was, which we had as a CALUS 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 this end.

I'll see Harris and military training. This is really a second phase of our integration which was.

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

All of those businesses are the legacy and the new businesses together. So this triggered.

Triggered a second phase of further planned integration end to end synergies on that side and that's a relatively towards it then.

Okay. So should we should expect I guess or the outcome of these are sort of integration activity to have maybe.

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

Speaker 8: meaningful impact on margins as we look ahead to 2025, is that fair?

Sure Yeah.

Okay.

Speaker 8: Okay, maybe just secondly, I just wonder if you can maybe talk about, I guess, what you're seeing as far as opportunities to deploy additional capital.

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

Speaker 8: training network, what are you seeing on outsourcing opportunities?

What are you seeing on outsourcing opportunities you know JV opportunities.

Speaker 2: lots of opportunities out there, Cameron, and you've seen what we're doing. I think we've, you know, from the outset, you know, we came into this with a lot of dry powders. I mean, when we think about what we did, well, back a little bit through COVID.

Lots of opportunities out there camera.

You've seen what we've done what I think we've you know 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 2: we didn't re-reduce the asset size, we put it at the right place.

We didn't really reduce the asset size, we put it at the right place and we and in doing so we took a lot of structural cost go back in and.

Speaker 2: And in doing so, we took a lot of structural costs to go back and then neighborhoods of 70 million.

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

Speaker 2: structural hard cost out of business, and we're seeing a lot of that.

Speaker 2: 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 have Singapore. We're opening up in Savannah very soon. We opened up Las Vegas, which has been very successful thus far. We have Orlando together with SimCom opening up, and we've announced in Vienna next year.

Floyd.

Singapore, we're opening up with Savannah, very soon we open up the Las Vegas was very successful does.

Thus far we have Orlando together with Zim, Commvault, but I don't think we've announced at Vienna next year.

Outsource things that look Oh, I can tell you.

Speaker 2: I can tell you, the progress is pretty much as I indicated in the past, I'm very happy with what we've seen. We've talked about Qantas before, I was just last month, I was in Athens with the CEO and his team at AGM, and they're the largest carrier in Greece, and we've done a deal with them. There's other deals that I can't really talk about right now, but I can say that we're traveling a lot, we're meeting a lot of customers.

Progress is pretty much has.

In the past I'm very happy what were seeing here, we've talked about once this before.

What's that.

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

They're the largest carrier in Greece, and you know where we've done the deal with them that there's 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 in.

Speaker 8: you know, we see opportunities to continue to grow, you know, and efficiently deploy capital, you know, particularly in the civil network, which, you know, as you know, is very critical to margins. Right. Okay. I appreciate the color. Thanks very much.

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.

Right. Okay I appreciate the color thanks very much.

Thank you.

Okay.

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 it at a high level.

Good afternoon. Thanks for taking my questions here, maybe just turning back to the sense, maybe if I look at it at a high level.

Speaker 9: 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 three, four percent. Presumably, if margins double or a little bit more than double, you'll get high single digit returns on that capital employed. That still feels...

And I know this map is woefully simplistic, but if I just look at you know your your.

Run rate.

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 you'll get.

High single digit returns on our top will employ that still feels 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: 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?

How do you think about.

Driving that return higher or is it kind of being able to grow revenue, while keeping our capital employed relatively static.

Speaker 9: margins need to actually get closer to the mid-teens over time to maybe drive better returns. Just try to think of the cadence of the returns on capital here over a longer period of time.

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

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.

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

Speaker 2: Well, as I said, over a long period of time, we've felt very comfortable about this business and, you know, in achieving the target that we've given of low double discharges. 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 of business. And again, there's the same factors are at play here. I mean, really, the two overall factors that are at work, number one, it's our risk.

And in achieving the targets that we've given up low double digits.

Look it's clear that we're not where we wanted to be today, we'd rather not be here, but it's finite is temporary it's not.

Reflective of the long term potential business there.

The same factors are at play here I mean really the two overall factors that are worth <unk> <unk>.

Number one is on risk retirement.

Speaker 2: and risk retirement of what we call these drag programs, and we're making progress. In some cases, we're actually moving to accelerated. I can tell you, like in this past quarter, there's 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 incur extra costs, but I think it's worth it to make sure that we exercise contractual obligation to meet the schedules on those contracts.

