Q2 2025 CAE Inc Earnings Call
Good day ladies and gentlemen. Welcome to the CAE second quarter financial results for fiscal year 2025 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 to ask questions. To join the question queue, you may press star then 1 on your telephone keypad.
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Speaker Change: I would now like to turn the conference over to Mr. Andrew Arnovitz. Please go ahead, Mr. Arnovitz.
Good morning, everyone, and thank you for joining us.
Speaker Change: Before we begin, I'd like to remind you that today's remarks, including Management's Outlook and answers to questions, contain forward-looking statements. These forward-looking statements represent our expectations as of today, November 13, 2024, and accordingly are subject to change.
Speaker Change: Such statements are based on assumptions that may not materialize and are subject to risks and uncertainties. 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 CEAD's annual MD&A, available on our corporate website and in our filings with the Canadian Securities Administrators on CEADAR+.
and the U.S. Securities and Exchange Commission on EDGAR.
Speaker Change: With the divestiture of CA's healthcare business in fiscal 2024, all comparative figures discussed here and our financial results have been reclassified to reflect discontinued operations.
Speaker Change: On the call with me this morning are Marc Parent, CIE's President and Chief Executive Officer, and Constantino Malatesta, our Interim Chief Financial Officer. Nick Liantidis, CIE's Chief Operating Officer, is on hand for the question period with financial analysts.
Marc Parent: I'm sure you've all seen by now the news release we issued yesterday afternoon that accompanied our Q2 results, that after 20 years at CAE, including the last 15 as President and Chief Executive Officer,
Marc Parent: And after spearheading the making of C is a global leader in training for simulation for civil aviation and defense and security forces
Marc Parent: Marc Parent will be leaving the company at next year's Annual General Meeting in August 2025 as part of an ongoing succession plan.
Marc Parent: Until this time, Marc will continue to lead CAE in his role as CEO.
Speaker Change: The Board of Directors has retained a leading executive search firm to conduct a comprehensive global search, which will include evaluating internal and external candidates to identify a new CEO to lead the company into the future.
Speaker Change: The Human Resources Committee of the Board will oversee the search process with support and assistance from Marc.
On behalf of all of us at CAE.
Speaker Change: I'd like to say that we're incredibly grateful for Marc's exemplary leadership.
Marc Parent: His lasting impact on CAE and on the aerospace industry are unanimously recognized And we look forward to continuing to benefit from his leadership until next year's AGM With that I will turn the call over to Marc
Marc Parent: Thank you, Andrew, for those kind words and good morning to everyone joining us on the call.
Marc Parent: As Andrew said, today is business as usual, and I do want to stay focused on the quarterly results.
Marc Parent: But, you know, this is a big moment for CE and for me personally, so I'll just take a moment to say that it's been really the privilege of a lifetime to lead this company.
Marc Parent: I can't tell you how proud I am of what our team has accomplished and I'm very thankful for all the support that I've received throughout the years.
Marc Parent: Thanks to our extraordinary people at CAE, we can proudly say that over the last couple of decades, we've absolutely reshaped the aerospace industry by creating something that's truly unique.
Marc Parent: CAE trains more pilots than anyone else in the world by far and by leveraging technology we prepare countless people for the moments that matter and fulfilled our mission to make the world safer.
This is the right time for a transition process.
Marc Parent: And as our financial performance shows, which we'll get to in just a moment, we're in a solid financial position. Our markets are on a long-term growth trajectory. And our competitive position in each of those markets is strong.
Marc Parent: Our innovative technology and our outstanding people now set the standard for safety and training worldwide. And I'm confident that she has a very bright future ahead. Now, turning to the business at hand in the second quarter.
Marc Parent: Our performance in the second quarter reflects strong demand for civil and defense market solutions, and despite some of the challenges we faced in commercial aviation from OEM aircraft supply disruptions, we've achieved solid results.
Marc Parent: Additionally, we extended our positive trend in defense this quarter with growth and margin enhancements that are largely attributable to our dedication to focus, customer centricity, and operational excellence across all of CAE's P&Ls.
Marc Parent: highlighting our strong position in growth markets. We secured nearly three billion dollars in total orders this quarter, bringing our adjusted backlog to a record 18 billion dollars.
Marc Parent: which is up over 50% compared to just over a year ago.
Marc Parent: In civil, we delivered 18 full flight simulators to customers during the quarter, and our average training center utilization was 70%, a decrease of one percentage point compared to the previous year.
Marc Parent: This quarter we experienced year-over-year growth in business aviation training, commercial training in Asia-Pacific, and simulated products.
Marc Parent: However, mainly due to OEM aircraft supply disruptions, U.S. pilot hiring remained low during a quarter impacting the incremental pilot training demand we would have expected under more normal conditions.
