Q3 2025 CAE Inc Earnings Call
Speaker Change: Sonya Bern Written by Anthony Pompliano Dream with Mitchell Silver Production Manager Matthewún Golden Production Operations prohibited Written and Directed by Michael Zann Director of Photography Alistair Sloth Decorating
Speaker Change: Before we begin I'm sure you've all seen the news release, we issued yesterday afternoon, alongside our Q3 results. It announced the appointment of four new directors to Cae's Board Caitlin Rubenesque U S New chair.
Speaker Change: The other appointees are Peter Lee, Catherine a Lehman and Luisa.
Speaker Change: These changes come after consultations with our stakeholders focusing on the boards ongoing review of its composition and a transition towards a renewed board leadership.
Speaker Change: Before appointments are being made in conjunction with the retirement of four directors.
Speaker Change: Alan and Mcguigan, who has served as chair of the board since 2022 and as a director since 2015.
Speaker Change: Margaret as Bilson, Oswald E and David G Perkins.
We extend our gratitude for their exceptional service valuable contributions during their tenure and we look forward to welcoming our new board members to C. H E.
Mark: Let me now turn the call over to Mark.
Mark: Thank you Andrew and good morning to everyone joining us on the call.
Speaker Change: Let me first say that Ah I, certainly echo Andrew's comments and in particular I want to express my heartfelt gratitude to Allen.
Mark: We're steadfast leadership and commitment.
Speaker Change: Through our shared vision for CAE.
Speaker Change: I'm also grateful to the other departing board members Francois Peg and David for their.
Speaker Change: Their continued support and advice food through the years.
Speaker Change: As we embark on the next chapter.
Speaker Change: Looking forward to working with our new board members in the coming months and I'm confident that together well.
Speaker Change: We will continue to build on our success.
Speaker Change: Before I move to our quarterly results I also want to take a moment to share how proud I am that.
Speaker Change: She has been recognized as one of Canada's top 100 employers for the third consecutive year.
Speaker Change: And has earned a spot on Forbes Canada's best employers list for 2025.
These honors reflect the collaborative innovative and empowering culture that we see.
Speaker Change: Made possible by the dedication of our 13000 employees.
Speaker Change: This strong foundation of talent and commitment.
Speaker Change: He needs to drive our success as reflected in our outstanding third quarter performance.
Speaker Change: During this quarter, we generated a record $410 million in free cash flow.
Speaker Change: Further securing seize future with $2 $2 billion of new orders, culminating in a record adjusted backlog of.
$23 billion.
Speaker Change: In civil we finalized the purchase of an increased stake in our Sim called joint venture.
Speaker Change: It extended our exclusive long term training agreement with flex yet and its affiliates.
Speaker Change: Initiatives that generated more than $500 million in additional order intake and backlog in a highly desirable business aviation training segment.
Speaker Change: In total for civil.
Speaker Change: We booked $1 $5 billion in orders or two times books to sales ratio.
Speaker Change: On revenue, that's 21% higher than Q3 of last year.
Speaker Change: We ended the quarter with a record $8 $8 billion total civil adjusted backlog.
Speaker Change: Which is up 44% over a year year over year.
Speaker Change: In products, we received orders for 15 full flight simulators, bringing the total to 42 as of the end of the third quarter.
Speaker Change: We delivered 20 full flight simulators this quarter no.
Speaker Change: <unk> increased smart from our first half he lives and from 13 in the same quarter last year.
Combined commercial and business Aviation training center utilization reached 76% consistent with last year's performance, although some softness persisted longer than we expected in commercial aviation training in the Americas.
Speaker Change: Pilot hiring remain modest in that region and some of our airline customers deferred their training bookings due to ongoing short term aircrafts supply chain challenges.
Speaker Change: Partly offsetting this headwind was the continued positive momentum in business aviation training, driven by higher utilization and profitability as we ramped up our newly deployed simulators and training centers.
Speaker Change: We also continued to make excellent progress in the market for our flight services software solutions.
Speaker Change: We signed orders for more than $60 million with major airlines in the Americas and Asia.
Speaker Change: And we just announced Turkish airlines as another customer who will be adopting six next generation unified dashboard and crew management solutions.
Speaker Change: The market is responding very positively to this see innovation, which provides airline operations control centers.
Speaker Change: Enhance situational awareness and disruption management capabilities.
Speaker Change: We're also probably inaugurated our first air traffic services training center in collaboration with NAV, Canada.
Speaker Change: Located in our main campus in Montreal. This newly opened training center extends six core mission of making the world safer.
As a pilot I can personally attest to the vital role that clear effective communication between flight crews and air traffic control personnel plays and ensuring the safety of every flight.
Speaker Change: By leveraging <unk> expertise and competency based train design advance structural delivery and data driven technologies, we're helping to prepare the next generation of aircraft professionals.
Speaker Change: This critical responsibility.
Speaker Change: In Defence performance tracking ahead of our expectations as we made more progress towards becoming a low double digit margin business.
Speaker Change: This was driven by strong execution risk reduction significant backlog growth and improving backlog quality.
Speaker Change: During the quarter, we made excellent strides in advancing growth and expanding margins.
Speaker Change: Including successfully completing another legacy contract from our backlog our second this year.
Speaker Change: Orders included a contract.
Speaker Change: Canadian future aircrew training program.
Speaker Change: Option awards to extend our support for U S Army fixed wing training and the KC 41, 35 program will United States Air Force as well as the ongoing modifications at updates or F 16 fighter training devices.
Speaker Change: These agreements reinforce our commitment to long term success of our defense customers.
Speaker Change: For the quarter.
Speaker Change: We recorded a total of $707 million in defence orders achieve.
Speaker Change: We achieved a book to sales ratio of one five times contributing to a record $11 $5 billion and defense adjusted backlog up 104% year over year.
Speaker Change: Over the last 12 months the defence book to sales ratio stood at an impressive $2 one nine times.
Dino: With that I'll turn the call over to Dino who will provide additional details about our financial performance.
Dino: Thank you Mark and good morning, everyone.
Dino: Consolidated revenues of one point to $2 billion was 12% higher compared to the third quarter last year. While adjusted segment operating income was 190, <unk> zero million dollars up 31% compared to 441, $45 1 million in the last quarter.
