CAE Inc.

Welcome to the CEE First Quarter Coffins Call. It would be advised that this call is being recorded. I would now like to turn the meeting over to Mr. Andrew Arnovitz. You may now proceed, Mr. Arnovitz.

Good afternoon, everyone, and thank you for joining us today. Before we begin, I'd like to remind you that today's remarks, including management's outlook for FY21 and answers to questions, contain forward-looking statements. These forward-looking statements represent our expectations as of today. August the 12th, 2020, 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 risks, factors, and assumptions that may affect future results is contained in SEED's annual MD&A, available on our corporate website and in our filings with the Canadian Securities Administrators on CDAR. and the U.S. Securities Exchange Commission on EDGAR. On the call with me this afternoon are Marc Pallant, C's President and Chief Executive Officer, and Sonia Branko, our Chief Financial Officer. After remarks from Marc and Sonia, we'll take questions from financial analysts and institutional investors. Following the conclusion of that Q&A period, we'll open the call to questions from members of the media. Let me now turn the call over to Marc.

Thank you, Andrew. And good afternoon to everyone joining us on the call. I'll first discuss some of the highlights of the quarter, and then Sonia will review the detailed financials. I'll come back at the end to talk about our outlook. Much has been said over the last five months about the COVID-19 pandemic and the profound ways it's changed our daily lives, both personally and professionally. And the word unprecedented has since become synonymous with the crisis. No doubt, the rapid onset and pervasiveness of the economic and social impacts of the pandemic are like nothing we've ever seen before. The impact on our employees and customers has certainly presented us with some very significant challenges. It's in the toughest moments, however, that we're truly put to the test. And throughout all of this, I continue to be very proud of the responsiveness of CAE and its employees. who've been adapting rapidly to this new reality by embracing new challenges, mitigating risks, and innovating new ways to best serve our customers as their partner of choice. As we came to expect in early March this year, the full brunt of the pandemic would indeed hit us hard during our first quarter, manifested by sharply lower demand and major disruptions to our global operations. Right at the start, We acted quickly to ensure the health and safety of our employees and customers by taking extensive measures, and we safeguarded the company's financial position and liquidity. CAE has shown considerable agility and resiliency amid the most challenging conditions our company has ever faced. In the first quarter, we managed to significantly mitigate our inevitable operating loss position to near break-even on a normalized basis. We also improved our pre-cash flow performance compared to last year, and critically, we maintain our resiliency with a solid financial base. Despite the challenging environment, we booked $417 million of orders in the quarter for a .76 book-to-sales ratio, and we ended the quarter with a solid $8.6 billion backlog. Looking specifically at CIVIL, Despite the major operational hurdles presented by mandatory temporary facility closures, including our training centers and main manufacturing sites, and extensive travel restrictions, we managed to deliver two full-flight simulators to airline customers in a quarter, and we averaged 33% utilization of our training network. With more than half of our global training network either closed temporarily or at reduced operations, utilization reached a low point around the 20% range during the quarter. Since then, we've seen average training center utilization rise to upwards of 40% as our facilities reopened and flight crews resumed some of their critical training activities. We also continued to book orders with civil signing training solutions contracts valued at $194 million, including a contract or an Airbus A320 full-flight simulator to China Express, a four-year training agreement with Alitalia, a five-year training agreement with Wamos Air, another five-year training agreement with long-term business aviation partner SC Aviation, and a two-year business aviation training agreement with Air Hamburg. On the OEM front, we also concluded a five-year training agreement with Boeing to support Boeing's ab initio pilot development program. We've been adapting quickly to new realities by introducing new virtual service offerings to support our customers as a response to border restrictions, including remote support for the installation, acceptance, and qualification of the simulators. We also recently obtained FAA and other Civil Aviation Authority approvals for virtual training in certain of our flight training organizations, and we developed remote instructor operating station solutions for live instructor interactions during training sessions. As a product of our ongoing digital innovation initiatives, we launched instructor-led online courses for aviation maintenance training and CAIRSIDE, a new digital community platform that provides training and career resources to pilots, which I would encourage you to visit at airside.aero. In defense and healthcare, the pandemic has also caused significant disruptions, which have hampered customer demand, and our ability to deliver our products and services. Notwithstanding the challenging environment, the defense booked orders for $201 million, including contracts to provide the United States Air Force with upgrades and enhancements to both the KC-135 and C-138 air crew training system programs, and to continue providing a range of in-service support solutions for the Royal Canadian Air Force's CF-18 aircraft. Other notable contracts, including providing Airbus defense space, support for the development of new and upgraded training capabilities for Germany's Eurofighter program. We also received an order to continue providing maintenance and support services for the Royal Navy's Merlin helicopter training system. And in healthcare, we put our full weight into designing, developing, and bringing to market the CAE Air One ventilators. We didn't have any deliveries from this new product line in a quarter, but we did incur some startup expenses, and we're only going to see delivers really ramp up from the 10,000 units ordered by the Government of Canada in the second half of the fiscal year. In response to the urgent needs of our customers, we provided complimentary training seminars on how to prepare healthcare workers in the fight against COVID-19. We also launched simulation-based training solutions, both web and hardware-based, to train personnel in the safe practice of ventilation and intubation, which is key to saving lives, and released a COVID-19 ultrasound training suite to provide hands-on foundational training for physicians. Additionally, as institutions begin to reopen and offer remote education, we provided new tools and training on how to implement distance learning with our solutions such as the distance learning for nursing course. With that, I'll now turn the call over to Sonia, who will provide a detailed look at our financial performance. And I'll return at the end of the call to comment on our outlook. Sonia?

