Q3 2025 CAE Inc Earnings Call
Daryl Anderson: Daryl Anderson Dialogo Jim Rickett İngolert Alan Ward Alex Yorke Bryan Anderson Daryl Anderson Dialogo
Speaker Change: A description of the risks factors and assumptions that may affect future results is contained in Cae's annual MD&A and MD&A for the three months ended December 31 2024.
Speaker Change: Billable on our corporate website and in our filings with the Canadian Securities administrators on SEDAR plus.
Speaker Change: And the U S Securities and Exchange Commission on Edgar.
Michael: On the call with me. This morning are Michael <unk>, President and Chief Executive Officer, and Constantino amount of Chester, our interim Chief Financial Officer.
Speaker Change: Nick Liam Thetis, She's Chief operating officer is on hand for the question period.
Speaker Change: After remarks from Marc and Constantino will open the call to questions from financial analysts.
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 Louisa do.
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 Mcgibbon, who has served as chair of the board since 2022 and as a director since 2015.
Speaker Change: Margaret as Bilson Oswald, if he and David G Perkins.
Speaker Change: We extend our gratitude for their exceptional service and valuable contributions during their tenure and we look forward to welcoming our new board members to CAE.
Speaker Change: Let me now turn the call over to Mark.
Mark: Thank you Andrew and good morning to everyone joining us on the call.
Mark: Let me first say that Ah I, certainly echo Andrew's comments and in particular I want to express my heartfelt gratitude Allen.
Mark: Steadfast leadership and commitment.
Mark: Through our shared vision for CAE.
Speaker Change: I'm also grateful to the other departing board members Francois Peg and David.
Mark: Their continued support and advice food through the years.
Mark: As we embark on the next chapter.
I'm looking forward to working with our new board members in the coming months and I'm confident that together well.
Mark: We will continue to build on our success.
Mark: Before I move to our quarterly results I also want to take a moment to share how proud I am that.
Mark: She has been recognized as one of Canada's top 100 employers for the third consecutive year.
Mark: And has earned a spot on Forbes Canada's best employers list for 2025.
Mark: These honors reflect the collaborative innovative and empowering culture that we built let's see.
Mark: Made possible by the dedication of our 13000 employees.
Mark: This strong foundation of talent and commitment.
Mark: To drive our success as reflected in our outstanding third quarter performance.
Mark: During this quarter, we generated a record $410 million in free cash flow, while further securing cease future with $2 $2 billion of new orders, culminating in a record adjusted backlog of $23 billion.
Mark: In civil we finalized the purchase of an increased stake in our Sim called joint venture and.
Mark: And extended our exclusive long term training agreement with Flexjet and its affiliates.
Mark: Initiatives that generated more than $500 million in additional order intake and backlog you know highly desirable business aviation training segment.
Mark: In total for civil.
Mark: We booked $1 $5 billion in orders or two times books to sales ratio.
Mark: On revenue, that's 21% higher than Q3 of last year.
Mark: We ended the quarter with a record $8 $8 billion total civil adjusted backlog.
Mark: Which is up 44% over a year year over year.
Mark: In products, we received orders for 15 full flight simulators, bringing the total to 42 as of the end of the third quarter.
Mark: We delivered 20 full flight simulators this quarter.
Mark: Notable increase from our first half he was sent from 13 in the same quarter last year.
Mark: Combined commercial and business Aviation training center utilization reached 76%.
Mark: Consistent with last year's performance.
Mark: Although some softness persisted longer than we expected in commercial aviation training in the Americas.
Mark: Yeah.
Mark: 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.
Mark: Partly offsetting this headwind was the continued positive momentum in business aviation training.
Mark: Driven by higher utilization and profitability as we ramped up our newly deployed simulators and training centers.
Mark: We also continued to make excellent progress in the market for our flight services software solutions.
Mark: We signed orders for more than $60 million with major airlines in the Americas and Asia.
Mark: We just announced Turkish airlines as another customer who will be adopting six next generation unified dashboard and crew management solutions.
Mark: The market is responding very positively to their see innovation, which provides airline operations control centers with enhanced situational awareness and disruption management capabilities.
Mark: We're also proudly inaugurated our first air traffic services training center in collaboration with NAV, Canada.
Mark: Located in our main campus in Montreal.
Mark: This newly opened training center extended six coordination of making the world safer.