And you know at risk retirement on what we call. These drag programs and we're making progress in some cases, we're actually moving to accelerated I can tell you like in this past quarter. The two programs that we've shifted the seven day work weeks to basically accelerate the schedule and get these behind US obviously, when we do that we have we encourage to cost but.

I think it's worth it to make sure that we you know.

Exercise.

External opportunity obligations to meet schedules on those contracts.

Speaker 2: you know, in the case of new programs, as I talked about during my remarks.

The case of new programs and when I talked about in Germany are my remarks.

Speaker 2: You know, we remain very bullish about the profitability of those new programs. They're winning for all kinds of reasons, such as something that I've talked about on previous calls, like being able to leverage and exercise what we call commercial, you know, rates on government contracts.

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

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

Exercise, what we call commercial.

Rates on government contracts and that.

Speaker 2: And that's, you know, it's going to be a mix of programs, but in aggregate, you know, those new programs that we're winning, you know, are very, you know, they are very creative to the margin obligation that we did. So that's really what's happening here. And as I said, you know, where we are today of those transformational programs, again, in the second half, they make only.

It's too it's going to be a mix of programs, but in aggregate.

Hopefully, you'll do with new programs that we're winning.

Are very you know they were they're very accretive to the margins obligation that we get so that's that's really what's happening here and as I said.

You know where we are today.

Those transformational programs.

Again in the second half they become only 3% of our revenue next year.

Speaker 2: 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, you know, basically the revenue that's been driven throughout the business, that's going to be from those transformational programs. And at the same time, we'll be substantially down on 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 two trend lines are, you know, some of the factors I talked about.

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 you know basically the revenue that's being driven throughout the business that's going to be from those transformational program and at the same time will be substantially down on the curve of retiring the risk on the dry program.

So that's what's at play here and of course.

Thing two trend lines.

You know some of the factors I talked about it.

Speaker 2: basically contracts moving to the right in terms of us being able to execute on contract.

Basically contract moving to the right in terms of us being able to execute on contract for and.

Speaker 2: In a lot of cases, no fault of our own, if I should say, like 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. And of course, that means delays for us.

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, we've 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 at least for us.

Speaker 2: So, all of those factors are at play here, but again, from a long-term standpoint, they're very comfortable about that.

So all those factors are at play here, but again over a long term standpoint, I'm 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 from first officer to captain much faster, and I'm just wondering, does that create...

I appreciate the color there Mark maybe just trying to civil we've been reading more.

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

Well you know one of the things we've been reading about is just just the investments of pilots.

Policy, moving first officer to captain much faster and and and and I'm just wondering.

Does that create.

More training opportunities for you does that shift how you think about.

Speaker 9: 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 impact maybe the mix of that commercial revenue between wet and dry or even the number of events you're typically seeing, you know, over a one-year period with an airline or with a specific pilot?

What versus dry hours like if if 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 all of that commercial revenue between wet and dry or even the number of events are typically seeing.

Over over one year period, with an airline or what the specific pilot.

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

Speaker 2: 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 changes would position your ROFO they being our first hospital b cap and that it is by necessity by regulation and that's on a global basis requires retrained.

Speaker 6: 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 business there is no doubt about that. The other component about

Our business is trading and where the by far largest in the world. So obviously, that's going to be a first order a catalyst for us so for us.

It's a positive catalyst for our business there is no doubt about that the other component of bonefish.

Is that.

Speaker 2: You know, we this the growth, you know, everyone is focused as you would would expect to make sure that we do that safe.

This the growth you know everyone is focused as you would.

We'd expect to make sure that we do that safely.

Speaker 2: That basically plays to see strength because no one trains more pilots.

Everything is okay with that and that basically place to see strength because no. One trains more pilots in the world than we do and that's where you see for example, you don't have agreements that we have with like for example, we announced last quarter with Boeing that we signed at the Paris Air show with and where it may.

Speaker 2: in the world than we do and that's where you see for example you know 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 because that partnership is all about Boeing selecting us to deliver their competency-based

I'm proud of the partnership with Boeing because that partnership is all about boring selecting us to deliver their competency base premium program starting are they the board.