Dino: Our quarterly adjusted EPS was <unk> 29 cents compared to 24 cents in the third quarter last year.
Dino: Net finance expense this quarter amounted to $56 $6 million, which is up from $52 $9 million in the preceding quarter.
Dino: And $52 4 million in the quarter last year.
Dino: The higher level of finance expense is mainly the result of higher lease liabilities in support of our training network expansions and additional borrowings to finance the Sim card transactions this quarter.
Dino: This was partially offset by lower finance expense of long term debt due to a decreased level of borrowings during the period aligned with our ongoing deleveraging objectives.
Dino: <unk> considered.
Dino: And I would expect the net finance expense for the year to be approximately $10 million higher than last year.
Dino: Income tax expense this quarter was $34 $8 million or an effective tax rate of 17%.
Dino: The adjusted effective income tax rate was 29%, which is the basis of your adjusted EPS.
Dino: We continue to expect our run rate effective income tax rate 25%.
Dino: I'm, especially pleased with our strong cash flow performance this quarter.
Dino: Net cash from operating activities was a record $424 $6 million compared to $228 million in the third quarter fiscal 2024.
Dino: Free cash flow was a record $409 $8 million.
Dino: $290 million third quarter Marsh here.
Dino: The increase was mainly due to a higher contribution of noncash working capital and higher than net income.
Dino: We expect to generate strong free cash flow for the year.
Dino: Conversion of adjusted net income of over $150.
Dino: Which is an increase from our previous conversion target of approximately $100.
Dino: Yeah.
Dino: Capital expenditures totaled $97 $6 million this quarter with approximately 80% invested in coal mainly to add capacity to our global training network to deliver on long term training contracts or backhaul.
Dino: We expect total capex for fiscal 'twenty 'twenty five to be approximately $30 million higher in fiscal 'twenty to 'twenty, four capex $330 million, which is lower than our previous expectations.
Dino: Our net debt position at the end of the quarter was approximately $3 $4 billion for a net debt to adjusted EBITDA of $3 six clients.
Dino: Before the impact of the legacy contracts net debt to adjusted EBIDTA was 3.08 clients.
Dino: We remain focused on further shifting or financial position and we continue to expect to be below three times net debt to adjusted EBITDA.
Dino: Fiscal year.
Dino: Now turning to our segmented performance.
Dino: Civil third quarter revenue grew 21% year over year to $752 $6 million, while adjusted segment operating income was 21% $250 $8 million, resulting in a 20% margin.
Dino: This excludes a net remeasurement gain of $72 6 million under our Sim card transaction.
Dino: Which effectively marked up our previously held equity interest in the joint venture to fair value.
Dino: As Mark highlighted earlier with plenty of FFS deliveries this quarter.
Dino: We saw a notable shift in revenue mix with a higher proportion for products compared to last year.
Dino: Defense revenue remained stable at 478 million shares.
Dino: Adjusted segment operating income increased 88% to $39 $2 million delivering an eight 3% margin.
Dino: Strong execution from the team and lower net R&D expenses.
Dino: [laughter] legacy contracts remain on track costs since schedules well managed as planned we concluded another one over a legacy contracts this quarter.
Dino: And on our and we are on track to finalize a third one at the end of the fiscal year.
Dino: This quarter legacy contracts contributed around 70 basis points margin dilution.
Dino: This impact the adjusted segment operating income margin for defense would have been 9%.
Dino: With that I will ask Marc to discuss the way forward.
Marc: Thanks Dino.
Marc: The investment thesis for <unk> remains as compelling as ever.
Marc: And a record setting $20 billion backlog reinforces my confidence in the company's bright future.
Marc: A common driver across both our civil and defence segments.
Marc: Staying high demand for pilots and pilot training.
Marc: To support industry growth and to replace retiring herself.
Marc: We are in an excellent position and strong markets and these structural factors continues.
Marc: Long term demand for training and operational support.
Marc: Yeah.
Marc: Civil.
Marc: While commercial OEM aircraft supply disruption.
Marc: Recent optimism surrounding production rate recovery and a return to service of aircrafts that they founded by engine issue you just heard it.
Marc: Although some airline customers in the Americas deferred initial training reservations. This quarter. Those same airlines are now actively engaging with us the plan the timing and scale of their pilot hiring ramp up and associated training needs.
Marc: This is my question is when.
Marc: Looking ahead, the demand for air travel ongoing pilot requirements in the delivery of nearly 15000 aircrafts on Boeing and Airbus is combined backlog over the next decade position us as a key player in a long term secular growth story.
Marc: Similarly, the outlook for business Aviation training remains highly positive, especially as we can.
Marc: Hany strengthening our presence in this critical segment.
Marc: Building on our increased investment in him Com flex yet one of the worlds largest fractional jet operators announced last week.
Marc: Gilliam aircraft border and projected fleet expansion to approximately 600 aircraft by 2031.
Marc: This underscores the accelerating shift towards fractional jet ownership.
Marc: It has been growing much faster than the overall market.
Marc: As Blake suggests exclusive training partner he is well positioned to benefit from this finished as well.
Marc: In defense.
Marc: Demand for our training solutions remains robust driven by a global shortage of uniformed personnel, prompting militaries in terms of C support readiness.
We're very well positioned in a strengthening market as the sector enters a prolonged bull cycle were rising budgets across NATO and Allied nations.
Marc: Geopolitical tensions and evolving security threats are driving defense modernization efforts increasingly need for training and simulation solutions that we provide.
Marc: These factors are creating substantial growth opportunity for key as governments and defense forces.
Marc: Innovation innovative solutions to enhance patient readiness and operational effectiveness.
Marc: A Prime example is the strategic partnership we announced yesterday between Chi and the government of Canada.
Marc: Through this partnership <unk> will leverage its deep expertise and work alongside the Royal Canadian airports in designing a co developing the future fighter leading training program or program.
Marc: This initiative will play a critical role in preparing for the transition to Canada next generation fighter Jets.
Marc: During the long term success of the C. F 35 program.
Marc: By integrating cutting edge technology and advanced training methods.