Speaker Change: As a pilot I can personally attest to the vital role that clear effective communication between flight crews and aircraft 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 for this critical responsibility.
Speaker Change: In defense.
Speaker Change: Performance is 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: <unk> successfully completing another legacy contract from our backlog our second this year.
Speaker Change: Orders included a contract pleasure at Canadian future aircrew training program.
Speaker Change: Option awards to extend our support for U S Army fixed wing training and the KC 135 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.
Speaker Change: Keeping a book to sales ratio of one five times.
Speaker Change: 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.
Speaker Change: 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.
Dino: Adjusted segment operating income was 190.
Dino: Millions of dollars.
Dino: <unk> 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: And that's 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 transaction this quarter.
Dino: This was partially offset by lower finance expense on 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.
Marsh: $290 million third quarter Marsh here.
Marsh: The increase was mainly due to a higher contribution from noncash working capital and higher net income.
Marsh: Told we expect to generate strong free cash flow for the year.
Marsh: Conversion of adjusted net income of over $150.
Marsh: Which is an increase from our previous conversion target of approximately $100.
Marsh: Yeah.
Marsh: Capital expenditures totaled $97 $6 million this quarter with approximately 80% invested income mainly to add capacity to our global training network to deliver on long term training contracts or backhaul.
Marsh: We expect total capex for fiscal 2025 to be approximately $30 million higher in fiscal 'twenty, four capex $330 million, which is lower than our previous expectations.
Marsh: 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.
Marsh: Before the talk of the legacy contracts net debt to adjusted EBIDTA was 3.08 clients.
Marsh: We remain focused on further strengthening our financial position and we continue to expect to be below three times net debt to adjusted EBITDA by the end of.
Marsh: For the fiscal year.
Marsh: Now turning to our segmented performance.
Marsh: Third quarter revenue grew 21% year over year to $752 $6 million, while adjusted segment operating income was 21% $258 million, resulting in a 20% margin.
Marsh: This excludes <unk>.
Marsh: Net remeasurement gain of $72 6 million under our Sim card transaction.
Marsh: Which effectively marked up our previously held equity interest in the joint venture to fair value.
Marsh: As Mark highlighted earlier with plenty of that first deliveries. This quarter. We saw a notable shift in revenue mix with a higher proportion for products compared to last year.
Marsh: Defense revenue remained stable at 478 million shares.
Marsh: While adjusted segment operating income increased 88% from $39 $2 million delivering an eight 3% margin.
Marsh: Thanks to strong execution from the team and lower net R&D expenses.
Marsh: [laughter] legacy contracts remain on track costs since schedules well managed as planned we concluded another one over a legacy contracts this quarter.
Marsh: And on our and we are on track to finalize a third one at the end of the fiscal year.
Marsh: This quarter legacy contracts contributed around 70 basis points margin dilution.
Marsh: This impact the adjusted segment operating income margin for defense would have been 9%.
Marsh: With that I will.
Marc: Ask Marc to discuss the way forward.
Marc: Thanks Dino.
Marc: The investment thesis for she 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: The sustained high demand for pilots and pilot training.
Marc: To support industry growth and to replace retiring herself.
Marc: We're in an excellent position and strong markets and these structural factors continues.
Marc: Long term demand or training and operational support.
Marc: Clean and simple.
Marc: While commercial OEM aircraft supply disruption.
Marc: Recent optimism surrounding production rate recovery and a return to service of aircrafts that they rounded by engineers.
Marc: Good.
Marc: Although some airline customers in the Americas deferred initial training reservations. This quarter. Those same airlines are not actively engaged with us the plan the timing and scale of their pilot hiring ramp up and associated training needs.
Speaker Change: This is my question is when.
Speaker Change: Looking ahead, the demand for air travel ongoing pilot requirements in the delivery of nearly 15000 aircraft a Boeing and Airbus is combined backlog over the next decade position us as a key player.
Speaker Change: Long term secular growth story.
Speaker Change: Similarly, the outlook for business Aviation training remains highly positive, especially as we can.
Speaker Change: Continued strengthening our presence in this critical segment.
Speaker Change: Building on our increased investment in him Com flex yet one of the worlds largest fractional jet operators announced last week, a $7 billion aircraft order and projected fleet expansion to approximately 600 aircraft by 2031.
