Q2 2026 CAE Inc Earnings Call
Good day, ladies and gentlemen, welcome to this CAE second quarter financial results for fiscal year 2026 conference call.
As a reminder, I'll participants are in listen-only mode and the conference is being recorded after the presentation. There will be an opportunity for analysts to ask questions to join the question queue. You may press star then 1 on your telephone keypad. Should you need assistance during the conference call you may signal an operator by pressing star then zero?
I would now like to turn the conference over to Mr. Andrew arnovitz, please go ahead Mr. Arnovitz
Good morning, everyone. And thank you for joining us today. Remarks, including Management's outlook and answers to questions, contain forward-looking statements, which represent our expectations as of today, November 12, 2025, and accordingly are subject to change. Such statements are based on assumptions that may not materialize and are subject to risks and uncertainties. Actual results may differ materially, and listeners are cautioned not to place undue reliance on these forward-looking statements. A description of the risk factors and assumptions that may affect future results is contained in C's annual MD&A and MD&A for the 3 months ended September 30, 2025, available on our corporate website and in our filings with the Canadian Securities Administrators on SEDAR+ and the U.S. Securities and Exchange Commission on EDGAR.
On the call with me this morning from CAE were Calin Rovinescu, the company's Executive Chairman, and Matthew Bramberg, President and Chief Executive Officer.
And Constantino Malatesta, our interim Chief Financial Officer.
Nikki and Titus Chief Operating Officer is also on hand for the question period.
Thank you, Andrew, and good morning, everyone.
To disciplined Capital Management and capital allocation and 3 improved performance through operational excellence and cost transformation.
We expect this plan to lead to sustained value creation and long-term shareholder returns.
The first order of business for Matt as he took the Reigns as CEO was to undertake a comprehensive review of seas business and operations. And my focus has been on ensuring continuity providing counsel and engaging with stakeholders, as we chart the transformation plan that Matt will set out in a few minutes.
Both to take their feedback, as well as to discuss the huge opportunities in front of us.
In fact, I recently participated in a Bloomberg conference panel in New York focused on Canada's generational defense investment. Push a discussion that underscored the Market's confidence in the opportunity ahead for CAE.
Canada's creation of the new Defence Investment Agency is an important step toward renewed emphasis on capability, modernization, and industrial sovereignty.
Priorities that align closely with ca's global position and core strengths.
As you'll hear from Matt, we're making meaningful progress on the first stages of the transformation plan which has already resulted in some important organizational changes.
Having LED several successful programs to unlock shareholder value in the past. I'm confident we're on the right track challenging the status quo while protecting what is core to CAE.
We selected Matt as our CEO because he has the operational depth and proven record of building and leading high performance teams that drive value in some of the world's leading Aerospace and defense companies, and he has the full support of the board as we embark on this next phase of ca's Journey.
CA's culture has centered primarily on growth over the last two decades, and it is time now to harvest that growth and extract even greater bottom line profitability.
And that is what our transformation plan will seek to do.
With that, I'll turn the call over to Constantino to provide some financial highlights. And then to Matt, to share his perspective, from his first 90 days outline, the high level approach to the transformation plan, and discuss the organizational changes that we announced today Constantino over to you.
Thank you Kaitlin and good morning.
Our quarterly EPS adjusted EPS was 23 cents compared to 24 cents in the second quarter last year.
Net Finance expense. This quarter amounted to 56.9 million up from 52.9 million in the second quarter last year. Mainly because of additional financing costs associated with the acquisition of the rest of simcom in business, Aviation, which took place in Q3 last year, an additional lease expenses related to training center expansions in our Global Network.
We continue to expect our run rate, effective income tax rate of approximately 25% reflecting the expected Geographic, mix of earnings and ongoing tax legislation, reforms from various jurisdictions.
Net cash from operating activities increased this quarter to $214 million, compared to $162.1 million in the second quarter of fiscal 2025. Similarly, we had strong free cash flow, which increased by 44% to $201 million, compared to $140 million in the second quarter last year.
The increase was mainly due to higher net income, adjusted for non-cash items and higher dividends received from Equity, accounted investees,
With continued expected reversals in non-cash, working capital Investments and our outlook for operations. We expect to generate strong free cash flow for the year with a conversion of adjusted net income of approximately 150%.
Capital expenditures totaled. 87.6 million this quarter with approximately 85% invested in growth.
or for simulators deployed to the FST SS program in support of U.S. Army helicopter training in Alabama,
We continue to expect total Capital expenditures in fiscal 2026 to come in lower than last year. And now, even below what we previously, guided more precisely, we are expecting a roughly 10% year-over-year decrease in capex.
Reflecting about a 25% reduction in civil spending with the remaining Investments focused on Market. Driven growth supported by multi-year customer contracts and simulator deployments across ca's Global training Network.
Our net debt position at the end of the quarter was approximately 3.2 billion dollars for a net debt to adjusted Abita of 2.66 times. At the end of the quarter,
We continue to expect to reach 2.5 times. Net debt to adjusted Evita by the end of the fiscal year.
In civil second quarter Revenue, grew 5% year-over-year to 670 million while adjusted segment. Operating income, decreased 6% to 108.7 million. Resulting in a margin of 16.2%.
Training Center, utilization came in at 64% down from 70%. In the prior year, we also delivered 12 full flight simulators compared to 18 last year.
This performance, reflects the normal seasonal slowdown in training activity, along with lower commercial training, utilization done in the same period last year.