Marc: Two triplet will equip fighter pilot candidates with the skills required to operate highly sophisticated C. At 358 in increasingly complex operational excellence.
Marc: Looking ahead to the remainder of this fiscal year.
Marc: And civil.
Marc: The ramp up of commercial aircraft deliveries is taking longer than expected and this is a key dwyer driver of initial training demand for newly hired pilots.
Marc: With the short term impact that this is having on incremental training demand in the Americas, We now expect.
Marc: Annual Civil adjusted segment operating income growth to be modestly below our previous outlook for approximately 10%.
Marc: Also.
Marc: Since product deliveries are expected to account for a higher proportion of civil revenue then you shouldn't plan.
Marc: We expect the annual civil segment operating income margin to be modestly below our previously expected range of 22% to 23%.
Marc: Looking beyond this period.
Marc: Continuing before she ample room for margin expansion in future years on volume efficiencies and mix.
Marc: [noise] defense.
Marc: With the benefit of our Rebase lining last fiscal year into higher attainment.
Marc: Quality of execution.
Marc: We now expect to achieve high single digit percentage revenue booked a year, which is up from our previous expectation in the low to mid single digit percent of frame.
Marc: We're also expecting the annual defense adjusted segment operating income margin.
Marc: <unk> modestly above the previously indicated range of 67%.
Marc: This puts us solidly on the path to becoming a low double digit margin business.
Marc: Taking our civil and defense almost together we remain on track to meet our previously stated three year EPS target, while achieving strong order intake backlog and free cash flow.
Marc: With that I. Thank you for your attention and we're now ready to answer your question.
Marc: Thanks, Mark operator.
Speaker Change: Open the line questions from financial analysts.
Speaker Change: Okay, well now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad, you will hear a tone acknowledging your request if youre using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then two.
Speaker Change: Our first question is from Conor Gupta from Scotiabank. Please go ahead.
Speaker Change: [noise].
Andy: Hi, This is Andy filling in for Con Ed Good morning, everyone.
Speaker Change: My first question was on the <unk>.
Speaker Change: Yeah. My first question is on the Capex side gets reduction was that more a function of delays in demand in certain areas or just more prudent.
Speaker Change: I think it's prudent that we always align.
Speaker Change: We our capacity with demand and so we always need to watch that but that's what you see reflected here.
Speaker Change: And if I can add to that I think we.
Speaker Change: Hi, I just wanted to add effectively that this this is lower than previous market expectations. So.
Speaker Change: Again. The continued example, a disciplined approach to capital allocation and cash management.
Speaker Change: This along with a $410 million of free cash flow I think is an evidence of our disciplined approach to capital allocation and our focus on driving free cash flow.
Speaker Change: Okay. Thank you that's helpful. And then maybe just one more question how is your training utilization trending in the Americas versus Europe and Asia.
Speaker Change: Well look I think if.
Speaker Change: Look let me start with the maybe the flight activity, which leads to that.
Speaker Change: But maybe we look at year over year figures.
Speaker Change: I think what I think what drives everything is the commercial flight activity of Wrightsville airline passenger traffic. So a numeric because what we've seen is about 7% growth over year over year and that's driving.
Speaker Change: Actually perversely, what you're seeing in Americas is as we've talked about we've seen the utilization of our training centers was down slightly and that's driven by the lower pilot hiring in the United States.
Speaker Change: As I look at in the European at least passenger traffic was up 5% and in that case, we're seeing corresponding utilization increase.
Speaker Change: The increase in India were up about 7% anything you'd add.
Speaker Change: So I think the the U S utilization is down year over year.
Speaker Change: And and it's really just a function of the hiring demand that that is supposed to be happening right now.
Speaker Change: Okay. Thanks, guys. Appreciate the time, that's all my question.
Speaker Change: Yeah.
Speaker Change: The next question is from James Mccarrick, calling from RBC capital markets. Please go ahead.
James Mccarrick: Hey, good morning, guys, congrats on a good quarter or not thanks for having me on.
Speaker Change: Thank you art.
Speaker Change: On the impact from a potential tariffs can you just I'll just discuss a little bit how you're positioned to react in the event you know.
Speaker Change: But tariffs that are sustained and you know have you seen any shift in your customers' decision, making often tariffs it was laying orders.
Speaker Change: Looking for other options I understand it's only been a few weeks, but any color you can provide on what would be.
Speaker Change: Very helpful. Thanks.
Speaker Change: Sure. Thanks for the question look it's obviously a situation that we wait like everybody else hope, which as you know constructive then.
Speaker Change: Lateral conclusion through a negotiation, but look.
Speaker Change: And I think as we said in the past we don't we don't we certainly don't expect to see a material impact.
Speaker Change: The short term certainly sort of next few months a year.
Speaker Change: No problem on this on our business as a whole, but it's definitely something that we're monitoring closely and.
Speaker Change: If you know any kind of terrorist become more lasting beyond that beyond.
Speaker Change: Getting toward in a year or two.
Speaker Change: Obviously, we would adapt and then we have the capacity to adapt that mean I mean bear in mind. If you look if you think about our business. It's a business that's changed a lot over the last 20 years and more than two thirds of our revenue is generated from services.
Speaker Change: And and we deliver that in country. So so that's not an issue.
Speaker Change: And so the main product that we sell into the United States is the full flight simulator.
Speaker Change: There's a lot of there's there's already a big proportion of that which is U S or EU origin.
Speaker Change: That's one factor, but again I think there's there's a lot of ways for us to mitigate things.
Speaker Change: And if things again should last.
Speaker Change: Shall I say next few months to a year.
Speaker Change: And again, if I look at our upcoming Conversely.
Speaker Change: What we're seeing this year.
Speaker Change: We're particularly not affected because with the lower pilot activity at the hiring activity that we've seen this year on the back of OEM delays.
Speaker Change: Actually had relatively few sales to our U S customers this year.
Speaker Change: So we've only got a few deliveries going there this year, although civilly or sales themselves remain strong they're just coming in from other parts of the world.
Speaker Change: Hey, Thanks for the color and then on the just the.
Speaker Change: Upon transalta.
