Q4 2025 CAE Inc Earnings Call
Okay.
Good day, ladies and gentlemen, welcome to the CAE fourth quarter and full fiscal year 'twenty 'twenty five conference call as.
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Speaker Change: I would now like to turn the conference over to Mr. Andrew <unk>. Please go ahead Mr. Ananda.
Speaker Change: Good morning, everyone and thank you for joining us.
Speaker Change: We begin I'd like to remind you that today's remarks, including management's outlook for fiscal 'twenty six and answers to questions contain forward looking statements. These forward looking statements represent our expectations as of today May 14, 2025, and accordingly are subject to change such statements are based on assumptions that may not materialize.
Speaker Change: It is subject to risks and uncertainties actual results may differ materially and listeners are cautioned not to place undue reliance on these forward looking statements.
Speaker Change: A description of the risks factors and assumptions that may affect future results is contained in Cae's annual MD&A available on our corporate website and in our filings with the Canadian Securities administrators on SEDAR plus in the U S Securities and Exchange Commission on Edgar.
Mark <unk>: On the call with me. This morning are Mark <unk>, <unk>, President and Chief Executive Officer, and Constantino Malatesta, our interim Chief Financial Officer.
Mark <unk>: Nuclear and Titos D as Chief operating Officer is also on hand for the question period.
Speaker Change: After remarks from Marc and Constantino will open the calls questions from financial analysts. So let me now turn the call over to Mark.
Mark <unk>: Thanks, Andrew and good morning, everyone.
Mark <unk>: We delivered an exceptional fourth quarter capped a strong year across all of our key financial and operational metrics.
Mark <unk>: I'm very pleased with the performance and proud of how the team delivered with disciplined execution and efficient capital management.
Mark <unk>: We generated $289 million and free cash flow in the quarter and a record $814 million for the full year.
Mark <unk>: Translating to a very robust cash conversion rate of 211%.
Mark <unk>: That level of cash generation enabled us to meet our year end leverage target, giving a stronger financial position and increased flexibility as we look ahead.
Mark <unk>: Importantly, we also continue building momentum for long term growth and profitability.
Mark <unk>: We secured $1 $3 billion in new orders in the quarter.
Mark <unk>: Our record and have you adjusted backlog of $21 billion, which is up 65% from last year.
Mark <unk>: This achievement is a testament to the confidence of our customers have in C and the strength of demand across our markets.
Mark <unk>: Turning to our segments I'm extremely proud of what we've accomplished executing our strategy with dedicated focus and operational rigor.
Mark <unk>: Although civil side.
Mark <unk>: Right ongoing constraints in global aircraft supply and the temporary drop of U S pilot hiring we delivered another strong quarter demonstrating both the resilience of our business model and the strength of our global franchise.
Mark <unk>: Civil achieved a record adjusted segment operating margin of 28, 6% in Q4 and 21, 5% for the year.
Mark <unk>: Adjusted segment operating income grew 6% year over year, but.
Mark <unk>: A particularly good result, given the factors that had been that had been holding the commercial market back to more normalized operating levels.
Mark <unk>: Our backlog is civil grew an impressive 37% to a record $8 $8 billion supported by $3 $7 billion of new orders, including 56 full flight simulators.
Mark <unk>: During the quarter civil assigned training and operating support solutions contracts valued at $742 million, including a sale of 14 full flight simulators and long term training and airline off breakthrough digital solutions contracts.
Mark <unk>: In defense.
Mark <unk>: We accelerated our path to greater profitability.
Mark <unk>: We delivered an adjusted segment operating income margin of nine 2% in the quarter and seven 5% for the year driven by solid program execution and then your doubling of the adjusted defense backlog to $11 $3 billion.
During the quarter defence booked orders for $596 million, bringing the full year total to a record 4.0 billions of dollars.
Mark <unk>: It's very clear that we're great gaining traction and are well positioned for continued growth in a market with significant long term tailwind.
Mark <unk>: With that I'll now turn the call over to Dino who can provide some detailed look at our financial performance I'll return at the end of this call to comment on our outlook.
Dino: Thank you Mark and good morning, everyone.
Dino: Looking at our fourth quarter results and consolidated basis.
Dino: Revenue of $1 $3 billion was up 13%.
Dino: This quarters last year.
Dino: Segment operating income was $215 $8 million compared to $125 $7 million last year.
Dino: Quarterly EPS was <unk> 47 per share compared to 12 cents in the fourth quarter last year.
Dino: For the year consolidated revenue was up 10% to $4 $7 billion.
Dino: <unk> segment operating income was up 32% to $732 million.
Dino: And annual adjusted net income was $385 5 million or $1 21 per share, which is up compared to 80, some cents last year.
Dino: Net finance expense this quarter amounted to $56 $5 million, which is up from $52 4 million in the fourth quarter of last year.
I expect run rate quarterly finance expense to be approximately $55 million. So quite a few 26, which is a bit higher than last year because of additional lease expenses related to recently opened training centers in our global network.