Marc Parent: Overall, commercial aviation training utilization was approximately three percentage points lower than last year on average, which is still very good, but it would have been even stronger if not for the temporary pressures on initial training and pilot churn in the Americas.
Marc Parent: We continue to deliver strong order flow in a quarter in a large secular growth market which sees highly differentiated training and flight operations software solutions.
Marc Parent: We booked $693 million in orders with civil customers worldwide for a 1.08 book-to-sales ratio on revenue that's 12% higher than Q2 of last year.
Marc Parent: We ended the quarter with a record $6.7 billion total civil adjusted backlog which is up 13% year-over-year.
Marc Parent: We received orders for 16 full-flight simulators in the quarters, including four based on the Comac C919 airliner, and we signed long-term training services and full-flight operation solution contracts with commercial and business jet operators worldwide.
Marc Parent: In defense, performance continued to track our expectations, driven by strong execution, risk retirement, significant backlog growth, and improving backlog quality.
Marc Parent: We made excellent progress during the quarter to renew growth and increase margins, including successfully concluding one of the legacy contracts from the backlog and securing a $1.7 billion transformative award under Canada's Future Aircrew Training Program.
Marc Parent: For the quarter, we recorded orders worth $2.3 billion, resulting in a 4.6 times book-to-sales ratio, leading to a record $11.4 billion in defense-adjusted backlog.
This is up approximately 94% year over year.
Marc Parent: Over the past 12 months, the defense books-to-sales ratio was 2.04 times.
Marc Parent: With that I'll now turn the call over to Dino who will provide additional details about our financial performance. Dino?
Thank you, Marc, and good morning, everyone.
Dino: Consolidated revenue of $1.14 million was 8% higher compared to the second quarter last year, while adjusted segmented operating income was $149.0 million, compared to $135.6 million in the second quarter last year.
Dino: Our quarterly adjusted EPS was $0.24. That compares to $0.26 in the second quarter last year.
Dino: We encourage restructuring, integration, and acquisition costs of $30.9 million during the quarter.
Dino: This is comprised of $5.1 million for the now-completed integration of their center.
Dino: and $25.8 million in connection with the restructuring program to streamline CAE's operating model and portfolio, optimize our cost structure, and create efficiencies.
Dino: This restructuring program was also completed in the second quarter and no further restructuring expenses are expected.
Dino: The conclusion of these programs is beneficial to the company's free cash flow profile going forward. Also...
Dino: We continue to expect to fully achieve annual run rate cost savings of approximately $20 million by the end of next fiscal year.
Dino: Net finance expense this quarter amounted to $52.9 million, which is up from $49.5 million in the preceding quarter and $47.1 million in the second quarter last year.
Dino: This is mainly the result of higher finance expense on lease slide buildings in support of training network expansions.
Dino: partially offset by lower finance expense on long-term debt due to a decreased level of borrowings during the period.
Dino: Income tax expense this quarter is $10.4 million, for an effective tax rate of 16%.
Dino: The adjusted effective income tax rate was 18%, which is the basis for the adjusted EPS calculation.
Dino: Net cash from operating activities this quarter was $162.1 million compared to $180.2 million in the second quarter of fiscal 2024.
Dino: Free cash flow was $140 million compared to $147.4 million in the second quarter last year.
Dino: The decrease was mainly due to a lower contribution in non-cash working capital.
Dino: As in previous years, we usually expect the portion of our non-cash working capital in the first half to reverse in the second half.
Dino: We also continue to target an average 100% conversion of adjusted net income to free cash flow for the year.
Dino: Capital expenditures totaled $57.0 million this quarter, with approximately 65% invested in growth, mainly to add capacity to our global training network to deliver on the long-term training contracts in our backlog.
Dino: We are now expecting total CapEx for fiscal 2025 to be slightly below our previously estimated range, which is indicated at $50M to $100M higher than the $330M we invested in fiscal 2024.
This change reflects the agility of our investment process.
and our ability to move in lockstep with the market.
Dino: Our net debt position at the end of the quarter was approximately 3.1 billion dollars, for a net debt-to-adjusted EBITDA of 3.25 times at the end of the quarter. Before the impact of our legacy contract, net debt-to-adjusted EBITDA was 2.97 times.
Dino: Our increased investment in Syncom does not change our leverage expectations. We continue to expect to be below three times net debt to adjusted EBITDA by the end of the fiscal year, and our deleveraging focus remains the same.
during the quarter.
Dino: CAE repurchased and cancelled a total of 392,730 common shares under its normal course issue bid, NCIB, which began on May 30, 2024, at a weighted average price of $24.43 per common share.
for a total consideration of $9.6 million.
Dino: Now turning to our segmented performance, in civil, second quarter revenue grew 12% year-over-year to $640.7 million, while adjusted segmented operating income rose 1% to $115.9 million, resulting in an 18.1% margin.