Speaker Change: This move underscores the accelerating shift towards fractional jet ownership.
Speaker Change: Which has been growing much faster than the overall market.
Speaker Change: As Flexjet exclusive training partner.
Speaker Change: He is well positioned to benefit from this industry as well.
Speaker Change: In defense.
Speaker Change: Demand for our training solutions remains robust.
Speaker Change: Even by a global shortage of uniformed personnel, prompting military and turned to see support readiness.
Speaker Change: We're very well positioned and strengthening market as the sector enters a prolonged bull cycle were rising budgets across NATO and Allied nations.
Speaker Change: Geopolitical tensions and evolving security threats are driving defense modernization efforts.
Speaker Change: Creasing the need for the training and simulation solutions that we provide.
Speaker Change: These factors are creating substantial growth opportunity for key as governments and defense forces see innovation innovative solutions to enhance patient readiness.
Speaker Change: And operational effectiveness.
Speaker Change: A Prime example is the strategic partnership we announced yesterday between Chi and the government of Canada.
Speaker Change: Through this partnership <unk> will and he brings deep expertise and work alongside the Royal Canadian airports designing co developing the future fighter leading training program or program.
This initiative will play a critical role in preparing for.
Speaker Change: But the transition to Canada next generation fighter Jets.
Speaker Change: Ensuring the long term success of the C. F 35 program.
Speaker Change: By integrating cutting edge technology and advanced training methods.
Speaker Change: Two triplet will equip fighter pilot candidates with the skills required to operate highly sophisticated 358 and increasingly complex outbreaks of Alaska.
Speaker Change: Looking ahead to the remainder of this fiscal year.
Speaker Change: In civil.
Speaker Change: Ramp up of commercial aircraft deliveries is taking longer than expected and this is a cheap wire driver of initial training demand for newly hired pilots.
Speaker Change: With the short term impact this is having on incremental training demand in the Americas, We now expect.
Speaker Change: Annual Civil adjusted segment operating income growth to be modestly below our previous outlook.
Speaker Change: Ultimately 10%.
Speaker Change: Also.
Speaker Change: Since product deliveries are expected to account for a higher proportion of civil revenue then you shouldn't plan.
Speaker Change: We expect the annual civil segment operating income margin to be modestly below our previously expected range of 22% to 23%.
Speaker Change: Looking beyond this period.
Speaker Change: Contingent before she ample room for margin expansion in future years on volume efficiencies and mix.
Speaker Change: [noise] defense with the benefit of our re baseline last fiscal year into higher attainment.
Speaker Change: Quality of execution.
Speaker Change: We now expect to achieve high single digit percentage revenue booked a year, which is up from our previous expectation in the low mid single digit percent of frame.
Speaker Change: We're also expecting the annual defense adjusted segment operating income margin to be.
Speaker Change: <unk> modestly above the previously indicated range of 67%.
Speaker Change: This puts us solidly on the path to becoming a low double digit margin business.
Speaker Change: 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.
Speaker Change: Free cash flow.
Speaker Change: With that I. Thank you for your attention and we're now ready to answer your question.
Speaker Change: Thanks, Mark operator.
Speaker Change: Is 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.
Andy: Hi, This is Andy filling in for contract good morning, everyone.
Speaker Change: My first question was on the topic.
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 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: Hey, 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 just start with 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 at 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 utilization in 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.
Speaker Change: Increase in India were up about 7% anything you'd add on it.
Speaker Change: I think the U S utilization is down year over year.
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: Okay.
Speaker Change: The next question is from James Mccarrick gone from RBC capital markets. Please go ahead.
James Mccarrick: Hey, good morning, guys. Congrats on a good quarter and 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 higher.
Speaker Change: How you're positioned to react in the event you know we have a tariff that are sustained.
Speaker Change: And have you seen any shifts in your customers' decision, making often tariffs. It was laying orders are 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 yet.
Speaker Change: Wait like everybody else hope, which as you know constructive in.
Speaker Change: Bilateral conclusion through a negotiation, but look.
Speaker Change: I think as we said in the past we don't we don't we certainly don't expect to see a material impact in the short term certainly sort of next few months or a year.
Speaker Change: From Monday on our business as a whole, but it's definitely something that we're monitoring closely and.
Speaker Change: If you have any kind of terrorist become more lasting beyond that beyond.