Thank you, Mark, and good afternoon, everyone. It was indeed an extremely challenging quarter, but with all the measures that we put in place in early April to safeguard our financial position and to ensure liquidity by reducing costs and preserving cash, We helped narrow the pandemic's operational impact, and we maintained our resiliency with a solid financial base. Our net debt position at the end of the quarter was $2.4 billion for a net debt-to-capital ratio of 50.7%. All things considered, I am pleased this remains stable with our net debt position of $2.4 billion, or 47.8% of total capital at the end of last year. And on an adjusted net debt-to-EBITDA basis, we ended the quarter with a ratio of 3.04 times, which is up 40 basis points compared to the end of the last fiscal year. Bolstering our financial resources during the quarter, we concluded a new two-year $500 million senior unsecured revolving credit facility and expanded our receivables purchase program by $100 million USD. These transactions provided us with access to additional liquidity and further strengthened our financial position. All told, between cash and available credit, we continue to have upwards of $2 billion of liquidity which we believe, in addition to the cash we expect to generate from operations, is enough to manage through the period ahead. The market situation has evolved rapidly, and reflecting the current impacts on our business and the time anticipated for recovery in our end market, we recorded non-operational costs of $108.2 million during the first quarter of fiscal 2021, relating mainly to impairment charges on properly planted equipment, intangible assets, and certain financial assets, as a result of the continued negative impacts of COVID-19 pandemic. And since the end of the quarter, we announced that we are taking additional measures to best serve the market by optimizing our global asset base and footprint, adapting our global workforce, and adjusting our business to correspond with the expected lower level of demand for certain of our products and services. These measures include the introduction and acceleration of new digitally enhanced processes, such as remote installations and certifications, and work-from-home practices. As a result, we expect to record restructuring expenses of approximately $100 million over the next 12 months, consisting mainly of real estate costs, asset relocation, and other direct costs related to the optimization of our footprint and employee termination benefits. Actions will include the consolidation of some of our facilities where overlap currently exists so that we gain the efficiencies of operating from larger centers, and we will also be relocating several training assets to optimize utilizations. Real estate and asset optimization costs are expected to account for approximately 70% of the total restructuring expense. Taken together, these measures are expected to enable CAE to emerge from the current period from a position of strength, and we expect to fully realize cost reductions of approximately $50 million annually starting in our fiscal year 2022. Now, turning to our operational performance and other highlights in the quarter, Consolidated revenue was $550.5 million, down 33%, compared to $825.6 million in the first quarter last year. And segment operating loss before specific items was $2.1 million, compared to a segment operating income of $113.3 million last year. Considering the extreme severity of the pandemic's impact on our ability to operate in the first quarter, a near break-even operating performance is a true testament to the resiliency of CAU's business model. Quarterly net loss before specific items was $30.3 million, or negative 11 cents per share, which compares to 24 cents that we reported in the first quarter last year. Also of note, we received approximately $56 million in gross government wage subsidies from several of our global jurisdictions during the quarter, of which approximately $44 million was credited to income. Substantially, all of this amount either flowed directly to employees according to the way the subsidy programs were designed in certain countries, or the amounts were offset by the increased cost we incurred in bringing back some 2,500 employees who were previously placed on furlough or reduced work weeks. I would underscore that we brought back these employees at the same time as implementing our cost savings measures, and in essence, the wage subsidies were applied as intended as a substitute for initial cost savings measures taken and to alleviate some of the impact on affected employees. Now, looking at cash flow, cash from operating activities before changes in non-cash working capital was positive $36.9 million for the quarter, compared to $137.8 million in the first quarter last year. Free cash flow was negative $92.7 million in the quarter, which is an improvement over the negative $102.1 million free cash flow results last year. The increase results mainly from a lower investment in non-cash working capital, lower dividends paid, and lower maintenance capital expenditures, partially offset by a decrease in cash provided by operating activities. We continue to expect free cash flow to be negative for the first half of the fiscal year, resulting from the acute impacts of the pandemic on demand and operations and seasonally higher level of investment in non-cash working capital accounts. We also continue to expect to generate positive free cash flow in the second half of the fiscal year. Return on capital employed before specific items was 8% this quarter compared to 10.7% last quarter and 11.9% last year. Income tax recovery this quarter was $35.4 million, representing an effective tax rate of 24% compared to 17% for the first quarter last year. The tax rate was higher due to the impact of impairment charges, partially offset by the change in the mix of income from various jurisdictions. Including the effective impairments, the income tax rate would have been 20% this quarter. Now looking at our segmented performance. In civil, first quarter revenue was down 48% year-over-year to $248 million as a result of a significantly lower-than-usual training utilization and the suspension of manufacturing and disruption of installations and deliveries of simulator products to our customers worldwide due to government-mandated travel bans, border restrictions, lockdown protocols, and self-isolation measures. Civil's operating loss before specific items was $16.2 million. On the other front, civil book to sales ratio for the quarter was 0.78 times, and for trailing 12-month period, it was 1.02 times. In defense, first quarter revenue of $280.2 million was down 13% over Q1 last year, as the COVID pandemic continued to contribute to delays in the execution of programs from backlog and in-order rentage, while operating income from specific items was up 15% to $17.3 million for an operating margin of 6.2%. The defense book to sales ratio was higher this quarter at 0.72 times, and it was 0.94 times for the last 12 months. Lastly, in healthcare, the first quarter revenue was $22.3 million, down 19% from $27.5 million in Q1 of last year. Segment operating loss was $3.2 million, compared to a loss of $2.8 million in Q1 last year. About half of the operating loss is attributed to the startup cost for our new ventilator contract, which had not contributed yet to revenue in the quarter. With that, I will ask Mark to discuss the way forward.