Dino: And the financing costs associated with the consolidation of the silicon joint venture in business aviation.
Dino: Income tax expense this quarter was $45 2 million, representing an effective tax rate 25%.
Dino: <unk>, two and the effective tax rate of just 14%.
Dino: In the fourth quarter last year.
Dino: The adjusted effective tax rate, which is the income tax rate used to determine adjusted net income and adjusted EPS was 25% this quarter compared to 47% in the fourth quarter last year.
Dino: The annual effective income tax rates in fiscal 2026 is expected to be approximately 25% considering the income anticipated from various jurisdictions and the impact from global minimum tax legislation legislative changes.
Dino: Net cash provided by operating activities was $222 $7 million for the quarter.
Dino: Compared to $2016 2 million in the fourth quarter of last year.
Dino: The year, we generated $896 $5 million from operating activities.
Dino: Turning to $566 $90 million last year.
Dino: This strong performance is a result of the team's focus on execution.
Dino: Hitting program milestones and being highly prudent about cash management.
Dino: This effort translated into an excellent free cash flow performance this year.
Dino: We're now targeting a conversion rate of 150% for fiscal 2026 and beyond.
Dino: This represents a step change increase from approximately 100% conversion rate, which.
Dino: Which we previously targeted.
Dino: As far as the highly cash generative nature of our skis business.
Dino: Uses of cash involved funding capex for $109 million in the fourth quarter and $356 2 million for the year.
Dino: Mainly by the expansion of our civil Aviation training network in lock step with securing customer demand.
Dino: These opportunities traveling to some of our best returns as a stimulator assets ramp up with the first three years of development, reaching an average of 40% pre tax incremental return on capital employed.
Dino: We remain highly focused on capital efficiency and expect total capex in fiscal 'twenty to 'twenty six to be modestly lower than in fiscal 2025.
Dino: This will be concentrated mainly on organic growth investments and similar capacity.
Dino: To be deployed to see network of aviation training centers, which are backed by multi year customer contracts.
Dino: Our net debt position at the end of the quarter to $3 2 billion for a net debt to adjusted EBITDA of $2 77 times comfortably below kind of.
Dino: Your target below two times.
Dino: With our disciplined capital allocation strategy and commitment to financial resilience and we expect to further reduce net leverage to two.
Dino: Two five times by the end of fiscal 2026 supported by strong sustained free cash flow generation.
Dino: Now too.
Dino: To briefly recap our segmented performance.
Dino: In civil fourth quarter revenue was up 4% over a year to $728 $4 million and adjusted segment operating income was up 9% year over year to 200 and income $4 million or a margin of 28, 6%.
Dino: For the year Civil revenue was up 11% to $2 7 billion and adjusted segment operating income was up 6% to $581 $5 million for an annual margin of 21, 5%.
Dino: Average training center utilization was 75% for the fourth quarter down from 78% the prior year, mainly to the reduction in pilot hiring in Americas, we needed some OEM aircraft supply constraints.
Dino: Utilization was 70, 474% for the year down from 76% the year prior.
Dino: In products, we delivered 15 civil full flight simulators in the quarter and 61 for the year compared to 47 deliveries in the prior year.
Dino: In defence fourth.
Dino: First quarter revenue of $547 million was up 29% over Q4 of last year.
Dino: <unk> segment operating income was $50 $4 million for a nine 2% adjusted segment operating income margin.
Dino: Legacy contracts remain on track with cost and schedule is well managed and the margin excluding legacy contracts. It was nine 9%.
Dino: This compares to a negative adjusted segment operating income of $65 7 million in the fourth quarter last year for the year.
Dino: Here.
Dino: <unk> revenue was up 8% 2 billion and adjusted segment operating income reached $155 million for an adjusted segment operating income margin seven 5%.
Dino: Before I turn the call over to Marc I'll make a few comments about the potential impacts of tariffs.
Dino: She is well insulated from direct tariff impacts approximately 770% of our six total revenues come from services delivered within our customers' own countries, which significantly limits our exposure to cross border tariffs for the U S market disproportionate.
Dino: Was even higher around 80% last year.
Dino: Moreover, our flagship product the full flight simulator is exempt from tariffs under the U S. M C.
Dino: But from an enterprise standpoint, with roughly one third of our workforce based in the United States.
Substantial operating footprint and on the already significant U S. Bill of materials, we're confident that we have the flexibility to effectively manage any residual risk.
Dino: <unk>.
Dino: With that I will ask Marc to discuss the way forward.
Thanks Dino.
Marc: Before getting into our outlook I wanted to take a moment to reflect on how far we've come.
Marc: Over the past few months I've had the real privilege of Onboarding, our new directors and our new chairman.
Marc: Spending time with our teams around the world from.
Marc: From training centers to benefactor aided engineering sites.
Marc: And what I have seen confirms everything that I have always known about this remarkable company of ours.
Marc: He has transformed into a purpose driven high performance organization.
Marc: Our mission to make the world safer isn't just words, it's really deeply embedded in who we are and what we do.