Speaker Change: Getting into more than a year or two.
Speaker Change: Obviously, we would adapt and then we have the capacity to adapt that means 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: 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, Oregon.
Speaker Change: That's one factor, but again I think there's a lot of ways for us to mitigate things.
Speaker Change: And if things again should last.
Speaker Change: Beyond the shall I say next few months to a year and if again, if I look at our upcoming Conversely, 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, we've 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 from other parts of the world.
Speaker Change: Hey, Thanks for the color and then on the <unk>.
Speaker Change: And as a result.
Speaker Change: You know 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: 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 and then Nick you know you've been looking at this business for a few quarters now the team highlighted in our 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.
Speaker Change: For 2026, and after that I can turn the line over.
Speaker Change: Okay cause what tag team. This 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 leading with very very good job and the momentum at the front end 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 is fueling demand for the products and services.
Speaker Change: [noise] that Cesar intuitive so the team is executing extremely well.
Speaker Change: Nothing really extraordinary and so that's what he knows that I say it really comes down to execution strong performance all round by the team.
Speaker Change: At the same time, there's risk reduction risk reduction is ramp, but we're taking a very very disciplined approach.
Speaker Change: When we look at the fourth quarter I.
Speaker Change: I think you always got to remember that.
Speaker Change: Defense is always I.
Speaker Change: Shall we say a lumpy business quarter to quarter RASM potential as we execute.
Speaker Change: On tracks.
Speaker Change: At any given time, you could generate plus or more.
Speaker Change: Revenue in a single quarter. So as we've talked about we are raising the outlook and I think we're still being prudent about the test business as a whole.
Speaker Change: But yeah, we're very remain very competitive so maybe just turnover your deal. Thank you Mark and I would echo that.
Speaker Change: Really really pleased with eight 3% that's why margin performance this quarter, an increase year over year quarter over quarter.
Speaker Change: You know 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 we've changed the team showing through in the performance and execution.
Speaker Change: We also closed off another legacy contract and we expect another 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: The higher than usual R&D tax credits in the quarter nothing overly significant contributor maybe a half a percentage point to the margin.
Speaker Change: And next just usual timing haven't 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 are.
Speaker Change: Certainly we have a different a different attitude towards executing.
Speaker Change: Executing on the programs.
Speaker Change: Part of the plan I 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 and also because you would have seen the order intake and the performance on New awards.
Speaker Change: There's a shift from defense has been quite strong so you know.
Speaker Change: That's also going to help us as we look out in the future. So I you know I think we're we're I certainly I'm.
Speaker Change: Pretty confident that we can maintain.
Speaker Change: And 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 award announced or are there any specific kind of governance.
Speaker Change: <unk> 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 what.
Speaker Change: What does this change kind of mean for.
Speaker Change: And Ah 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 is a bit of a drag right now but how.
Speaker Change: How should we think about the relationship and that market is recovering to the delivery of the Boeing starting to ramp up is there 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: You know, maybe even high level reflective of 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.
Speaker Change: Not to the effect the first one but just excuse me I had around that one look I think silver is.
Speaker Change: Notwithstanding the softness that we've seen in the quarter again are in.
Speaker Change: In the U S. As you said.
Speaker Change: And it's quite right.
Speaker Change: Civil had excellent results this quarter I think it reflects.
Speaker Change: The diversification in our civil business in itself and you highlighted a lot of the a lot of the components there.
Speaker Change: In this quarter. What we saw is is basically the continuation of what we saw in previous quarters and in this in this year in pilot in.
Speaker Change: 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 OEM is in the <unk>.
Speaker Change: Out of that.
Speaker Change: Disruption caused by grounding of aircraft.
Speaker Change: Across the world that are really at a place that affected customers.
Speaker Change: Airbus aircrafts, primarily so for us in.
Speaker Change: And the where how that reflects itself in the United States is that.
Speaker Change: Well you don't have strong pilot hiring you don't 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 to many people towards 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 powertrain in Minneapolis for example.
Speaker Change: Although that's not a very big impact in terms of revenue itself. It kind of has a disproportionate effect.
Speaker Change: In.
Speaker Change: Margins because the training we do on the type of aircraft that the regional fly regional aircraft.
Speaker Change: Carrots fly.