Thanks, Sonia. At the outset of the pandemic, we faced two essential questions as it relates to our business. How long would the crisis last, and how bad would it get? With the benefit of some perspective over the last five months, The positive news is that we believe the worst of the pandemic's impact on sea may now indeed be behind us. However, the pace of recovery is unlikely to be linear or quick, and it will most certainly be dictated by the progression of the pandemic and the rate at which travel restrictions and quarantines can safely be lifted and economic activity improves. Global air transportation and air passenger travel were especially hard hit, with IATA currently forecasting commercial passenger traffic to be down 50% to 60% this year, and a recovery that could take three years before getting back to pre-COVID levels. We continue to view the current fiscal year as a tale of two halves, with the first half of the new year marked by lower demand and disruptions, or the second half to potentially begin to inflect more positively. The timing of market recovery remains unclear, but we're confident in the long-term fundamentals of the market we serve, and we know this too shall pass. Looking ahead, we're planning CA's future from a position of resilience and strength. We have global leading market positions, recurring revenue streams, attractive end markets in the civil, defense, and healthcare, as well as a solid financial position. In civil, as the global fleet eventually resumes service, We expect to continue building on our previously positive momentum, increasing market share and securing new customer partnerships with our innovative training and operational solutions. We're currently in advanced discussions with a number of airline customers to potentially do more for them. I believe the current context will lead to more airline training outsourcing opportunities as the industry looks for ways to gain greater agility and resiliency in the post-COVID-19 era. In business aviation, which represents a substantial part of our civil business, demand is driven largely from addressing the regulated training needs of the already active globalist business aircraft fleet and the delivery of large cabin businesses. From this perspective, we continue to believe this segment of the market will fare better than commercial in the downturn, but will also likely recover faster. Demand for civil full-flight simulators is closely linked to new aircraft deliveries, and while the total market for simulators is expected to be substantially smaller this fiscal year, we expect to maintain our leading share of the available full-flight simulator sales. We have the benefit of a large backlog of customer-funded full-flight simulator orders, though, and several full-flight simulator deliveries from backlogs should indeed be delayed, but the risk of cancellation remains low, and we expect to substantially deliver this backlog over the next couple of years. In defense, we also benefit from a large backlog of contracts with government customers to provide training solutions and mission support services that are considered essential to national security. This week, we announced that Dan Gelston will become CA's new group president in defense and security, transitioning from Hollywood EVP Business Development and Growth Initiative, who currently serves as Interim Group President. Dan brings a wealth of experience as a proven leader with more than 20 years of experience in the U.S. military, intelligence community, and the global defense industry, and will be joining us on August 24th and based out of our Washington, D.C. office. In the current fiscal year, COVID-19-related issues are slowing defense's progress towards program milestones on work and backlog, including for some of our more complex programs. The pandemic has also led to delays in contracts awards globally, and the structural effects of low oil prices has further impacted the rate of expected contract awards in the Middle East. More recently, the acceleration of new COVID cases in the United States has impacted our ability to deliver training services from certain of our sites. Although defense continues to be hampered by COVID-19 in fiscal year 21, the long-term outlook for defense continues to be for growth supported by a large addressable market for our innovative solutions and a realization of the benefits of our new leadership. Despite the near-term headwinds, we're maintaining our leading position as a training and mission support partner thanks to our leading-edge capabilities in translating the physical world into the synthetic world. We're expanding beyond training to become a leader in digital immersion. And with our expertise in the integration of live, virtual, and constructive training, we believe that we'll make attractive inroads into that market in the years ahead. And in healthcare, our purpose, mission, and passion is to make healthcare safer. We believe the significant changes brought about by this pandemic will result in a bigger role for e-learning and healthcare simulation and training. Looking forward, the secular shifts ahead appear promising. We continue to believe CA Healthcare is well-positioned to capitalize on this change in the appreciation of the benefits of healthcare simulation and training to improve safety and to help save lives, not only during a healthcare crisis, but also during more normal times. And with its innovative products and demonstrated agility, CA Healthcare our expectation is that CA Healthcare will become a more material part of the company over the longer term. We have a deeply rooted culture of innovation and a proven ability to adapt quickly to dynamic market conditions. The CA Air One ventilator we just developed in healthcare is a testament to CA's agility and innovation. We rapidly applied the full gamut of our technical capabilities in response to the crisis, and now we're fielding new opportunities globally in the design, manufacture, and sale of life-saving ventilators. Tough times require new thinking, and across all of our markets, we've adapted our offerings by introducing new ways to leverage virtual reality and distance learning technologies to serve our customers' critical needs. CAE is a high-technology company, providing solutions at the leading edge digital immersion. Our extended outlook remains highly compelling, with potential for compound growth and superior returns over the long term. C employees, our most valuable assets, are imbued with a culture of innovation, empowerment, excellence, and integrity, and we expect to emerge from the pandemic in even better positions. Our restructuring program is expected to yield approximately $50 million of of annual recurring cost savings starting in fiscal year 2022 from initiatives including the introduction and acceleration of new digitally enhanced processes and the optimization of our global asset base and footprint. At the same time, we're keeping up the pace of our investment and focus on technological innovation to reimagine the customer's experience and broaden our aperture to revolutionize training and operational support solutions. As our core end markets recover, the new normal that emerges could present novel challenges for our customers. We believe certain trends will arise in greater force post-COVID-19, such as e-learning, remote work, an even greater imperative on safety, and the accelerated digital transformation and virtualization of the physical world. C's core capabilities align very well with these future needs, and we fully intend to use the current period to further strengthen our technological expertise and expand the aperture of how and what we bring to market. We're leaning forward to capture more organic growth by leveraging our leading-edge understanding of man to complex machine interfaces, and we continue to assert our leadership in attractive markets with long-term secular tailwinds. Already, we're seeing excellent customer receptivity to our recent new technology development in the area of machine learning-enabled data analytics, remote delivery and virtual augmented reality, and we'll be driving forward to excel on these new fronts now more than ever. To conclude, we're effectively managing the things we control within this unprecedented environment, and we're decidedly focused on the future, and I expect we'll be ultimately stronger for it. With that, I thank you for your attention, and we're now ready to answer your questions. Thank you, Mark.

Operator will now want to open the line to financial analysts and institutional investors for questions.

Certainly. Thank you. And once again, I was reminded to register for a question. It is the one by the four on your telephone. You are a three-tone prompt to acknowledge your request. If a question has been answered, I could draw your illustration as the one for by the three. One moment, please, for our first question. And we'll get to our first question online from Sadi Shamoon with BMO Capital Markets. Go right ahead.

Okay, thank you. Good afternoon. Hi. Just a couple of questions on the cash flow, maybe, Sonia. So if I look at your cash flow from operation before working capital, you've kind of more than covered your CapEx and development costs this quarter. Can we infer from that that the civil aviation segment was also positive before working capital this quarter?

