Q4 2024 CAE Inc Earnings Call

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Operator: Good morning, ladies and gentlemen, welcome to the CAE fourth quarter and full year financial results for fiscal year 2024 conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity for analysts to ask questions, followed by a Q&A for members of the media. To join the question queue, you may press Star, then 1 on your telephone keypad.

Good day, ladies and gentlemen, welcome to the CAE fourth quarter and full year financial results for fiscal year 'twenty 'twenty four conference call.

Speaker Change: As a reminder, all participants are in listen only mode and the conference is being recorded.

Speaker Change: After the presentation, there will be an opportunity for analysts to ask questions followed by a Q&A for members of the media to join the question queue. You May Press Star then one on your telephone keypad should you need assistance during the conference call you May signal, an operator by pressing Star then zero.

Operator: Should you need assistance during the conference call, you may signal an operator by pressing star, then 0. I would now like to turn the conference over to Mr. Andrew Arnovitz. Please go ahead, Mr. Arnovitz. Good morning, everyone.

Speaker Change: I would now like to turn the conference over to Mr. Andrew <unk>. Please go ahead Mr. <unk>.

Andrew Arnovitz: And thanks for joining us. Before we begin, I'd like to remind you that today's remarks, including Management's Outlook for Fiscal 25, and answers to questions contain forward-looking statements. These forward-looking statements represent our expectations as of today, May 28, 2024. And accordingly, our subjects may change. Such statements are based on assumptions that may not materialize and are subject to risks and uncertainties.

Mr. <unk>: Good morning, everyone and thanks for joining us before we begin I'd like to remind you that today's remarks.

Andrew Arnovitz: Actual results may differ materially, and listeners are cautioned not to place undue reliance on these forward-looking statements. A description of the risks, factors, and assumptions that may affect future results is contained in CA's annual MD&A, 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 on EDGAR. With the divestiture of C's healthcare business, all comparative figures discussed here and in our financial results have been reclassified to reflect this continued operation.

Speaker Change: This was one of the answers to questions contain forward looking statements. These forward looking statements represent our expectations as of today May 28, 2024, and accordingly are subject to change such statements are based on assumptions that may not materialize and are subject to risks and uncertainties.

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

Speaker Change: 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 Clos.

Speaker Change: In the U S Securities and Exchange Commission on Edgar.

Speaker Change: With the divestiture of <unk> health care business, all comparative figures discussed here and in our financial results have been reclassified to reflect discontinued operations.

Andrew Arnovitz: On the call with me this morning are Marc Parent, CIE's President and Chief Executive Officer, and Sonya Branco, our Chief Financial Officer. Nick Leontidis, CIE's newly appointed Chief Operating Officer, is also on hand for the question period. After remarks from Mark and Sonya, we'll open the call to questions from financial analysts, and at the conclusion of that segment, we'll open the lines to members of the media. With that, I now turn the call over to Mark. Thank you, Andrew.

Speaker Change: On the call with me. This morning are markdown, <unk>, President and Chief Executive Officer, and Sonya Branco, our Chief Financial Officer.

Speaker Change: <unk> newly appointed Chief operating Officer is also on hand for the question period.

Speaker Change: After remarks from Marc and Sonya, we'll open the call to questions from financial analysts and at the conclusion of that segment. We will open the lines to members of the media with that let me now turn the call over to Mark.

Marc Parent: And good morning to everyone joining us on the call. As you'll have seen from our earnings release, fourth quarter results are unchanged from last week's pre-announcement, which was mainly intended to communicate the re-baselining of our defense business and the appointment of Nicolay Antides, a proven CE veteran, as our Chief Operating Officer. To provide additional context, last week, we also offered an earnings preview in our preliminary fiscal 2025 outlook. This morning, Sonya and I will provide a bit more color on our performance and our very strong financial position.

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

Mark: As you'll have seen from our earnings release fourth quarter results are unchanged from last week's pre announcement, which was mainly intended to communicate the re baseline of our defence business and appointment of Nick Nikitas, a proven seed veteran as our chief operating officer.

Mark: To provide additional context last week, we also offered an earnings per U and our preliminary fiscal 2025 outlook.

Mark: This morning, I'll provide a bit more color on our performance and our very strong financial position.

Mark: Yeah.

Marc Parent: Last week, we took decisive action to establish a clear path for margin improvement in our defense business. I certainly recognize that our defense performance has significantly fallen short of our expectations and understand and share investors' frustration.

Mark: Last week, we took decisive actions to establish a clear path for margin improvement in our defense business.

Mark: I certainly recognize that our defense performance has significantly fallen short of our expectations and understand and share investors' frustration.

Marc Parent: The impairments and accelerated risk recognition on the legacy contracts that we announced last week are disappointing but necessary steps towards putting the overhang of these past issues behind us. These actions were made possible by renegotiating agreements with our customers and our suppliers, adjusting the scope and the timing of these contracts for our mutual benefit. Ultimately, this enables us to address the programmatic risks that have been affecting our business.

The impairments and accelerated risk recognition on the legacy contracts that we announced last week are disappointing, but necessary steps towards supporting the overhang of these past issues behind us.

Mark: These actions were made possible by renegotiating agreements with our customers our suppliers adjusting the scope and the timing of these contracts for our mutual benefit.

Mark: Ultimately this enables us to address the programmatic risks that have been affecting our business.

Marc Parent: Alongside the rebaselining of the defense business was the acceleration of risk recognition on legacy contracts, and execution of a leadership or reorganization and implementation of targeted operational enhancement at both the segment and corporate level. These initiatives are designed to fortify our execution capabilities and foster greater synergies between our defense and our civil business. I fully expect these changes to enable greater focus on the simplification of our operating structure, with our COO overseeing the five P&Ls that encompass CEA's entire business scope.

Mark: Alongside a re baseline of the defense business was the acceleration of risk recognition of our legacy contracts.

Mark: And execution of our leadership, our reorganization and implementation of targeted operational enhancements at both the segment and corporate levels.

Mark: These initiatives are designed to fortify our execution capabilities and foster greater synergies between our defense and our civil businesses.

Mark: I fully expect these changes to enable greater focus to the simplification of our operating structure with our C. O overseeing the five P&L that encompasses and tire business school.

Marc Parent: This new structure and recent upskilling of talent in defense will further enhance the execution and oversight of major defense programs and facilitate the exploration and realization of synergies between our civil and defense operations. Also, and in the vein of further bolstering CE's future, our fourth quarter and full year results reflect continued strong growth in our core markets, robust order flow, and consistent cash generation. For CA overall, we grew Adjusted Bytelog by approximately 13% year-over-year with $1.6 billion in orders in a quarter, or a 1.38 book-to-sales ratio. And for the year, we booked over $4.9 billion in orders for a 1.15 times book-to-sales ratio.

Mark: This new structure and recent Upskilling of talent and defense will further enhance the execution and oversight of major defense programs and facility the exploration that realization of synergies between our civil and defense operations.

Mark: Also in the vein of further bolstering she's future our fourth quarter and full year results reflect continued strong growth in our core markets robust order flow and consistent cash generation.

Mark: <unk> overall, we grew adjusted backlog by approximately 13% year over year with $1 $6 billion in orders in the quarter or one three book to sales ratio.

Mark: For the year, we booked over $4 $9 billion in orders or a 1.15 times book to sales ratio.

Marc Parent: As of the end of March, we had a record backlog of $12.2 billion. We also further strengthened our financial position, having generated $418 million of free cash flow during the fiscal year. And together with proceeds from the sale of health care, we reduced leverage below three times net debt to adjust it even up. Excluding legacy contracts and Sybil, we booked orders in the fourth fiscal, fourth quarter fiscal quarter for $832 million, including contracts for seven full flight simulators.

Mark: As of the end of March we had a record backlog of 12 point 12, 12 2 billion.

Mark: We also further strengthened our financial position, having generated $418 million of free cash flow during the fiscal year.

Mark: And together with proceeds from the sale of health care, we reduce leverage to below three times net debt to adjusted EBITDA, excluding legacy Con.

Mark: In civil we booked orders in our fourth fiscal fourth quarter fiscal quarter or $832 million, including contracts for seven full flight simulators.

Marc Parent: This brings the total civil order intake to a record $3 billion for the year, including 64 full flight simulator sales, demonstrating the sustained high demand for pilot training solutions and our flight solutions software platform. Civil ended the year with a record adjusted backlog of $6.4 billion. Notable contracts in the quarter included a multi-year commercial aviation training agreement with ITA Airways and a first of its kind partnership in Canada where SEA instructors will deliver initial training for NAV Canada flight service specialists and air traffic controllers. And testament to our progress in flight solutions, we announced yesterday the signing of European ultra-low-cost carrier Wizz Air as a new partner under a multi-year supply agreement.

This brings the total civil order intake to a record $3 billion for the year, including 64 full flight simulator sales demonstrating the sustained high demand for pilot training solutions and our flight solutions software platform.

Mark: Civil concluded the year with a record adjusted backlog of $6 $4 billion.

Mark: Notable contracts in the quarter included a multiyear commercial aviation training agreement with Ita Airways and a first of its kind partnership in Canada, where she is structures will deliver initial training for NAV, Canada flight service specialist and air traffic controllers.

And Testament to our progress in flight solutions, we announced yesterday.

Mark: Signing of European Ultra low cost carrier with her as our new partner under a multi year supply agreement.

Marc Parent: We'll be supplying Wizz Air with CA's operational control and crew management software and CA's recovery manager solutions for operational and crew destruction. Average trading center utilization was strong at 78% for the fourth quarter and 76% for the year, up from 72% the year prior. In products, we deliver 17 civil full flight simulators a quarter and 47 for the year compared to 46 deliveries in the prior year. As disclosed last week, this is a bit lower than the approximately 50 that we had expected, with timing differences due to customer requests to postpone deliveries because their own facilities weren't ready to receive the full flight simulators as originally planned. Taking time delays from last year to account, we expect to deliver more than 50 full-fledged simulators in fiscal 2025. Now, turning to defense.

Mark: We will be supplying was there with six operational control and crew management software and six recovery manager solutions for operational crude disruptors.

Mark: Average training center utilization was strong at 78% for the fourth quarter and 76% for the year up from 72% the year prior.

Mark: In products, we deliver 17 civil full flight simulators in the quarter and 47 for the year compared to 46 deliveries in the prior year.

Mark: As disclosed lastly, this is a bit lower than the approximately 50 that we had expected with timing difference due to customer request to postpone deliveries because their own facilities werent ready to receive the full flight simulators as originally planned.

Mark: Taking time delays from last year to account, we expect to deliver more than 50 full flight simulators with fiscal 2025.

Mark: Turning to defense.

Marc Parent: At the same time as we've been taking actions to re-baseline the business, we've continued to make headway with our transformation strategy. We reached $1.9 billion of adjusted order intake on an annual basis, including training and simulation solutions for 1.04 times the book-to-sales ratio. This contributed to a $5.7 billion adjusted defense backlog. In a quarter, we had orders totaling $718 million, including a transformative win involving a contract with General Atomics to support the Remotely Piloted Aircraft System, or RPAS, program for delivering aircrew and maintenance technician training and supporting training devices and courseware to meet Canada's RPAS requirements.

Mark: At the same time as we've been taking actions to re baseline the business. We've continued to make headway with our transformation strategy.