Dino: With 18 full flight simulators delivered this quarter, we saw a notable shift in revenue mix with a higher proportion from products compared to last year when we delivered 11.
Dr. Pradova, Dr. Pradova,
Dino: Defence revenue rose 4% to $495.9 million, while adjusted segmented operating income rose 55% to $33.1 million. Delivering a 6.7% margin, right on target thanks to strong execution from the team.
Dino: Legacy contracts remain on track with costs and schedules well managed.
Dino: As planned, we concluded one legacy contract this quarter and on track to finalize another one next quarter with yet another following in the quarter after.
Dino: This quarter, legacy contracts contributed around 30 basis points of margin dilution.
Dino: Without this impact, the Adjusted Segment Operating Income for Margin for Defence would have been 7%.
Marc Parent: With that, I will ask Marc to discuss the way forward.
Thank you, Tino.
Marc Parent: For CEA overall, a key factor driving long-term demand in both our civil and defense segments is the high level of demand for pilots and pilot training to manage growth and replace those that are retiring.
Marc Parent: The outlook for aviation training solutions in civil is as strong as ever, driven by growth in air travel, the need for more pilots, and a requirement for continuous training to keep up with evolving aviation technologies as well as regulations.
Marc Parent: Our business is largely supported by the regulated train pilots and crews need to maintain certification for the global fleet of commercial business aircraft.
Marc Parent: And this will only compound as the in-service commercial jet fleet roughly doubles within the next two decades.
Marc Parent: Factors like the aging pilot workforce, mandatory retirement, and sustained growth for air travel solidify our long-term confidence in CA's future.
OEM AirPath supply disruptions it testified with recent labor disputes.
Marc Parent: But with that now positively resolved, we believe that the airline industry can now begin to gradually recover from these narrow-body supply challenges.
Marc Parent: with some relief expected in the coming period as grounded aircraft return service and new aircraft delivery rates eventually rise.
I'm just going to temporary nature of these supplies.
Marc Parent: Boeing and Airbus have a combined order backlog of nearly 15,000 aircraft, amounting to about a decade's worth of deliveries.
Marc Parent: With regards to business aviation specifically, I'm thrilled about the agreement announced last week to purchase a majority stake in our SimCom coinvention.
Marc Parent: This strategic, organic investment strengthens our position in the core business aviation training market, boosts recurring revenue, and deepens our commitment to delivering top-tier training solutions for a vital customer segment.
Marc Parent: Under this agreement, both CAE and CIMCOM have also extended our exclusive business aviation training partnerships with Flexjet and its affiliates by an additional five years, securing a 15-year exclusivity period.
Marc Parent: This long-term agreement functions like an outsourcing agreement with one of the world's premier luxury private jet companies, giving CA increased exposure to the rapidly growing fractional jet and charter aviation markets.
Marc Parent: We anticipate that this investment will be accretive to both earnings and free cash flow in our first full year going forward.
Marc Parent: Regarding our civil outlook, disruptions in aircraft supply have indeed impacted an incremental portion of the demand that we normally see in our Commercial Aviation Training Division.
Marc Parent: Consequently, we've implemented measures to enhance operational efficiency and mitigate the decrease in training demand.
despite persistently low pilot hiring levels in the United States.
Marc Parent: Training bookings for third and fourth quarters are higher, reinforcing our expectation for a stronger performance in the latter half of the fiscal year.
Marc Parent: Additional factors that underlie our expectations for a stronger second half includes the seasonal improvements in commercial and business aviation.
Marc Parent: accretion for our decreased investment in SimCom and an uptick in volume and profitability from full flight simulator delivers.
All balanced.
Marc Parent: We're maintaining our target of approximately 10% annual growth in civil adjusted segment operating income for fiscal 2025.
Marc Parent: And we continue to expect an annual civil adjusted segment operating income margin to be between 22 and 23 percent.
Marc Parent: with ample room to grow beyond that on volume, efficiencies, and mix.
Marc Parent: In defense, we're well positioned in a growth market as the sector moves into a prolonged up-cycle with increased budgets across NATO and allied nations.
Marc Parent: fueling demand for the training and simulation solutions that we offer.
Marc Parent: Our expertise spanning civil aviation and defense uniquely equips us to meet these needs.
Marc Parent: Demand for our training solutions remains strong, driven by a global shortage of uniformed personnel.
prompting militaries to partner with CAE to support readiness.
Branco, Sonya Branco, Marc Parent
by leveraging our position on programs like the Canadian FAC.
Marc Parent: We aim to advance multi-domain training in secure, synthetic environments across our global network.
Marc Parent: The foundation is solidly set for renewed growth and margin expansion in our defense business in the coming periods.
Marc Parent: We've strengthened our processes, sharpened our strategy, and enhanced our talent to improve efficiency and execution.
Marc Parent: Meanwhile, we've achieved transformative growth in our backlog of high quality programs.