Thanks, Betty. So I think I'm glad that you highlight this. So despite the fact that more than half our training facilities were closed or reduced capacity and our civil manufacturing was closed for more than half the quarter, overall free cash flow has improved. And as you point out, cash from ops, although much less, or cash from ops before working capital, although much lower than last year, was still positive. So the business overall, despite the challenges, was cash positive before working capital. And this applies to each of the segments, including our civil overall and our training networks. So, you know, despite living through one of the most challenging quarters in our history, I think it's a great demonstration of the resiliency and the cash generative model of CAE that our cash from ops was positive in this quarter. Now, of course, we invested in non-cash working caps. Some of that is a bit of slowdown in some payments that we're managing through or, you know, with some of our airline customers. But a lot of it was still the impact of the usual seasonality that we see. So if you take a look at the working capital accounts, A lot of the investment was on the accounts payable side, and that's really a reflection that we see every year of the higher production levels and activities in Q4, which then flow through in the first quarter, but at lesser revenue, and obviously completely very much exacerbated in this quarter with the fall on the revenue side. So, yes, to your point, overall, see cash from operations before working cash positive, and that's in all segments, including our training business.

Okay. No, it's impressive that you can be cash flow positive before working capital, I guess, in a quarter where utilization are in the low 30%. But do you expect working capital to be kind of neutral, reverse back in the nine months coming? Like, how do you kind of think about that for the balance of the year?

Yeah. And to your point, Fadi, so, you know, I think it's impressive. There's resiliency, but also it reflects a lot of the the measures we put in place on cost containment and levers to preserve cash, and so that all contributed to the positive cash position. In terms of working capital, you know, so the first half usually is seasonality will drive some investment and then some reversal in the second half. You know, and especially I think that will be reinforced with kind of the second half inflection positive on free cash flow. So I expect on the free cash flow side, continue to be negative in the first half, positive in the second half, and some of that will also, I expect, come from working capital as well.

Okay. Just one clarification. With cash flow guidance, free cash flow guidance does not include the impact, like the cash impact of the restructuring plan that you announced? Or is that included?

Yes, it does. So we've incorporated the cash impact of the restructuring. And as I mentioned in my remarks, we will execute this throughout the next year. And so the cash profiling will follow some of that execution. And so it will, but it is incorporated in the free cash flow.

Okay. And based on all of this that you just told me and, you know, given expectations that, you know, things should get better in the next six to nine months as the business aviation market kind of recovers and the aviation market will recover, I'm thinking H1 plus H2 cash flow, you're saying positive and then, I mean, it will be negative and positive. We should arrive at some outcome that is generally neutral to positive for the benefit, like for the year old.

If we add both halves, we will come to an outcome. We haven't provided guidance for the full year. A lot of variables still. But the fact that we haven't guided strongly either way, negative or positive, kind of infers what you're thinking.

Okay. One other question quickly. I mean, you talked a lot about the agitization of the model and the opportunities that probably come out of a crisis like this. Is there a way for us to think about how much of the training that is conducted is not necessarily need to be conducted at the center, at the training center itself, like you don't need a simulator to do it. It's a classroom kind of training. How much of that kind of training happens to be in a classroom that could potentially move into an online model in a permanent way going forward and maybe optimize this whole training solutions further as we go in the next few years.

I'll take that, Paddy. I think that we don't have a number for it, but, you know, if you take an initial course, for example, on a to fly an aircraft, typically, you might spend, if it looks like a business aircraft, you may spend three, four weeks at the training center, and you're doing probably the equivalent of two and a half weeks of that sitting in a classroom. That's just ballpark, okay? It depends on the aircraft. The rest, you're doing seven, eight rides in the simulator. So, I mean, that can give you some idea, but When we talk about the restructuring savings that we have and achieving permanent cost reductions going forward, the $50 million we talked about, some of that is basically taking advantage of some of what you just talked about. You know, we've learned to do a few things virtually during the pandemic. And at the same time, we've been investing quite substantially in digital over the last couple of years. And, you know, we announced our project, Digital Intelligence. You'll remember a $1.5 billion investment in R&D a couple years ago that we did at Launch in Montreal. That, by the way, is why that investment is why we could turn ourselves around and go virtual literally overnight because of the ability to do that. But now, post-COVID, everything is going virtual. I shouldn't say that, but the world is obviously going virtual, but definitely virtual. If digitization, if I multiply it maybe just exaggerating for effect, it increased tenfold. So the investments that we make here, the processes leveraging digital, is going to have substantial impact on how we deploy training in the classroom specifically, how we deliver simulators as well. So all these things that we're going after getting permanent savings, that's where you're going to see it.

Thank you. Thank you very much. We'll go to our next question on the line. From the line of Doug Taylor with Canaccord Genuity. Go right ahead.

Yeah, thanks. Good afternoon. One more question on the cash flow guidance. I'd just like to understand whether your guidance is contingent on utilization rates for the civil aviation business moving materially higher than the 40% that you mentioned they're at presently, or if you can achieve that same positive free cash flow with 40% throughout the balance of the year, for example.

I think it's a bit too early to give predictions on the level of the realizations, but we do expect the ramp-up to be slower than we saw, and so we factored that into our free cash flow predictions. That said, we do expect some sort of inflection in the second half to drive a better performance in the second half, and that will be the driver of free cash flow improvement.

Okay. The utilization, I mean, during the summer months usually is a bit slower given the demand for policy. I'm just wondering if that is at all a factor this year or if that whole seasonality thing can be completely thrown – in the trash for this year when we look at utilization in July, August versus, you know, the fall and winter. I'm sorry, we missed that first part of your question, Doug.

I think I got it. Yeah. So, Doug, there is normally some seasonality to training demand. The way to think about it is when, you know, pilots in various regions are very busy flying, they're less busy on the ground in the training centers training. So, in Europe, for example, the summer months are usually quieter in terms of training demand. And they'll plan out their annual recurrence, their recurrent training according to the demands of the flying schedules. But to your second point, everything is out of whack in this environment. I mean, having had the kind of operational disruptions that we saw through the first quarter and the demand shock, You know, we got down to utilization levels on average in the network in the 20% range, so that's unheard of. Yeah, I suspect. Go ahead.