In defense Revenue, grew 14% year-over-year to 566.6 million while adjusted segment operating income increased 41% to 46.6 million, delivering an 8.2% margin. Thanks to higher activity on new higher margin program, rewards, and the ramp up of recently, awarded contracts in the US and Canada.
With that, I will turn the call over to Matt.
Thanks Tino and good morning everyone.
Before I get started, I want to acknowledge yesterday, November, 11th, Veterans, Day in remembrance day. It's something that's very important to me and the over 10% of our employees that are veterans and given that almost 45% of what we do is to serve the war fighter. It's an important time to take a moment and reflect
since stepping into the CEO role in mid August, I have spent time with our customers, our partners, our shareholders, and our employees across the company,
These first few months have confirmed. What those of you who follow the company already know?
CAE is a strong business with strategic advantages and a compelling industry. Fundamentals that support growth.
We have world-class technology and a leading share of the markets in which we participate.
CA has very strong customer relevancy with Airlines.
Oems governments and defense services.
And the CIA brand commands respect.
Not only for our capabilities, but for what we stand for: safety, quality, and mission readiness across both civil aviation and defense.
Looking forward. The task is not to leverage our team.
Our technology, our customer relationships, and our strategic assets. To not only grow the top line, but also improve cash flow and our return on assets.
We will build on our strategic advantages to further unlock value in our markets and that's what our transformation will seek to do.
We are a world leader in Flight, simulation and training. I have discovered firsthand that, we have an entrepreneurial culture and a highly passionate employee base who all recognize the importance of what they do.
It shows in our engagement surveys.
And in our customer satisfaction surveys.
The key now is to harness that drive and align it behind a coherent strategy supported by disciplined Capital Management and Tighter operational controls.
What is unique about CAE is that innovation is built into how we think.
How we design and how we execute.
Our ability to simulate, complex, environments, and scenarios is unmatched.
And our model based system engineering capability is world class.
Our expertise in Hardware software. Integration is a key differentiator,
Said.
That Innovative Edge runs through everything we do.
For example.
The new CAE Prodigy image generator is the world's first, third generation Level, D certified image generator.
Prodigy is redefining realism and efficiency by narrowing the gap between virtual and Real Worlds, with ultra realistic visuals and high-fidelity motion and flight Dynamics.
and for the first time, we are applying the same image generator technology, a cross both Commercial and Military training systems
It has been certified for commercial aircraft use and is already operational on multiple Eurofighter and CH-53 Stallion simulators.
With dozens more in the pipeline.
To me, this is the clear expression of C's technology differentiation.
through Capital, sorry excuse me, through discipline, Capital, allocation
And a deep engineering culture. We can deliver dual-use Technologies with lasting strategic, and financial impact.
Another example is the nh90 sea lion program in defense.
Which demonstrates our ability to deliver highly integrated mission level, simulation environments at scale.
It is a fully immersive, multi-roll training ecosystem, that mirrors, the operational complexity of Naval helicopter missions and is powered by more than 3,000 CPUs. 50 gpus and over 100 terabytes of data.
The system Rivals, the computational scale of enterprise-grade Defense networks. It is able to link multiple training devices, together from full mission simulators to Tactical and procedural trainers.
This provides a flexibility for our users. The war fighter to operate independently or together in coordinated scenarios.
But also sets it apart is a depth of its domain modeling from Advanced sonar. Acoustics to ship deck width ship deck, wind and wave Dynamics, capturing the full realism of Naval Aviation operations,
These are just 2 of many examples of how cia's, technology, leading technology leadership, translates directly into customer value competitive advantage, and long-term growth.
The technology Advantage spans, both civil and defense.
The majority of what we do in each business is training and simulation and I believe there is real potential to create G greater Synergy and shared Innovation between them.
So, looking forward, the task at hand.
The opportunity is to protect and Leverage, The Great technology people and customer relevancy. That is propelled CAE over the past decade.
while at the same time to sharpen how we operate with a focus portfolio, a simplified organizational structure and a higher bar for performance and returns,
We are therefore embarking on a transformation plan.
A transformation plan that will include several key drivers.
To start.
We've begun to align our organization and Leadership for greater Clarity of responsibilities and sharper execution.
Nicely and Titus will retire at the end of the calendar year and transition to the role of special adviser to the CEO.
Nick's 37-year contribution to CAE has been extraordinary.
Building civil into a global leader stabilizing our defense operations, and helping set down foundation for our next phase.
and Nick is sitting here with me today and having gone through many transitions
I want to tell you Nick. Thank you personally as a mentor. And as a friend, over the past 90 days, it has been a pleasure to spend time with you and get to know you and I look forward to working with you until the end of your retirement.
With his retirement, we are reducing a management layer by limiting, the Chief Operating Officer role and moving to a more streamlined business-led, production model organized, around driving excellence and quality across product and Service delivery.
To that end, we've Consolidated leadership of the Civil business with the appointment of Alexander Poe as its president.
By doing so, we are combining commercial and business Aviation to accelerate the transformation and to optimize utilization and efficiency on a global scale.
This move also establishes a single Integrated Service Excellence organization.
Designed to best serve the needs of our civil aviation customers.
as many of, you know, Alex most recently LED our business Aviation Training Division after heading commercial Aviation training in Asia Pacific,
He has an excellent customer relationship portfolio and brings a strong operational track record and financial acumen. Having started his CA career in structured finance and M&A.
In defense, we've Consolidated from 3 p&ls into 2.
Will continue to lead our us Defence business. While France bear will have the responsibility for Canada International
in doing. So we will sharpen focus and improve coordination across our Global defense organization.