Marc: Whether it's preparing pilots for complex aerospace, enabling defense forces to be mission ready or supporting critical operations. We are there for the moments that matter.
Marc: What always strikes me most is the caliber and the commitment of our people.
Marc: Across 240 sites in more than 40 countries. Our 13000 employees show up every day with focus resilience and a deep sense of purpose.
Marc: That mindset combined with our unmatched technology, our operational excellence a strategic position has made <unk> a clear.
Marc: A clear leader in this industry.
Marc: And over the last couple of decades, we have evolved from an industrial products company to a global powerhouse in training assimilation.
Marc: We are no longer working to meet the center we're defining it.
Marc: And with the momentum that we built I believe that the best is still ahead.
Marc: The market has begun to recognize our progress across the business as reflected in our stock outperformance relative to the broader north American indices here.
Marc: And as we look ahead to fiscal 2026.
Marc: We're carrying significant momentum with confidence and clarity, we have an over $21 billion of adjusted backlog and with the financial and operational discipline that we've demonstrated.
Marc: We're entering the new fiscal year from a position of real strength.
Marc: With continued focus on execution innovation and value creation.
Marc: I am confident that we will build on this foundation to deliver growth higher margins and stronger free cash flow.
Marc: In civil we remain well positioned with strong fundamentals solid demand across both commercial and business aviation.
Marc: Before getting into the specifics of our outlook, it's worth highlighting the recurring nature of our civil business, which is a key reason and we remain confident in its long term resilience and growth.
Marc: Recurrent training, which is required approximately every six months to maintain pilot certification represents about 70% of total trading activity.
Marc: These regulatory requirements are consistent worldwide, making this for sure that the band durable and relatively insulated.
Marc: Short term economic volatility.
Marc: And the remaining 30% of trading the bank comes from new pilot certifications that aircraft type transitions driven by fleet and pilot retirements.
Marc: In the civil business, but we also need the market in the sale and support our full flight simulators.
Marc: And while this is inherently more cyclical it closely tied to aircraft deliveries. This part of the business is all supported by very strong long term fundamentals.
Marc: Because of a short term supply chain constraints that have impacted OEM aircraft output.
Marc: We expect modestly lower simulator deliveries this fiscal year with a greater proportion of occurring in the second half.
Marc: For the year as a whole we expect to continue winning our fair share of full flight simulator orders.
Marc: Looking longer term the outlook remains highly compelling Boeing.
Marc: Boeing and Airbus have a combined backlog of over 17500 aircrafts at both projects the global in service fleet to nearly double over the next 20 years on top of that.
Marc: 280000, new pilots will be needed globally over the next decade to support this world and offset pilot retirements.
Marc: These structural drivers create a clear and compelling runway for sustained growth in pilot training long term.
Marc: In business Aviation, we expect to see continued momentum as we scale operations that need 20 centers and wrap up recent stimulator deployments.
Marc: Business segment is benefiting from benefiting from growth in the number of high net worth individuals in our world.
Marc: Strong OEM backlogs, the structural shifts doors fractional ownership.
Marc: Flight activity levels in the United States at 15% above 2019 and factual.
Marc: The 2019 levels and fractional operators like Flexjet I've seen a nearly 60% increase in flight hours over the same period.
Marc: Reinforcing the underlying demand fundamentals.
Marc: Our exposure is weighted towards larger business aircraft types, which have historically demonstrated greater greater resilience to economic cycles or dynamic that gives us added confidence in the current macroeconomic environment.
Marc: In any event, we still we see no indications.
Marc: Worsening conditions at this time.
Marc: Another example of the growth and resiliency of our civil business as our strategic expansion into the air traffic controllers training market, which is a natural adjacency that builds on our decades of experience in simulation based training for highly regulated safety critical roles.
Marc: This initiative has been notably capital efficient with the launch last year of our first air traffic services or Ats training centre in Montreal.
Marc: Which leverages, our existing asset base and in partnership with NAV, Canada, which manages one of the largest aerospace areas in the world.
Marc: A mere six months later the center welcome its first students in just over a year since announcing our entry into the a T S training.
Marc: She is now successfully trained seven cohorts of air traffic controllers in flight service specialists, who have now completed their basic training and transition back to NAV, Canada or they're on the job training.
Marc: Through this partnership we aim to train approximately 500 personnel by 2028.
Marc: And our decision to expand into this segment was driven.
Marc: Driven by clear and growing global neat.
Marc: By our own estimates some 70000 somebody.
Marc: And Youll air traffic controllers are going to be required over the next decade.
Marc: And shortages, particularly in the U.
Marc: And I'd say some parts of Europe are already putting pressure on aerospace capacity and system efficiency.
Marc: Our established expertise and high consequence printing environment, we're well positioned sports, it's essential function of the aviation ecosystem, enhancing both safety and throughput as well.
Marc: Adding a new Google revenue stream she civil portfolio.
Marc: For civil overall, we're taking a measured view of the first half of fiscal 2006, as we monitor broader macroeconomic conditions and OEM aircraft delivery rates.