Just to add a bit more color on kind of some of the assumptions kind of underpinning the second half, we do expect some recovery, but also a higher level of deliveries. As you saw, only two deliveries this quarter. And so we do expect the deliveries to be very second-half weighted as well. So that will drive some of the cash flow performance as well.

Okay. And one more question on the civil side. I mean, I wonder if you could provide an update on, you know, what some of the regulatory bodies are – doing with respect to relaxing the training requirements, which, I mean, certainly was a factor early in this COVID pandemic. I mean, would you say that's back to normal across your geographies, or is that – how do you expect that to continue to evolve over time?

You know what, I haven't heard much about it at all in the past, you know, literally three months. So I think that was a one-off that was literally to cater for the fact that, you know, people literally couldn't get to the training centers because of, border restrictions, things like that. So I think that one-off situation is behind it.

That's helpful. I'll leave it there. Thank you for taking my questions. Thank you.

Thank you very much. We'll get to our next question on the line, from the line of Kevin Chang with CIBC. Go right ahead.

Hi. Thanks for taking my question here. If I could just dig into the utilization rate, you know, Where we sit here today, the 40%, is there a way to think about what that looks like across your key regions, you know, Asia, North America, and Europe? And then if I were to split that between business and commercial training, is there a way to think of the difference in utilization between the two, or is it all pretty static around 40%?

I think you'll find business aircrafts a little bit more than commercial. as an overall number. I think I wouldn't get, you know, big differences across the world. So let me just go to look at my notes here. But in the end, do you have more details on it yourself? So, yeah, with regards to the data.

So what we're seeing is that BAC is trending better than commercial, comparing, you know, quarter over quarter. And in terms of regions, I think what we're seeing, the hardest hit is really in, the hardest hit is Europe. And that's what we're seeing. Asia still impacted, but doing pretty resilient, but really Europe is where there's the hardest impact.

Yeah, and North America really, good training in North America, continues to lead the way from that point of view. We've seen less impact there. Borders, really, as you saw the wrap-up utilization, it was really, really affected a lot is the opening of borders. And so, for example, Dubai opened up recently. So, you know, a business aviation activity will have, will pick up quite substantially there because, for example, customers of Far East can't get to North America because there's restrictions. And, you know, we can serve their training demands on business aircraft in Dubai as just one example.

Okay. That's a very helpful caller. And then secondly for me, just on the restructuring, just wonder what impact does any of that have on the simulators deployed in your own network? Does this restructuring result in a shrinking of that network as maybe you get rid of, you know, simulators that might be tied to aircraft that, that have seen a significant decline in demand as airlines adjust their own fleet. Just wondering how that number trends as you go through this restructuring.

Yeah, so I think one of the main impacts is the consolidation of some facilities, you know, where we have overlap. Now, by no means are we exiting any market, but really consolidating to create larger center, drive more efficiencies. Another part of that restructuring includes relocation of assets. So between training centers and then matching them up across our geographies to better align to where the demand is and optimizing utilization. As part of that, there will be some assets with excess capacity that will be sidelined and ultimately sidelined until volume comes back. So we expect about 20 units of assets that will be relocated across the network. in total, or around 20, ultimately, and less than that, that would be, much less than that, that would be reduced.

Okay, that's helpful. And maybe just the last one for me, just maybe following on some of the previous questions around the increase in virtual training, and I appreciate, you know, I guess some of the cost savings there, but do you see that impacting maybe the relative capital intensity of civil moving forward in the sense that it might reduce the footprint you might need when you think of what the training center has to be in terms of size to flow a number of pilots. Is there a capital savings associated with the increase in virtual training or does that not impact that line item?

Well, I think it would impact it for sure. I think that the There's benefits from customers as well. If they have to spend less time at the training centers, it's a very big cost savings for them because they don't have to travel as much, be out of the line as long. So there's benefits on both sides. But, yeah, there will be some capital savings as well. I wouldn't call it a first-order effect, but it definitely will affect things.

Okay. That's it for me. Thank you for taking my questions, and best of luck for the remainder of the year.

Thank you. And we'll proceed to our next question on the line. This is from Cameron Dorkson with National Bank Financial. Go right ahead.

Thanks. Good afternoon. Question on the defense segment. So you've got new leadership coming in there. Mark, I'm wondering if you could maybe talk a bit about what, you know, his priorities are going to be or I guess maybe what his marching orders are for the defense segment, if there's anything different that you want to do there or any key priorities.

Well, I think, look, first of all, very happy to have Dan on board. As I mentioned, he has very, very strong credentials and track record in the defense industry and the jobs that he's done, as well as in the U.S. Military and Intelligence Committee. So I think, look, he's picking up the baton from Heidi Wood, who's done a great job over the last few months at stabilizing our defense business and laying a path for growth. And for me, it's all about executing growth. Look, you've heard me talk a lot about, but, you know, I think, look, I think this year, 2021, it's a transition year for defense. There's a lot going on. You know, we won't go back into everything we said, but I guess just when I just give you one data point right now, Because of the impact of resurgence of COVID in the United States, our activity at our training center in Florida, on C-130Js, where we train primarily foreign customers, is harder hit now than it was back in March and April. So it gives you one idea. But to me, it's the priority is growth. There's growth market. We see a very, very sizable market. We've talked about that many times and really sees upon that age. And his makeup is a growth-oriented individual. He has a solid tracker. Used to working, by the way, in the kind of construct that we are in, you know, in having special security agreements and selling into, for example, U.S. market. So I think we're going to – I think that, for me, it's all about growth. Growth beyond this year because this year is about stabilizing what we have. And, you know, because it's a tough year, but stabilizing and growing.