Together these changes create 2 comparable segments with the technology scale and reach to capitalize on growing Defence Market opportunities.
I want to thank Mark, Olivier, sabran who will be leaving CIA in December for his Decades of dedication to the company and for his instrumental role in, developing our International defense presence,
We are deeply grateful for his many contributions and wish him continued success in his future endeavors.
We also welcome Inu and Rojo.
Juan will join CAE in January as our new senior vice president operations.
Juan brings over 25 years of global Aerospace and Industrial experience with companies including Raton, Pratt and Whitney and Hamilton sunstrand and has a proven record of driving operational excellence.
Juan will focus on productivity.
Quality cost and continuous Improvement across our product organization.
In a typical year CAE designs manufactures and services over 300 training devices for the civil and defense markets.
Making this a prime opportunity to unlock further efficiencies and value.
In doing so we will strengthen execution and product quality while lowering product cost and driving greater supply chain efficiency. Prefer both civil and defense segments.
Today's leadership announcements are only the first step in creating a leaner more focused organization 1 that has fewer layers eliminates redundancies and is aligned to deliver sustainable value creation.
In addition to the leadership changes the transformational, focus on 3, priorities,
Our portfolio.
Our Capital discipline.
And our performance.
First, let me comment on our portfolio.
We have a strong balanced portfolio across civil and defense.
2 businesses, powered by long-term. Secular Tailwinds.
Our defense segment provides durable predictable. Growth largely insulated from the broader economy with Sovereign, backed contracts, that generate steady cash flow.
That cash gives us the flexibility to fund the highest return opportunities across the company.
And as I discussed a few moments ago, there is real technology and capability overlap between civil and defense that strengthens both sides of the portfolio.
And addition, our operations seem to be focused on unlocking value of both segments,
However, we are taking a bottom-up look at every business, every investment, and every partnership within our two segments to ensure that our capital and management attention are concentrated where CAE has the greatest advantage and the greatest potential return.
Our portfolio assessment is in its early stage.
But I fully expect decisions and actions to be made over the next few quarters.
Second.
Our Capital discipline.
1 of my first actions is CEO was to review our Capital approval and operating policies.
while our previous practices were successful at supporting growth,
we need to also reflect return on Capital and free cash flow.
We have already tightened policies around capital and operational expenditures introducing sharper filters for returns strategic fit and execution certainty.
All material capital projects, along with all material commercial proposals, are reviewed by me to ensure that they meet.
the heightened return thresholds.
We also standardize how we bid how we track and how we evaluate projects.
Just shifting from discrete investment reviews to a more holistic rigorous portfolio approach, that looks ahead and links directly to our strategy to our risk appetite.
And to our expected returns and cash flows.
Through these enhancements.
We expect to identify certain businesses and contracts that no longer align with our long-term objectives, a healthy outcome of this review.
We also invest significantly in research and development.
Here too. We are taking a pragmatic data-driven approach.
Evaluating initiatives not only against their budgets but also their original business case.
Where the assumptions are, market dynamics have shifted. We have already identified projects for wind down.
Spending to moderate later in the year.
Ultimately, our goal is to be more selective.
Not less, ambitious, just more selective, the opportunity set in our end markets is large and growing and that allows us to drive profitable growth while raising our standards for return on Capital.
In short.
We'll be more disciplined, more selective and more demanding in all, our commercial bids and all our capital projects, and all our research and development programs.
Likewise any acquisition would be considered only within our core markets?
And finally, our performance.
We are already taking actions to simplify our structure. Consolidating. Where it makes sense and aligning. The organization around speed around accountability and around execution.
Today's leadership changes are the first steps toward driving that next level of operational performance.
We are reviewing every aspect of the company from our real estate footprint.
And our asset utilization to cost transformation, and go to market strategies.
We are taking a thorough and pragmatic approach to ensure that every part of cie operates at its full potential.
One of our most powerful assets is our Global Aviation Training Network, comprised of over 85 locations and 360 full flight simulators built over the past two decades.
We deliver 1.3 million hours of training annually, far more than anyone else.
our Global training Network spans more than 6 million square feet, and we occupy roughly another 5 million square feet companywide
Which intuitively feels large relative to the scale of our output.
We are looking for opportunities to better optimize that footprint so that we have the right simulators in the right locations.
And the network is sized appropriately to Serve customer needs and optimize returns.
We will also ensure that we are being more selective on future expansions, matching supply with demand.
The team is engaged, and we will look to unlock significant value through this effort.
On the product side, we manufacture more full-flight simulators than anyone else by far.
And our Factory operations will also be an important area of focus.
The simulator production environment is a high mix, low-volume business and our facilities need to reflect that reality through more modern processes and a stronger integration with product management.
The performance is not just about scale and structure. It is also about how the whole system works together.
My Philosophy is that great organizations require collaboration between people processes tools and purpose.
Every improvement we make, whether in governance, decision rights, or measurement, is tied to our focus on capital and performance, and measured with respect to the impact on growth, profitability, cash flow, and return on capital.
With that, in mind, we're also putting in place stronger governance over how performance is measured and managed. After every investment, is launched ensuring projects deliver. What they promised, not just an Inception but through their entire life cycle.
Furthermore, to align incentives with this philosophy. We are assessing our executive compensation plans with the intent bidding. Next fiscal year to make Capital efficiency and free cash flow metrics more prominent.
There are multiple work streams and initiatives underway. This transformation will take time.
However, the time and investment will unlock greater value from ca's platform powerful platform.