Speaker Change: Aircrafts like C. R J's like Dash eights, which those airplanes have been alone around for a long time and so have our simulators. So they tend to be far down the depreciation curve and therefore, we make.
Speaker Change: A larger amount of profit on it. So that's what you see happening here and it's the same factor we had before whats change in this particular quarter is that right.
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.
Speaker Change: Deliver 40 airplanes in the quarter, so that's resulting obviously isn't that people, saying, okay well.
Speaker Change: Optimism happening here, so look again as I said.
Speaker Change: What's your deliveries 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'll see just testimony of the strong order intake you see that's certainly Pete what was it two airlines enthusiasm for the future is certainly not a bad thing that's testimony by the book to Bill that we have.
Speaker Change: As well of course the business aircraft for business aircraft is is doing extremely well we come we continue to ramp up and more recently deployed training centers. For example, like our new training Center with Tim Com now I would now was wholly owned by Us in Orlando or training center in Las Vegas, and we're seeing higher.
Speaker Change: Patient and growth.
And all of those cases, and and you just look at the order intake.
Speaker Change: We just added 500 million dollar city order intake.
Speaker Change: In business aircraft as a result of.
Speaker Change: The Sim.
Speaker Change: Tim comment because of acquisition and the associated.
Speaker Change: Associated flagship.
Speaker Change: Orders that delivery is going to come out of that in terms of trading slot. So look I think our as I said in my remarks, it's not a question of if Theres 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 and then Alex none of the outstanding job, leading a leading this company over the last few.
Speaker Change: We work very well together and I think there's a very I think smart timing in terms of transition my transition with you know.
Speaker Change: Bringing on a very very strong and should rule with that very excited determined Caitlin drove an escape.
Speaker Change: With his background at 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: The current board of leaving the board.
Speaker Change: Sure. So I think we're all very encouraged by it.
Mark: I appreciate it thank you Mark.
Speaker Change: Okay.
Speaker Change: The next question is from Kevin Chiang from CIBC. Please go ahead.
Speaker Change: Good morning, Thanks for taking my question I apologize if you went through some of this in the prepared remarks I was also one of I'll call it over here.
Speaker Change: Just on the I guess somebody announced.
Speaker Change: That's a step order with Embraer is a pretty large order for that I'm just wondering.
Speaker Change: You know, how you see that opportunity for us.
Speaker Change: The pulse system called the OLED.
Speaker Change: I know, it's probably early days, but.
Speaker Change: Although new investment.
Speaker Change: We will be required to make to support trading.
Speaker Change: Related to that large.
Reorder.
Speaker Change: The business aviation side.
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.
Speaker Change: Because we've been training them for years, what's positive is not only the amount of aircraft that they're 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 flagship aircrafts. So.
Speaker Change: Again, I Couldnt I couldnt be more happy with that order, but maybe they went out.
Speaker Change: I mean the flagship.
Speaker Change: <unk> placed an order for 180, plus graders and <unk> those are those aircrafts that are weaker.
Speaker Change: 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.
Speaker Change: Investment in more greater capacity than morphine on capacity, so, but there's no need for anything.
Speaker Change: And that so it's known that can take those that capacity.
Speaker Change: In terms of space and.
Speaker Change: 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.
Speaker Change: The order intake.
Speaker Change: <unk> function because one of the things we did was.
Speaker Change: So this contract when we originally consummated the JV was a 15 year agreement we were five years and so the agreement was reset to 15 years and so this this justifies the investment for the for the next batch of aircraft.
Speaker Change: No that definitely makes sense it seems like a.
Speaker Change: A pretty pretty nice tailwind for you, especially a pull system called transaction.
Speaker Change: Maybe just a second question.
Speaker Change: Generally think of CAE a broadened them.
Speaker Change: Immunized from kind of a marginal change in U S. Besides just by being more of a broader U S. Budgets, just just given the type of stuff you do just wondering if that does indeed.
Speaker Change: Illustration.
Speaker Change: If you're looking at.
Speaker Change: Our cost cutting maybe in a different way that previous administrations just wondering.
Speaker Change: Our risk or anything that.
Speaker Change: That might've been impacted within your backlog given the given the change of administration.
Speaker Change: I mean, the first thing I'll say to that one is as I've always said 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 a focus in the United States and all of its allies.
Speaker Change: Canada, Japan, No NATO no red is a strikes.