Speaker Change: The margins are obviously that came in really strong in the quarter guidance you know it maybe implies a little bit of a step down next quarter.
Speaker Change: So anything to call out there in terms of one time items in Q3, you know what was the seasonality that might help the results in the quarter just trying to get it you know see how things might evolve.
Speaker Change: A little bit longer term.
Speaker Change: And then Nick you know you've been looking at this business for a few quarters now the team highlighted in the release margins are expected to continue to expand so can you just talk about your level of confidence in that and or anything in particular that you see as an opportunity you know with the fiscal 2026 and after that I can turn the line over.
Okay. Good so a pac team says, okay I'll kick it off turn over to deal and then finish off with me I look I think what you're referring to here is we're feeling very good about the direction of the business certainly the team in place of which Nick is leaving but very very good job and the momentum at the front end and you just look at the order intake.
Speaker Change: I think it's nothing short of outstanding and in the geopolitical environment.
Speaker Change: For unfortunate reasons.
Speaker Change: It's truly demand for products and services.
Speaker Change: That you know fees are two of them. So the team is executing extremely well. There's this there's nothing really extraordinary.
Speaker Change: But needless to say it really comes down to execution strong performance all round by the team at the same time, there's risk reduction risk reduction. It is ramp up we're taking it very very disciplined approach and when we look at the fourth quarter.
Speaker Change: I think you always got to remember that.
Speaker Change: As always.
Speaker Change: Shall we say a lumpy business quarter to quarter RASM potential demand.
Speaker Change: Execute contracts.
Speaker Change: At any given time, you'll generate plus or more.
Speaker Change: Revenue in a single quarter, so as we've talked about.
Speaker Change: We are raising the outlook.
Speaker Change: And I think we're still being prudent about defense business as a whole, but yeah. We're very remain very confident so maybe just turnover your deal. Thank you Mark and I would echo that.
Speaker Change: I'm really really pleased with eight 3% that's why margin performance this quarter, an increase year over year quarter over quarter.
Speaker Change: Again, you're right I think you see a lot of.
Speaker Change: It's been a direct result from the process changes and teams that really changes the amazing team showing through in the performance and execution.
Speaker Change: We also closed off another legacy contract and we're expecting that they're going to contract or.
Speaker Change: By the end of next year.
Speaker Change: So feel good about that as well there was a little bit of help.
Speaker Change: Here are the unusual R&D tax credits in the quarter nothing overly significant contributor maybe a half a percentage point to the margin.
Speaker Change: And that's just seasonal timing and senior sometimes in Q3, but overall really strong performance of emerging and really been work done by the team.
Speaker Change: Yeah, just just echo the comments already in terms of performance I think the teams and.
Speaker Change: Certainly we have a different a different attitude towards are executing.
Speaker Change: Executing on the programs.
Speaker Change: Part of the plan.
Speaker Change: Think also the mixing the mixes is is better. So you know legacy contracts low margin contracts I mean, I mean, theres always some of that but but the pipeline also because you would have seen the new order intake and the performance on new orders this year for defense, it's been quite.
Speaker Change: Strong so you know that.
Speaker Change: That's also going to help us as we look out in the future. So I you know I think we're I certainly I'm.
Speaker Change: Pretty confident that we can.
Speaker Change: And maintained.
Speaker Change: Or exceed this level of performance.
Speaker Change: Thank you very much.
Speaker Change: Okay.
Speaker Change: The next question is from Faddish immune from BMO capital markets. Please go ahead.
Speaker Change: Yes, good morning.
Speaker Change: Mark I was wondering if you can kind of upward some perspective.
Speaker Change: On the board changes of water now.
Speaker Change: Or are there any specific kind of governance valuable items at the board are focused on.
Speaker Change: To the extent that you can share with us even from a high level kind of what what what.
Speaker Change: What what does this change kind of mean for.
Speaker Change: And my my second question I apologize I missed it.
Speaker Change: The beginning of the call a little bit.
Speaker Change: We had another call going on but.
Speaker Change: The puts and takes in terms of the organic growth in the civil aviation market going forward.
Speaker Change: I'm guessing the west market.
Speaker Change: It's a bit of a drag right now, but how should we think about the relationship and that market recovering to the delivery of the bowling starting to ramp up is that a lag effect between the two that we should know about.
Speaker Change: And then if you can offer kind of them from.
Speaker Change: Maybe even high level perspective, what what does the organic growth look like when you put all things together between business Aviation then what youre seeing on the commercial aviation side.
Speaker Change: Well, maybe I'll just start with that last question a.
Speaker Change: Not to the effect the first one but just excuse me got my head around that one look I think silver.
Speaker Change: Notwithstanding the softness that we've seen in the quarter again are in the U S. As you said.
Speaker Change: It is quite right.
Speaker Change: Civil had excellent results this quarter and it reflects the diversification in our civil business in itself and you highlighted a lot of the a lot of the components there.
Speaker Change: Look in this quarter, what we saw as is.
Speaker Change: Okay.
Speaker Change: <unk> of what we saw in previous quarters and in this in this year in pilot hiring in the U S.
Speaker Change: Is that basically a fraction of what it was just last year and actually third quarter was our worst quarter in that regard and that just that's just basically because we saw continuation and perhaps more to that while certainly more than we anticipated I think we're not alone in that and the amount of airplanes that were delivered by Oems.
Speaker Change: The amount of.
Speaker Change: Disruption caused by grounding of aircraft.
Speaker Change: Cross the world that are really in either place that affected customers.
Speaker Change: Airbus aircraft, primarily so for us.
Speaker Change: In the where how that reflects itself in United States is that.
Speaker Change: Well you don't have strong pilot hiring you don't have so you don't have a lot of.
Speaker Change: New aircraft being delivered to airlines do you see the airlines basically essentially they increased pilot hiring substantially over the last couple of years and now basically they have if you like for a short amount of time too many people too many pilots hired.
Speaker Change: For the needs that they have on the aircraft that they are flying so typically when they stopped hiring pilots what happens.
Speaker Change: Is that the.
Speaker Change: The like the effect of the large carriers are taking pilots when they hired to take them from the regionals and the regionals themselves, they're basically hiring new pilots and that creates a.