Enabling us to Delight our customers Drive, higher Returns on invested capital and generate stronger free cash flow.
So, let me take a moment to walk you through how we see the transformation developing over the next few quarters.
We are focused on implementing the organizational changes announced today as well as conducting a portfolio and project review establishing baselines and setting the metrics that will guide us forward.
By the end of the fiscal year, we expect to share a clear blueprint of the broader transformation plan, with prioritizing initiatives, and financial, and operational targets, as well as our approach to monitoring and Reporting on our progress.
We are driving the work methodically.
Deliberately pragmatically and with the results focused mindset.
So, now that we've talked about the transformational plan, let me switch gears and talk briefly about current operations.
In civil financial performance in the quarter was in line, with our expectations reflecting is Dino mentioned, typical seasonality and some short-term softness in commercial training.
And that 12 still maintains our market share although historically a soft number.
Order activity was lighter than we anticipated at this stage consistent with a slower recovery. In Pilot hiring particularly in the US.
As a result, the Civil book-to-sales ratio was 0.88 times for the quarter, a temporary dip from remaining above 1 at 1.22 times on a trailing 12-month basis.
We believe pilot hiring activity has passed the trough and is currently improving. Indications from airlines in the U.S. are that pilot hiring has commenced again and will ramp up in the second half of the year and into 2027.
Notwithstanding the lighter activity, CA continues to maintain its leading market, share and is well positioned to Leverage The Inevitable Market recovery.
We ended the quarter with a civil adjusted backlog of 8.5 billion up 27% from last year. Providing a strong Foundation as market conditions continue to normalize.
Building on that base is solid fundamentals. We signed a 15-year training agreement with WestJet, announced but not yet reflected in the Q2 adjusted backlog, for the establishment of the Alberta Training Center of Excellence for Aviation and Aerospace in Calgary, which is scheduled to open in 2028.
It is a great example of an infrastructure-like investment that has a recurring revenue and cash flow profile and builds long-term strategic partnerships with airlines as part of a plan for future growth.
Also encouraging is that owing to production and deliveries, we have accelerated, driving renewed pilot demand and simulator sales. As I said, we are seeing indications of recovery and growth in the civil market.
US Airlines most of whom have recently reported encouraging results are ramping Up. Pilot hires for the second month in a row and even in business, Aviation customers at last month's mbaa reported a higher pilot turnover as commercial carriers Reserve recruitment.
Global Business Jet activity is at record levels up, 20% in the US and 12% in Europe compared to 2019.
Led by fractional fleets that have expanded more than 60% over the same time frame.
These dynamics reaffirm the long-term trajectory of CAE.
However, given the slower near-term, Cadence we. Now expect civil performance for the year to be roughly in line with the prior year.
Consistent with that. As you heard from Dino, we are further reducing Capital, expenditures to reflect both the moderate pace of demand recovery, and our discipline approach to cash management and efficiency.
we expect the benefits of the underlying Market recovery to be more pronounced in fiscal 2027 and Beyond
in defense, financial performance was performance was also in line with our expectations
With steady margin Improvement, and double-digit growth. And we are maintaining our full year outlook.
Momentum continues to build as we renew and strengthen the adjusted backlog with higher-value, longer-duration programs.
Second quarter, adjusted order intake totaled $556 million.
Reflected in the continuous success, across key franchise platforms.
This contributed to a book to sales ratio of 0.98 times for the quarter and 1.19 times over the last 12 months and resulted in an adjusted defense backlog of 11.2 billion.
The defense pipeline also continues to be robust, with some $6.1 billion in orders pending customer decisions.
In the US we are awarded a contract for 2. New F-16 Mission training centers to be employed to the Air National Guard base at souf Falls, South Dakota and the joint National Guard base at McIntyre South Carolina.
The F-16 program is a great example of ca's enduring role on long, life defense platforms.
Over its nearly 5 decades in production more than 4600 aircraft have been built with roughly 3,100 still in active service across 29 Nations.
Making it the most widely operated fighter jet in the world.
The fleet has logged over 19 million flight hours and flown more than 13 million sorties.
And CA has delivered more than 280, High Fidelity. F-16 pilot mission training devices worldwide, including recent Awards, the total will be over 300
We have delivered more than 90% of all high Deli, F-16 simulators, and service today supporting over 15 Nations.
This installed base represents a significant opportunity for modernization and upgrades as operators. Look to bring their training devices up to the latest configuration.
Since its inception, the F-16 franchise has generated roughly $2.5 billion in cumulative sales for CAE and remains one of our largest defense product lines.
And the F-16 is just 1 of several key platforms on which CA continues to play a critical role in training and Mission Readiness across some of the most enduring and widely deployed military Platforms in the world.
Database from long-term infrastructure, like training Partnerships that generate highly recurring cash. Flows to enduring platform. Franchises that anchor. Multi-deck a defense programs.
So to summarize my take on current operations both civil and defense are performing, broadly as expected and are near-term. Focus remains on discipline execution, operational efficiency and free cash flow generation and we advance the companywide as we advance the companywide transformation.
Looking at the Outlook of cross CA remains strong, we are uniquely positioned at the intersection of 2 enduring Global growth markets, civilization, civil, aviation, and defense.
In defense, momentum continues to build across Allied markets supported by sustained modernization programs, including those underway in Canada and we are well, positioned to capitalize on that growth through our proven capabilities, in Mission Readiness and Training Systems.
And in civil aviation while near-term, Cadence remains uneven, the fundamentals are powerful.