Speaker Change: [noise] readiness of course and that readiness Beach training when do you think about what our military does when they're not in situations conflict.
Speaker Change: A trend that is all that they do.
Speaker Change: And with increasing readiness, what that means is more demand for the kinds of services and products that when you do when you see that as reflected in a very strong order backlog.
Speaker Change: That's that we've already won and the opportunity that we have out there in terms of the business that we have out there for us.
Speaker Change: Basically selection by customer so.
Speaker Change: 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.
Speaker Change: Like a shutdown of the U S government that could have let's say that it will I have no crystal ball into that or if you're a continuous resolutions.
Speaker Change: Has it been somehow the norm in the past year that can cause short term disruption. It basically let's say we're on a we wanted to do a contract which we have won a lot and I do get into a situation for example of our continuous resolution or in that particular case, what happens with the government.
Speaker Change: Was concluded to be able to start activity on new contracts, but those are short term issues are not reflective of long term trends.
At the end.
Speaker Change: Finally, I think the big thing about is in defense and civil we enjoying the benefits of having very long term contracts. So the backlog that goes out many many years.
Speaker Change: That's great color. Thank you very much and have a go live with it.
Speaker Change: Sure.
Speaker Change: The next question is from Sheila <unk> from Jefferies. Please go ahead.
Sheila: Good morning, and thank you.
Speaker Change: Maybe.
Speaker Change: Maybe if I could ask a two part question in terms of simulator deliveries how are you.
Speaker Change: Are you thinking about.
Speaker Change: About 20 about this year with Pepsi as your previous guidance being waited for Q4, but obviously there was a pull forward into Q3 and how we think about the exit margin rate that's known.
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.
Speaker Change: 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 the March 31st some made some deliberate.
Speaker Change: Next fiscal year, but but I don't see an issue with the with the guidance that we've given today.
Speaker Change: In terms of Q3, maybe I'll, let the constantino.
Constantino: Excuse me yeah. So what I think we will see is again products being a higher proportion of the revenue mix going forward in that and that's why we've also adjusted the guidance to say that it would be modestly below the 20% to 22% for the adjusted Soi margin range for the year.
Speaker Change: Okay Hum.
Speaker Change: That makes sense and then maybe just.
Speaker Change: Another question on <unk> again, we see we see we're seeing a growing debate among operators outlining expectations spectrum T. F. Oh geez over the coming years. Some suggest are just shouldn't be unwinding from peak levels steadily in line with architects with commentary, others like where they're talking about beyond 'twenty.
Speaker Change: So just maybe if you could touch on that too hot.
Speaker Change: G P up and what you're seeing for 2020, how we should be thinking about framing that.
Speaker Change: 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.
Speaker Change: Yeah, I mean, the overall I mean, we do track the.
Speaker Change: The aircraft grounded.
Speaker Change: The 320.
Speaker Change: Neal so the number is going down I mean, it's certainly coming down from from where it was I mean, we have you know indigo is an example, they are the largest.
Speaker Change: You know Airbus operator of Nielsen have the largest fleet of grounded aircraft and they are there.
Speaker Change: There they are.
Speaker Change: 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 are all these engines in a timely manner.
Speaker Change: Some of the capacity issues. They have to service. All these are all these engines in a timely manner.
Speaker Change: Definitely I mean, they're a barometer too.
Speaker Change: So 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.
Speaker Change: How long it's going to take it's not really for me to say, but.
Speaker Change: We definitely see improvement.
Speaker Change: Great. Thank you.
Speaker Change: Thanks Sheila.
Speaker Change: The next question is from Matthew Lee from Canaccord Genuity. Please go ahead.
Matthew Lee: Hey, Thanks for taking my question I noticed this quarter, you didn't really touched in CIB and I'm doing 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: I mean, 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.
Speaker Change: So let's pick up on that one 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 a but.
Speaker Change: But I I think Joe 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 with it.
Matthew Lee: Pick up on a 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: Investments, where it makes sense and then older further bolstering or our financial position to deleveraging. So we look at NCI to be effective with like Mark said opportunistically over time excess free cash flow.
Matthew Lee: You saw in Q3, we did not purchase any additional shares.
Matthew Lee: Because our focus is deleveraging.
Speaker Change: 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.
Speaker Change: Focus on capital allocation.
Speaker Change: Looking at all opportunities, depending on excess free cash flow, but definitely more of an opportunistic approach.