Mark: We reached $1 9 billion of adjusted order intake on an annual basis.

Mark: <unk> training and simulation solutions for one point, all four times book to sales ratio.

Mark: This contributed to a $5 7 billion of adjusted Defense backlog.

Mark: In the quarter, we had orders totaling $718 million, including a transformative win involving a contract with general atomics to support the remotely piloted aircraft system or our pass program.

Mark: We're delivering aircrew and maintenance technician training and supporting train devices and courseware to meet candidates are past requirements.

Marc Parent: This, to me, is a prime example of a kind of larger and more differentiated program that we're in a position to address that will ultimately drive the defense transformation that we did expect. With that, I'll turn the call over to Sonya to provide a detailed look at our financial performance, and I'll return at the end of the call to comment on our outlook.

Mark: This to me is a prime example of the kind of larger and more differentiated program that we're in a position to address that will ultimately drive the defense transformation that we've been expecting.

Sonya: With that I'll now turn the call over to Sonya, who will provide a detailed look at our financial performance I'll return at the end of the call to comment on our outlook Sonya.

Sonya Branco: Thank you, Marc, and good morning, everyone. Looking at our fourth quarter results, on a consolidated basis, revenue of $1.1 billion was down 6% compared to the fourth quarter last year. Adjusted segment operating income was $125.7 million, or $216 million, excluding the impact of the legacy contracts, compared to $193 million last year. Quarterly adjusted EPS was $0.12 per share, or $0.37 excluding the legacy contracts, compared to $0.33 in the fourth quarter last year.

Sonya: Thank you Mark and good morning, everyone.

Sonya: Looking at our fourth quarter results on a consolidated basis revenue of $1 $1 billion was down 6% compared to the fourth quarter last year.

Sonya: Adjusted segment operating income was $125 $7 million or $216 million, excluding the impact of the legacy contracts compared to $193 million last year quarterly adjusted EPS was <unk> 12 per share or 37 cents, excluding the legacy contracts compared to 33 cents in the.

Sonya: Fourth quarter last year.

Sonya Branco: We encourage restructuring, integration, and acquisition costs of $55 million during the quarter in connection with the previously announced restructuring program related to portfolio shaping actions, including the sale of Health Care and the continued integration of ARIFIN. The air sensor integration is progressing as planned and is expected to wind down by the end of June.

We incurred restructuring integration and acquisition costs of $55 million during the quarter in connection with the previously announced restructuring program related to portfolio shaping actions, including the sale of health care and to the continued integration of Air Centre.

Sonya: The air sensor integration is progressing as planned and is expected to wind down by the end of June the.

Sonya Branco: The restructuring program is related to portfolio shaping actions and to streamline CAE's operating model and portfolio, optimize our cost structure, and create efficient Total restructuring costs incurred since the start of this restructuring program this quarter amounted to $39.3 million, and we expect to record approximately $10 million of additional restructuring expenses over the next two quarters. In light of the organizational and operational changes announced last week to replace the defense business, further strengthen our execution capabilities, and drive additional synergies between CAE's defense and civil aviation businesses.

Sonya: The restructuring program is related to portfolio shaping actions at the streamline fees operating model and portfolio optimize our cost structure and create efficiency.

Sonya: Total restructuring costs incurred since the start of this restructuring program this quarter amounted to $39 $3 million and we expect to record approximately $10 million of additional restructuring expenses over the next two quarters in light of the organizational and operational changes announced last week the replay spine the defense business.

They strengthen our execution capabilities and drive additional synergies between Cae's defense and civil aviation businesses.

Sonya Branco: For the year, consolidated revenue was up 7% at $4.3 billion, adjusted segment operating income was up 2% to $549.7 million, and annual adjusted net income was $276.8 million, or $0.87 per share, which is stable compared to $0.87 last year. Excluding legacy contracts, adjusted segment operating income was up 19% to $640 million, and annual adjusted net income was $355.3 million, or $1.12 per share, which is up Net finance expense this quarter amounted to $52.4 million, which is stable from the preceding quarter and up from $50.4 million in the fourth quarter last year.

Sonya: For the year consolidated revenue was up 7% at $43 billion.

Sonya: The segment operating income was up 2% to $549 $7 million in annual adjusted net income was $276 $8 million or <unk> 87 cents per share, which is stable compared to 87 cents last year.

Sonya: Couldn't legacy contracts adjusted segment operating income was up 19% to $640 million in annual adjusted net income was $355 $3 million or $1 12 per share, which is up 29% compared to last year.

Sonya: Net finance expense this quarter amounted to $52 $4 million, which is stable from the preceding quarter and up from $50 4 million in the fourth quarter last year I expect our annual finance expense in fiscal 2025 to be similar to fiscal 2024 on lower interest expense on debt offset by.

Sonya Branco: I expect our annual finance expense in fiscal 2025 to be similar to fiscal 2024 on lower interest expense on debt, offset by higher lease expense related to recently deployed training centers in our global training network in support of growth. Income tax recovery this quarter was $80.6 million, representing an effective tax rate of 14% compared to an effective tax rate of 24% in the fourth quarter last year. The adjusted effective tax rate, which is the income tax rate used to determine adjusted net income and adjusted EPS, was 47% this quarter compared to 23% in the fourth quarter last year.

Sonya: Higher lease expense related to recently deployed training centers and our global training network.

Sonya: In support of growth.

Income tax recovery this quarter was $86 million, representing an effective tax rate of 14% compared to an effective tax rate of 24% in the fourth quarter last year. The adjusted effective tax rate, which is income tax rate used to determine adjusted net income and adjusted EPS was <unk>, 47% this quarter compared to 23 in the fourth quarter.

Sonya Branco: The increase in the adjusted effective tax rate was mainly due to the depreciation of tax assets in Europe, partially offset by the changing mix of income from various jurisdictions. On the same basis, the adjusted effective income tax rate for the year was 17 percent.

Sonya: Last year the increase in the adjusted effective tax rate was mainly due to the derecognize certain of tax assets in Europe, partially offset by the change in mix of income from various jurisdictions on.

Sonya: On the same basis, the adjusted effective income tax rate for the year was 17%.

Sonya Branco: The annual effective income tax rate in fiscal 2025 is expected to be approximately 25%, considering the income expected from the various jurisdictions and the implementation of the global minimum tax policy. With the closing of the sale of our healthcare business, net income from discontinued operations was $20.5 million this quarter compared to $4.8 million in the fourth quarter last year. The increase compared to the fourth quarter was mainly attributable to the after-tax gain on the disposal of discontinued operations of $16.5 million in relation to the sale of the health service.

Sonya: The annual effective income tax rate in fiscal 2025 is expected to be approximately 25% considering the income expected from the various jurisdictions and the implementation of global minimum tax policy.

Sonya: With the closing of the sale of our health care business net income from discontinued operations was $25 million this quarter compared to $4 $8 million in the fourth quarter last year, the increase compared to the fourth quarter was mainly attributable to the after tax gain on the disposal of discontinued ops of $16 $5 million related to this.

Sonya: Sale of the health care business.

Sonya Branco: Net cash provided by operating activities was $215.2 million for the quarter, compared to $180.6 million in the fourth quarter last year. And for the year, we generated $566.9 million from operating activities compared to $408.4 million last year. We had free cash flow in the quarter of $191.1 million and $418.2 million for the year, for an annual cash conversion of 151%; we continue to target an average 100% conversion rate going forward. Uses of cash involve funding capital expenditures of $91.7 million in the fourth quarter and $329.8 million for the year, driven mainly by the expansion of our civil aviation training network in lockstep with secured customer demand.

Sonya: Net cash provided by operating activities was $215 2 million for the quarter compared to $186 million in the fourth quarter last year and for the year, we generated $566 $9 million from operating activities compared to $184 million last year.

Sonya: We had free cash flow in the quarter of 191 $1 million and $418 $2 million for the year for an annual cash conversion of 151%. We continue to target an average 100% conversion rate going forward.

Sonya: Uses of cash involved funding capital expenditures for $91 $7 million in the fourth quarter and $329 $8 million for the year driven mainly by the expansion of our civil Aviation training network and lock step with secured customer demands.

Sonya Branco: These opportunities translate to some of our best returns as our simulator assets ramp up within the first few years of their deployment. Commensurate with our ongoing success in capturing market opportunities and training, I expect total CapEx in fiscal 20 to 25 to be $50 to $100 million higher than fiscal 2024. Approximately three quarters of this relates to organic growth investment in simulated capacity to be deployed to our global network of primarily civil aviation training centers, backed by multi-year customer contracts.

Sonya: These opportunities translate to some of our best returns as our simulators assets ramp up within the first few years of their deployment commensurate with our ongoing success to capture market opportunities in training I expect total capex in fiscal 'twenty to 'twenty five to be $50 million to $100 million higher than fiscal 2024.

Sonya: Approximately three quarters of this relates to organic growth investments and stimulated equity to be deployed to our global network of primarily civil aviation training centers and backed by multi year customer contract.

Sonya Branco: Our net debt position at the end of the quarter was $2.9 billion for a net debt to adjusted EBITDA of 3.17 times, excluding legacy contract leverage which was at 2.89 times at the end of the same period.

Sonya: Our net debt position at the end of the quarter with $2 $9 billion for a net debt to adjusted EBITDA of $3 one seven times.

Sonya: Pudding legacy contract leverage was at 289 times at the end of the same period.

Sonya Branco: We're 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. Given our progress in strengthening CE's financial position, as we announced last week, we are reestablishing a normal course issuer bid as part of our capital allocation strategy. The NCIB is currently intended to be used opportunistically over time with excess free cash flow.

Sonya: We're prioritizing a balanced approach.

Sonya: Capital allocation, including funding accretive growth continuing to strengthen our financial position commensurate with our investment grade profile and returning capital to shareholders.

Sonya: Our progress and strengthen <unk> financial position as we announced last week, we are reestablishing a normal course issuer bid as part of our capital allocation strategy.

Sonya: The MTI B is currently intended to be used opportunistically over time with excess free cash flow.

Sonya Branco: Given our outlook and the cash generative nature of our highly recurring business, this board of directors will also continue to evaluate the possibility of reintroducing a shareholder dividend. At the same time, I expect that we'll maintain a very solid financial position, bolstering our balance sheet through ongoing deleveraging, consistent with our investment grade profile. Now to briefly recap our segmented performance. In civil, fourth quarter revenue was up 6% year over year to $700.8 million, and adjusted segment operating income was up 17% year over year to $191.4 million, for a record margin of 27.3%. For the year, civil revenue was up 12% to $2.4 billion, and adjusted segment operating income was up 13% to $548.9 million, for an annual margin of 22.5%.

Sonya: Given our outlook and the cash generative nature of a highly recurring business. He's board of directors will also continue to evaluate the possibility of reintroducing a shareholder dividend.

Sonya: At the same time I expect that we will maintain a very solid financial position bolstering our balance sheet through ongoing deleveraging consistent with our investment grade profile.

Sonya: Now to briefly recap our segmented performance in civil fourth quarter revenue was up 6% year over year to $700 $8 million and adjusted segment operating income was up 17% year over year to $191 $4 million were a record margin of 27, 3%.

For the year Civil revenue was up 12% to $2 4 billion and adjusted segment operating income was up 13% to $548 $9 million for an annual margin of 22, 5%.