Structural pilot demand in recording backlogs continue to support the compelling. Long-term growth story.
And across CAE, our Focus remains on execution, driving higher margins stronger, free cash, flow and better Returns on invested capital.
These priorities are the foundation for sustained value, creation, and long-term shareholder returns.
As I look forward, the same 3 priorities that are informing our transformation sharpening. Our portfolio strengthen Capital discipline and elevating performance.
Will serve as my philosophy as CEO and as we see Northstar going forward.
This defines how we operate.
How we will invest, and how we will measure success.
This is a deliberate and disciplined journey, and the direction is clear.
We are aligning CA structure, resources and incentives around performance Capital, efficiency, and accountability.
I'm excited to lead. CA forward with a world-class team and unmatched training Network and a clear strategic Vision with discipline focus, and a continued support of Kalin and our board. I am confident in our future and energized by the opportunity ahead.
We are powered by Leading Edge technology and strong secular growth Tailwinds in both civil and defense. It gives us tremendous Runway to deliver sustained performance and long-term shareholder value.
Thank you. And I look forward to your questions.
Thank you for that Matt operator. We'd now like to open the lines to questions from Financial analysts.
We'll now begin the question and answer session to join the question queue. You may press star then 1 on your telephone keypad, you will hear a tone acknowledging your request. If you are using a speaker-phone, please pick up your handset before pressing any keys to a draw. Your question, please. Press star. Then 2 1 moment. Please for your first question.
Your first question comes from fatty shamoun with BMO Capital Market. Your line is now open.
Good morning, thank you. Um, Nick, I just want to say first, uh, congratulations on your retirement and appreciate all the insight and help over the years. Um, just a couple of question, maybe, you know, around this Capital efficiency, Focus obviously.
um,
so,
You've talked a lot about, kind of, you know, harvesting capital after a period of growth.
Um, can you share a little bit?
how the um threshold approved Capital has changed uh and I'm curious when you look at the business and you look at the opportunity to streamline the portfolio that you talked about and to sweat the asset more
What is the order of magnitude return on capital? This business is able to generate over the medium to longer term, not short term. Not looking for like kind of guidance here. But you were at one point in the past, CAE generated, you know, double-digit RYC, mid-teens RYC in a few years as well.
Is this order of magnitude possible still to kind of look at over a period of 3 4, 5 years potentially to see that kind of Leap Forward in the roic um, performance.
Body. Thank you for the question. It's good to hear your voice. First, let me just, uh, give Nick the mic and then I'll I'll approach your questions.
Yes. Um hi Freddie. Thanks for the uh, thanks for the kind words and it's been a pleasure to work with you. Uh, all of these years.
Thanks again, Nick so far. You had several questions there and I want to make sure I answered them in the right order. Um, why don't you slow down and and ask the first 1 and I'll make sure I answer it correctly.
I'm curious if you can share how the threshold uh to approve capitals change. You talked about um kind of changing the mechanism within CAE and and the threshold how you approve capital. How is that changed? What is the threshold look like now?
Yeah, so appreciate the question fee. Yeah, we're we're evaluating all of our prior Investments to make sure that the assumptions that went into them are still true. And that is a lens that we'll use to. Look at the current Network and make sure it's located in optimized for today's performance. We're also reflecting today's market conditions. So when we make new Investments, we're going to affect the reality of where airlines are and what the growth prospects are. And through those 2 lenses, we're going to make a more disciplined approach going forward. Again, we have a world-leading network 1 that we're very proud of 1 that's a strategic advantage and we think there's tremendous opportunity for us to leverage that Network going forward, given that we have the largest training Network in the world.
and, and the other question was around return on invested capital,
Um this business did double digits roic, not very long ago.
And through all this work that you're looking at in terms of portfolio, streamlining and threshold and and and uh you know more Capital Discipline, Do you see a vision where we can get back to that type of double digit row YC in the next few years?
Yeah, thought it would be premature for me to answer that question precisely today, but that is the top focus of me and the entire leadership team. Looking at how we've invested Capital over the past 5 years and how we will invest Capital over the next 5 years. And so how we can make better decisions for future investment and maximize return on the current investment. So that's exactly what we're going to spend the next few months on packing. It'll be a to share that with you. As we talk about next year's Financial Outlook,
okay, I appreciate it.
Your next question comes from Christa Friesen with CIBC your line is now open.
Hi. Thanks for taking my question.
Um I was I was just wondering if you maybe you can uh speak to us about any surprises. You have encountered so far. I appreciate you've only been in the seat for about 3 months now but you've made some early changes and just wondering if you've uh encountered, anything unexpected
Yeah, thank you for the question. I think there have been only positive surprises. The level of energy across the organization, the entrepreneurial focus and the strong customer relevancy, is something. I've seen in every part of the franchise, and so that has been an incredible, uh, reassurance. I knew that coming in but it's a pleasant surprise. I also think the depth of our technology and how we can better leverage defense and civil is an opportunity. I hope to unlock and quantify over the next few quarters. So all that.
Been very reassuring.
Okay, great. And um, as you've mentioned, uh, in your opening remarks and and in the press release, there have been some initial organizational changes.
Are there any opportunities you see in the near term in the next quarter to for additional changes? You can Implement before, maybe we get your full uh, full blueprint for the company.
Yeah, I I appreciate the the questions. So the focus now is on giving the new team time to assess the the responsibilities and create the Strategic path going forward. And is that team is in place we'll be able to share the objectives and the measurements we're going to use to chart the progress forward so give us a few quarters. Uh I have led Transformations like this many many times over my 25 years and it's about identifying the opportunity. Putting a team in place identifying the measurement objectives and then letting them run and that's what we intend to do.