Speaker Change: 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 on working capital. Obviously, you know a significant positive the working capital reversal in Q3.
Kamran Derksen: 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.
Kamran Derksen: That maybe is a change in from past practices to improve cash flow from working capital.
Kamran Derksen: Thank you for answering the question.
Kamran Derksen: 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.
Kamran Derksen: That's especially in defense this is allowing us to hit our billing milestones right and then we use the levers that we have at our disposal to mark can reduce noncash working capital to generate cash.
Kamran Derksen: Alongside the continued strict inventory management discipline organic investments, obviously in lock step with the market.
Kamran Derksen: You know 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 a 100%.
Kamran Derksen: So this really is because of our focus on cash generation.
Speaker Change: Okay, No that's helpful and maybe just as a.
Kamran Derksen: I'll follow up on that.
Speaker Change: The defense side, maybe just a question for Mark just on the future.
Speaker Change: Future leasing fighter program in Canada, obviously, you'll see selected to manage that program had been incidents.
Speaker Change: Are you is 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 will start actually contributing financially.
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.
Speaker Change: Another really Great example of just how well see its position in a growth market.
Speaker Change: What you see here and I can tell you this.
Speaker Change: I've been having personally these in depth discussions with government.
Speaker Change: Mr. Blair specific mean defense, Canada is looking at stepping up the government is stepping up significantly X expenditures in defense to maintain preparedness and readiness.
Speaker Change: Canadian troops.
Speaker Change: And in basically again, that's Canada joined me and of course, a nation's theyre 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.
Speaker Change: Military programs and I can tell you I've had a very personal role in working with government to make that happen and I think this is this is a I would tell you I mean.
Speaker Change: We're excited about this is with the candidates.
Speaker Change: There seems to be getting to industry.
Speaker Change: Uh huh.
Speaker Change: They are 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.
Speaker Change: Being recognized as a strategic partner on this program features lit is so essentially design and and assist their project team and finalizing the procurement requirements accelerating the procurement process beyond anything that's done that's been done there.
Speaker Change: On the future fighter needing program, which of course as I said is going to prepare us for the transition. So she at 35 basis. So.
Speaker Change: We had the announcement of this.
Speaker Change: This week with the Mr. Depose the minister of public works.
Speaker Change: Possible or the acquisition so they just fall of what they said.
Speaker Change: <unk> got budgeted 5 billion on a program that covers.
Speaker Change: Yeah.
Aircraft training courseware.
Speaker Change: German instructors and on site support for gaming trained 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 I just recently.
Speaker Change: <unk> contract in Canada, we're doing exactly that.
Speaker Change: If you like the phases of training that are before future pellet.
It's too early to state edge.
Speaker Change: Basically you get very precise with the guards to.
Speaker Change: The 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 the basically capability will be there on the C. F 35 inch our service.
Speaker Change: Okay, that's great detail I appreciate it thanks very much.
Speaker Change: Thank you.
Speaker Change: The next question is from Noah <unk> from Goldman Sachs. Please go ahead.
Noah: Hey, good morning, everyone.
Speaker Change: Good morning.
Speaker Change: Just wanted to go further on the civil margin I appreciate all the detail you provided thus far.
Speaker Change: I know 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 you know 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.
Nick: And I'll turn it over to Nick and the last question I definitely say accretive but go ahead Matt.
Nick: And your first question. So yes, we do have.
Speaker Change: Hmm.
Speaker Change: We do have a.
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.
Speaker Change: 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.
Speaker Change: So 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 shouldnt be.
Speaker Change: Two disruptive to the to the numbers themselves.
Speaker Change: Maybe just adding new us, but just basically looking at the market itself.
Speaker Change: The global business jet fleet.
Speaker Change: No it's fine.
Speaker Change: Order from flagship, but deliveries of aircraft out of the this <expletive> Oems.
Speaker Change: <unk> to be 12% higher.
Speaker Change: Year over year to one five.
Speaker Change: And.
Speaker Change: Consistent with basically previous forecast.
Speaker Change: The proportion of that that's large jets and I say large jets, because that's where we've been disproportionately that's what does a disproportion amount of training we lose on large that's like or Gulfstream Falcons.
Speaker Change: Global expenses, they're expected to a kind of a two thirds of all of those expenditures are due busy for the next five years.