Sonya Branco: In defense, as we disclosed last week, we accelerated the recognition of risks associated with our legacy contracts in the fourth quarter, following revised agreements on scope and timing with customers, suppliers, and other stakeholders. These actions resulted in profit adjustments associated with a reassessment of our estimated costs. Fourth quarter defense revenue, at $425.5 million, was down 21% over Q4 last year. This includes a $54.3 million impact from the accelerated risk recognition on legacy contracts and the conclusion of certain service contracts we decided to no longer pursue.

Sonya: In defense as we disclosed last week, we accelerated the recognition of risks associated with our legacy contract in the fourth quarter following revised agreements on scope and timing with customers suppliers and other stakeholders. These actions resulted in profit adjustments associated with the reassessment of our estimated cost.

Sonya: Fourth quarter defense revenue of $425 $5 million was down 21% over Q4 last year.

Sonya: It includes a $54 3 million dollar impact from the accelerated risk recognition on legacy contracts and the conclusion of certain service contracts, we decided to no longer pursue it.

Sonya Branco: Adjusted Segment Operating Loss was $65.7 million, and Adjusted Segment Operating Income, excluding legacy contracts, was $24.8 million, compared to an Adjusted Segment Operating Income of $30.5 million in the fourth quarter last year. For the year, defense revenue was stable at $1.8 billion, and adjusted segment operating income was down 98% to $0.8 million. Adjusted segment operating income excluding the legacy contracts was up 72% to $91.1 million.

Sonya: Adjusted segment operating loss was $65 $7 million and adjusted segment operating income excluding legacy contracts with $24 million compared to an adjusted segment operating income of $35 million in the fourth quarter last year.

Sonya: For the year Defence revenue was stable at $1 8 billion and adjusted segment operating income was down 19% to 800 points.

Sonya: 0.0 point $8 million.

Sonya: Adjusted segment operating income, excluding the legacy contracts was up 72% to $91 $1 million.

Marc Parent: With that, I'll ask Mark to discuss the way forward. Thanks, Sonya. I'm going to separately address the outlook for our two segments. But before I offer any numbers, I'd like to mention that our combination of our civil and defense businesses has a significant strategic advantage. Now, let me reiterate that and be very clear that our defense performance, in terms of profitability, certainly hasn't met my expectations so far.

Speaker Change: With that I'll ask Martin will discuss the way forward.

Thanks Danielle.: Thanks Danielle.

I'm going to separately address the outlook for our two segments, but.

Speaker Change: Al for any numbers I'd like to mention that.

Martin: Our combination of our civil and defense businesses have significant strategic advantage.

Martin: Now, let me reiterate that.

Very clear.

Martin: Our defence performance in terms of problems.

Speaker Change: He certainly hasnt met my expectations so far.

Marc Parent: But our strategy remains solid. Over the past two years, we've achieved some 20% growth in adjusted backlog and expanded our pipeline with bid opportunities that aligned very well with our core strengths in training and simulation, offering attractive risk return profiles. Our simulators and our training products are very complementary for both civil and defense purposes. The synergies are strong in terms of technology, manufacturing, as well as the approach to the market. There's hardware and software commonality between the products.

Speaker Change: But our strategy remains solid.

Speaker Change: Over the past two years, we've achieved some 20% growth in adjusted backlog and expanded our pipeline with bid opportunities that align very well with our core strengths in training and simulation offering offering attractive risk return profiles.

Speaker Change: Our simulators in our training products are very complementary for both civil and defense purposes.

Speaker Change: Synergies are strong in terms of technology manufacturing as well as go to market approach.

Speaker Change: There's hardware and software commonality in the products and increasingly there's operational synergy and how we optimize training across the two businesses.

Marc Parent: And increasingly, there's operational synergy in how we optimize training across the two. I'm very confident that Nick, Lee, and Titus will strengthen our execution capabilities and drive additional focus and synergies between both of our business sets. For civil, the secular demand picture for aviation train solutions remains very compelling, underpinned by growth in air travel, demand for pilots, and the need for them to stay current with always advancing aviation technology and regulation. Our business is driven primarily by the regulated training required to maintain the pilots and crews who operate the global in-service fleet of commercial and business aircraft. That's an additional secular driver.

Speaker Change: I am very confident that Nick Leland T. This will strengthen our execution capabilities and drive additional focus and synergies between both of our business segments.

Speaker Change: For civil the secular demand picture for aviation training solutions remain very compelling.

Speaker Change: Underpinned by growth in air travel demand.

Speaker Change: Demand for pilots and the need for them to stay current with always advancing aviation technology and regulation.

Speaker Change: Our business is driven primarily by the regulated training required to maintain the pilots and crews who operate the global in service fleet of commercial and business aircraft.

Marc Parent: We expect to sustain high levels of pilot movements from the growth and replacement of the active pilot population. According to our estimates, over half the commercial and business jet pilots who will be active in a decade from now have yet to even begin their transition. With that background, I expect low double-digit percentage civil annual adjusted segment operating income growth in fiscal 2025 and continued margin strengthening with an annual segment operating income margin of approximately 23 percent.

Speaker Change: And as additional secular driver we.

Speaker Change: Back to sustained high level of pilot movements from the growth and replacement of the active pipe pilot population. According to our estimates over half the commercial and business jet pilots will be active in a decade from now have yet to even begin their training.

Speaker Change: With that background I expect low double digit percentage civil annual adjusted segment operating income growth in fiscal 2025 and continued margin strengthening within an annual segment operating income margin of approximately 23%.

Marc Parent: The expected increase in civil margins reflects the ongoing ramp-up of newer training centers and recently deployed full-flight simulators, partially offset by the SAS conversion that's currently underway in our Bright Operations Solutions software business. As in previous years, I expect annual civil performance to be more heavily weighted to the second half.

Speaker Change: The expected increase in civil margins reflects the ongoing ramp up of your training centers and recently deployed full flight simulators, partially offset.

Speaker Change: By the South conversion, that's currently underway and our freight operations solution software business.

Speaker Change: As in previous years, I expect annual civil performance to be more heavily weighted to the second half.

Marc Parent: In defense, we're also in a secular growth market, as the sector enters an extended upcycle marked by rising budgets across NATO and allied nations. Key trends include heightened focus on near-peer threats, greater government commitments to defense modernization and readiness amid geopolitical tensions, and growing demand for the training and simulation solutions that we provide. Our expertise in both civil aviation and defense positions us well to meet those needs, and specifically to CAE.

Speaker Change: In Defence. We're also in a secular growth market as a sector enters an extended up cycle marked by rising budgets across NATO and Allied nations.

Speaker Change: I teach key trends include a heightened focus on near peer threats greater government commitments to defense modernization and readiness.

Speaker Change: Geopolitical tensions and a growing demand.

Speaker Change: For the training and simulation solutions that we provide.

Speaker Change: Our expertise in both civil aviation and defense positions us well to meet those needs.

Speaker Change: And specific to see.

Marc Parent: We're seeing a consistent demand driver across regions for a train solution, and a shortage of uniformed personnel for defense, which has led militaries to rely on industry partners like CAE for training solutions to ensure readiness. This aligns perfectly with our core strengths, and our defense transformation strategy over the past few years has focused on expanding our leadership position on integrated training and simulation solutions. This strategic focus has allowed us to streamline our project selection to ensure a better risk-return balance.

Speaker Change: We're seeing a consistent demand driver across regions for our training solutions.

Speaker Change: Shortly a uniformed personnel for defense, which is led militaries to rely on industry partners like E for training solutions to ensure readiness.

This aligns perfectly with our core strengths that our defense transformation strategy over the past few years, our focus on expanding our leadership position on integrated training and simulation solutions.

Speaker Change: This strategic focus has allowed us to streamline our project selection to ensure a better risk return balance.

Marc Parent: Moreover, we've renegotiated favorable terms, such as costless contracts for development work and tighter pricing bans on service contracts, while leveraging civil-like business models in defense. These improved terms will positively impact our risk-adjusted returns as newer contracts ramp up. This approach has already resulted in significant backlog growth with larger, more profitable programs, and we anticipate even greater growth in fiscal 2025. Our expectations for fiscal 2025 reflect the re-baselining of the business and the enhanced visibility that this obviously gives us. We're extremely focused on acting on what we can control. It will prove it through execution in the coming quarter.

Speaker Change: Moreover, we've renegotiated favorable terms such as cost plus contracts for development work and tighter pricing bands on service contracts, while leveraging civil like business models in defense.

Speaker Change: These improved terms will positively impact our risk adjusted returns as you were contracts ramp up.

Speaker Change: This approach has already resulted in significant backlog growth with larger more profitable programs and we anticipate even greater role since fiscal 2025.

Speaker Change: Our expectations for fiscal 2025.

Speaker Change: The re baseline of the business.

The enhanced visibility that this obviously gives us.

Speaker Change: We're extremely focused on acting on what we can control it will prove it through execution in the coming quarters.

Marc Parent: We expect annual revenue growth in the low to mid-single-digit percentage range and annual defense and SOI margin to increase to the 6-7% range and, like civil, to be more heavily weighted to the second half. We have large multi-year programs currently in negotiation that should add significantly to our backlog soon. Beyond our selection for transformational defense contracts in Canada, we're well-positioned over the next year on several strategic programs across the Indo-Pacific region, Europe, and the United States.

Speaker Change: We expect annual revenue growth in the low to mid single digit percentage range and annual defense and Soi margin to increase to the 6% to 7% range and like civil to be more heavily weighted to the second half.

Speaker Change: We have large multiyear programs currently in negotiation that should add significantly to our backlog shoot.

Speaker Change: Beyond our selection on transforming transformational defense contract in Canada, we're well positioned over the next year on several strategic programs across the Indo Pacific regions.

Speaker Change: And in the United States.

Marc Parent: In particular, the demand for air coup training programs similar to Canada's SPAC in our past across the Five Eyes and NATO partners, as well as the Allies, continues to increase. These programs require the type of technologies and proficiency that are CAE strengths. We intend to leverage our position on these generational programs in Canada to enable multi-domain training in secure synthetic environments across our global network. With that, I thank you for your attention, and we're now ready to answer your question. Thank you, Marc.

Speaker Change: In particular.

Speaker Change: The demand for aircrew training programs similar to canvas back in our past across the five Ais a NATO partners as well as the allies.

Speaker Change: The news to increase these.

Speaker Change: These programs require the types of technologies efficiency that are key strengths.

Speaker Change: We intend to leverage our position on these generational programs in Canada to enable multi domain train and secure synthetic environments across our global network.

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

Speaker Change: Thank you Maher thank you operator.

Operator: Thank you, operator. We have our first questions from the financial community. Great, so we'll begin the analyst question and answer session. As a reminder, you can press star one on your telephone keypad, and you will hear a tone acknowledging your request.

Speaker Change: Like our first question is from the.

Speaker Change: And there are some community.

Speaker Change: Great. So I'll begin the analyst question and answer session. As a reminder, you can press star one on your telephone keypad and you will hear a tone acknowledging your request to <unk>.

Operator: To start your question, please press star then. The first question is from Kevin Chiang from CIBC. Please go ahead. Thanks for taking my question. And good morning, everyone.

Speaker Change: Part of your question. Please press Star then two.

Speaker Change: The first question is from Kevin Chiang from CIBC. Please go ahead.

Kevin Chiang: Thanks for taking my question and good morning, everyone.