Marc: In terms of our quarterly cadence in civil we expect this first of the year to begin much like last year in both revenue and margins with performance building progressively towards a stronger second half driven by increased trading activity and product deliveries.
Marc: So you're ahead.
Marc: We expect segment operating income to grow in the mid to high single digit percentage range.
Marc: With a modest increase in the annual adjusted segment operating income margin.
Marc: At defense, she is well positioned to benefit from a sustained global upcycle and military spend.
The European condition recently introduced to re arm EU program targeting 800 billion Euro and defense investment by 2030 and could potentially be even greater with proposed fiscal rule exemptions.
Marc: Across NATO, and Allied nations, including notably stronger commitment from Canada, increasing defense budgets are driving demand for the advanced training and simulation solutions, where CAE is it clear competitive differentiation.
Marc: We built a strong franchise in Canada over the past several years with major program wins and extension including contracts like.
Marc: That contract, we are past contract fixed wing search and rescue and the FTC and the C F eighteens systems engineering support contract.
Marc: The kidney that federal government plants nearly doubled its annual defense spending from approximately $40 billion to over $80 billion by 2032.
Marc: And in spite of the substantial growth opportunity or in light actually of the substantial growth opportunity and the scale of our current program base.
Marc: We've recently evolved our defense organisational structure to establish Canada as a standalone region with its own dedicated P&L.
Marc: Alongside our U S and international segments.
Marc: This change reflects the growing strategic importance of the Canadian defense market and our leadership position within it while also enabling our international team to sharpen its focus on a broader global opportunity.
Marc: We're immensely proud to have been ranked <unk>.
Marc: Once more at Kansas Top Defense company by Canadian Defense Review magazine, marking the third time at CS has received this honor.
Marc: To me this recognition highlights our commitment to advancing global defense capabilities for cutting edge training solutions, ensuring that we remain a trusted ally.
Marc: Securities and operational readiness.
Marc: <unk>.
Marc: Our aim is to be the Kansas Premier trading partner and one clear validation of the progress we're making came in February when she was named as a strategic partner to the government of Canada for the future fighter at leading training program.
Marc: Under this initiative, we will design and co develop the next generation training for Royal Canadian airports fighter pilots supporting Canada's fifth generation fighter readiness and reinforcing our leadership in high consequence training and mission support.
Marc: This is just another example of a long term high value opportunities that we see unfolding and it highlights sees all enroll and strengthening the capabilities of Canada in the salad.
Marc: Well the defense backlog definitely doubled year over year and a solid.
Marc: Foundation of program execution weeks.
Marc: We expect continued progress toward reaching our goal of a low double digit percentage margin and above market long term growth.
Marc: Specifically for the year ahead.
We expect defense to have low double digit percentage annual segment operating income growth.
Marc: And in annual segment operating margin in the eight to eight 5% range.
Marc: To sum up.
Marc: She is entering fiscal 2026 sort of a position of strength.
Marc: She remains both a highly compelling long term growth story and at the same time, a very good partner store.
Marc: We've built a resilient high performing company, one that's winning in the market delivering for customers and creating long term value for shareholders.
Marc: We bring together all the hallmarks of an excellent company a.
Marc: Our record order backlog deep customer intimacy strong competitive differentiation high proportion of recurring revenue and cash flow.
Marc: And exposure to secular growth market.
Our focus remains on innovation and delighting, our customers coupled with capital efficiency operational excellence and disciplined execution.
Marc: Lastly, as we manage a planned CEO transition later this summer the board and I are committed to a smooth and seamless handover.
Marc: The process to identify the next CEO is well underway and we're confident it's going to result, a leader will carryforward chief strategy culture and momentum.
Marc: I feel very good about our strong foundation, our deep leadership team and a clear path ahead.
Marc: D is exceptionally well positioned for continued success and sustainable growth well into the future.
Marc: With that I. Thank you for your attention and we're now ready to answer it.
Marc: Yes.
Operator: Thanks, Mark Operator, we'll now open the lines to financial analysts.
Marc: Thank you.
Marc: Now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad.
Marc: Your tone acknowledging your request if you're using a speaker phone. Please pickup your handset before pressing any key.
Marc: To withdraw your question. Please press Star then two.
Speaker Change: Our first question is from Kevin Chiang with CIBC. Please go ahead.
Kevin Chiang: Hi, Good morning here. Thanks for taking my question, maybe just my first one if I can dig into whats underpinning your civil outlook I understand the prudency just given all the all the macro uncertainty, but maybe we can dig into what youre seeing in terms of commercial training demand versus business jet training.
Kevin Chiang: Demand and then on the on the margin outlook for the year I guess I would've thought that mix would have been more of a tailwind if you're selling fewer <unk>.
Kevin Chiang: This year and you have the full benefit of some call them. Maybe if you can just walk me through some of the puts and takes on the margin outlook as well. Thank you.
Kevin Chiang: Oh, Okay, well look I'll I'll kick it off and maybe turn it over to Nick for some additional color on this some of it look I'm just going back to the civil outlook I mean, what would you lose or taking a measured approach.