Our fiscal 2025 defense outlook reflects the business's re-baselining.
and the improved visibility that it provides.
Marc Parent: We anticipate annual revenue growth in the low to mid-single digits and expect defense-adjusted segment operating income margin to increase to the 6-7% range with performance like civil weighted more towards the second half of the year.
Marc Parent: With that, I thank you for your attention and we're now ready to answer your questions.
Speaker Change: Thank you, Marc. Operator, we'd now like to open the line to members of the financial community.
Speaker Change: Certainly. To join the question queue, you may press star then 1 on your telephone keypad. You'll hear a tone acknowledging your request.
Speaker Change: If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, press star then 2.
Speaker Change: Our first question is from Kevin Chang with CIBC. Please go ahead.
Speaker Change: Thanks for taking my question and congrats, Marc, on your pending retirement here. Maybe just on defense, you called out 7% SOI margins excluding the legacy.
Speaker Change: How do you think about bridging that gap, you know, is that 10% of the backlog today, or?
Speaker Change: or does this require continued restructuring in how you're bidding and what you're winning in order to ultimately get to that double-digit eBit margin.
Speaker Change: Look, I think the factors that's going to drive the growth are the same ones that we've talked before.
It's really...
Speaker Change: And thanks for your comment, Kevin, by the way, about me. I appreciate it. It really comes back to the retirement of the legacy contract risk, and we're right on track on that one.
Speaker Change: and really replacing contracts in our backlog that we've won over the last few years and that are lesser margin than the 10% or so that we target, and replacing them with contracts that have a higher margin.
Speaker Change: And that's really what's happening here, and I think you can see, with the growth in the backlog, that we're having quite the amount of good success on that front.
Speaker Change: I don't know if you want to add anything to that? No thanks Marc, and good morning Kevin. So absolutely, I think what Marc said is absolutely bang on there. It's really based on continuing strong execution, right, and the team has planned and securing growth for those more transformative backlogs. An example is that $1.7 billion subcontract we awarded Q2.
The defense pipeline is still strong at $72.2 billion.
Speaker Change: We'll see the gradual increase over time in the next second half here.
Speaker Change: Q2 probably very similar to, sorry, Q3 probably similar to Q2.
Speaker Change: with some improvement and then a higher improvement on the fourth quarter.
Speaker Change: Okay, that's helpful. And then just my second one here, you know, you're holding the Margin Guide for Civil, you know, I'm sure SimCom helps here in the back after your fiscal year, but you're also cloud- Operator, you still there?
Can you hear me?
Speaker Change: Yes, the operator is here and I can hear Mr. Chang.
Speaker Change: I believe he's done with his question. Can we move on to the next question?
Oh
Speaker Change: The next question is from Sheila Kayelu with Jeffreys. Please go ahead.
Speaker Change: Thank you very much and congratulations Marc on what an accomplishment over the last two decades or so. I'm going to steal the last question so maybe let's if we could talk about the civil inflection that's underwritten for the second half.
Speaker Change: How do we think about that? What's driving some of that, you know, SimCom, flight operations, software profitability and cost out? Maybe if you could comment on some of the drivers into the second half.
Speaker Change: And then my follow-up would be on just the GTF grounding, how that has shifted over the last three months.
Thanks, Sheila, and again, thanks for your comments as well.
Speaker Change: Look, when we look at things, let's think about all the factors there are.
Sure, thanks. You're a fact.
seeing us here.
I think in commercial aviations, you highlighted the...
Speaker Change: Issues that are affecting us and still affecting us, the lower deliveries at a Boeing, exacerbated by the strike. Of course, that's resolved now. The impacts from all the grounded aircraft.
Speaker Change: at the Airbus aircraft because of the GTF. And that's come off the peak itself. You know, rear-cooling off this last summer really was a very hot pilot hiring trend in the United States. So look, as we look at the period ahead and what underlies our forecast, is that
As I mentioned, the impact of the GTF on Airbus
Speaker Change: grounding is improving. PICO AOGs are behind us. We see some modest, I'd say modest, but definitely uptick towards more normal pilot hiring by US airlines.
Speaker Change: We do expect an improvement at some point in Boeing deliveries, although I would say like, you know, anybody else, that remains probably our biggest question mark.
in Q3, Q4.
Speaker Change: So, you know, there's clearly some pluses and minuses in the outlook.
Speaker Change: The fact that coming back to airlines as well, I think we tend to look at the U.S. a lot, but I can tell you...
from the
Speaker Change: to be much higher in the second half and historically Q4 is our biggest It's our biggest quarter and and looks like it's going to be the same this quarter
Speaker Change: We are going to get contribution from SimCom that comes with the acquisition and we're also going to see better contribution by flight services. So you put all that together and these are kind of higher margin components, you put all those together.
Speaker Change: gives us the confidence that whatever outlook we give you, 22-23%, we're going to be able to hold it.