Speaker 2: charting the one we announced, the bullying analysis, starting in India, you know? And to me.

And Boeing announces starting in India.

And to me so that you know.

Speaker 2: You know, that's BCCA bringing technology to bear, bringing the sheer size.

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

Speaker 2: of the footprint that we have, the amount of training hours that we do, the technology we bring to be able to give objective database insights to OEMs such as Boeing and to airlines across the world to make sure that they can efficiently, you know, basically bring on pilots

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

To make sure that they can efficiently.

Basically bring on pilots new pilots move past two different positions that are earlier age while still maintaining the safety of the sky that we enjoy.

Speaker 2: new paths, move paths 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 talking my questions.

Our next question comes from.

Speaker 4: Our next question comes from Christine Lawag with Morgan Stanley .

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

Hey, good morning, everyone or good afternoon.

Speaker 10: Hey, good morning, everyone, or good afternoon. Morning.

Alright, great.

Afternoon.

Speaker 1: Mark, Sonia, maybe going back to the healthcare business, you know, the past few quarters, we've finally seen it be profitable. Can you just give us a little background of why now for the sale? And then also as a follow on, I mean, the healthcare business.

Mark I don't know maybe going back to the health care 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 as a follow on I mean, the health care business was supposed to be.

Speaker 10: an industry in which you had low market share that you had an opportunity for growth. Now that you won't have health care anymore, are you thinking about another potential leg to the business?

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.

Well the lead time with health care.

Speaker 2: Well, let me start with health care. Look, together, in concert with the board, obviously, we're always looking at a portfolio to make sure that we're maximizing the value. And that's the value to all stakeholders. And so in this specific case of health care, we find ourselves.

Yeah together in concert with the board obviously, we're always looking at the portfolio to make sure that we're maximizing the value and that's the value to all stakeholders and it's really the specific case of health care.

We find ourselves in a place today.

Speaker 2: You know, and, you know, we've been looking at this for, you know, not overnight, obviously, but that the next wave of investment that's going to be required for this.

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

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 see can drive more focused investment in synergy in our court.

Speaker 2: is probably best made by new capital providers so that we at CE can drive more focused investment and synergy in our core. So we think now is the right time and I'm absolutely convinced that Madison Industries is 100% the right order for this business.

So we think now is the right time, and and I, absolutely convinced that Madison industries is 100% the right owner for this business you know or you don't have had opportunity to talk with the CEO and a couple of times in our shared values and our similar cultures to me make this transaction a perfect fit again for all states.

Speaker 2: You know, I've had opportunities to talk with the CEO a couple of times. You know, our shared values and our similar cultures, to me, make this transaction a perfect fit, again, for all stakeholders. And

Holders and so you know that 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 in and that software so to certain extent here we're changing.

Speaker 7: So that's really how I see it. 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.

Health care for software.

Thank you Mark I really appreciate it.

Yeah.

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

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

Welcome.

Speaker 4: So, I just wanted to ask another question on the defense margins, you know, with regards to that low margin.

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

With regards to that low margin business rolling off.

Speaker 11: 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 nuance than that? Because, you know, I'm just trying to get a better understanding of 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.

I'm, just trying to better understand how these contracts that retire.

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 not because 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 improve.

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

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

Speaker 2: It's really a question of finishing the contracts. There are a number of contracts 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.

That were executing that.

Our to deliver products and services to specific customers without getting to the specific nature of each one each one has a contractual end date and years 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 customers on time so.

Speaker 2: 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, you know, we assume. And that's really what we're talking about. And, you know, with regard to the assumptions we've made with our...

And it 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 costs.

And that's really what we're talking about and you know.

With regard to the assumptions we've made without.

Speaker 2: that, you know, for us to be able to do that portends, you know, the outlook.

You know for us to be able to do that portends.

With you.

Speaker 11: Okay, and are you able to provide some color on those dates when those are going to be coming off the book?

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 you know to me are at it again in aggregate it.

Speaker 2: Look, I think that, you know, to me, it's again, in aggregate, it's the trend lines are, you know, what, you know, are what we've said. Look, I think.

Trend lines are you know what you know.

What we've said look I think.

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

Speaker 2: I think it's safe to say that, you know, we'll be substantially complete, you know, with those in aggregate, in totality by the end of the year.