Speaker Change: A disproportionate amount of training in our training centers for regional aircraft in the United States. So centers like for example, we have a strong center for.
Speaker Change: Regional pilot training in Minneapolis for example.
Speaker Change: And although that's not a very big impact in terms of revenue itself. It kind of has a disproportionate effect.
Speaker Change: In our margins because the training we do on the type of aircraft that the regional fly regional aircrafts.
Speaker Change: As fly our aircraft like C. R. J, I guess eights, which those airplanes have been alone around for a long time and so are our simulators. So they tend to be far down the depreciation curve and therefore, we make a larger amount of profit on it. So that's what you see happening.
Speaker Change: Here and it's the same factor we had before whats changed in this particular quarter is that.
Speaker Change: Because of the sustained situation around Oems, we've seen actually airlines actually canceling or deferring their training slots in the quarter.
Speaker Change: Now as I said in my remarks, you see those same airlines.
Speaker Change: The positive news that we're seeing now you saw Boeing recently announced that they had delivered 40 airplanes in the quarter. So that's resulting obviously isn't that people, saying, okay well we.
Speaker Change: Optimism happening here, so look again as I said.
Speaker Change: What's your deliveries and as they recover I mean U S is the utilization or in our U S training Center I should follow where they should follow rather relatively quickly.
Speaker Change: Behind of course, that's not the only story, we're talking about commercial aircrafts.
Speaker Change: Sales of simulators is still very strong and you see just testimony of the strong order intake.
Speaker Change: You see that certainly Pete what was it at the Airlines, who was the asthma for the future is certainly not as bad as testimony by the book to Bill that we have.
Speaker Change: As well of course business aircraft for business aircraft is is doing extremely well we come we continue to ramp up more recently deployed training centers for example, like our new training center with him combat that with now with wholly owned by US in Orlando or training center in Las Vegas, and we're seeing higher utilized.
Nation and grow.
Speaker Change: And in all of those cases, and and you just look at the order intake.
Speaker Change: We just added $500 million to the order intake in.
Speaker Change: In business aircraft as a result of.
Speaker Change: The.
Speaker Change: Tim combat because acquisition and.
Speaker Change: And associated flagship.
Speaker Change:
Speaker Change: Orders that delivery is going to come out of that in terms of trading slots. So look I think our as I said in my remarks, it's not a question of if there's a question of when and were going to see strong demand.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Sorry go back to your previous question look I think what you're seeing here and I'm not I'm not going to answer for the board, but what did you say it is a function of ongoing board renewal you'll have you'll have my succession at the same time you have a huge you have a new chairman coming in then Alexander the outstanding job, leading a leading this company over the last few years.
Speaker Change: We work very well together and I think.
Speaker Change: There is a very I think smart timing in terms of transition my transition with <unk>.
Speaker Change: Bringing on a very very strong.
Speaker Change: All right that is very exciting determinant Taylor drove an escape, but with his background of air Canada Chairman of IHOP had in the past to be able to be someone that's going to be able to play a very very strong role in terms of certainly hiring my successor, and having a very effective transition.
Speaker Change: With the current board and leading the board into the future. So I think we're all very encouraged by it.
Speaker Change: I appreciate it thank you Mark.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: The next question is from Kevin Chiang from CIBC. Please go ahead.
Speaker Change: Right.
Kevin Chiang: Morning, Thanks for taking my question I apologize if you will.
Kevin Chiang: Some of this in the prepared remarks, but I was also what I'll call earlier.
Kevin Chiang: But just on the I guess somebody announced.
Kevin Chiang: Flexjet order with Embraer is a pretty large order for that I'm just wondering.
Kevin Chiang: How do you see that opportunity for C pulse system called the P. OLED.
Kevin Chiang: I know, it's probably early days, but.
Kevin Chiang: Although new investment.
Kevin Chiang: Acquired to make to support training.
Kevin Chiang: Related to that large large fleet order on the business aviation side.
Kevin Chiang: I'll start it off and then hand it over to Nick is extremely positive for us because again, we're exclusive to flight that we deal with it very very well.
Nick: Because we've been training them for years, what's positive is not only the amount of aircraft that they are buying but they're buying the mix of aircraft, which really basically grows the accessibility and we have a training on the whole suite of Flexjet aircrafts. So.
Nick: Again, I Couldnt I couldnt be more happy that order, but maybe one add yes, I mean the flagship.
Nick: <unk> placed an order for 180, plus graders and <unk> those are those aircrafts that are weaker.
Nick: We currently serve in the in the in the in the training Center I mean, we don't have enough capacity to deal with 183 aircrafts with what we've got right now so yes, there will be.
Nick: Investment in more greater capacity than morphine on capacity, so, but theres no need for anything.
Nick: On that Lake Nona can take those that capacity.
Nick: In terms of space and and deliver the training and you know this is part of the part of the reason why you saw the order intake and you'll also see the.
Nick: The the order intake.
Nick: A function because one of the things we did was.
Nick: So this contract when we originally consummated the JV with a 15 year agreement with five years and so the agreement was reset to 15 years and so this this justifies the investments for the for the next batch of aircraft.
Speaker Change: No that definitely makes sense it seems like a pretty pretty nice tailwind for you.
Nick: Especially a pull system called the transaction.
Speaker Change: Maybe just my second question.
Nick: I generally think of CA.
Nick: Rodney.
Nick: Immunized from kind of a marginal change in U S defense spending will have a broader U S. Budgets, just just given the type of stuff you do just wondering if that's changed or the new administration.
Nick: So you're looking at.
Nick: Our cost cutting maybe in a different way that previous administrations, just wondering if you see anything that risk or anything that.
Nick: That might've been impacted with a good backlog given the given the change in administration.
Nick: I mean, the first thing I'll say to that one is as I've always said is the day that sees forces will be a proxy for the U S defense budget I would be very happy, but that's not the case I think the reality is the what you see is the focus in the United States and all of its allies.
Nick: Canada and no NATO no red is a strike.
Nick: <unk> readiness of course.
Nick: And that is readiness beach training when do you think about what our military does whether or not in just wish conflict there.