Okay, no, that's great. And maybe second question for me, just on the, you know, you're shifting over to civil. You mentioned that you're in some perhaps advanced discussions with some airlines about potential outsourcing opportunities. You know, is that something you think you can execute on, you know, this fiscal year? And, you know, what's your willingness to deploy capital into any of those opportunities?

Yeah, I think we definitely can secure some of those opportunities this year. I don't hold the customer's pen on signing the contracts, but clearly I think we have a very compelling solution to bring to bear, especially in these times. So I do think we'll see the opportunities, and we're in advanced discussions with a number of customers, as I talked about. And, yeah, we'll deploy capital because as we've demonstrated over the past few years, when we deploy capital in our training network, it's very creative and relatively fast. So we're quite happy about that business. Of course, it's hardcore business. We know it well. So, yeah, absolutely, we'll seize upon those opportunities, and I think we can secure some.

Great. That's all for me. Thanks very much. Thank you.

Thank you. We'll get to our next question on the line. This is Kornak Kutta with Scotiabank. Go right ahead with your question.

Thanks, and good afternoon. Sorry to beat the dead horse here. Just on the utilization, if I go back to your comments back in May, I think you are suggesting 20% in April at the low point and then 25% to 30% in May. So if I do the math, perhaps you might have been in the mid-40% range in June to get to the 33% for the full quarter period. So, first, is that math correct, and have you seen that mid-40% sustain in the first 40 days of this current quarter?

Well, I think we averaged about 33%, as we said, in the quarter, and we're in the 40s. Look, it's pretty much in line with the growth of the fleet. I mean, the correlation between the globe, you think the fleet of aircraft flying around in the world today, and look at the increase, I think you'll find a very high degree of correlation between that fleet activity and the level of utilization in our training centers, which you might expect because, of course, it's a regulated market. So that's about what I would say on it.

Okay. Thanks, Mark, for that. And then just trying to reconcile some numbers here. So if I look at the training center utilization as well as the military deliveries in Q1, They were both down more than 50% versus last year, but their revenue was down only 48%. So just trying to understand the mix, it seems like it's coming from business aviation, as you said, the utilization was better, and which we probably do not see in the utilization numbers. Is there anything to the mix in revenue that should have driven revenue better than utilization and deliveries?

Not really. I think there's so many different elements to the civil portfolio. I think 48% down on revenue and about half on – more than half on the utilizations. They're pretty much aligned, and we kind of see a similar level of reductions across the board on the portfolio items.

Okay. That's great, Sonia. On the backlog side, so obviously the order activity was reasonably okay, I guess, compared to where the revenue was. But there were some adjustments in the backlog that kind of led to, I think, a decent decline in the backlog. Can you help us understand the nature of those backlog adjustments in terms of the amount or nature of maybe cancellations or adjustments? Thanks.

No cancellations on any price, so no cancellations included in that adjustment number. It is larger than usual, and one of the items was there was a meaningful negative effects element, more than $100 million. The Canadian dollar appreciated quite a bit since the March, and we always revalue the backlog to the current effects. So quite a large impact on effects, and the remaining really reflect the impacts of the training requirements and demand that we see from customers who've gone through their planning and their process of realigning operations and their fleet and working with us so that captures some of that revised training demand in the near future.

Great. And last one for me. On the working capital side, the inventory seems to have gone up. sequentially. Are you building any whitetails in anticipation of any last-minute orders, or that inventory balance is entirely for the contractual revenue in the second half?

Yeah, so no, there are no investments in whitetails. We're actually being quite rigorous in approval on inventory management as part of our cash preservation, not cash working cap, management measures, which you see there is really a reflection of the fact that we only delivered two simulators in the quarter. And so you're building up, you're working the process in anticipation of deliveries for the rest of the year.

Great.

That's it for me. Thank you. Thank you very much. We'll get to our next question on the line from Derek Gutt with GFL. Go right ahead with the question.

Hey, Mark, thanks for taking the question. On the topic of virtual training, do you think longer term that you get FA approvals and approvals around not having to come into your centers, do you think that lowers the bar for competition and brings the moat down thinking longer term and the ability on you to increase pricing power in this vein?

No, I don't see it. I really don't. I think it makes us stronger, to be very frank with you. I mean, people still have to come to the training center to do full flight simulator training. And to the extent that, you know, with the tools that we can provide to be able to do it virtually, and using all of our simulation suite that we can make it seamless for them, I think it makes us even stronger, better. So I would have the reverse conclusion. Okay, thanks.

Thank you very much. We'll get to our next question on the line. It's on the line of Bernard Parier with Desjardins Capital Markets. Go right ahead.

Yeah, good afternoon, everyone. Looking at simulator delivery, I understand that the Q1 was pretty abnormal with only two, but when we look at the last two years, you delivered 68 and 66 deliveries. So how should we be thinking in fiscal 21 and fiscal 22 given the current market conditions?

Well, I won't go into fiscal 22. I think I would tell you that Our assumption is we'll deliver about 35 to 40 this year, very much geared towards the back half because for obvious reasons, we're delivering all over the world and some places that we're delivering to still have restrictions on how we can get there. Like I said, 35 to 40 for this year, really much in the back half. I'm not getting into the Next year, we'll update that as we go forward. Okay.

And Mark? Sorry, Benoit? Maybe I'd add to that. But we did say in our earlier remarks that, you know, we have a large backlog there that's funded by customers that we expect to substantially deliver over the next couple of years. It is just that. It is a large backlog. And while we can't at this point precise what those delivery numbers would look like into the next fiscal year, I think you could infer that, you know, there is a large backlog there, and as things ease up, we will substantially deliver it. So if you're sensing of whether there's a sort of a cliff impending, I wouldn't think that.

No, that's one of the things that we have is a large backlog that provides, you know, a level of support for our business for quite a while. Okay.

And if we stay in civil, what are you seeing in terms of demand for training services in second up in the context of the training bubble that you talked about in Q1?

Well, I think we made certain assumptions. I would tell you that it's very, very fluid. We airlines are in large cases are predicting their training demand month by month, literally. So we're staying close to our customers. We haven't made certain assumptions when we talked about predictions for cash for this year. I don't think we made outlandish assumptions with regard to what that bubble will be. But I think we sized ourselves to be able to seize the opportunity. Like, you know, the situation is very fluid, as I said, so it's hard to predict, you know, how and when that will happen.