Speaker Change: The next question is from Saadi Shamoon with BMO Capital Markets. Please go ahead.
Yeah, good morning and congratulations, Marc, on your retirement.
Speaker Change: Is the full flight simulator delivery target still in the 50 range this year, or has that changed? And I wanted to ask also, like...
Speaker Change: If you can give us some perspective on kind of the supply chain issues in the aviation like if the aircraft deliveries
Speaker Change: from Boeing in particular, but generally Airbus and Boeing kind of struggle to
Speaker Change: get off the ground in the next 6 to 12 months because of these supply chain issues. Can we...
potentially start seeing some of these issues.
Speaker Change: that you're experiencing in the U.S. now spread over to other regions? Is there a potential risk for some delivery deferrals? I'm just trying to kind of understand from your conversation with customers.
What does this look like? Are there...
kind of started to get nervous about
you know.
aircraft referrals, driving...
Speaker Change: Just looking over the next 2 to 4 quarters, if you can provide some perspective on that, that would be great.
Speaker Change: Okay, thanks again, Patty, for your comments, as well as myself, and it's been a pleasure working with you throughout the years, and I look forward to the next two or three quarters to do that. Although, I think, going back to some of your questions, starting with the first one, yes, we're still aiming for over 50 deliveries this year. That hasn't changed.
Speaker Change: that we don't expect that to change either. Look, I think the factors you talked about, we're obviously not immune to what may happen in the market, clearly, in terms of delivery of aircraft. But when I look at the situation I've talked about,
Speaker Change: with the groundings. We're off the peak because of issues with the engines.
The Boeing is a great company, that's going to happen.
Speaker Change: And, you know, we've taken, I think, a pretty sanguine view of how...
Speaker Change: that all would play out and in the meantime what you see is on our side is managing our costs, managing our ethics.
Speaker Change: to say in lockstep with them at. With regard to sentiment out there, look, again, we're a global company. So when I look at the situation and utilization in Asia-Pacific, very high. And that's still with a situation that...
Speaker Change: specifically if I look at, you know, geographies like China, there really hasn't been a recovery in international travel.
Very big on domestic, but not international.
effort.
There's still a play there.
Speaker Change: But again, I don't know, maybe Nick, you want to provide more color based on what you see out there? Well, yeah, I mean, I think, you know, the opportunities for us right now are, you know, especially in full-flight simulators, Marc said, the deliveries, we don't see any softness. We don't see, like, we don't see people backing off from what they've ordered.
Speaker Change: I think in terms of the numbers, we'll see by the end of the year, but we are winning business from places like Asia right now, these days, more than we did in the last couple of years where they were kind of coming out of it.
Speaker Change: China, Marc mentioned that we did cease the movement out of China and I think the
overall.
Speaker Change: I don't, I mean, at least for now, you know, we don't see any change now, you know, the
Speaker Change: You know, the deliveries that you mentioned, I mean, I mean, they're low, but they're not that, you know, they're actually not that different than last year. So.
Speaker Change: to demand, and so we're capturing it wherever it is geographically.
Speaker Change: Maybe just to add a last point, Batty, from our staff.
These factors are clearly temporary.
That's a thing in my remarks.
Speaker Change: There's a backlog of 15,000 airplanes that Airbus and Boeing have to deliver.
over the next year.
Speaker Change: That's a lot of pilots in the world, across the world, and compound that with pilot hiring. Can you give us some things we want to think about where that...
Speaker Change: Growth is going to come, I'm just, just look at one factor. You think about India. We do a lot of business in India we're very strong there and there's about, in terms of just wide body aircraft.
Speaker Change: You know, for a population of what is about 1.3 billion people, there's about 60 wide-body aircraft in the air.
In Singapore alone, there's about, I think, about 250.
Speaker Change: Think about that. I mean, clearly the ratios won't be perfect, but that's just telling you how much growth is remaining in just one country, of course, one that doesn't have a lot of competing infrastructure.
Speaker Change: that basically competes with airlines. So that gives you an idea where all those airplanes are gonna go to, and they've been spoken for, they're going to be delivered. So make no mistake, this is a temporary situation we see here, we're quite convinced of that.
Appreciate it. Thank you.
Speaker Change: The next question is from James McGarigle with RBC Capital Markets. Please go ahead.
Hey, good morning and congrats on a really good quarter.
Speaker Change: I just had a question on the book the bill came in a above one this quarter But you know below what we've been seeing from your team and you know that the past few quarters
Speaker Change: and then we saw, you know, the CapEx guy come down.
Speaker Change: Anything to read into there and anything change about how you're looking at the longer-term growth opportunity in civil or just more of a you know the impact of near-term headwinds from OEM delays and pilot high hiring in the Americas?
Speaker Change: Actually, you know, the way we look at it, the civil book-to-bill ratio is still...