Nick: A trend that is all that they do and with increasing readiness what that means is more demand for the types of services and products that when you when you see that as reflected in a very strong order backlog.
Nick: That's that we've already won and the opportunities that we have out there in terms of the bids that we have out there for.
Nick: Basically selection by customers so.
Nick: I am not I am not I mean, what you could see I mean is short term variations like if we see some for example, like a shutdown of the U S government that could have well, let's say that it will I have no crystal ball to that or if you have continuous resolutions at that.
Nick: Has been somehow the norm in the past few years that can't call. It short term.
Nick: Sharon if were basically let's say we're on a we wanted to do contract, which we have learnt a lot and I did get into a situation for example of our continuous resolution or in that particular case, what happens with the government.
Nick: Precluded should be able to start activity on new contracts, but those are short term issues are not reflective of long term trends.
Nick: And finally, I think the big thing about is in defense and civil we enjoying the benefit of having very long term contracts. So the backlog that you're seeing.
Nick: Goes out many many years.
Speaker Change: That's great color. Thank you very much and how they can live without it.
Nick: Sure.
Speaker Change: The next question is from Sheila <unk> from Jefferies. Please go ahead.
Sheila: Good morning, and thank you.
Speaker Change: And maybe one of them.
Speaker Change: And maybe if I could ask a two part question in terms of simulator deliveries, how youre thinking about.
Speaker Change: About 20 about this year with Pepsi as your previous guidance being waited for Q4, but obviously if there was a pull forward into Q3, and how we think about the exit margin rate okay.
Speaker Change: Or given potentially less simulator deliveries that are implied and.
Speaker Change: What it means for fiscal 'twenty.
Speaker Change: Manhattan analytic sure I mean on the simulator deliveries I mean, obviously, we're not we're not changing any of our any of our guidance. We we have.
Speaker Change: We have the same it's it's gonna be a I think as we said more than 50 sevens.
Speaker Change: And obviously, you'll see the actual number even though some of this just depends when we're on the edge of March 31st you know somebody to be delivered in next fiscal year, but but I don't see an issue with the with the guidance that we've given today.
Constantino: In terms of Q3, maybe I'll, let the constantino.
Constantino: Q4, excuse me yeah. So what I think we will see is again products being a higher proportion of the revenue mix going forward and that's why we've also adjusted the guidance to say that blue youll be modestly below the 20% to 22%. So the adjusted Soi margin range for the year.
Constantino: Okay Hum.
Constantino: That makes sense and then maybe just.
Constantino: Another question on <unk> again.
Constantino: We see we're seeing a growing debate among operators outlining expectations for two P. M. Oh geez over the coming years. Some suggest are just shouldn't be unwinding from peak levels steadily in line with our taxes commentary, others like where they're talking about beyond 2020. So just maybe if you could touch on that.
Constantino: At G P happened, what you're saying for 2026.
Constantino: We should be thinking about framing that.
Constantino: I think yes, I think we can talk about it because it's typically with some of our large customers like indigo airlines or that issue.
Constantino: Yes, I mean, the overall I mean, we do track the.
Constantino: The aircraft grounded.
Constantino: <unk> hundred 20.
Speaker Change: Neal so so the number is going down I mean, it's certainly coming down from from where it was.
Speaker Change: I mean, we have you know indigo is an example, there is the largest.
Speaker Change: Airbus operator of.
Speaker Change: Niels and have the largest fleet of grounded aircraft and they are I mean, they're there. They are improving so I think it's just a question of time as they catch up on some of the.
Speaker Change: Some of the capacity issues they have to service all these all these engines in a timely manner.
Speaker Change: But definitely I mean, they're a barometer to to.
Speaker Change: How this is going in and they are in their fleet is improving and we can see it through obviously training. So so you know this you know how long it's going to take it's not really for me to say, but I think the we definitely see improvement.
Speaker Change: Yeah.
Speaker Change: Okay. Thank you.
Speaker Change: Thanks Sheila.
Speaker Change: The next question is from Matthew Lee from Canaccord Genuity. Please go ahead.
Matthew Lee: Thanks, taking my question I noticed in the quarter, you Didnt really touched in CIB and you know I joined this call late but yeah.
Speaker Change: Just given the focus on deleveraging and maybe opportunity for tuck ins as well as from the Capex you mentioned, how much of a priority is buying back shares at this juncture.
Speaker Change: I think maybe I'll just kick it off.
Speaker Change: And then we've always had the.
Speaker Change: The same priorities that we've had with it that we prioritize accretive growth but.
Speaker Change: But deleveraging is close behind so let's pick up on her wouldn't I mean in the end of the day I think what we've said that in CIB, we will use it opportunistically and we did.
But I think that just today I think we reflect that.
Speaker Change: Where the stock is that that we thought we had better opportunities to use our cash flow.
Matthew Lee: Pick up on the deal I don't think so mark in the morning, Matthew So.
Matthew Lee: We do we continue to talk to take a real balanced capital allocation approach.
Matthew Lee: And that's where it makes sense and then older further bolstering or a financial position to deleveraging. So we look at NCI to be in fact, it was like Mark said Opportunistically, we'll define excess free cash flow.
Matthew Lee: You saw in Q3, we did not purchase any additional shares because our focus is deleveraging.
Matthew Lee: Do you guys have a target for the year in terms of NCI be usage or you know something we can point to in that in that regard or was it just more opportunistic.
Matthew Lee: Absolutely more focused.
Matthew Lee: Focus on capital allocation.
Matthew Lee: Looking at all opportunities, depending on excess free cash flow, but definitely more of an opportunistic approach.
Matthew Lee: Alright, thanks, guys.
Speaker Change: The next question is from Kamran Derksen from National Bank Financial. Please go ahead.
Kamran Derksen: Yeah. Thanks. Good morning, just a quick question on working capital, obviously, you know a significant positive.
Speaker Change: Working capital reversal in Q3.
Speaker Change: I'm just wondering if theres anything I guess that you are doing differently to manage your working capital flows to improve overtime just anything you can point to specifically.
Speaker Change: That is a change from past practices.
Speaker Change: Improved cash flow from working capital.
Speaker Change: I'm going to thank you for answering the question.