Kevin Chiang: We've actually just started with a civil question. Just the slippage of some of the full flight simulator simulators, it sounds like the client wasn't, I'm wondering if you're starting to see any impact on pilot training demand just with some of the aircraft delivery issues at the large OEMs. Is that impacting what you're seeing from the airlines in terms of the demand for training, maybe relative to what you would have been forecasting or expecting, let's say, six to nine months ago? Just wondering if you see anything material there. Okay, let me take it, Kevin.

Speaker Change: We've also we will start with a simple question.

Speaker Change: Just the slippage of some of the full flight simulators simulators themselves like a quiet wasn't.

Speaker Change: Our position to take those take the take those product, but I'm wondering if you can.

Speaker Change: You're starting to see.

Speaker Change: Any impact on pilot training demand just with some of the aircraft delivering this.

Speaker Change: Issues at the large Oems is that is there.

Speaker Change: That's impacting what you're seeing from the airlines in terms of the demand for training maybe relative to what you would've been forecasted well expected.

Speaker Change: Six to nine months ago.

Speaker Change: Wondering if you're seeing anything material there.

Marc Parent: Look, I mean, first and foremost, you're right. I mean, the changes that we saw just in relative to delivery of simulators and, therefore, the adjusted operating income goals were purely because of those training centers that weren't ready or customer training centers that weren't ready. And, you know, basically those simulators will be delivered this year. So that's, that's really what happened there. It's not a reflection of any type of demand that, you know, changes in the market.

Okay, Let me take it Kevin look I mean, first and foremost you're right I mean the the.

[noise] changes that we saw just in the relative.

Speaker Change: Relative to our outlook on delivery of simulators and therefore, the adjusted operating income growth was purely because of those training centers that weren't already a customer trade centers were already in.

Speaker Change: Those familiar with will deliver this year. So that's really what happened there it's not a reflection of any type of <unk>.

Speaker Change: Demand the.

Speaker Change: Change in the market.

Marc Parent: I mean, I could ask Nick for more color, but look, I mean, we've been living in the kind of environment of lower, lower than, you know, let's say lower than potentially anticipated deliveries of 737 MAX aircraft, as well as, you know, less activity because of the engine issue that's affecting mainly Airbus airplanes that, you know, as you know, have, you know, literally hundreds of airplanes grounded around the world So we've been living in that environment for quite some time.

Speaker Change: I mean, if I could ask maybe Nick for more color Craig require but look I mean, we've been living in the kind of environment of lower lower than Europe, let's say, Lord and potentially anticipated deliveries of 737 Max aircraft as.

Speaker Change: Hum.

Speaker Change: Less activity because of the engine issue, that's affecting mainly Airbus airplanes that yeah. As you know we have literally hundreds of airplanes grounded around the world. So we've been living in that environment for quite a while so really that isn't really changing so I would say theres pockets in that and I think there's pockets that.

Marc Parent: So, you know, I would say there's pockets, and I think there's pockets that you see that airlines are affected by the slowdowns. They're not able to get the airplanes that they want to secure demand.

Speaker Change: You see that airlines are affected by the slowdowns are not able to get the airplanes that they want to secure the demand. The demand itself is very strong and what you see as airplanes are here like pulling your airplanes out of mothballs basically taking airplanes that are.

Marc Parent: The demand itself is very strong. And what you see is airplanes, it's airlines pulling airplanes out of mothballs, you know, basically taking airplanes that are coming off season and maintaining them on lease. But we're not really seeing a change in the demand environment at this time. We're just watching it. And the guidance that we put for civil service for next year or for this coming year reflects, you know, our cautious outlook in that regard.

Speaker Change: <unk> of that coming off season, maintaining them on lease, but we're not really seeing a change in the demand environment. At this time, we will watch it yet and the guidance that we put or civil for next year or so for this coming year.

Speaker Change: Reflects our cautious outlook in that regard.

Marc Parent: That's, that's helpful. I mentioned my second question. I appreciate all the colleagues you provided in terms of the rebasing of Defense. It also feels like a segment that has been in some sort of perpetual restructuring for quite some time now, or at least, you know, some sort of strategic repositioning, you know, with the acquisition of L3 Harris's military training division. Maybe if I were to ask you, when you look out two years from now, or whatever the time frame is, you know, what is it? What should defense look like?

Speaker Change: That's helpful.

Speaker Change: And then just my second question.

Speaker Change: I appreciate all the color you provided in terms of the re basing of.

Speaker Change: Defense.

Speaker Change: It also feels like a segment that feels like it's been in some sort of perpetual restructuring for quite some time now or at least.

Speaker Change: No no.

Some sort of strategic repositioning you know with the acquisition of L. Three houses military training Division.

Speaker Change: Maybe if I were to us when you look out two years from now or whatever the timeframe is.

Speaker Change: What is it what's the.

Defense look like like the revenue needs to be bigger in order to get the margins you want.

Kevin Chiang: Like, does revenue need to be bigger in order to get the margins you want? And maybe you risk the backlog in terms of, you know, there's always risks around execution. Is that it?

Speaker Change: And maybe give us the backlog in terms of you know there's always risks around execution as it is being more focused on the addressable market you're trying to go after them I'm just trying to get a sense of you know.

Kevin Chiang: Is it being more focused on the addressable markets you're trying to go after? I'm just trying to get a sense of, you know, if all goes well, if you're in defense, you know, you fast forward two years, what exactly does defense look like? Is it a bigger business with better margins? Is it a smaller business with, But look, I think I would start with all of those, Kevin.

Speaker Change: If all goes well with your in defense.

Speaker Change: Fast forward two years, what exactly does it look like it's a bigger business.

Speaker Change: With better margins is it a smaller business with better margins.

Speaker Change: Any color there would be helpful.

Marc Parent: Clearly, as I said, look, the numbers that we're printing now surely don't meet my expectations, and neither do our investors, clearly. But I think what we've done here is re-baseline the bid. We've been talking about the issues that are affecting us in defense for at least a couple of quarters here, at least in detail.

Speaker Change: Well look I think I would start by all of those Kevin.

Speaker Change: Uh huh.

Speaker Change: Clearly as I said look the numbers that we're printing now it's really don't meet my expectation and neither of those are investors clearly, but I think what we're what we've done here.

Speaker Change: He is re baseline of the business.

Speaker Change: We've been talking about the issues are affecting us in defense.

Speaker Change: Or.

Speaker Change: You know at least a couple of quarters here at least in the detailed last quarter. We gave you precision on that.

Marc Parent: Last quarter, we gave you precision on, you know, that really there were eight contracts we call the legacy contracts that were really undermining the profitability of our business. I mean, those contracts all have the same kind of MO, you know, signed prior to COVID, fixed firm price contracts, and they were very much adversely affected by supply chain issues, manpower issues, runaway inflation, of which we're not immune. You know, a lot of our defense clients and sister companies across the defense environment, particularly in, well, actually, I would say only in the United States, across the world, actually. I mean, those affected us.

Speaker Change: Really there were eight contracts, we called the legacy contracts that were really undermining the profitability of our business. I mean, those contracts are all have the same kind of AMOLED signed prior to COVID-19 fixed firm priced contracts.

Speaker Change: Very very much.

Speaker Change: Hershey affected by supply chain issues manpower issue runaway inflation of which we're not immune.

Speaker Change: Lot of our defense of the first planes and its sister companies across the.

Speaker Change: The defense environment, particularly well actually I wish I'd say, one thing I'd say is across the world actually.

Speaker Change: We do.

Marc Parent: We ring-fenced those funds. And this quarter, what we've done here, is basically work extremely hard to renegotiate with our customers in this regard to figure out exactly what the remaining scope of those programs is. The time it's going to take us to execute those contracts, the cost it's going to take us to execute those contracts, and the difference between that and the cost that we have anticipated in the past is $90 million. And that, to a certain extent, maybe shouldn't be much of a surprise because, in the third quarter, what we had said was that those eight contracts, we're really going to drag them by three to 300 basic points for the next six quarters while we execute those contracts.

Speaker Change: Those affected us we ring fence.

Speaker Change: And this quarter, what we've done here.

Speaker Change: Is basically worked extremely hard to renegotiate with our customers in this regard to figure out exactly what the remaining scope on those programs is the time, it's going to take those stakes to those contracts.

Speaker Change: Cost is going to take us with those contracts.

Speaker Change: The difference between that and the cost that we anticipate in the past.

Speaker Change: It is 90 million and that's to a certain extent, maybe it shouldn't be much of a surprise because if you remember in the third quarter. What we had said is that those eight contracts, we're really going to drag for next by three to 300 basis points for the next six quarters, while we execute and build com.

Speaker Change: Yeah.

Marc Parent: What we've done here is through the actions that we've taken, through the agreements that we've made for our customers, we're able basically to take that risk, say, off the table or be predictable because we're taking it now. So that gives us a clear view of the future, and the programmatic risk now going forward, not only in those eight programs, but overall across all the programs in the event is balanced. So that's one major component.

The what we've done here is through the actions that we've taken through the agreements we have made for our customers, we're able basically to take that risk off the table or our.

Principal because we're taking it now so that gives us a clear view of the future and the program on the programmatic risks now going forward not only on those programs, but overall on across all the programs at the best is balance.

Speaker Change: That's one major component the.

Marc Parent: The other component is I'll go back to the success of the strategy on the front end. I'll reiterate the fact that when we look at the book of business, we are winning business. We are winning larger business in the areas where we have core capabilities, training centers, training products, meaning full-fledged simulators, where this is core to us. We know how to do that.

Speaker Change: The other component is I'll go back to the success of our strategy on the front end or reiterate the fact that our.

Speaker Change: When we look at the book of business. We are winning business, we are winning a larger business in the areas, where we have core capabilities.

Speaker Change: Training centers training products, meaning full flight simulators.

Speaker Change: This is core to us we know how to do that we know how to do it well we've signed them at margins that are recruited to the outlook that we have in defense, which is 10% or more in terms of profitability.

Marc Parent: We know how to do it well. We've signed them at margins that are realistic to the outlook that we have in defense, which is 10% or more in terms of profitability. Those programs are going to materialize in our backlog. I expect about 15% of that to materialize in our revenue this year. That's all going to contribute to the answer to your question.

Speaker Change: Those programs are going to materialize in our backlog.

Speaker Change: I expect about 15% of that so all of those to materialize in our revenue. This year, that's all going to contribute to the answer to your question is stable revenue growth higher margins on the way to the <unk>.

Marc Parent: Stable revenue growth, higher margins on the way to the low teens or north of 10% margins. I want this and generating stable cash flows, which you should expect out of a defense business because we're basically selling to customers with sovereign guarantees. So, that's what I expect out of the defense. That's, that's very helpful.

Speaker Change: Low teens or pet care north of 10% margins I want this and generating stable cash flows, which should you should expect out of the defence business, because we're basically selling to customers with sovereign guarantees so.

Speaker Change: That's what I expect out of the festival.

Speaker Change: That's that's very helpful color. Thank you for taking my questions.

Speaker Change: Okay.

Kevin Chiang: Thank you for taking my question. The next question is from James McGarragle from RBC Capital Markets. Please go ahead. Hey, good morning, and thanks for having me on.

Speaker Change: The next question is from James Mechanical from RBC capital markets. Please go ahead.

Tim James: Good morning, and thanks for having me on.

Speaker Change: The answer is it depends.