Kevin Chiang: Specific in light of the the more cautious tone that we hear from airlines and you have a little bit of softness that we saw late in fiscal year <unk>.
Kevin Chiang: You know as we point out the second half is typically stronger than we've seen that I think every year I've been at sea. So we're expecting a more moderate environment and are in the first half.
Kevin Chiang: Both in terms of the what we see in terms of our deliveries of simulators that we're going to.
Kevin Chiang: Execute and some near term uncertainty, but all that's reflected in the guidance that we had I think it will hasten one thing is on the train decided to get out here over connect trade demand remains very resilient.
Kevin Chiang: We see some regional variation we.
Kevin Chiang: We see the pilot activity pick up.
Kevin Chiang: Recently state so we're watching that very closely.
Kevin Chiang: Coming back to simulator deliveries.
Kevin Chiang: <unk>.
Kevin Chiang: Which will really function of the delivery of aircraft out of Boeing and Airbus I mean, what we see as the supply chain issues are getting better.
But they continue to constrain the aircraft production itself, we're certainly not at peak production rates. So we're expecting a modestly lower deliveries. This in the first half of this year. So that's gonna be wait for the back half. So those are some of the components. So maybe just add a little bit to that.
unknown: I was just going to say, Kevin it's just the pilot hiring if it goes through the drivers you know pilot hiring which is one of the one driver is.
Kevin Chiang: It's improving for sure, but not not where they were last year.
Kevin Chiang: Aircraft deliveries same thing I mean things are improving actually with our with Boeing but we've been pretty lopsided with Airbus being the vast majority of the <unk>.
Kevin Chiang: Deliveries and therefore, a lot of our product sales have been in in in Airbus versus Boeing and so you know and and of course the customers themselves. There is there is a certain amount of I guess slack in the system right now because they were hiring at a certain level. So so we'd just like to let all this kind of balance out a little bit.
Kevin Chiang: I think and and so you know when we look at the when we look at the year. When we look at the forecast and the guidance that we've given I mean, it's taking a little bit of that into consideration because obviously, we see it improving as mark said demand in the training centers, there's still quite strong I mean, obviously, you can always be stronger, but the difference is.
Kevin Chiang: Is it.
Kevin Chiang: Not that not that big guys, who see an and.
Kevin Chiang: We are.
Kevin Chiang: I mean mid to high single digit growth on on our in our base.
Kevin Chiang: Civil which is this high as you know is something that.
Kevin Chiang: It's not it's not.
Kevin Chiang: We need some of these these drivers to improve.
Kevin Chiang: That's helpful. I'll leave it there. This is super helpful. Thank you very much.
Speaker Change: The next question is from Saudi Salmon with BMO. Please go ahead.
Saudi Salmon: Okay. Good morning, Thank you for taking my question.
Saudi Salmon: I wanted to ask about the flight operation, but some of the.
Saudi Salmon: Put together.
Saudi Salmon: A few small acquisitions in sabre.
Saudi Salmon: And I think I recall you.
I've been investing and modernizing the software the moslem offering we approached the market and.
In that business.
Saudi Salmon: We recently saw Boeing so are the competing offers through our private equity I wanted to get your thoughts like what state of Fred goodness.
Saudi Salmon: That was my segment is out right now from a competitive positioning perspective.
Saudi Salmon: And if you can give us some color about how it's performing relative to the level that you have expected by this time.
Saudi Salmon: Okay.
Saudi Salmon: Thanks for the question.
Nikola: And I'll kick it off maybe add again with Nikola.
Nikola: We're winning in the market. That's the first thing I'll say you know were very.
Nikola: And this is Don.
Speaker Change: Just continuing what we had said at previous call, where we are winning a disproportionate.
Speaker Change: Proportion of the business that we get in campaigns that we see out there for our order book is growing.
Speaker Change: I can tell you that basically I would say we're at capacity for the work that we can take on right now and if anything were paced right now in terms.
Speaker Change: Our growth at the speed at which the airlines actually.
Speaker Change: Under undergo the changes that are operational control centers, because it'll where you're making a change are adopting a system like ours.
Speaker Change: It takes a lot of time and effort, but I think to implement think like for our company.
Speaker Change: Implementing our ERP program and it's the same kind of thing. So there. So it takes a lot so.
Speaker Change: Youre working hand in hand with airlines and.
Speaker Change: So what kind of pace from that standpoint, but look again or avoiding in the market, where very Canada. We have a broad business over the next few years, what we're seeing what you're seeing is still right. Now is we're winning orders there basically fast kind of profile order, which means that we are going to be recognizing.
Speaker Change: The the revenue any earnings over a number of years as we execute disorders, it's kind of like the analogy, we're moving but.
Speaker Change: Average selling a simulator for Saturday like an on premise solution or delivery training, which is over.
Speaker Change: Quite a few years so it terms of the execution of our business. That's what was that quite happy with our positioning Mark and we're executing well we have we have a strong order book in terms of the question you asked about the.