Speaker Change: So if you look at the market the market I mean, that's.
Speaker Change: As you can see about a four I mean.
Speaker Change: I think I'm just reading for me just with forecast, 4.7% tighter large cabin business jets forecast.
Speaker Change: 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 collection of course.
Speaker Change: To show extremely strong performance on a year over year basis growing much faster than the market itself. I mean, just the fractional ownership black fractional owner flight activity to give you. An example is up 65% from 2019 levels, obviously prior to Covid.
Speaker Change: And year over year, just I mean, even on.
Speaker Change: It should take a closer and closer to now I mean your <unk>.
Speaker Change: Like fractional ownership collateral one operator, you are up 11% of course all of that reflects in the amount of expenditure.
Speaker Change: And spanning our business centers like the ones that you mentioned that Nick mentioned Las Vegas of course, yeah cause a subsequent call.
Speaker Change: So I guess.
Speaker Change:
Speaker Change: About 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 you had expansion you've done and then you do not face Boeing and Airbus are delivering somewhere in your demand and you don't have engines are grounding airplanes, so sort of the.
Speaker Change: That market's normal 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, we're not going to get into the outlook today, but I think we've got like 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 more absorption of AUM.
Speaker Change: We're ahead or they leave or get packed in our training centers. So I think all things being equal I think the factors you mentioned will inevitably and quite deliberately make margins go higher.
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: Fiscal 'twenty five by the end of fiscal 'twenty five there's one more that we expect to roll off.
Speaker Change: Okay, no that will leave that we'll lose five contracts going into next fiscal year, we started to see.
Speaker Change: They can everybody read.
Speaker Change: Yeah.
Speaker Change: And that's what got me just trying to get a call it.
Speaker Change: Yeah go ahead.
Speaker Change: No no I was just kind of maybe Nick you want to add Colorado, how you feel about those type of well, yeah, I mean, I I think I.
Speaker Change: I don't see at.
Speaker Change: At least for now I mean, we were on track with our with the remainder some of them are out.
Speaker Change: The next next year or what.
Speaker Change: Whether you are after but I mean, they roll off as planned.
Speaker Change: We feel pretty good.
Speaker Change: And so we've taken two to manage the the remaining work and to manage the risk with the customer. So you know.
Speaker Change: It's it's.
Speaker Change: It's 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 it.
At least 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 pulling away from days I think capital markets. Please go ahead.
Yes, good morning, everyone.
Speaker Change: Obviously on the free cash flow side better than expected that Dino you provide great color around the working cap for Q3, but when we look in terms of capital deployment.
Speaker Change: Do you intend to be below three times by year end, so it's gonna be a great achievement.
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.
Speaker Change: 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 deploying <unk> on the market based on what we see and from Mark from our situations she with her.
Speaker Change: With our customers, we don't want to be ahead of our customers' CFO Chi.
Speaker Change: You've been taken.
Speaker Change: We don't deploy professors know 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: It's you know we are taking a focused approach.
Speaker Change: Pro forma leverage we wanted to make sure we continue to focus on on the Investor Great performance.
Speaker Change: And we're looking to be below the two five times net debt to adjusted EBITDA range by the end.
Speaker Change: Next fiscal year, So continued focus on generating free cash flow and disciplined approach to capex working lockstep 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.
Speaker Change: Just in terms of defense margin, obviously, when we look at fiscal year 'twenty six you're going to run down Burger legacy contract, but also at the same time, you'll be ramping up a new business that I would assume will be.
Speaker Change: Accretive to margin. So can you point out to some direction, we might see on defense for margins for fiscal year 'twenty six.
Yeah.
Speaker Change: It does sound glib, but higher obviously been why I mean for the factors that we've talked about before I mean as you said, we're the back we're winning a lot of backlog here and will replace the new backlog is very accretive to the margin.
Speaker Change: Margin target that we have below double digits and I have always said that 10%.
Speaker Change: Waypoint not a destination, but.
Speaker Change: I'm not going to get into your outlook today.
Speaker Change: Saw the strong execution would be very prudent of how we see business for obvious reasons.
Speaker Change: So look I think that.
Speaker Change: Well, we'll give you are as usual.
Speaker Change: 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 <unk> website.
Speaker Change: We'll talk to you after the fact that should you have any additional questions. 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.