James McGarragle: Thank you. On the defense margin guidance, I'll pick up in the back half. So can you just talk about the visibility that you have into that higher margin in the back half? And is there any seasonality on the defense side going forward?

On does that affect the margin guidance why the pickup in the back half. So can you just talk to the visibility.

Speaker Change: That you have into the higher margin in the back half and is there any seasonality in the defense side going forward or should we expect that back half margin to kind of be the exit rate for margin into the upcoming fiscal year.

James McGarragle: Or should we expect that back-half margin to kind of be the exit rate for margins into the upcoming fiscal year? Look, I think that if you look at our performance in the past few years, you always see that it's back-half loaded. And there is a reason for that.

Speaker Change: Well I think that if you look at our performance for the past few years, you always see the back half loaded and there is reasons for that.

Marc Parent: There are budgets in specific countries. There's programs that are ramping up. This year, I mean, we have high visibility for this year.

Speaker Change: Jim in the.

Speaker Change: The specific countries, there's programs ramping up this year I mean, we have high visibility of this year the majority.

Marc Parent: The majority of the revenue and, hence, the profit that we need to execute this year's plan and meet the guidance of six or seven percent that we put out there. We've already won those contracts. They're in the backlog. It's for a safety key.

Speaker Change: All the revenue and ergo the problem that.

Speaker Change: But we need to execute this year plan and meet the guidance of six 7% that we put out there. We've already won those contracts. They are in our backlog of square feet.

Marc Parent: We obviously have very high visibility on the legacy contracts that we talked about, having a rebase line, and the programmatic risk there. Yeah, what I'd say is basically, we're going to, in terms of variability in a year, it's basically just, just the way we've seen in previous years. I think maybe to provide a little bit more color on it, I'd say that when we look at the year on average, the average margin we talked about would be six to seven percent.

Speaker Change: Uh huh.

Speaker Change: We have you know.

Speaker Change: Very high visibility on the legacy contracts that we've talked about having to re baseline the programmatic risk there.

Speaker Change: So.

Speaker Change: You know what I'd say is basically we're going to in terms of again in terms of the variability in the year. It's basically just a just as the same way we've seen it in previous years.

Speaker Change: I think maybe to provide a little bit more color on it I'd say that when we look at the year of the average the average margin, we talked about 56% to 7%.

Speaker Change: I would expect that it will start the year, where we ended at in terms of profitability. So call. It in the five north of 5% range with stronger second half.

Marc Parent: I would expect that you know we'll start the year where we ended it in terms of profitability, so call it in the five, north of five percent range, with stronger results in the second half. That's what I would say, on the civil side.

Speaker Change: That's what I was saying.

Speaker Change: Okay. Thank you and then.

Speaker Change: As a follow up on the civil side, you know you'd like that a lot of that organic investment you're making this year is going to be in the civil business.

Speaker Change: Obviously fly right.

Speaker Change: Solid returns, 20% to 30% in that business two to three year ramp up.

Speaker Change: That mean, we should be thinking about growth at current levels or even higher.

Speaker Change: Over the next two or three years can you talk to the visibility and the conversations you're having with your customers.

Speaker Change: A little longer term on the civil side.

Marc Parent: Well, look, I think that I fully expect that the demand environment in civil business will be strong for years to come. I think maybe just a little bit provide a little bit more color on civil. I think, If you think about the whole civil business, you know, you saw the changes we've made under Nick now as COO. We're giving more visibility to the leaders of that business. The three leaders that we have, you know, Alex Prevost running the business aircraft training, Michel Hazard running the commercial aviation training and simulators, Pascal Grenier running the software business, we'll be able to provide you with, you know, I think more of a broader view of those specific, you know, individual businesses with civil.

Speaker Change: Well look I think that I fully expect that the demand is there.

Speaker Change: Demand environment as civil business, you saw three years ago.

Speaker Change: I think maybe just a little bit provide a little bit more color on civil I think if.

Speaker Change: If you think about the our civil business you saw the changes we've made or the under under Nick now or see a seal.

Speaker Change: Were you being more visibility on the leaders of that business are the three levers that we have with Alex preferable running a business aircraft training Michel has already moved up.

Speaker Change: Running a commercial aviation training simulators Pascal radiate running the software business will be able to provide you.

Speaker Change: More a more a broader view of those specific.

Speaker Change: Our individual businesses with civil but let me just have a shot at that maybe goes to your answer here.

Marc Parent: But let me just have a shot at that maybe goes to your answer here. And to break down the revenue in our civil business, about a third of it comes from selling simulators to World Airlines. About a third of it comes from training for the world's airlines, for our training centers for airlines around the world. And a third of it comes from business aviation training.

Speaker Change: And if you break down the revenue in our civil business about a third of it comes from selling simulators to world's their lives.

Speaker Change: A third of it comes training for the Worlds Airlines, who are training centers for airlines around the world and a third of it comes from business Aviation training in the final really 10% comes from our software business. Each each of these business has its own dynamics that drives margin.

Marc Parent: And the final, really 10% comes from our software business. Each of these businesses has its own dynamics that drive margin. You know, we talked a lot about utilization, which is a strong metric, but it's not the only metric, and it is affected by seasonality, especially when you get into the second half, where you have lower utilization in our training centers because the airlines, you know, certainly in the West, Western hemisphere, they're flying.

Speaker Change: We've talked a lot about utilization, which is a strong metric, but it's not the only metric that is affected by seasonality, especially when you get into the second half.

Speaker Change: Lower utilization in our training centers because your lives.

Speaker Change: Certainly in the west Western Hemisphere, they're flying so they're not trained in a large part.

Marc Parent: So they're not training in large part within our product segment, which is selling simulators. The margins and actually the revenue can be affected, you know, quite significantly by who's the customer, the product mix of that simulator, whether the equipment is supplied by the buyer in terms of the cost of the equipment, for example.

Speaker Change: Within our products segment, which is selling simulators.

Speaker Change: <unk> has the margins in the end they actually the revenue can be affected.

Speaker Change: Quite significantly by who's the customer.

Speaker Change: So that's familiar whether the equipment is supplied by the buyer in terms of the cockpit equipment for example.

Marc Parent: There's an impact from joint ventures as well, because we do a lot of joint ventures. And in those cases, you know, you don't see the revenue, but you'll see the income pick up. And finally, the software. There that's really affected by the timing of, you know, the contracts, whether or not they're SAAS contracts, which we are prioritizing. And that has a lower margin, at least while we're going through that SAAS conversion. And so, and that's the reason I'm explaining all that. That's why we tend to drive, we guide on an annual basis at Civil.

Speaker Change: There is an impact from joint ventures, as well because we do a lot of joint ventures and in those cases you don't.

Speaker Change: You don't see the revenues, but you will see the city income pick up and finally the software.

Speaker Change: That's really affected by the timing of the.

The contracts, whether or not there <unk> contracts, which we are prioritizing and that has a lower margin Alicia while we're going through that chefs conversion.

Speaker Change: And so and that's the reason I'm explaining all of that that's why we tend to drive we guide on an annual basis civil So look I mean going forward the trend is going to be higher in civil and all of those segments.

Marc Parent: So look, I mean, going forward, the trend is going to be higher in Civil, in all of those segments. I would, you know, with the proviso, as I talked about the SAAS conversion, which is probably a two to three year, basically, ramp up as we go through the SAAS conversion. I appreciate the call Aaron. I'll turn the line over to you.

Speaker Change: With the provisory as I talked about the SaaS conversion, which is probably a two to three year.

Speaker Change: Basically ramp up as we go through the SaaS conversion.

Speaker Change: I appreciate the color and I'll turn the line over thank you.

Marc Parent: Thank you. Welcome. The next question is from Benoit Poirier from Desjardins Capital Markets. Please go ahead.

Speaker Change: Welcome.

Speaker Change: The next question is from Panama Cartier from dish I think capital markets. Please go ahead.

Benoit Poirier: Yeah, thanks. Good morning, Mark. Good morning, Sonya.

Speaker Change: Yeah. Thanks, Good morning, Mark Good morning Sanyo.

Benoit Poirier: Yeah, just to come back on the assumption behind the 6-7% EBIT margin target for defense in fiscal year 25, I think I heard that about 15% of total revenue is expected to come from those transformative deals that are already in the backlog. So could you maybe provide some color about what the contribution was in Q4 and what makes you confident or the visibility you have with respect to the ramp-up in the second part of the year?

Speaker Change: Yeah, just to come back on the assumption behind the six 7% EBIT margin target for defense in fiscal year 'twenty five I think I heard that's about 15%.

Speaker Change: Total revenue is expected to come from those transformative deals that are already in the backlog so.

Speaker Change: Could you maybe provide some color about what was the contribution in Q4 and what makes you confident or the visibility you have with respect to the ramp up in the ER.

Speaker Change: The second part of the year.

Benoit Poirier: I may not be as clear, or maybe when I answer that question, it's not 50%, it's 1.5, 15% of the revenue that we're going to get this year comes from those transformational programs, Benoit, and that's relative to 3% last year. So last year, we had like 20% of our backlog in defense was these new transformational programs, and that translated into 3% revenue. Again, this year, that'll be 15% this year and obviously growing in years to come as they ramp up.

Speaker Change: Now it may not be as clear or maybe when I answer that question, it's not 50%.

Speaker Change: It's one 515% of the revenue that we're going to get this year comes from those transformational programs has been a lot that's relative to 3% last year.

Speaker Change: So we had last year, we had like 20% of our backlog in defense was these new transformational program or programs.

Speaker Change: What does that translate and 3% of revenue again this year that will be 15% this year and obviously growing in the years to come as they ramp up.

Marc Parent: Okay, and obviously, you provided some color about fiscal year 25. Previously, you mentioned that it would take six to eight quarters to achieve the completion of those legacy contracts. How should we be thinking beyond fiscal year 25? And is the 10% target still achievable? Well, the 10% margin is absolutely still achievable.

Speaker Change: Okay, and obviously you provide some color about fiscal year 'twenty five but previously you mentioned that it would take us six to eight quarters to achieved the completion of those legacy contract how should we be thinking beyond fiscal year, 'twenty five and use the 10% Todd.

Speaker Change: That's still achievable.

Marc Parent: And that all the actions we've put in place are going to make that happen. Now, we haven't got it in place for next year yet, because we haven't been precise, but it'll happen within the planned period. So with so within the next few years, but we haven't gotten ahead of ourselves beyond this year.

Speaker Change: Well, the 10% margin absolutely still achievable and that's all the actions we've put in place.

Speaker Change: To make that happen.

Speaker Change: No we haven't guided to next year that we haven't been precise but it'll happen and it's in within the plan period. So quick.

So within the next few years, but we haven't gotten ahead of ourselves beyond this year.

Benoit Poirier: Okay, and with respect to the appointment of Nick as CEO, obviously, he's been CEO for over 35 years. Could you talk, Mark, about the strategy here, the action that Nick is going to undertake, and maybe more color about the expected synergies that he would like to extract between civil and defense? You're gonna have to ask me to put Nick on the spot, but before I do, let me talk about why you think Nick is. As you said, he is a veteran of this company. And interestingly, you may or may not know, actually, Nick started his career in defense.

Speaker Change: Oh, Okay, and with respect to the appointment of Nic as a C. O obviously being a C for over 35 years could you talk maybe mark about the strategy here of the action that Nick is going to undertake and maybe more color about the expected synergies that you were.