Speaker Change: Boeing selling in the Jefferson deal I think the the strong level of them.
Speaker Change: Of interest that we saw the market demonstrates the attractiveness of the size of the market. So I mean, I think basically that's what I'd point to that.
Nick: Nick do you want anything more but no I was just going to say right now.
Speaker Change: Business no the number of implementations have ramped up significantly.
Speaker Change: With the all of the wins so the way I would the way I would look at this.
Speaker Change: As we have about $700 million of orders and the average contracts about five years. So we have a.
Speaker Change: 100, $150 million of revenue sitting there that we need to implement.
Speaker Change: <unk> solutions that we've sold and start to generate revenue so.
Speaker Change: The best is yet to come I guess is the way I would put it.
Speaker Change: Okay.
Speaker Change: Just.
Speaker Change: Kind of follow up on on on these comments.
Speaker Change:
From a scale perspective do you do you do you think I V.
Speaker Change: Scale ultimately to be effective in mis.
Speaker Change: Part of the business and are you finding I mean from the backlog I guess the answer is yes, but are you finding a lot of.
Speaker Change: I know she's in your commercial approach between come out what Youre doing on the training side I know you're doing on the flight operation side.
Speaker Change: Well I'd just point to one thing just recent example, we just had.
Speaker Change: <unk>, a big customer a meeting of the business are just last week in Greece, and we hosted that that the argue Aegean training center and Uh Huh.
Speaker Change: It was with the seals co Ceos of.
Speaker Change: Oh, the AGM and I can tell you that the reaction of the airlines to.
Speaker Change: Basically what this thing done.
Speaker Change: Scope of CAE full finished training market and then there.
Speaker Change: Is it in the service market just from a brand.
Speaker Change: Capability I think there's definitely synergies there.
Speaker Change: But that's just anecdotal.
Do you.
Speaker Change: You mean the synergies for this business are primarily in the front end we have.
Speaker Change: It seems that are that are active on both sides of the house when it comes to capturing customers and we leverage everything that we do with our customers to support more business with flight scape in particular, so I mean, it's you know it's a different business, but it's another it's another way.
Wait for us to become you know at the end, we want to become as important as we can to our customers and this is another way to do that.
Speaker Change: And maybe just to add on I don't think that.
Speaker Change: I don't think that would maybe is maybe that was part of your question the body I mean.
Speaker Change: To be specific I mean, we absolutely need it.
Speaker Change: Sounds like we need to add any more capability or through M&A or anything like that this business again.
Speaker Change: Portfolio that we have in the various software platform. It really have allows us to have the success. We have in the market because of some of which is going to fuel a strong business for us has demonstrated in the <unk>.
Speaker Change: $700 million of added backlog that Nick talked about.
Speaker Change: Thank you.
Gupta: The next question is from contact Gupta with Scotiabank. Please go ahead.
Gupta: Thanks, and good morning.
Speaker Change: I just wanted to kind of touch on defense, Montana, but here I'm looking at obviously the last year the sequential progression has been pretty remarkable.
Gupta: The margin exiting.
Speaker Change: The fiscal year at about call it 9%.
Speaker Change: That would be the tax credit and the legacy dilution.
Speaker Change: Whats keeping the lid on your expectation for this fiscal year, many were expecting you'd do it in a half a cent margin I mean.
Speaker Change: Is there a timing in terms of how the legacy program some forward or are.
Speaker Change: Is there something in the mix in the backlog that's not letting the margin kind of exceed that 9% you saw in the latest score.
Speaker Change: Okay.
Speaker Change: Well I'll start by saying, we're not putting a lid on anything.
Speaker Change: If you think about going to eight 5% on average like what's inherent in that is you could you could continue to see the inherently the progression that kind of progress that you saw this year I think Luc will well I like to walk before we can run and we've been watching pretty fast and I think we're going to continue to do that so look.
Speaker Change: I'd say our.
Speaker Change: I think you saw it in the numbers we.
Speaker Change: We were confident in this year, we do feel very good about where we are how we closed the fiscal year with carrying very strong momentum into the new year.
Speaker Change: Look and there's two really two drivers behind your outlook that we're giving them first.
Speaker Change: What you're seeing is the benefit of strong program execution, we're hitting a milestone or unlocking the cash which by the way was a key contributor to the very strong free cash flow performance that we had this in the fourth quarter.
Speaker Change: His second really where we're ramping up higher margin programs that we've won and commenced tobacco. If you remember the story that we've had.
Speaker Change: For quite a few quarters now is that basically what we've been doing.
Speaker Change: Is basically like a retiring programs executing on programs that are inherently.
Speaker Change: Been one at margins that are basically if you like dilutive or not accretive to the low double digits margin expectations, we have of the business, replacing them with contracts that too and that's continues to be the story here and when you look at the size of the backlog ending.
Speaker Change: Ending the year at 11 three backlog.
Speaker Change: Which by the way I would say and that's not over and we have like over $7 billion in bids and proposals that are outstanding so submitted to customers waiting.