Speaker Change: you know comfortably above one the strong growth and of course you got to look at it on that growth is on top on top of you know quite a rise in revenue so that that tells you that market's still pretty hot but
Speaker Change: Nick, do you want to comment on it? Yeah, I don't think there's anything to read into it. It's about one. As Marc said, revenue is $640 million, so it's a high number compared to last year.
Speaker Change: which is about 68 million lower, so I think, you know, the, you know, we get the, we get the opportunities booked a bill above one, so we should take that as growth.
Speaker Change: Maybe on the CAPEX side, effectively, we have changed the guidance to specify that we expect CAPEX and FY25 to be slightly below the previous guided range of $50M to $100M more than FY24. FY24's number was $230M, but again, this is an example of our agility.
Speaker Change: in our investment process and, you know, to move lockstep with the market as we don't deploy simulators on speculation. You know, our highest returns we get are from organic investments.
Speaker Change: The track record is delivering 20-30% range incremental pre-tax ROCE on organic growth. So we continue to monitor the market situation but we never want to be ahead of our customers so discipline is key.
Speaker Change: Appreciate the color and then on the defense margin guide, you know, it applies, you know, continuing improvement as you mentioned in Q3.
and then into Q4.
Speaker Change: So, can you just, you know, provide some more color on what's driving that? Is there seasonality in the defense business at all?
Speaker Change: I'm just trying to get a better understanding of the margin exit rate and whether or not that represents a good run rate to use for fiscal 2026. I'll turn the line over after that. Thank you.
Speaker Change: Well, I mean, we're not going to get into, you know, fiscal 26 right at this point, except to say that it's got to be right in line in the guidance that we've previously given, that we were definitely reiterating, feel very confident about the guidance we gave in regards to margins and growth.
Speaker Change: for defense this year, and, I mean, where that's coming from, where that's going maybe next month? Well, it's coming from both sides, as I think we described at the beginning of the year. The cost savings are definitely, you know, running through the ...
Speaker Change: running through the P&L now and obviously we expect that to continue to some of these cost savings will
only be realized by the end of the year.
Speaker Change: So it's good so far. And also, of course, the execution and the order.
Speaker Change: There is new business, like FACT for example, which is only getting started now, and this new business is going to drive
Speaker Change: growth in the, well, not just the backlog, but obviously on the P&L. So, in fact, it's a big program. It's going to, as an example, we've announced a number of other programs recently in Canada in particular, and we've also announced.
Speaker Change: In terms of, you know, it's just, it's just, you know, better execution, I think, is the way you should read it.
Speaker Change: and that, you know, comes with cost savings but also comes with winning, you know, good orders.
Speaker Change: I would say, you know, we've given you this guidance, we have the visibility to get us there, and you should take it to the bank.
Speaker Change: The next question is from Matthew Lee with Canaccord. Please go ahead.
Matthew Lee: Hey, morning guys. Thanks for taking my questions and I'll echo the sentiment, Marc.
Matthew Lee: On the SimCom stake acquisition, you kind of mentioned in the past that consolidating JV partners is an important avenue of organic investment for you. Do you see other opportunities in your stable of partners to make further transactions of that nature in the medium term, or is this one a bit more attractive right now just given how well Bizjet is performing?
Speaker Change: Well, you know, look, I'll reiterate what I've said about this transaction, and I'm very excited about it. I was very excited, but...
Speaker Change: with our partner in that business in the first place, but you know
Speaker Change: To me, when you look at things like this, acquisitions happen when they happen, right?
Speaker Change: And in this one, it's kind of, I mean, not really an acquisition, it's an organic investment because we're just basically consolidating the remaining, a large part of the remaining ownership of that business.
Speaker Change: So, look, if there's more, I've always said, if there's more opportunity to consolidate our joint ventures, I mean, those are the kinds of transactions, if you like, that are most attractive because we know the business, obviously, and we're in a very strong position to be able to execute.
Speaker Change: This particular one is a really, really great example of, you know, basically getting a partner that is an extremely strong player in the fractional and charter market. It really doesn't get any better than the most profitable.
part of our civil business to continue to develop.
Speaker Change: Yeah, and then maybe if I can add to that effectively, I think this is, you know, considering...
Speaker Change: normal course capital deployment evaluation, right, like we do when we consider deployments to the network, investments in TVs, consolidation opportunities for the network.
Speaker Change: So, again, very excited about the opportunity with Simphom. It is our highest margin subsegment, and it does secure upside with a key customer, right? It's an extension of 15 years' extensivity to the period of flex check.
Speaker Change: So really excited. After the first year, I think we can expect maybe low single-digit EPS accretion and mid-digit EBITDA and free cash flow accretion.
Matt starts now.
Matthew Lee: Okay, that's helpful. And then maybe one on the cost side. The restructuring program seems to take about $20 million off the cost base and that's great. Are there any other low-hanging fruit on the OPEX side where costs come out or maybe areas that can perhaps be a little bit more efficient?