Okay, great. Thank you. I'll jump back in the queue.
Your next question comes from konar Gupta with Scotia Bank. Your line is now open.
Thanks operator. Good morning. Uh and I Echo congratulations, Nick for the remarkable career you had at CAE. Um, my first question is on, on the capex side, I think you guys announced a 10% reduction in capex was just last year. How much of that is Market condition driven, as opposed to your Capital allocation decisions? You have taken early on and of that capex, how much is that 1? Large defense contract. If you can share,
And, uh, driven really, by 25% reduction in civil complex, that is a reflection of, um, really our discipline approach to Capital. Um, so it is a reflection of the, The Slowdown, the, the lull, the temporary Lull in the, in the, uh, in the, um, activity. And so we have adjusted, uh, and use the agility that we've, uh, We've implemented here to adjust the capex on a grow for basis, about 40% of the growth capex. Um, this quarter was for the fstsb.
Thank you and uh, on to leverage, uh, ratio side of things. Um, you know, I think it's more sort of a, you know, broader to the question long term but, you know, you guys are on very much track on 2.5 times. Uh, leverage ratio by the end of this fiscal year and this is when the Civil Market is not, you know, you know, running full steam at this point and you've just started the transformation plan M. So if, if you're disciplined on Capital, allocation my guess is. You might have an underlever balance sheet over time. So how do you bring that to a reasonable level?
Yeah, thanks for the question. So our first and primary focus on the balance sheet is going to continue to de-lever.
And secondly, as we look at investing for some transformation, because it does take investment, it will ensure that it meets our return thresholds going forward, and that'll be the objective for the foreseeable future. Any change in the capital allocation strategy will be something, we take up with the board, but that's not in the near-term horizon.
I appreciate that. Thank you.
Your next question comes from Ben. Your line is now open.
Yeah, thank you very much. And good morning everyone. Um, just looking at the Capitol employee for civil, not, uh, it's reach, uh, 6 billion at the end of Q2, which was up, basically, from 5.1 billion a year ago and has basically doubled over 7 years, and if I look at civil Revenue, it was up about only 50%, uh, over the the this time frame. So could you talk about the potential opportunity to to maybe optimize Capital employee? And when we look at the utilization rate of 64% in the quarter, if we put aside the 10 they make it looks like it's uh almost a trough level that was reached during the great financial uh crisis and also during the uh uh September 2001. So any uh, optimal level that you, you would consider for uh the the
The overall training Network. Thank you.
Yeah, it's it's a great question and I appreciate you asking it as we look over the past 5 years, we've made, so giving investments in Acquisitions, and building out our Network. And some of our research and technology. And so, what we're doing now is charting the path going forward. I can tell you, there's some strategic advantages to the Investments of the past 1. We had this fantastic defense portfolio which is time perfectly with a worldwide increase in defense spending a once in a generational opportunity. And on the Civil side we have the world's largest training Network 1 that's poised for the recovery which is inevitable. So we're going to leverage both of those but we will come back at the end of year and talk about how we'll allocate Capital going forward between m&a between Capital allocation and the Civil Network and our research and development.
In general, I think that the amount we spend on Capital and the amount we spend on research and development is high for a company of ca's size and I see opportunity to reduce it, but that'll be something we talk about as we get into next year's guidance.
okay, and Matt maybe any thoughts about the potential training opportunity for the uh, sizable bizjet order placed by bana Aviation, and whether any new investment would be required or the the, the current training Network can support such a training opportunity,
Yeah, I'll turn that over to Nick.
Yeah, so, uh, bond is, uh, is going to be a customer there. This is a bombardier, uh, win, uh, with a large order. So, I, I as they start to ramp up the, um,
The, um, the the deliveries, you know, we're going to be training, uh, Bond, uh, as as a customer.
That that's right. And maybe last 1 for me Matt you attended the Canadian Aerospace Summit in Ottawa toward the end of October. Um I suspect that you met several industry. Participants. So any key takeaways from your meeting and what are the next steps for? Uh uh building Canada's Defence industrial strategy, thank you.
In Canada and is Kaylin commented on the remarks. This is a once in a generational opportunity for Canada to grow. Its defense industrial base and my message to the participants in the conference and to the team internally is This is Our Moment is a Canadian company to participate in the growth of a Canadian based industrial defense industrial base. That will not only important for Canada. We'd be important for the world so that was my message to the conference. That was the topic of my speech and that's something that I'm very committed to drive from the ca standpoint.
And then what's Ka here, to talk to add 1 and 1, thought to that as well, 1 of the, uh...
potential additional opportunities here is that, uh, when Canada
Purchases, uh, equipment. Uh, aircraft capabilities from other International providers, where Canada doesn't have current capabilities.
If there's a a uh uh training footprint, that attaches to that, if there's a mission Readiness footprint that attaches to that there are opportunities for CA and frankly, for other Canadian, uh, companies to participate in some of those opportunities globally, uh, as a almost as a requirement of the Canadian government. So the Canadian government is more open to that than they've been in the past. Given, you know, the focus on uh, promoting uh, from an industrial policy of Canadian companies. So
There's an opportunity inside Canada for Canadian Defence spending, and there's an additional opportunity outside Canada where Canada purchases international capabilities. So that's a secondary interesting opportunity that will, you know, play out with the fullness of time.
That, that's a great caller. Thank you very much for the time.