Speaker Change: I'd like to extract between civil and defense.

Marc Parent: So having led, you know, starting as an engineer but have, like I was, by the way, but having led some major defense contracts, including the most complicated, the more extensive that we have ever had, probably before FACT, which was putting together the first PFI contract in the UK for defense, which was setting up, you know, our Benson Training Center, where we train all medium helicopters for all airports. I think you may have visited, at one point, that training center that we have in the Royal Air Force, which is still one of the most prestigious and technologically advanced in the world. So Nick, put that together. Civil in that period and built us the franchise that we have in defense. He's going to put those strengths to good use in defense.

Speaker Change: We're gonna have to ask me to put make on the spot, but before I do let me.

Speaker Change: Talk about how I view things.

Speaker Change: Nick as you said mix is a best friend of this company.

Speaker Change: And interestingly you may or May not know actually Nick started his career defense. So heavy led.

Speaker Change: Starting as an engineer but.

Like I was by the way but.

Speaker Change: Having led some major defense contracts, including the most complicated the more extensive that we've ever had probably before fact, which was putting together the first <unk> contract in the U K and defense, which was standing up.

Speaker Change: Benson training center, where we train all medium helicopters rural airports I think you may have visited at one point that training center.

Speaker Change: We have in the Royal Air Force, which is still one of the most procedures and technology advanced in the world So Nick put that together.

Speaker Change: So just suffice to say you know having known Nick and then it gets worked for me directly ever since I've been at sea and various roles.

Speaker Change: Nick understands the business Nick has a very strong operational mindset and focus on execution as well as strategy and that's basically the reason I put him in charge of expense over 10 years ago, and and I think he has done a pretty good job is tripling the operating.

Speaker Change: In civil in that period and billing us.

Speaker Change: <unk> franchise that we have in defense he's going to put those strengths to fold. This in defense.

Speaker Change:

Marc Parent: Beyond that, I mean, specifics. Look, I see there's a lot of simplification here that can be had through greater focus. It's very clear to me that one of the reasons, certainly not the only one, but a key reason that we've been successful in civil is focus. I talked about the three P&L leaders that are fully accountable and have all the tools to be able to execute in their business.

Speaker Change: Beyond that I mean specifics look I see theres, a lot of simplification to hear that.

Speaker Change: Can be had through greater focus is very clear to me that.

Speaker Change: One of the reasons certainly not the only one key reason that we've been successful.

Speaker Change: In civil is the focus I talked about the three P&L leaders that are fully accountable and have all the tools to be able to execute and their business. We're providing through the changes we're making here we're enhancing the focus here to very specific peak P&L leaders in the United States our largest business.

Marc Parent: Through the changes we're making here, we're enhancing the focus here on very specific P&L leaders in the United States, the largest business, the largest military market in the world by far, very specific focus with Jason Goodfriend as interim president. They're working through the U.S. board for NIC and with Marco DiVisa running all our international programs, including Canada, where we have some very large contracts that I announced today. So number one is greater focus. That's very important. And beyond that is synergy capture.

Speaker Change: Is the largest military.

Speaker Change: Market in the world by far very specific focus with Jason good friend.

Speaker Change: President interim president there working for working.

Speaker Change: The U S board for Nick.

Speaker Change: And always market against several eight running all of our international programs, including Canada, where we have some very large contracts that I announced today. So number one is greater focus that's very important and not much beyond that dis synergy capture is clear to me that there's a lot of synergy left to be.

Speaker Change: Had a by leveraging our scale and technologies across the entire enterprise and thats going to be key to Nick's responsibly, but beyond that and it may be a couple of words from your sorry, Yeah. I was just going to reinforce I mean, the simplification and accountability.

Marc Parent: It's clear to me that there's a lot of synergy left to be had by leveraging our scale and technology across the entire enterprise. And that's going to be key to NIC's response. But beyond that, Nick, maybe a couple of words from your side. Yeah, I was just going to reinforce the simplification and accountability. I think we went a little bit astray.

Speaker Change: I think we went a little bit of history.

Nick: I'm trying to do all of that under the guise of the two business units. I think we have go-to-market business units in business aircraft and commercial and in DNS US DNS international. And, and then we'll drive synergies across that. Of course, there's going to be some, you know, some restructuring. I'll use the word restructuring, of course, because we have some duplication which was necessary at the time. But I think, you know, it's one of those things when you look at it, and you say, Okay, well, you know, we need to make changes. And by the way, that's my right now. I'm just asking questions. And I ask questions about everything. Why is this like this? Why is this like that?

Speaker Change: Trying to do all of that.

Speaker Change: Under the guise of the two business units I think the we have go to market business units and business aircraft in commercial and in DNS U S VNS International.

Speaker Change: And then we will drive synergies across that of course, there's going to be some.

Speaker Change: Some.

Speaker Change: Restructuring I wouldn't use the word restructuring of course, because we have some duplication, which.

Speaker Change: Where necessary at the time, but I think.

Speaker Change: It's one of those things when you look at it and you say, okay well.

Speaker Change: We need to make changes and by the way. That's my right now I'm, just asking questions and I'll ask questions about everything why is this like this why is it like that and it's amazing the answers that you get so I think a lot of times it's.

Nick: And it's amazing the answers that you get. So I think a lot of times it's, you know, we get we get, we get people working on this; the people know what to do. I'm just going to enable them to do it. And, as I tell other people, you know, we play as a team, and we're going to have to do this together as a team. And people know where the inefficiencies are, and they know what they need to stop doing. That's a great caller, gentlemen. And maybe a very quick one for Sonya.

Speaker Change: That we get.

Speaker Change: We get people working on this the people know what to do.

Speaker Change: I'm, just going to enable them to do it.

Speaker Change: And and as Akhil are there, but you know we play as a team and we're gonna has to do this together as a team.

Speaker Change: People noteworthy inefficiencies are and they know what they need to stop doing.

Benoit Poirier: Just looking at your CAPEX, that is expected to be up 50 to 100 million. How should we be thinking about sustainable CAPEX? It seems a bit elevated versus history.

Speaker Change: That's great color gentlemen, and maybe a very quick one for Sanyo just looking at your Capex that is expected to be up 50 to 100 million how should we be thinking about the sustainable capex. It seems a bit elevated versus the history. So I'm just wondering I understand the growth of fortunate.

Speaker Change: But just want to try to look beyond fiscal year 'twenty five about.

Speaker Change: What what could be kind of the sustainable level of capex. Thank you.

Sonya Branco: So I'm just wondering, I understand the growth opportunities, but just want to try to look beyond fiscal year 25 about what could be kind of this sustainable level of CAPEX. Thank you. Yeah, Benoit, thanks for the question.

Speaker Change: Yeah. Thanks for the question so the Capex.

Speaker Change: It's really the spend that's really a direct reflection of the success that we've had with all of the orders we secured to outsource more training. So two quarters of this capex, it's simulators to our network. So whether it's Qantas AGM, we've got plenty of Las Vegas been plenty of examples.

Speaker Change: Through that record order intake that that we've got in the years. So we don't deploy simulators to our network on a speculative basis every single one of them are backstopped by signed long term recurring revenue customer contracts. So you.

Sonya Branco: So the CAPEX is really, really a direct reflection of the success that we've had with all of the orders we've secured to outsource more training. So three quarters of this CAPEX are simulators for our network. So whether it's Quanta, it's AGN, we've got plenty of Las Vegas, Vanna, plenty of examples, you know, through that record order intake that we've had over the years. So we don't deploy simulators to our network on a speculative basis.

Speaker Change: What we see the this year's Capex is really a reflection of the secured order intake that we have and this is to deliver to growth and our customers and and frankly, we've we have a proven track record of delivering.

Speaker Change: Really accretive returns on this organic capex, the 20% to 30% range of incremental return on capital on our organic growth. So I'm not necessarily going to guide beyond that year, but it will be a function of the level of orders and end market capture that that will we will succeed.

Sonya Branco: Every single one of them is backstopped by signed long-term recurring revenue customer contracts. So, you know, what we see in this year's CAPEX is really a reflection of the secured order intake that we have. And this is to deliver growth and our customers. And, and frankly, we've got a proven track record of delivering, you know, really accretive returns on this organic CAPEX, the 20 to 30% range of incremental return on capital on our organic growth.

Konark Gupta: So what we're not necessarily going to guide beyond that year, but it will be a function of the level of orders and market capture that that will succeed. Thank you very much for the. The next question is from Konark Gupta from Scotiabank. Please go ahead.

Speaker Change: Thank you very much for this one.

Speaker Change: Yeah.

The next question is from Conor Gupta from Scotiabank. Please go ahead.

Marc Parent: Thanks for taking my question. Just on the defense, I'm wondering, Mark, how does the rebaselining of legacy contracts affect your market position and your ability to structure future bids appropriately? I think it reinforces them.

Konark Gupta: Thanks for taking my question I'm, just kind of a defense I'm wondering mark how does the rebase lining off of legacy contracts affect your market position and you're able at the structure of future burts appropriately.

Konark Gupta: Because I think what's important here is that, you know, this is a very successful renegotiation that we've done with the teams. You know, teams have been working on this for quite a while. Obviously, we have tiger teams on every one of those programs for obvious reasons, but, you know, focus on the execution of those contracts. But, you know, when I talked about in the previous quarter, when I said that we're going to take every step to be able to accelerate the recognition of risk on those programs.

Mark: I think it reinforces them.

Mark: Because I think what's important here is that.

Speaker Change: To me. This is a very successful renegotiation that we've done the teams. The teams have been on this for quite a while obviously we have tightened teams on every one of those programs for obvious reasons, but.

Speaker Change: Focus on execution of those of those contracts, but.

Speaker Change: When I talked about in the previous quarter, when what I said that we're going to take every effort to be able to accelerate the recognition of risk on those programs. So really scope out the remaining work here I mean, and I had talked about at the time that look we're gonna have to have tough negotiations here.

Konark Gupta: So really scope out the remaining work here. I mean, and I talked about time that look, you know, we're going to have to have tough negotiations here, you know, and it could lead to, in some cases, you know, basically having to accept penalties, for example, because, you know, we're late on contracts, as just one example. But the reality is we haven't had to do that in any one of these cases.

Speaker Change: And it could it could lead to in some cases, you know basically you're having to accept penalties for example for because we're late on contracts. So that's just one example, but the real issue is we havent to do that and we haven't had to do that at any one of these cases so.

Marc Parent: So we're going to do what CAE always does. We are going to execute on those contracts. And the customers, every one of them on these eight contracts is very happy with the outlook that we now have on those programs. So we will deliver what we committed to on those contracts. And at the end, the timeline and the scope of what we'll do is in line with the expectations of the client to have a winner. So our reputation that CAE has of always delivering is intact. And in some cases, actually, in some of these programs, that's really why I talk about them as particularly successful.

We're gonna do we see always thought we are going to execute on those contracts and the customers.

Speaker Change: For every one of them on these eight contract are very happy with the outlook that we now have almost full and it says we will deliver what we committed all of those contracts.

Speaker Change: And at the <unk> and the timeline and the scope of what we'll do is in line with your expectations kind of have a winter. So our reputation does he has always delivering is intact and in some cases actually in somebody's program and that's really why I talk if I talk about it as particularly successful.