Speaker Change: So again, that's our disciplined approach to managing capital and costs. I think we are looking at various opportunities. One of the examples is managing CapEx.
Speaker Change: where we reduce the guidance this year to be in lockstep with the market. We'll do that as well with all the other types of investment opportunities in research and development and our overall SG&A. You see SG&A actually being a little bit lower this quarter compared to last year and in previous quarters, and that is again a reflection of our cost savings.
Speaker Change: Kicking in always looking for efficiencies. It's a part of our disciplined approach in how we spend our money
Speaker Change: The next question is from Cameron Dirksen with National Bank Financial. Please go ahead.
Cameron Dirksen: Thank you, good morning, and let me echo congratulations to Marc on your retirement. I guess a question around the new U.S. incoming administration. I'm just wondering if you can maybe discuss...
Cameron Dirksen: Some of the risks that you might see and potentially even opportunities with the change in government in the U.S. I guess one of the things that is, you know, top of mind with a lot of investors is around the impact from tariffs and obviously aerospace products has historically been exempt from most of those tariffs. But now we've got an incoming president talking about a 10% blanket tariff on anything important to the U.S. So I'm just wondering about how you see that risk for CAE and, you know, potentially if there's other risks or opportunities that you see.
Speaker Change: Well, you know, I'm sure you'll pardon me if I don't speculate on the situation, but obviously we're going to monitor it. We're certainly not forecasting, you know, any kind of significant impact for CE.
Speaker Change: I remember we have a very strong presence in the United States, you know, just to give you an idea of that of a statistic I've talked about in the past, if you look at just pilot training, military pilot training, we train all 43,000.
Speaker Change: air crew in the US military at some point of career. All branches. Army, Air Force, Marines, Navy. So, and 50% of our employees are there. It's our largest market.
Speaker Change: In terms of, you know, the overall markets, I think you've seen the reaction to the market. I think the overall market, I think it's good. In some segments that we have, like in business aircraft, I think it's a positive, definitely.
Speaker Change: So look, I think we're going to continue to monitor the situation, but I don't really see any changes near or longer term at the moment. Of course, we'll keep monitoring the situation.
Speaker Change: Okay, no, that's fair enough. And just very quickly, just on the defense side, just wanted to ask if you'd had any, I guess, incremental success in accelerating the retirement of some of the legacy contracts. I know that was something that was a goal to maybe get these completed earlier than what's currently scheduled.
Speaker Change: Well, look, I'm glad you asked the question, and I'm very...
Speaker Change: Happy about the progress that we're making there. You know, we've retired one group
Speaker Change: Well, there's another one that's a big one that we're retiring literally any day now literally and we're on pace You know, well exactly we want to be in fact, maybe slightly ahead and want to add more details Yeah, I was gonna say overall I think you know, we're we're on track to where we want to be with these programs I think we're you know, you know, we're we're we're over the hump in terms of trying to
trying to ring-fence them to a scope that is manageable.
Speaker Change: You know, obviously, if there's any change, we'll let everybody know, but right now, you know, the guidance we've given on when these programs are going to retire.
Speaker Change: are good, and the budgets that we have to retire them are also good. So I think we're just going to run through. Obviously, if we can retire them early, we will.
Speaker Change: One expected next quarter and one in Q4. Aiming to outperform on that if we can retire more risks, but it's not planned as tracked.
Speaker Change: The next question is from Tim James with TD Cohen. Please go ahead.
Tim James: My first question, just in terms of growth in the network, SEU growth, would it be correct to assume that it's really focused in the kind of short to medium term on business platforms, just given, you know, the dynamics in the commercial market currently?
Thank you.
Speaker Change: Maybe turn it over to Nathan. Yeah, no, actually, it's both. I mean, we are, we have...
Speaker Change: You have a demand to to deploy capacity on the commercial side and on the business on the business side as well You know when you take the CapEx number that we've given you guidance The number of simulators that we're deploying is roughly the same as what you would have seen last year
Speaker Change: And we have customers, you know, we have customers, you know, that continue to grow and we have new customers. And so between the two, we are still deploying SIMs on the commercial side.
Speaker Change: Okay, thank you. And my follow-up question, have the challenges facing commercial training just really been creating a volume impact, a throughput impact, or has there been a pricing impact there as well in that business?
Speaker Change: No, it's just volume. Most of the customers that we have, in terms of pricing, these things are set in the contract. So it's really just some lower volume in some places that drives the pressure.
www.mustwatch.eu www.mustwatch.eu
Okay, great. Thank you very much.
Speaker Change: The next question is from Ron Epstein with Bank of America. Please go ahead.
Speaker Change: Hey, good morning. This is Jordan Reines from Tehran. Thanks for taking the question. For the back half of the year for the civil margins, how much of that should we be expecting to come through from just software sales similar to 4Q of last year?