Speaker Change: In terms of a customer decision I mean, it really positions us extremely well.
Speaker Change: Can you re shaping the business.
Speaker Change: Towards the hike towards our goal of a higher quality higher margin work. So look we're in a world. So I continue again going back to say Theres no lid on this business I don't certainly expect to perfectly linear upward trajectory, we've done very well, so theres always going to be quarterly quarterly variability in this.
Speaker Change: Business, because inherently when you execute.
Speaker Change: Depending on which programs you exclude index in any given quarter, but look we we anticipate look could be I would say cadence similar to like last year performance building progressive progressively from Q1 onward.
Speaker Change: So look.
Speaker Change: On the bottom line is that the fundamentals are very clearly improve we've done a turnaround this business and we're very good about the trajectory.
Speaker Change: It sounds familiar so mark. Thank you and then I think you've touched on them working cap a capital aspect. There. So I wanted to ask maybe from Dino.
Speaker Change: How should we think about the working capital are in.
Speaker Change: In this fiscal year do you see these are cash conversions continue at a similar clip or the mix will have some implications.
Speaker Change: So.
Speaker Change: Thank you for the question.
Speaker Change: I'm really really pleased with their free cash flow generation of $290 million this quarter and a record $840 million free cash flow generated more than 25, so the conversion rate of 211.
Speaker Change: Percent so the capital allocation priorities do remain unchanged deleveraging is a central part of what we're envisioning going forward.
Speaker Change: Our aiming to take for leverage down to two five times by the end of the year and that is again as a result of our confidence in the cash the recurring cash generation nature of our business moving forward as well as maintaining our focus on capital discipline.
Speaker Change: <unk> noncash working capital and are we in in this year, we unlocked a lot from the noncash working capital.
Speaker Change: Fortunately, a sixth and help with the cash flow.
Speaker Change: Generation and deleveraging.
Speaker Change: Goals next year, we'll see a continued focus on noncash working capital efficiency.
Speaker Change: And allowing us to maintain our two five times deleveraging target for next year.
Speaker Change: Okay. Thank you.
Speaker Change: Okay.
Speaker Change: The next question is from Cameroon, Derksen with National Bank Financial. Please go ahead.
Derksen: Yeah. Thanks, Good morning, just maybe to follow up on the on the cash question just on the Capex are indicating a modest decline year over year, but maybe maybe just two quick questions. On this I mean, one what is your expectation for maintenance Capex for for 2026 do we should we expect something similar to what we saw in 2025 and then secondly.
Derksen: Maybe you can just sort of detail, where I guess the growth Capex is going for this year, but what specific areas are you investing in.
Speaker Change: Thank you very much.
Speaker Change: Cameron so effectively we had adjusted your capex guidance or even higher than.
Speaker Change: 24 <unk>.
Speaker Change: And we achieved that by hitting $206 million. This year. So total capex is expected to be modestly lower than last year. Again continued example, disciplined capital approach, we invest organically to keep pace with the growth of our existing customers around 75% of next year's Capex will be effectively.
Speaker Change: To.
Speaker Change: To address some of the market deeds going forward, 25% maintenance Capex. So maybe similar to what we had this year.
Speaker Change: No.
Speaker Change: Generally speaking these opportunities give us the highest returns ramping up with the first years of deployment and reaching an average 20%, 30% pre tax incremental return on capital employed right.
Speaker Change: I've experienced the more intensive most people use appointment schedule recently now we're focused on cash generating returning capital.
Speaker Change: And return on capital as well as long term margin profile. So a lot of discipline in our execution going forward next year working lockstep with the market to make sure that we have the ability to address and.
Speaker Change: Reduce or any.
Speaker Change: Any capex, it's concerning the market calls for it.
Speaker Change: Just closing it off the two to Dino his comments a camera and look at.
Speaker Change: We just come off the <unk>.
Speaker Change: Yes.
Speaker Change: You know deep set.
Speaker Change: Set of multiyear investment cycle, we invest a lot into training locations. Yet we played offense during the downtime in a big way he sees the opportunity, but we took a took share we help customers outsource their training their training rebuilding San.
Speaker Change: Sport Newport's expanded a lot, particularly in business aircraft. So now we find ourselves in a place a very attractive place for now consolidating and operationalize signup opportunity and that really transitions to the guidance. We have basically both capex volumes of Capex that is.
Speaker Change: Going off its peak.
Speaker Change: Okay. That's helpful and maybe just a follow up I mean, just thinking about the growth Capex. I mean, you know largely driven by customer needs. I mean should we think about the investment here is largely just adding simulators to existing training centers or are there still some areas.
Speaker Change: Or do you think you need a new training center, either on the civil side or on the business jet side.
Speaker Change: Excellent yeah, no. So this year the most of the Capex so that were that.
Speaker Change: That we're spending is.
Speaker Change: We're opening Vienna, and and we're expanding in Orlando after the acquisition that Theres, a theres a theres a few things there so and we have a couple of things and and one of them to our existing training centers in the in cab. So.
Speaker Change: There's no there's no plans new.