Those in aggregate in totality by the end of next year, that's part of it obviously you know they will close.

Speaker 2: That's what it is. Obviously, you know, they will close, you know, on the...

On the <unk>.

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

Speaker 2: not all at the same time, but again, substantially complete by the end.

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.

Speaker 11: Okay, and then just turn to the to the civil side of the business. And I'm not asking for, you know, a fiscal 2025 guide, but more so think

Speaker 11: you know, how much room there is to recover to pre-pandemic levels of.

Speaker 11: And just looking at, you know, the most recent IATA data still has passenger kilometers down 10% in Asia, down 4% in Europe , international travel is still down 7%.

Most recent I ate a data source passenger kilometers down 10% in Asia down 4% in Europe International travel is still down 7% versus.

Speaker 11: 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, plus then a continued recovery to pre-pandemic levels in Asia, Europe , and international travel.

Versus pre pandemic, so on a high level basis as a REIT. We just 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.

I think what is for sure that we're gonna rated 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 was taken out of the business just by itself. Even at you at pre pandemic levels would mean, a higher margin, which you're already seeing in the results.

Speaker 2: I think it's for sure that we're going to rise 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.

Speaker 2: Couple onto that, there's, you know, business aviation is very, very strong.

Couple onto that there's scale.

Business Aviation is very very strong and that's a very good part of our business from a profitability standpoint, you saw the outsource things that were making there is more coming down that path. So yeah.

Speaker 2: and that's a very good part of our business from a profitability standpoint. You saw the outsourcing that we're making. There's more coming down that path.

Speaker 2: 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 a very strong demand environment that we're seeing across the whole business.

Speaker 2: So, you know, we don't have a target today for margins, except they're going to go higher.

So yeah, we don't have a target today for margins, they're going to go higher.

Thank you very much I'll turn it over.

Yeah.

Speaker 4: Our next question comes from Benoit Poirier with Desjardins Capital Markets. Please proceed.

Our next question comes from Ben Locke Party with digital Bank capital markets. Please proceed.

Speaker 5: 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 the good profitability level or it takes two or three years before ramping up at the good profitability level.

Yeah 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 prophecy boutique early days for those transformational programs just wondering about the accretion early days.

Or do they still contribute that's a good proxy nuclear level or it takes towards sweetener before ramping up the asset.

The profitability level.

Speaker 2: It depends on the program, because it's a service contract, typically it will take longer because obviously you're delivering 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. You won't have to wait long.

It depends on the program. Okay, then one day because its a service contract typically they will they will you know it will take longer to do because obviously, we're delivering service over time.

Rather than products, which tends to do it tends to turn into revenue faster.

In both cases, theyre going to be accretive to the double digit.

Goals that we have so and that that will happen radar right from the get go right from the start.

So you won't have to wait long. So that's just started being accretive to that.

Speaker 2: start being accretive to the numbers that we see.

The numbers that we see.

Speaker 12: 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 margins to high single digits 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?

Okay, and just based on the comments earlier about the the pace for the legacy programs due to ramp. So you mentioned, mostly 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 2: 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 in fiscal 'twenty five today, so I'll keep it when we say Ah trial.

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

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

Speaker 12: 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, debt repayment, investment grade, and then return to shareholders. Are there any optimal ratios you would like to operate going forward?

In the opening remarks, you mentioned that focus on growth and debt repayment investment grade and then return to shareholders. Our Durham. He optimal ratio you would like to operate going forward.

Speaker 1: I think like we mentioned in the past, the three times was not necessarily the goal but a waypoint. So really what we're saying is that we continue on the balance.

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

Speaker 1: 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, you know, 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 the stimulators to address demand and these are highly accretive within.

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

Speaker 1: And we'll continue to de-lever to kind of remain very comfortably investment grade.

And we will continue to de lever to kind of.

Remain very comfortably investment grade so ultimately, it's a balance of those and and an ongoing conversation with the with the board on on potential capital returns shareholder returns yet.

Speaker 1: So ultimately it's a balance of those and an ongoing conversation with the board on potential capital returns, shareholder returns, yeah.

Okay. Thanks, very much working upon.

Yes.

Speaker 4: 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.

There are no near Atlanta seems Mariana Perez Mora our programs today.