Speaker Change: You're hard to commend, but I think we got the question. Yeah, I think my question is related to the percentage of software sales. So, again, we've completed the integration of a software business, and that's important on a go-forward basis. We won't be expecting any additional costs there. We are still converting and going through the process to converting those contracts onto our platforms. It's a small percentage going forward in the second half.
Speaker Change: The next question is from Noah Popenak with Goldman Sachs. Please go ahead.
Hey, good morning, everyone.
I know.
Speaker Change: And Marc, I echo the sentiments of others on the call and thanks for the time that you spent with us over the years.
Thank you.
Speaker Change: you stay in this low to mid single digit organic revenue growth range, or could we see over the medium term a pretty significant acceleration in your growth rate that you'd often see with a doubling of a backlog?
Speaker Change: Too early to provide, you know, longer-term growth that we've given, and I wouldn't want to change it at this point. Except, the only thing I'll say, it really depends a lot on mix.
backlog is us delivering training
Speaker Change: for the Canadian Air Force to train their PIAs and Canadian, you know, not just PIAs, but electronic warfare officers, that kind of thing, complete outsourcing.
of that segment.
Speaker Change: for the next 25 years. And we already do some of that today, by the way. So some of that is income replacement, but it's just a part of it. And I would say a relatively small part of it because the contract itself.
Speaker Change: It's much larger, so instead of doing it's just a part of the train today.
Speaker Change: We do like the complete part training and the scope has expanded. So that's the training part. But again, to your question, over the next, you know, three to four years on that contract alone,
We're going to, the government's recapitalizing.
Speaker Change: all of its assets, which means we will be building a lot of simulators and similar training devices.
in our factories.
Speaker Change: And that has a different profitability mix. We're going to be building new hangers.
Speaker Change: Runways all kinds of things of bases which has different marks of large football. So again, I've said a lot of here but
Speaker Change: Tour Early provides different guidance, but it does give us the confidence in a steady growth of this business.
Speaker Change: No, that's it. The way to look at that contract is the first five years is product delivery and then the next
Speaker Change: 20 years of service delivery, unless the government, you know, does more. So I think Marc said it well. It's that that's going to ramp up. It's going to ramp up the revenue on that contract over the next few years.
Speaker Change: Yeah, and I think, look, we've concentrated a lot on that contract, but you know, there's...
Speaker Change: I mean just we don't spell them out in so much detail and I'd like just in the in the backlog this quarter we have you know Some CFE F-16 contracts in the Asia-Pacific MH-60 helicopter training contract in India. We're starting our Hades program for the US Army Global Express
Speaker Change: So, look, I'm not going to over-promise anything and then, you know, we know better in our defense. Okay. But, you know, when Nick said thank you to the bank, I like him saying that.
Speaker Change: Okay and just on the civil margin for the rest of the year is there any finer point you'd be willing to or could put on the split between the third and fourth quarter just if 3Q looks like last year then 4Q would need to
Speaker Change: be around 30%. Is the split similar to last year or is it more like fiscal 23 when 3Q, 4Q were fairly even?
Speaker Change: Yeah, usually our Q4 is strongest. Our second half is always stronger than the first. Absolutely, but this year Q4 is stronger with more deliveries coming in in that back half.
cost savings.
Speaker Change: Cost savings kicking in as the year progresses. We're expecting the 20 million annual savings at the end of next year.
Speaker Change: and training performance as well. We see the bookings are also variability in every quarter.
Speaker Change: But we expect the Q4 to be stronger, a bit higher than 20% in Q3, and then the rest in Q4 higher.
Good morning and congratulations, Marc, on the pending retirement.
Speaker Change: Maybe just a question on the CEO search. The press release states that you will be supporting the process, Marc. Can you maybe provide some details on what type of characteristics, attributes, experience you're looking for in a potential candidate? And also maybe clarify if this process will be combined with the ongoing CFO search process or on a separate basis?
Speaker Change: Well, just on that one, it's two separate issues all together, and for that one concerning internal and external candidates as well, as far as I'm concerned, Vino is doing a fantastic job here in the interim. With regards to COs, yes, I have participated with the board on that.
Speaker Change: and the board is to make sure that we select the right person, man or woman, that's going to just propel this great company to the next level. And I don't want to get into the characteristics of what kind of person that is, the net is cast wide across the globe.
Speaker Change: and we will get the best person and I think it's truly to provide any more guidance for relatives that except that the process is well in the way and I've been part of quite a few meetings on that subject.
Appreciate it, Marc.
Speaker Change: Thank you, operator. I think that's all the time we have for the call. We landed just shy of 9 a.m. I want to thank all participants for joining us this morning and remind you that a transcript of the call will shortly be available on CA's website. Thank you and have a good day.
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