Speaker Change: Particularly pleased with our record free cash flow generation $410 million. This quarter I think what you're seeing here really use the direct benefit of strong execution.
Speaker Change: That's especially in defense this is allowing us to hit our billing milestones right and then we use are the levers that we have at our disposal to unlock and reduce noncash working capital to generate cash.
Speaker Change: Alongside our continued strict inventory management.
Speaker Change: Bloom organic investments, obviously in lock step with the market.
Speaker Change: This is a disciplined approach to managing our cash and it's giving US continued confidence that we will meet our deleveraging commitments. So we I think you saw in the guidance, we expect to deliver a cash conversion rate exceeding 150% in FY 'twenty five compared to our previous stated that conversion rate target of about.
Speaker Change: 100%. So this really is because of our focus on cash generation.
Speaker Change: Okay.
Speaker Change: That's helpful and maybe just as a.
Speaker Change: I'll follow up I mean on the defense side and just a question for Mark just on the future.
Speaker Change: Future leader in Fighter program in Canada, obviously, you'll see selected to manage that program had been incidents.
Speaker Change: You as the extra for that future program could you just talk a little bit about what what exactly your role is here on this program and kind of what the timeline might be for this would start actually contributing financially.
Yeah.
Speaker Change: Yeah. Thanks for the question Cameron I'm, particularly very pleased.
Speaker Change: Of that particular analysis that I mean this is just another.
Speaker Change: Another really Great example of just how well six position in a growth market. So.
Speaker Change: So what you see here and I can tell you this.
Speaker Change: We've been I've been having personally these in depth discussions with government.
Speaker Change: Mr. Blair specifically in defense, Canada is looking at stepping up the government is stepping up significantly.
Speaker Change: Expenditures in defense to maintain preparedness and readiness.
Speaker Change: Canadian troops.
Speaker Change: And in basically again, that's Canada, joining a course of nations are doing just that so what you see here is a definitely a shift in previous practice. This is government, putting a new mechanism in place to accelerate that the procurement of military programs and I can tell.
Speaker Change: U I have had a very personal role in working with government to make that happen and I think this is this is a.
Speaker Change: I would tell you I mean.
Speaker Change: We're excited about this is with the candidates.
Speaker Change: Depreciation for the gaming industry.
Speaker Change: In in a very very big way and what you see here is we are becoming a key strategic partner and what we're going to be doing here is.
Speaker Change: Being recognized as a strategic partner on this program feature slate is so essentially design and and assist their project team and finalizing the procurement requirements accelerating the procurement process beyond anything that's done.
Speaker Change: It's been done in the past on the future fighter needing program, which of course as I said is going to prepare us for the transition. So she had 35 base.
Speaker Change: So you know we.
Speaker Change: We had the announcement this so this week with the mixture depose the minister of public works responsible for the acquisition so.
Speaker Change: They just fall of what they said.
Speaker Change: They've got budgeted 5 billion on a program that covers.
Speaker Change: Yes acquisition of aircraft training courseware, some procurement instructors and on site support for gaming train delivery, you know asset management.
Speaker Change: This supports yeah.
Speaker Change: By the way all of the kind of stuff that we do not only in Canada, but around the world I mean, if you look at that.
Speaker Change: Huge contract that was just recently.
Speaker Change: That contract in Canada, we're doing exactly that.
Speaker Change: For if you like the phases of training that are before for the triplet.
It's too early to state as it can be.
Speaker Change: This could get very precise with regards to the.
Speaker Change: Timelines here, except that we're obviously starting immediately on this program and the whole idea is to accelerate the procurement of this program. So that would be basically capability will be there when they see them.
Speaker Change: 35 inch or service.
Speaker Change: Okay, that's great detail I appreciate it thanks very much.
Speaker Change: Thank you.
Noah: The next question is from Noah <unk> from Goldman Sachs. Please go ahead.
Noah: Hey, good morning, everyone.
Speaker Change: Good morning, Mike.
Speaker Change: Just wanted to go further on the civil margin appreciate all the detail you've provided thus far.
Speaker Change: You've expanded business truck capacity pretty significantly.
Speaker Change: Is that does that fall or are you in the process of filling that such that there's a utilization temporary issue and the margin and then.
Speaker Change: If we look at the aggregate acquired revenue in civil over the last five years has that been accretive or dilutive to the margin.
Speaker Change: And I'll turn it over to Nick and the last question I definitely say accretive but go ahead Nick.
Speaker Change: And your first question. So yes, we do have.
Speaker Change:
Speaker Change: We do have.
Speaker Change: Couple of training centers that are ramping up at the moment, namely Las Vegas in Savannah.
Speaker Change: We are as you saw from the announcement, but.
Speaker Change: The training center in Lake Nona is also and I would say almost at capacity So I think.
Speaker Change: There is definitely some drag that is coming from the.
Speaker Change: From the ramp up of those two training centers.
Speaker Change: And and come next year.
Speaker Change: Come in in April we will be also opening Vienna. So there will be some there as well, although Vienna will be will be ramped up quickly because we were just moving a lot of the assets that are going into Vienna. Initially are going to be assets that we already own and just moving around so it shouldn't be.
Speaker Change: Two disruptive to the to the numbers themselves.
Speaker Change: Maybe just adding new us, but just basically look at the market itself.
Speaker Change: The global business jet fleet itself.
Speaker Change: This is not an order from flagship but deliveries of aircraft out of the this <expletive> Oems.
Speaker Change: Spec to be 12% higher.
Speaker Change: Year over year 2025.
Speaker Change: And.
Speaker Change: Consistent with this the previous forecast.
The proportion of that that's large jets and I say large just because that's what we're disproportionately that's what a disproportion amount of training we lose on large that's like Gulfstream.
Speaker Change: Gulfstream Falcons.
Speaker Change: Global expensive they are.
Speaker Change: <unk> to a kind of a two thirds of all expenditures do visit yes for the next five years.
Speaker Change: So if you look at the market the market I mean, that's.
Speaker Change: So you see about a four.
Speaker Change: I think I'm just reading for me just the forecast here for 10% or a large cabin business jets forecast.