Okay. And if we go on defense, the active bid proposal increased substantially from $3.6 billion in Q4 to about $5 billion. So could you talk about the reasons behind the increase and also from a margin standpoint, what we should see in fiscal 21 given the mix between services and equipment?

Well, I think that, what I'll tell you, I think besides the backlog, or sorry, the amount of business proposals going up, we haven't stopped on that front. We're still writing proposals, and that's the key to this business. Now, what you see is a couple of things, right? First of all, we're bidding on larger contracts. We have the ability to be able to do that. At the same time, you know, the awards haven't been assessed. So, you know, that, you know, the ones that we would have liked that already have the order in hand is still in the business proposal. So, that's more than the negative part. Look, in terms of margin, I think we'll just stay, you know, Sonia comment on that, but, you know, no big guidance on that one. Well, you want to

Yeah, so as Mark mentioned, I think, you know, we will continue to see short-term, well, disruptions throughout the year on execution of contracts and advancements as these, you know, travel restrictions and lockdowns continue. So we're kind of seeing this as a transition year, you know, growth beyond. but a bit of a transition year. And, you know, the margin will be impacted by the level of advancement on these programs because, as you know, they're mostly product programs, so they're highly contributive to the SOI margin, disproportionately so, and also on order intakes, right? So we've seen delays, Q4, Q1, on order intake, especially on the product side, and so that's contributing as well. So as that continues to To impact this, I think we'll continue to see a bit of impact on defense throughout the year.

Okay. And what would be the mix between equipment and services in Q1 specifically for defense? And are you expecting a big shift toward the Q2 and the second half, Sonia?

Not necessarily in the second half. We do see some shifts in order to support kind of like a stronger second half. In this quarter, it was in the 30s, which is much lower than usual.

Okay. That's great. Okay. And last question for me. With respect to government subsidies, what should we expect in terms of subsidies in Q2 and maybe the second half?

I think it's hard to say because some of these programs, the criteria keeps or gets updated. You know, we're operating in 30 different countries, and these measures are really – shifting in every country. The most important one is here in Canada, of course. For the most part, certain locations like Europe, et cetera, these subsidies are straight closures to employees that have been furloughed or impacted and so on. On the Canadian side, it really will depend on the, on CAE's eligibility criteria. So, we were eligible in this quarter, and so we continue to monitor on whether we will continue to be eligible in the coming months.

Okay, perfect. Thank you very much for your time. You're welcome.

Thank you very much. And once again, I was reminded to ask any questions or comments. It is the 1-4 on your telephone keypad. And we'll get to our next question on the line from Tim James with TD Securities. Go right ahead.

All right, thanks. Good afternoon. I have a question here from Mark. The press release states that CD is applying digitally immersive technologies to further differentiate solutions and address a wider range of customer needs. I'm just wondering if you could please expand on sort of what that wider range of needs could include.

Well, I guess I won't get into too much right now, Tim, but you might think about it. Look, at the end of the day, C is a technological powerhouse. And we demonstrate, and I've talked about that in my notes, that we've demonstrated spades, how we can bring that to bear in an extremely short amount of time in the development certification of a simulator. You know, this was not, I'm sorry, a ventilator. And I keep coming back to that because it's a quintessential example of what can be done. This is not... a simple device. It's a life-saving device, certified the highest levels of Health Canada, not a watered-down pandemic requirement, a real requirement for the use on most critically ill patients in an ICU setting using pure oxygen. So the fact that we're able to do that, again, not a built-to-print, but a new design, and completely build it, and now producing 10,000 units for the Government of Canada, is testimony to the technological capabilities of this company and the culture of which we do it. So you think about how that can be translated. By the way, we demonstrated that in the ventilator, but if you think about who we are, we've always been a technology-based company. Our focus has been on the world of training in our core markets, and that's We will continue to excel at that. But if you think about a ventilator, a ventilator is not a training device. Now, it is, but if we combine it with a full training suite, in fact, we could basically, you know, the expertise that we have to be able to subject matter expertise that we need to be able to develop came from the fact that we're training experts. So there's a lot more we could do with that technological capability. In Canada, for example, just as a for instance, you know, I think Canada walked into this crisis with no indigenous capability to be able to do ventilators in Canada. That's why the Prime Minister announced three Canadian companies to be able to do so. Now, I don't think Canada ever wants to get flat-footed again in that kind of situation. So there's a talk about self-sufficiency, just the fact that, you know, Canada – Canada makes its own ammunition for weapons, not because it couldn't source it anywhere else in the world. It's because if there was an emergency wartime-like situation, they don't want to have to rely on somebody else for bullets. Well, now that kind of thinking is being turned to medical equipment. Obviously, we hear a lot about personal protective equipment, that kind of thing. If we have this competitive, and we do believe it's competitive, by the way, right out of the box, you might think that, and we are seriously looking at that, can we continue providing that type of equipment? Not only in Canada, and that's just one example, but I can think of a whole source of example. I brought in Heidi Wood as our head of, at my level, executive director. VP of Business Development and New Growth Opportunities. And I think what's important there, as I brought her in before this pandemic ever was, you know, seen the light of day, because we have been thinking for a while that there's a lot of areas that we can leverage our technological capability. But now, of course, post-COVID and the civil aviation market that, you know, we're not going to, you know, be Pollyanna and think that's going to come back anytime soon. But we think there are a lot of things that we can do that are, be able to grow within the, well, obviously we do things like capture more outsourcing opportunities, grow defense, grow civil, but take the technological capabilities that we have, including very large capabilities in digital and leverage that into other areas. Not necessarily new markets. Markets we're in, but deepening our share of wallet with our customers. And that's right in line with what we do. Because we always, you know, right embedded in our vision of the company is partner of choice. And that's what we do. We get into, you know, with our customers. We don't, we like, yeah, we'll try to sell you a simulator. We'll try to sell you training. We'll supply you plans. But more importantly, we get into a relationship with And we stay connected because of our focus on delighting the customer and providing, you know, technological-based solutions that enable them to answer some of those critical needs that they have. So that's what we're talking about. So watch – I think you'll have to watch us over the next few quarters and watch the stuff we'll do. But certainly we're going to put some bets down. We're going to put some bets down, and I think we should do that. And – I think that we're very good at agile, and if you've heard the term I like, it's well used in Silicon Valley and places like that. It's about fail fast. Try things. Use agile methodologies and fail fast. Test them on your customers. Get some customer feedback and see if they work. See if you get traction. That's the kind of things we do. Long answer, not a lot of specifics, but that's what I do right now.