Your next question comes from, Christine Lang with Morgan Stanley. Your line is now open.
Hi, good morning everyone. Um,
Matt. Um I wanted to understand a little bit better where you are in the process of the new roic threshold. Um, it sounds like it's going to be higher than where it is. But I want to understand better are you in the process of
Uh, identifying and Firming up with this new level should be or have you already identified it and we'll share at a later date. Um, any more information on this and your process would be helpful.
Sorry, uh, Mike. Uh, thanks for the question. Uh, the answer is yes. We have a dent at higher thresholds, but our Capital base is large and doesn't move quickly, and we need to take time to sort out how we can drive Topline performance out of the existing Investments and ensure we make the right decisions. Going forward for future Investments. We're not going to miss opportunities. To grow our business, we're committed to Growing our core markets, but we need to figure out how to leverage this Capital base, which is a strategic asset. So all
Call that guidance will come out as we announced Financial guidance for 2027 and Beyond. So thanks for the question.
Great, thank you very much.
Your next question comes from Cameron Derkson with National Bank. Your line is now open.
Yeah, thanks very much. Good morning. Um, just to give us a question on the timeline, uh, when we should expect to see
Uh margin Improvement in free cash flow Improvement. You know certainly we can appreciate uh that you've got a lot of initiatives here that that you've talked about today that are going to take some time. Uh, but is it is it you know, to be expected that we would see some uh, benefit to the bottom line as we get into fiscal 2027 from these initiatives? Or is it something that you think might take longer than that uh, to to really realize the some of the benefits?
Yeah, thank you for the question. As I've said earlier, we're not going to be giving 2027 kinds today
Uh but having LED Transformations like this in the past, some initiatives will be shorter term and yield immediate results and some will take quarters or years to develop, but that's what we're going to spend the next couple quarters refining and then articulate that at the end of the year. So I, uh, commit to providing you more guidance and more visibility as we resent 2027 guidance.
Okay, fair enough on the the sort of the portfolio you've talked a little bit about uh I guess some of the contracts you have uh long-term contracts and perhaps some of them don't fit the return profile anymore. Uh, I guess what's the ability to either, you know, reprice, some of these contracts or get out of them earlier, or is this something that you know, we would have to see those contracts kind of run off before we'd see the the bottom line benefits just any thoughts on on how that might play out.
Opportunity that will start to articulate at the end of the year.
okay, appreciate the
Thanks very much.
Your next question.
Comes from Matthew.
Line is now open.
Morning guys, uh, most of my questions have already been answered but maybe just on the Civil side. Uh, can you expand on, what's about concrete signs? You're watching for, that would help indicate a turn in simulated orders. And, you know, when should we expect that to show up first, uh, where rather utilization or a new ffs orders? Thanks.
Yeah, it's it's a great question. I think you for asking it, I've been watching this interview for 25 years and a quarter or 2 of movement is not something that concerns me. The long term fundamentals are what really matter here. Uh the demand for air traffic will continue to grow 80% of the world's population hasn't flown. The major are Framers have 8 to 10 years of backlog. And there's a year of aircraft on the ground. So is all those things start to recover and they will where the world leader in both flight. Formulators flight full flight simulator sales and training
And so, we will benefit from a lead time perspective when an airline hires; it could be about 6 months before they start training, depending on their indoctrination and onboarding process. And when someone orders a full flight simulator, it's a 1 to 1.5-year lead time. So that's one of the reasons why we adjusted for the second half of the year; we're seeing softness that we won't see recover in this fiscal year. And we're looking at next year, and we'll provide that guidance here towards the end of the year. So, thanks for the question.
Yeah, that's helpful. Um, just to a clarification here, it sounds like your growth guidance reduction in civil was mainly due to lower deliveries uh, for the year. Um, my understanding was that usually deliveries are a bit of a lower margin business than training, so if so shouldn't margins, be better year-over-year and, um, if not, maybe there's some facts and not considering
Uh, hi Matthew. So I'll take that question that the reality is that we see both lower deliveries. Yes. Uh, anticipated. Also in the second half, but also the utilization rate, uh, there is a ramp up, uh, effectively as, uh, as the softness, um, comes back as the overhang, essentially comes back and we'll see utilization increase, um, uh, and so it's, it's actually a mix of both the full flight simulator. Deliveries annualization, uh, enact, and as well, a little bit in in, in the back to business, as well as things pick up. We'll we'll see, uh, ramp up of, uh, of margins going forward into 27 and Beyond
Understood, thank you very much.
Your next question comes from Anthony Valentini. With Goldman Sachs, your line is now open.
Hey guys, thank you so much for the question. Um, Matt I just want to put a little bit of a, you know, finer uh, point on this.
I think that the company historically had talked about pre-tax Returns on capital of 20 to 30%, within 2 years for each simulator that we, you know, was deployed into the network. Um you know, given the focus on the operational excellence and and removing costs. I'm curious if now that Target is higher or is that the company just you know kind of got away from some discipline of achieving those returns um and you feel like you can get the company back to those levels.
Thank you for the question. Uh what, what really matters to me is what we're going to do going forward?
And we have this world-class Network. It's uh it's a, it's a field of strawberries that are going to continue to grow.
And we want to harvest it and we will be more diligent about where we put simulators in the future. And that's based on higher return thresholds. And we're current simulators and they, they were made with the right intention and the right investment the right business case in the past, but the world has changed and we'll make decisions on whether we relocate them or whether we retire them. And that's the activity that's underway. And so as we come out of the end of the year, what matters is not
Where we've been, but what we do with this, fantastic strategic asset and the decisions we make going forward.