Marc Parent: In some cases, we have negotiated additional scope on those contracts, so follow-on contracts as a result of negotiations. So long answer, but this is, if anything, just enhances our reputation. And that's great. Thanks.

Speaker Change: In some cases, we have negotiated additional scope on those contracts you'll follow on contract as a result of a negotiation so long answer but this is say.

If anything just enhances our reputation.

Konark Gupta: And if I can follow up quickly with Nick, um, you know, Nick, you talked about, um, you know, obviously some of the low hanging fruit there from a synergy standpoint, uh, from technology, et cetera, uh, duplication, all that, any, any specifics you can share. I know it's early, but, uh, anything you can tell me about what best practices you can bring to the defense segment to derive or support some of them? Well, I think I can give you a lot of examples, but I'd prefer not to right now.

Speaker Change: Perfect. That's great. Thanks, and if I can follow up quickly with Nick.

Speaker Change: Like you've talked about obviously some of the low hanging fruit there from a synergy standpoint from technology et cetera duplication, although any any specifics you can share. It I know, it's early but anything you can tell about what best practices can you bring to the defense segment to derive a support some of the synergies.

Speaker Change: Well I think.

I can't give you a lot of examples, but I really wanted to try not to right now, but I can say that.

Konark Gupta: But I can say that, you know, in the L3 acquisition, for example, and the legacy CAE business, there's a lot of overlap in technologies. The best example I can give you is the contract we won called Upast. You know, both teams have products. So these things have to be rationalized, you know; they don't have to be done.

Speaker Change: Yeah.

Speaker Change: He also be acquisition for example.

Speaker Change: The legacy business, there's a lot of overlap in technologies.

Best example, I can give you is the country can be worn called to our pets.

Speaker Change: Both teams have products. So these things have to be rationalized. So they don't have to be done.

Nick: I mean, we're supporting customers we're supporting. But, you know, we need to, you know, we need to build up the synergies and develop a strategy where, you know, the whole company has one product in some of these areas. Same with, same on the civil side. There are opportunities for the defense guys to offer solutions like Gulfstreams and Globals because, as you know, these aircraft are used for missions, for missionized missions, if I can use this word. So, so, right now, you know, it's very much, it's very much not, you know; they don't know what the civil guys do.

Speaker Change: We're supporting customers, we're supporting but we need to.

Speaker Change: We need to build up the synergies and and and develop a strategy where the whole company is one product in some of these areas same with the same on the civil side. There are opportunities for the defense guys to offer solutions like Gulfstream and glow.

Speaker Change: <unk> because as you know these aircrafts are huge submission for.

Speaker Change: <unk> mission is.

Speaker Change: Emissions, if I could use is what so so so right now you know it's very much it's very much not.

Speaker Change: I don't know what the civil guys do and we don't know what.

Nick: And we don't know what these defense requirements are. But for sure, the customer is interested in having these solutions. And as we know, especially in some of these programs like the Globals and the Gulfstreams, these are very good programs for us. And I mean, basically, we lift and shift a training program; we lift and shift a simulator and instructor training. And we have a program; you can have a Gulfstream program anywhere you want.

Speaker Change: Defense requirements are but for sure the customer is interested in having these solutions and as we know, especially on some of these programs like the globals and the Gulfstream. These are these are very good programs for us and I mean, basically we lift and shift our training program, we lift and shift of simulator.

Speaker Change: <unk> and instructor training and we have a program you can have a go through program anywhere you want so I think that's the kind of stuff that I think we're going to pursue maura.

Konark Gupta: So I think, you know, that's the kind of stuff that I think we're going to pursue more of because, obviously, we will always have these programs that are a little bit more complicated. And, and yes, we'll protect for all the obvious stuff. But, you know, we need a base of business that is a little bit less volatile. And I think these are, you know, a couple of examples of things that I think we can do to make ourselves more successful. That's really great. Thanks so much.

Speaker Change: Because obviously, we will always have these programs.

Speaker Change: As you know are a little bit more complicated than and yes, we will protect it for all the all the obvious stuff, but but we need a base of business, which is a little bit less volatile and I think these are you know.

Speaker Change: Couple of examples of things that I think we can do.

Speaker Change: To make make ourselves more successful.

Speaker Change: That's a that's really great color. Thanks, so much and congrats on the neutral Nick Thanks.

Nick: And congratulations on the new role, Nick. Thanks. The next question is from Cameron Doerksen from National Bank Financial. Please go ahead. Yeah, thanks. Good morning.

Speaker Change: Thank you.

Cameron Doerksen: Maybe just a couple of balance sheet cash flow questions from me for Sonya. Can you just talk about what your expectation is for debt reduction this fiscal year, and maybe you can just update on what sort of the target leverage for the company is over the next. Thanks, Cameron.

Speaker Change: The next question is from Kamran Derksen from National Bank Financial. Please go ahead.

Cameron Doerksen: Yeah. Thanks, Good morning, maybe just a couple of balance sheet cash flow questions from me for for Sonya can you just talk about what your expectation is for for debt reduction.

Speaker Change: <unk> this fiscal year and maybe you can just update on what do you sort of the target leverage for the companies over the next few years.

Sonya Branco: As part of our continued balanced capital allocation, we're going to continue to focus on deleveraging. We have always said that the three times was really just a waypoint on the way to lower leverage. So that's a continued focus. We don't, we haven't necessarily set a target, it's going to be a balance, but something in line with our investment grade. So I'd say, you know, two to two and a half times is normal for an investment grade.

Kimberly: Yeah, Kimberly I think salmon.

Speaker Change: Part of our continued balanced capital allocation, where we're going to continue to focus on deleveraging. We had always said that the three times. So it's really just a waypoint underway to a lower leverage. So that's a continued focus I don't think we haven't necessarily set a target it's going to be a balanced but something in line in with.

Speaker Change: Our investment grade so I'd say I'm, you know two to two and a half times as a useful for an investment grade it gives us flexibility and it gives us flexibility to bring back current returns and support our organic investments in Capex a lot of longer term, that's what I'd be targeting but ultimately over the next year, it's really continuing on the deleveraging.

Sonya Branco: It gives us flexibility, and it gives us the flexibility to bring back current returns and support our organic investments in CapEx. So, longer term, that's what I'd be targeting. But ultimately, over the next year, it's really continuing on the deleveraging profile, while we continue to invest in accretive organic investments and bring back some shareholders. Okay, and on the working capital, I mean, we had a pretty big cash tailwind in fiscal 24, that followed a significant investment in fiscal 23.

Speaker Change: While we continue to invest in accretive organic investments.

Speaker Change: And bringing back some some shareholder returns.

Sonya Branco: I'm just wondering if you could maybe, you know, talk about what your expectation is for fiscal 25, as far as the working capital investment is concerned, and maybe, talk about how it sort of changes through the year, quarter to quarter. I'm really pleased with the progress on the non-cash working capital for the year. So it's really the result of continued focus on the efficiency of our key metrics, whether it's DSO, inventory management, deposits, and unbuilt sales.

Speaker Change: Okay, and the working capital I mean out of a pretty big.

Speaker Change: I think it's a cash tailwind in fiscal 'twenty for the fall.

Speaker Change: Significant investment in fiscal 'twenty three I'm just wondering if you could maybe talk about what your expectation is for fiscal 'twenty five as far as the working capital investment to and and maybe.

Speaker Change: Talk about how it sort of changes through the year, but quarter to quarter.

Speaker Change: Sure I'm I'm really pleased with the purpose on the noncash working capital every year. So it's really the result of continued focus on efficiency of our key metrics, whether it's DSO inventory management.

Speaker Change: Processing, and AR and Unbilled AR sales. So it resulted in a strong reversal and an overall reduction in non cash working cap on the balance sheet. So our focus is continuing for the year and expect the historical trend to continue both on our seasonality a.

Sonya Branco: So it resulted in a strong reversal and an overall reduction in non-cash working capital on the balance sheet. So the focus is continuing. For the year, I'd expect the historical trends to continue, both on a seasonality basis, H1, H2, that trend continues, although more abated.

Speaker Change: H one H two that trend continues although more abated.

Sonya Branco: And for the year, training is still the bulk of our business, and that's generally billed after execution. So as it grows, it's slightly non-cash working capital investments. But we continue to focus on the metrics, on the efficiency of those metrics. And overall, we target 100% conversion of net income to pre-cash. Okay, that's helpful. Thanks very much. The next question is from Tim James from TD Securities. Please go ahead.

Speaker Change: And for the year, you know training is still the bulk of our business and that's generally billed after expectation so and as it grows it is slightly noncash working cap investment, but we continue to focus on the metrics on the efficiency of those metrics and overall, we target 100% conversion of net income to free cash flow.

Speaker Change: Yes.

Speaker Change: Okay. That's helpful. Thanks very much.

Speaker Change: Okay.

Speaker Change: The next question is from Tim James from TD Securities. Please go ahead.

Tim James: Just one question here. Sonya, you mentioned that expansion of the training network will be in lockstep with with customer demand. And then you mentioned, you know, you look to you sign long term contracts for occurring revenue with customers. Is it possible to outline, Curdle rates that accompany that approach, and what I'm trying to get at is just a sense or a comfort level for, you know, an outcome where customers, maybe their own demands change from what they contract with CEE and how do you manage that and how are you insured against changes in their own activity levels that they want to put through a specific full flight simulator in the I'll hand it up to Nick to give a bit of color, but, you know, the hurdle rates are high.

Tim James: Thanks very much.

Tim James: Just one question here.

Tim James: So when you you mentioned that expansion of the training network will be in lock step with that with customer demand and then you mentioned you look to sign long term contracts for recurring revenue with customers is it possible to outline.

Speaker Change: Hurdle rates that a company that approach.

Speaker Change: What I'm trying to get out is just a sense or a comfort level for <unk>.

Speaker Change: Outcome, where customers maybe their own demand change from what they contract with C and how do you manage that and how are you insured against changes in their own activity levels that they want to put through.

Speaker Change #100: Pacific full flight simulator in the future.

Speaker Change #101: I'll hand, it off to Nick to give a bit of color, but you know the hurdle rates are high and the capital.

Nick: The capital investment, ultimately, as I said, we never deploy speculatively. And so these are all backed by at least one, if not several, customer contracts. And ultimately, the proof is in our results, right, so driving 20% plus margins on the civil network and the ramp up of these incremental returns on capital of 20 to 30% within two to three years. So you can see, you know, not only what we expect but what we deliver on the CapEx.

Speaker Change #102: And ultimately as I said, we never took place speculative and so these are all backed by at least one if not several customer contract and ultimately the proof is in our is that our results grade two driving 20% plus margins on the civil network and the ramp up of these incremental return on capital of 20 to 30 per se.

Nick Nikitas: Within two to three years. So so you can see not only what we expect for what we deliver on the Capex and on the on the on the outsourcing profile. Nick I was just going to say a lot of our contracts.

Nick: And on the outsourcing profile, Nick, I was just going to say a lot of our contracts, particularly our big clients, people like LATAM, I mean, these are secured capacity. So the exchange there is, okay, you secure me X number of simulators of capacity because I need that just to be able to keep all the pilots current in their aircraft or training on another aircraft or whatever. And then, in exchange for that, I will pay you a certain amount of money to keep that capacity. And of course, you know, like COVID is a good example, right? We had COVID, and customers came back and said, hey, we need some relief, whatever, okay.

Speaker Change #104: In particular, our good clients.