Speaker 13: Good afternoon, everyone. This is Mariana Perez-Mora, up for run today.

So my first question is about utilization rates you had 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 13: 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 percent.

But you keep opening new sites, what is suite 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 rates.

Speaker 13: but you keep opening new sites. What is the sweet utilization rate, kind of 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 peak utilization, sweet spot rates?

Well look.

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

Speaker 2: I think, basically, it's tough to answer your question specifically because, you know, you can, I mean, we can theoretically go up to 100% utilization and higher on individual training centers. And you know what? We actually do that today on the number of training centers. But you can't, you can't maintain it there, you know, for the complete, as a whole, because obviously, you've got to spend time for maintenance, things like that. And I would say that 100%.

You've got to spend time for maintenance things like that and I would say that 100%. It's not like every hour of a year I mean in terms of our commercial it is trying to use about 6000 hours a year our business aviation training centers 4500 hours hours.

Speaker 2: 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 center is 4,500 hours a year, which is the more effective.

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

Speaker 2: kind of schedules we can do in business aircraft. But look, our utilization here is going higher on average. We saw seasonality

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

Speaker 2: in Q2 because airlines have been flying a lot. If I looked at Europe this summer, they were

Speaker 2: It was very, very busy, and our utilization was substantially low in Europe in the summer, but that's... That's...

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

Speaker 2: that's actually normal. We're back to seasonal rates and that's bled a little bit onto Q3. But as we look forward, that's recovering, you know, in a quite substantial way. So our focus is on maximizing utilization and 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

That's actually normal we're back to seasonal rates and that's bled a little bit onto Q3.

Look forward, that's recovering at a quite substantial and weight. So our focus is on maximizing rising utilization.

And where the demand is there for us to be able to do that so let's say watch for increased utilization and the last thing I would say is.

Speaker 2: 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, you know, they may be, you know, half empty or a quarter empty or not full at all yet. So that would affect the overall utilization.

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 you know they may be half half empty or corner empty or not is not full at all yet so that will affect the overall utilization.

Yeah.

Speaker 13: 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 things like normalize from pop.

Speaker 2: But we can achieve 80%. We've done it in the past. So we don't have a target to stop, it will maximize the utilization. And there is there really is no sweet spot. And 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. And

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

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

The utilization there is there really is no sweet spot. It will continue in 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 2: You know, we are deploying a lot of efforts 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, you know, the schedules of all 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 here.

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 simulators.

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 I'm getting to these like med leverage targets and how you're thinking about this like are you thinking about the regular dividend again or more opportunistic kind of like specialty with an answer.

Speaker 13: 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?

Our share buybacks.

And so so we haven't come out with with that view, yes. We're on ongoing discussions until 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 will continue that.

Speaker 1: So, we haven't come out with that view yet. We're on ongoing discussions, and so we 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.

Cash and come back with a quantum and vehicle in the future.

Okay.

Alright, Thank you very much.

Yes.

Okay.

Speaker 4: Our next question comes from Conor Gupta with Scotiabank. Please proceed.

Our next question comes from Connor Gupta with Scotiabank.

Proceed.

Sure.

Thanks, operator, good afternoon, everyone just stick to one question Yeah, a lot of U S Airlines.

Speaker 14: 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.

Thinking about their domestic demand is kind of flat doing are 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 our pilots.

Pilots, especially with respect to go North American customers.

I know all of those factors are just adding to what I talked about in terms of what we call the churn churn pilots moving.

Speaker 2: No, all of those factors are just, you know, adding to what I talked about, in terms of the what we call the churn, churn pilots moving from, you know, either narrow bodies to wide bodies, or co-pilot to pilot, or from one plane to another, you know, from a regional to anything like that, you know, 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.

Either narrow buys to wide bodies hope as a pilot.

One plane with up to another you know.

From a regional to.

Anything like that you know triggers.

Man for training and I can tell you there's a lot of unmet demand out there both in commercial aviation and business aviation and as I said before we're ramping up the satisfying. It then that you know as part of <unk>.

Speaker 2: As I said before, we're ramping up to 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.

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.

Okay.

Thank you.

Mr. Arnold at Sterno 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.

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 today's website.

Good afternoon.

Speaker 4: 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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