Speaker Change: Our facilities are it's.
Speaker Change: Really just growing some of the some of the training operations that we were you know it's part of the business cases like some comments that it was a good example, a business case called for a bunch of simulators. So these simulators are starting to be manufacturing now.
Speaker Change: Okay. So that's very helpful. Thanks very much.
Speaker Change: Okay.
Speaker Change: The next question is from Greg Konrad with Jefferies. Please go ahead.
Greg Konrad: Good morning.
Greg Konrad:
Speaker Change: To focus on civil backlog I mean, you gave a little bit of color around flight operations, but if we think about 2025 growth in backlog of 37% maybe mid single digit revenue growth. It implies a much higher coverage of 2026 revenue then you've hit.
Toric, we have what shifted in backlog either from a margin perspective, or just you know recognition just given the high coverage in 2026.
Speaker Change: I'm I'm, sorry that was at the country was about where you were so you started with basically the question with it looks like sort of a place in that regard.
Speaker Change: Maybe that's a little bit.
Speaker Change: Segment overall in civil as a whole you're talking about yeah, just given the strong backlog growth and revenue outlook for 2026, I mean, how you think about that backlog converting to revenue just given there seems to be a much higher coverage for 2020 than you've historically had just given the size of the backlog.
Speaker Change: Yeah, Greg, It's Andrew I think I know, where you're coming from one of the big components of the increase is the consolidation of the Centcom JV.
Speaker Change: Flexjet contract, which is spread over 15 years. So you know you can't sort of aligned the purity.
Speaker Change: Backlog increased one one with the revenue generation you want.
Speaker Change: Perfect.
Speaker Change: And then maybe just given on the civil side, you know you talked about the U S. A little bit, but just given most of the training or most of the revenue in 'twenty, Texas coming from training can you. Maybe just talk about you know regionally, where you're seeing the biggest areas of strength within our civil aviation.
Speaker Change: Yes, so I think.
Speaker Change: Sure in terms of in terms of by region I would say.
Speaker Change: Americas would.
Speaker Change: Would be.
Speaker Change: Probably our weakest region right at the moment.
Speaker Change: And Asia is probably our strongest.
Speaker Change: Because of all the I guess all of the things that you that you probably bring them. In your question you know, there's a lot of new airlines a lot of growth in our in some of our customers and in particular in some of our customers were seeing some good growth.
Speaker Change: Business aircrafts I would say relatively relatively stable I mean, we are expecting some improvement in utilization.
Speaker Change: In business aircraft, but nothing nothing outrageous. So I think you know.
Speaker Change: You know training demand is pretty strong across the board, but of course the U S is the one which is a little bit more I'm, a little bit more muted for us.
Speaker Change: Thank you.
Okay.
Speaker Change: Once again any analysts what the question should press Star then one.
Speaker Change: Our next question is from Tim James with TD Colin. Please go ahead.
Tim James: Thanks, very much for taking my call. Good morning, just one question mm mercury highlighting them.
Speaker Change: The great growth.
Speaker Change: Look now for Canadian Defense spending you know a doubling as you mentioned by 2032, you'll see already is just a great presence and a lot of very strong contracts in Canada can you talk about and maybe it's early but any anything you can say in terms of what that big pickup in defense spending could mean in terms.
Speaker Change: Of additional opportunities for C and what those might look like if you have any sense for that at this point.
Speaker Change: Well I can only give directional and it odd.
Speaker Change: You just look at what our what I talked about in terms of the doubling of the size of expenditure of the.
Speaker Change: Hence budget in Canada over the next.
Speaker Change: A few years I mean I.
Speaker Change: I feel very very good that that's going to translate into senior thing.
Speaker Change: Foresee on top of the <unk>.
Speaker Change: We're a very significant level of order intake and actually revenue that we're generating right now on contracts in Canada, and you know what.
Speaker Change: I think we will get a what I would say that a disproportionate share because we we actually literally are a strategic partner and that those are there. We're a strategic partner to the government of Canada as they want to operationalize.
Speaker Change: The acceleration of defense spending in Canada.
Speaker Change: And when you think about what military Stu when they're not in conflict. It hopefully you never in conflict, but what do you Miss military student or basically they trained they train that's all they do train train train so obviously.
Speaker Change: That's what we do so you can you can be.
Speaker Change: You could see right off the bat that any capability that they deploy whether it's new aircraft with schuh helicopters that you ship it and submarine Oh that is going to require very significant and realistic training so as Canada's strategic partner.
Speaker Change: I think we were going to continue to do very well in that market in Tennessee.
Speaker Change: Okay, great. Thank you.
Speaker Change: Yeah.
Speaker Change: Great well, operator, I think well bring the call to a close I want to thank all participants for joining us. This morning, and remind you that a transcript of the call on Q&A will be made available on <unk> website.
Speaker Change: Thanks, very much and good day to all.
Speaker Change: This brings to a close today's conference call. You may disconnect. Your lines. Thank you for participating and have a pleasant day.
Speaker Change: [music].