Speaker Change #105: People like lead time I mean, these are secured capacity. So the so the the exchange. There is okay. You secure me X number of simulators that capacity because I need that just to be able to keep all the pilots.

Speaker Change #104:

Speaker Change #104: You know current in their in their in their aircraft or training or another I guess or whatever and then in exchange for that I will pay you a certain amount of money to keep that capacity now of course like to Covid is a good example, right. We had COVID-19 customers came back and said Hey, we need some relief whatever okay.

Nick: But contractually, we have the, you know, we have the hammer. I hate to use that word, but we have the hammer. And then the question becomes, okay, if an airline wants to change its capacity, now you got to remember, you know, there are a lot of ways they're like, I don't want to use the word mathematical, but you have so many pilots, you need so many hours of training, you're going to have so much churn, you're going to have so much, I mean, it's not, you know, the So we will contract on that basis. So then, you know, your fluctuations tend to be a little bit less pronounced, especially on the commercial side. Okay, that's helpful, Nick.

Speaker Change #104: But contractually we have the we have the.

Speaker Change #104: The the hammer I hate to use that word, but we have the hammer and then the question becomes okay. If an airline wants to change the capacity now you got to remember this.

Speaker Change #104: A lot of waste or like I don't want to use the word mathematical but you have so many pilots we need so many hours of training youre going to have so much churn youre going to have so much I mean, it's not.

The airlines can be a very good at predicting.

Speaker Change #104: There are their demands so we contract on that basis, So then or you're fluctuations tend to be a little bit less pronounced, especially on the commercial side.

Tim James: Thank you. Sonya, if I could just return, you mentioned the 20 to 30% return on capital target within, correct me if I'm wrong, you said two to three years. Can you just remind us on the, does that return on capital calculation mimic what you, I think, publish as a consolidated target? Is that how we should think about the kind of the numerator and the denominator?

Speaker Change #106: Okay. That's helpful. Thank you just wondering if I could just return so you mentioned the 20% to 30% return on capital target within correct me, if I'm wrong, but you said two to three years can you just remind us on the the is that return on capital calculation mimic what you think publishes a consolidated target is that how we should think about.

Speaker Change #106: That kind of a numerator and the denominator in that in that metric when we're thinking about an individual.

Sonya Branco: in that metric when we're thinking about an individual dollar invested in a full flight, so that incorporates, you know, all of that calculation. So ultimately, we look at it simulator by simulator. And this is the aggregate of all the simulators we've deployed and ultimately track the contribution of that simulator over its capital cost. And so, you know, we're measuring the incremental accretive benefit of that growth and that.

Speaker Change #107: All are invested in a full flight simulator.

So that's that incorporates a you know all of that calculation. So ultimately we look at it simulator by simulator and this is the aggregate of all of the simulators, we've deployed and ultimately attract the contribution of that familiar over over its capital cost and so you know that we're measuring the incremental.

Speaker Change #107: <unk> benefit of that growth in that.

Speaker Change #108: Thank you.

Sonya Branco: Thank you. The next question is from Jordan Leone from Bank of America. Please go ahead.

Speaker Change #110: The next question is from Jordan <unk> from Bank of America. Please go ahead.

Jordan Leone: Hey, good morning. Could you just give us some color on what you're seeing for utilization rates going into the summer and bizjet activity at the Vegas facility? Did you say Vegas was on? Well, the biggest facility is, uh, is, you know, is ramping up this year. We'll have a. We'll have, you know, pretty close to a steady state year. You know, we've been, the training center has been open now for a couple of years.

Speaker Change #109: Hey, good morning.

Jordan <unk>: Just give us some color on what you're seeing for utilization rates going into the summer.

Speaker Change #112: There is good activity at the Vegas facility.

Speaker Change #113: Did you say the Vegas for fun.

Yeah.

Speaker Change #114: Yeah, well, maybe I'll turn it over to you.

Speaker Change #115: Well the biggest facility as is.

Speaker Change #115: Wrapping up this year, we will have.

Speaker Change #115: We'll have a pretty close to a steady.

Speaker Change #115: Steady state year, we've been working on this train center has been open now for a couple of years in fact, I just did a review with the team and and they've got a they've got a good plan to bring it up to what we would call a steady state.

Jordan Leone: In fact, I just did a review with the team, and, you know, they've got a good plan to bring it up to what we would call a steady state. And, more generally, of course, Q2 will always be a little bit quieter, especially in places like Europe, because we have some big customers like EasyJet who are basically forbidding anybody to train. You know, they just want everybody flying for the summer season.

Speaker Change #116: Uh huh.

Speaker Change #116: And in more generally of course, Q2 will always be a little bit quieter, especially in places like Europe, because we have some big customers like easy jet or basically forbidding anybody to train.

Speaker Change #116: Just want everybody flying for for the summer season.

Nick: So we'll see some slowdown there. In the U.S., maybe less because there's still a lot of hiring going on, so that's not as affected by seasonality. But in Europe, definitely, we see a lot of seasonality.

Speaker Change #116: So we will see some slow down there in the U S. Maybe less because theres still a lot of hiring going on so that's not as that's.

That's not as as.

Affected by by seasonality, but in Europe, definitely we see a lot of seasonality.

Jordan Leone: Cut it. Thank you. As a reminder, any analyst who wishes to ask a question may press star then. The next question is from Noah Poponak from Goldman Sachs. All right, good morning.

Speaker Change #117: Got it thank you.

Speaker Change #118: As a reminder, any analyst who wishes to ask a question May Press Star then one.

Speaker Change #119: The next question is from Noah <unk> from Goldman Sachs. Please go ahead.

Speaker Change #120: Hi, good morning.

Noah Poponak: Good morning.

Noah Poponak: I'm in the, use of the term re-baselining, I'm trying to better understand how much you have actually reset the schedule scope. And if you've had any price reset in these eight legacy contracts versus, you know, the charges just reflect the mark to market of the reality of the current margins on those eight. Wait, it's really back. As I was mentioning Noah, in each one of these eight contracts, there have been substantial and extensive renegotiations on every part of those contracts.

Speaker Change #119:

Speaker Change #119: <unk>.

Speaker Change #122: Use of the term re baseline and I'm trying to better understand.

Speaker Change #122: How much you.

Speaker Change #122: I've actually reset schedule scope.

Speaker Change #122: If you've had any price reset in these legacy contracts.

Versus you know the charges just to reflect the <unk>.

Speaker Change #122: Mark to market of the reality of their current <unk>.

Speaker Change #123: So those are the country.

Speaker Change #123: It's really bad.

Speaker Change #123: I was mentioning in each one of these contracts.

Speaker Change #123: There have been substantial.

Speaker Change #123: Extensive renegotiated is on every part of those contracts, okay, and that's really to define the remaining work that we have to do on those contracts. The time, it's going to take us and they're very specific cost is going to take us I would tell you on still on top of that as you would expect.

Noah Poponak: Okay, and that's really to define the remaining work that we have to do on those contracts, the time it's going to take us, and the very specific cost it's going to take us. I would tell you that still, on top of that, as you would expect, on every one of those contracts, on top of those estimates, we put the usual, you know, contingencies that associate with any remaining what I would call normal risk on those programs because you can never fully eliminate risks; there's always some risks, but we have contingencies against those.

Speaker Change #123: On every one of those contracts on top of that or was that house, we've put to usual.

Speaker Change #123: Contingencies that are associated with any remaining what I would call normal risk on those programs because you can never fully eliminate risk there's always some risk, but we have contingencies against them and we have on top of that management reserve.

Noah Poponak: And we have on top of that management reserve on top of those individual programs and through our whole, you know, defense backlog as a whole. So if anything, when I look at those contracts, I would feel good that, you know, we should not be in a position that, you know, we're in a situation that we haven't been in quite a while here, certainly on those programs, where basically, we don't have to use any size and part of those industries. You know, we want to outperform all those programs very clearly. That's really what we mean by rebaselining here.

Speaker Change #123: Half of those individual program and through our whole defense backlog as a whole so if anything when I look at those contracts.

Speaker Change #123: I would I would feel good that we should be in a position that we're in.

Speaker Change #123: We're in a situation that we haven't been in quite a while you're sort of on those programs, where basically we don't have to use.

Speaker Change #123: Eddie.

Marc Parent: It's put this overhang behind us. You know, we're not going to, we still have to execute on those contracts. We're not walking away from anything.

Speaker Change #123: Part all those contingencies, so we want to outperform others program very clearly that's really what we mean by re baseline and here. It is put this overhang behind us.

We still have to execute on those contracts were not walk away walking away from anything here, we're still largely going to be executing on those contracts to bring them to a close over the next six to eight quarters.

Speaker Change #123: Couple of them probably will go into the next year, just because of the timeline, but again, we predicted what the cost is going to be on those programs. So.

Marc Parent: We're still largely going to be executing on those contracts to bring them to a close over the next six to eight quarters. A couple of them probably will go into the next year, just because of the timeline. But again, you know, we predicted what they would cost us. It's going to be on those programs.

Speaker Change #123: Good very good about the execution of the visibility I have on those bookings.

Noah Poponak: So I feel very good about the execution and the visibility that I have on those programs. Okay. Have you actually been given higher prices by your customers on some of them, or is it sort of the same price?

Speaker Change #123: Okay.

Speaker Change #124: Have you actually been given higher prices by your customer on some of them or is it sort of at the same price and just.

Marc Parent: and just resetting, you know, all of the other things. I was mentioning on some of those contracts that we've actually been successful in getting follow-on work. What I mean by that is, ECPs, or engineering change proposals, on a couple of them, and on one in particular in Europe, we actually got a follow-on contract, which is definitely a better price in terms. And how many of the eight are unprofitable? I mean, going forward, all of them are being, well, not all of them, most of them are instituted at zero margin because we're sitting in there, because we've taken the charges on them. There are about three of them that are operating at a very slight profit going forward.

Speaker Change #124: Resetting all of the other.

Speaker Change #124: Inputs.

Speaker Change #124: Yes.

Speaker Change #125: Oh, yes.

Speaker Change #125: I was mentioning some of those contracts that we've actually been successful in getting follow on work, what it might be or what I mean, but as.

Speaker Change #125: E C diesel engineering change proposals on a couple of them and on one in particular in Europe, We actually got a follow on contract, which is definitely a better pricing in trucks.

Speaker Change #125: Okay.

Speaker Change #126: And how many of the eight are unprofitable.

There I mean going forward all of them are being well not all of that the most of our institute at zero margin because we're setting in there because we've taken there.

Speaker Change #126: The charges on the there was about it.

Speaker Change #127: There's three of them that are.

Speaker Change #127: Operating at a very slight profit going forward. So that's that's good situational.

Speaker Change #127: Yeah.

Speaker Change #127: Okay.

Speaker Change #128: Thank you.

Speaker Change #128: Welcome.

Marc Parent: So that's a good situation for them. Okay. Thank you. Operator, I see we've used the full hour and then some, so I think we'll close the call here. I want to thank participants for joining us this morning and remind you that a transcript will be available shortly of the call on CAE's website. Thank you and have a good day.

Speaker Change #129: Operator, I see we've used the full hour and then some so I think we'll close the call here I want to thank participants for joining us. This morning, and remind you that a transcript will be available shortly.

Speaker Change #129: The call on <unk> website. Thank.

Thank you and have a good day.

Speaker Change #130: That's good.