Speaker Change: And the next five years.
Speaker Change: Versus about two 9% CAGR for medium cabin.
Speaker Change: And I think even another factor, that's particularly important for us and in concert of the Sim card acquisition is the fractional and charter operators fractionals, such as flex should of course.
Speaker Change: Can you just show extremely strong performance on a year over year basis growing much faster than the market itself. I mean, just a fractional ownership black fractional owner of flight activity.
Speaker Change: An example is up 65% from 2019 levels, obviously prior to Covid, so and year over year, just studying it should take kosher closer to now or a year over year flat.
Speaker Change: Fractional ownership collateral own operators were up 11% of course all of that reflects in the amount of expenditure, we made expanding our business centers like the ones that you mentioned that Nick mentioned Las Vegas and of course, he echoed a subsequent call.
Speaker Change: So I guess.
Speaker Change:
Speaker Change: Without putting a specific year on it but if we just think about the period of time in the future when.
Speaker Change: You have the full utilization of the business that expansion you've done and then you do not face Boeing and Airbus are delivering somewhere near demand you don't have engines are grounding airplanes. So setup.
Speaker Change: That market's normal.
Speaker Change: Again, not putting a year on it but just in the period of time in the future. When all of your inputs are relatively normalized what do the civil margins look like.
Speaker Change: Higher [laughter] no look I think you know what I mean.
Speaker Change: We're not going to get into the outlook today, but I think we've got I think I said in my notes I think I used the words and I'll repeat them I think we have ample room to grow beyond that for the factors that you've mentioned and of course, you know more absorption of overhead or the leverage effect in our training centers. So I think all things being.
Speaker Change: I think you know the factors you mentioned will inevitably and quite deliberately make margins go higher.
Speaker Change: Okay.
Speaker Change: And then I just also wanted to ask a little bit more about the defense margin did I hear correctly, you say that there's only one more legacy challenged contract that rolls off in your fiscal 'twenty six.
Speaker Change: In fiscal 'twenty five by the end of fiscal 'twenty five there's one more that we expect to roll off.
Speaker Change: No that will leave that we'll lose five contracts going into next fiscal year, we started where they have taken their three fiscal years.
Speaker Change: And that's what got me, just I'm going to call it.
Speaker Change: Yeah, Yeah go ahead.
Speaker Change: No no I just could add maybe Nick you want to add color on how you feel about those types of around yeah, I mean I think.
Speaker Change: I I don't see.
Speaker Change: At least for now I mean, we were on track with our with the remainder some of them are out.
Speaker Change: Next year or whether.
Speaker Change: Whether you are after but I mean, they roll off as planned.
We feel pretty good about all the positions that we've taken to.
Speaker Change: To manage the are the remaining work and to manage the risk with the customer so.
Speaker Change: It's hits its.
Speaker Change: It's good that we have three out of the way, but we still have five and we still need to pay a pay close attention to execution on those programs.
Speaker Change: But I don't see a piece at the moment I don't see any issues.
Speaker Change: Okay.
Speaker Change: Understood. Thank you very much.
Speaker Change: Thank you operator, we'll take just one more question as we come up on the hour.
Speaker Change: Sounds good and our last question is from Denmark, partly from days I'll think capital markets. Please go ahead, yes.
Speaker Change: Yes, good morning, everyone.
Speaker Change: Obviously on the free cash flow side better than expected. The Dino you provide great color around the working cap for Q3, but when we look in terms of capital deployment, you intend to be below three times by year end. So it's gonna be a great achievement could.
Speaker Change: Could you remind us your targeted level in terms of leverage longer term and given the nice inflection on free cash flow discipline around capex.
Speaker Change: I'm just wondering how you see capital deployment once you're at a targeted level.
Yeah.
Speaker Change: Thanks for the question so effectively like I said, I'm really proud of the free cash flow conversion.
Speaker Change: This year.
Speaker Change: Quarter was going to be $10 million. So when we look at.
Speaker Change: Capex again, it's a matter of working and talking to them.
Speaker Change: Point <unk> on the market based on what we see and from Mark from our the situation, we see with our with our customers. We don't want to be ahead of our customers. So that's the approach we've been taking don't.
Speaker Change: We don't deploy professors and a marching on spec, we invest organically to keep pace with the growth of our existing customer base.
Speaker Change: So that's why we constantly monitor the market situation.
Speaker Change: As you know we are taking a focused approach.
Speaker Change: Pro forma leverage.
Speaker Change: Wanted to make sure we continue to focus on on the Investor grade performance and we're looking to be below the two five times net debt to adjusted EBITDA range by the end in the next fiscal year. So continued focus on generating free cash flow and disciplined approach to capex working walks.
Speaker Change: With the market going forward.
Speaker Change: Okay operator.
Speaker Change: Okay.
Speaker Change: Sorry, again real quick.
Speaker Change: Yeah, you got really quick just in terms of defense margin, obviously, when we look at fiscal year 'twenty six you're gonna run down Burger legacy contract, but also at the same time, you'll be ramping up a new business that I would assume would be a.
Speaker Change: Accretive to margin. So can you point out through some direction, we might see on defense for margins for fiscal year 'twenty six.
Speaker Change: Yeah.
Is that sound glib, but higher obviously been why I mean for the factors that we've talked before I mean.
Speaker Change: Say, where the back we're winning a lot of backlog here and will replace the new backlog is very accretive to the.
Speaker Change: Margin target that we have below double digits and I have always said that 10%.
Speaker Change: As a waypoint not a destination but.
Speaker Change: We're not going to get into your outlook. Today, you saw the strong execution, we're being very prudent about how we see the business for obvious reasons.
Speaker Change: So look I think that.
Speaker Change: Well, we'll give you are as usual all booked as we get into next quarters.
Speaker Change: Thank you for the time.
Speaker Change: Alright, thanks, very much to everyone joining us on the call today I'll remind you that a transcript will be available later on the web.
Speaker Change: Right.
Speaker Change: We'll talk to you after the fact that should you have any additional questions.
Speaker Change: Thanks very much.
Speaker Change: That brings our close to today's conference call. You may disconnect. Your lines. Thank you for participating and have a pleasant day.