Okay. Uh, totally fair. Um, last 1 for me is I would just love to get your view on, um, you know, the evolving Defence environment, you know, obviously the macro is really strong, but it seems like there's a push to get, you know, more autonomous systems and drones, um, into the hands of the war fighter. Um, how does that impact ca's business? I mean, is there less training that is involved for those types of systems or, you know, is there still a lot of training that that needs to happen?
Whether they're remote or operating systems of aircraft training is required, and we have a fantastic partnership for example, with General atomics and we do their Predator training platform that supports not only the US operator, but the international operators as well. So drones remotely piloted Vehicles is a big part of the future for the defense Services. It's something we're very well positioned in, with our modeling capability and something we're continue to grow as we look forward. Thanks, thanks for the question.
Great, thank you, B.
Your next question comes from Connor. Walters with Jeffrey's your line is now open.
Hi guys, thanks for taking my questions and congrats to Nick on a great career here. I wanted to follow up on DNS in your prepared remarks. You guys attributed the 14% year-over-year growth to the ramp up of new margin of creative contracts. When we look at sequentially, margins, remain flat and the guide is kind of calling for them to remain in this ballpark. So
With, you know, that favorable macro backdrop and demand environment, how sustainable do you think that level of growth could be? And how should we be thinking about the underlying mixed Dynamics through the year here?
Hi Connor, this is Dean and I'll take that question and thanks for asking it. So so I I think effectively what we're seeing now is those higher margin contracts, ramping up and being signed and and and executed uh and we're seeing some of the lower margin uh contracts kind of uh get completed.
Isn't done. There's also this, um, I think opportunity that we're looking at for cost optimization 1 of the offsets to the profitability in this quarter is higher sgna, uh, that kind of offset some of that profitability even as those Merchants are coming on. So as as Max, I think talked about we're looking at all angles to optimize our structure. Uh, look at better ways, to be more efficient and will drive that, uh, margin, uh, higher uh, as we go forward. And as we continue to sign those higher margin contracts, and they come on board.
Perfect, thanks so much.
your next question comes from Jordan Leona with Bank of America, your line is now open
Hey, good morning. Thanks for taking the question. I just wanted to follow up on defense. Uh, so, the product, uh, Revenue in the quarter was really strong, uh, year-over-year. How much of that should be expected. We'll just continue throughout the rest of the year. Uh, and then also to on the defense business, uh, for where you want to take it push margin growth, how are you looking at that post tags? That's comments about uh, reducing uh, Cost Plus contracts. Uh,
Company staking on more of their own developmental risk. Uh, and what.
Is your protection against taking on, uh, other fixed price contracts that uh, could go Ary again.
Yeah, thanks for the question. Let me answer the the last 1. And then I'll turn Dean over to answer the first
What's uh unique about cie is we have the size and capability to respond to what all the defense departments are looking for. We are commercialized entity with a defense business, which means we can go after fixed price contacts, uh, contracts and have the ability to execute or if it's necessary to a cost type development contract. I've been doing this for 15 years and I've never seen a more Nimble capable company than cie. We're also uh, very flexible in how we go to market around the world. I think all those are really what hex is trying to encourage from the large defense companies and we have the opportunity to participate in that Arena. So I'm looking forward to leveraging our skills, our technology, our operational base to answer the needs of both the US Canada, and the rest of the world Dino.
Thanks, Matt. So, um, I'll I'll talk about that first part of the question. So effectively, there is a higher percentage or proportion of product revenue. On the defense side, uh, this quarter, this year to date, uh, and effectively on the defense side product businesses tend to have higher margins than the training business. What's
Driving that is effectively new contracts and recently signed contracts ramping up this year, the big ones as we had talked about previously is the Canadian fact contract a Subs, the the 1 that been subcontracted CAE where the first 5 years were delivery mainly products and then in the last 20 years it's essentially sustainment and there's a couple of other contracts in the US uh that were signed in a quarter that allowed us to recognize uh good margins on as they ramp up. Got it. Thank you both.
Open.
Hey uh, thanks for having me on. I just wanted to ask a follow-up question on the uh, lower capex guide. You know, you referenced a step down uh, due to the store pace of demand and civil. But you know that that that said is this the appropriate level of capex that we should expect going forward and, you know, should we interpret this reduction in capex as a signal of potentially lower growth in 2027? Or, you know, do you think you can drive growth just through improving. Uh, utilization in that segment? Just trying to understand how that aligns with your longer term Outlook, uh, for the Civil Society.
Yeah, James uh, I guess we saved the best question for last and I appreciate it. Uh, as I mentioned earlier, the amount we invest in Capital Growth capex, maintenance capex. I've used them together and research and development is high for a company of our size. And what we're going to do is determine what that level should be, but we will make the right Investments to continue growing. We'll make in the right place and in the right segments and as I said earlier, we have a world-class Network, we produce more full flight, simulators than anyone else in the world and we have fantastic customer relevancy. So as we moderate and come out with guidance in 2027, we'll provide full visibility to where we think. Uh, the next few years will come and I really appreciate the question from you and everyone else this morning.
Hey, thanks a lot.
Thank you, and thank you Matt and team. Uh, we seem to have run the hour here. Operator will conclude the call here. I want to thank all the participants who joined us this morning and all the financial analysts for their questions. Remind you that a transcript will be available later today. On C's website, thank you. And have a good day.
Connect your lines. Thank you for participating and have a pleasant day.