Okay, thanks, Mark. My next question, I'm wondering if you could talk about that portion of civil equipment revenue that isn't just the big-ticket full-flight simulators. Approximately how significant is that portion of civil equipment revenue relative to full-flight simulator sales, and is it more or less stable now? under current conditions or conditions of weakness because it's easier to meet milestones, deliver the product, it's not impeded by travel restrictions, etc.

I think what we would call the aftermarket PDS guide services, I don't think we've ever supplied the breakdown.

Yeah, Tim, we don't actually break that out, but I would say that it's a fairly significant part of the business we do. you know, in civil. It's mainly driven by regulation. So that is to say, you know, whenever, you know, an aircraft is updated, usually every couple years, the aircraft systems, the simulators need to be updated. And then there are regular maintenance items as well. I mean, a simulator will run day in and day out for 25 years or more. So you can imagine that, you know, there are things that have to be updated just by virtue of wear and others that need to be updated by virtue of regulation. So typically on a simulator that will sell, will generate about $1.5 million to $2 million of TDS revenue or updates and upgrades over its lifespan on it in the installed base.

And is it fair to say that that aftermarket revenue source is more stable during times like this than just the outright sale and delivery of? flight simulators, I assume.

Go ahead, Mark. No, I think it's affected as well. You know, everything at the airlines, you know, that has been affected by this crisis, and that has been affected as well.

And travel restrictions.

Yeah, travel restrictions, you know, within a lot of cases, to be able for us to deploy those solutions, we have to travel, and we, you know, with the restrictions that we have, we have been able to travel as well. So I wouldn't make the assumption that That is, I mean, maybe a little bit more stable, but I wouldn't say materially.

Okay, thank you. My last question, just want to turn to the 737 MAX. I mean, over the next couple of years, it's going to be sort of moving a little differently, I think, relative to a lot of the commercial aircraft platforms, given the challenges that it's had in the past. Do you have any sense for the timing of kind of deliveries at this point and training demand outlook for that platform? and when you expect that that could begin to positively impact financial results? Is it as simple as kind of thinking about when the grounding is lifted and deliveries of the aircraft resume that coincidentally sort of your revenue will ramp up?

Well, certainly, and even before, because they obviously have to train their crews ahead of time. So, You know, I think we were very, very close to Boeing specifically in assisting them with the certification efforts, you know, in the support of activity as it relates to training. And, of course, you would expect us to be doing that because we have the lion's share of all the simulators that have been sold on the 737 MAX. So we're very close to that story. And we think that Boeing's making a great headway with the certification authorities. I think we saw recently the FAA issue their proposed rulemaking with a comment date that's very soon. So that, to me, is a signal that, you know, things are closed and they have to get it certified for that certification of the aircraft and certified for operations. I think that should follow pretty quick, I would think. But you'll have to ask Boeing for that. But I think suffice to say, as soon as that is lifted and Airlines, I'm sure, will be taking the airplanes. That's an airline-to-airline situation. But you saw Michael Leary at Ryanair saying he's definitely going to take all his aircraft. That's what he said. And they're a good customer. So I'm sure that they're maintaining their training on the 737 MAXs. So I think we'll be a lockstep with delivery and return to service of the various fleets of aircraft. Great. Thank you very much.

Operator, I see we've gone over a lot of time a bit here. So I think we'll conclude the Q&A session for analysts and investors now. And we'll open up the lines to members of the media.

Certainly. Once again, as a reminder for the media on the phone, if you'd like to ask a question, feel free to press any one by the four on your telephone keypad. And you are a three-tone product. Now it's your request. What's going on for the media? Is there one floor for any questions or comments? One moment, please, for our first question. And we'll get to our first question on the line from the media from Allison Lampard with Reuters. Go right ahead.

Thanks. Are you seeing any increase in pilot training on wide-body models like the Boeing 757 due to the industry's demand for cargo flights?

Well, we definitely see cargo going up for sure. I think cargo carriers are you know, are having a high level of activity because of, amongst other things, online shopping, which certainly is a big thing at my house. So I think that, yeah, we are seeing more opportunities for cargo carriers, absolutely.

Can you specify at all in terms of training on the wide bodies in your centers?

I can't really know. Look, I would tell you we don't have a huge amount of white bodies in our training centers. We have some, but it's more a narrow-bodied fleet. Now, what you see, though, is more airlines actually using even narrow bodies to carry increased levels of cargo because the lion's share of, even though there's dedicated cargo carriers, the lion's share of the cargo is carried in the belly of aircraft. So, yeah, there may be less passengers, but there's more cargo in a lot of cases. So I can't really be more specific than that.

And just one last follow-up. How much demand do you see for pilot training in the United States or opportunity, given the retirements we've just seen and potential furloughs in October?

I think the level of activity for training right now in North America is pretty good. It's pretty high. I would say, you know, one thing I would point you, it's not necessarily simulator-based training, but I put you on the training of pilots. It's interesting. You might think that, you know, you talked about furloughs of pilots. I bet there would be no demand for pilots. But when we look at the industry overall dynamics over the next two, three years, there will be a need for pilots, new pilots, because of the ones that are being furloughed that I think, you know, we announced just one contract that we just received that we announced in my notes from Boeing where they put us on a contract for pilots. So, therefore, you see, you know, they're being bullish on the fact that there will be pilots needed, you know, for the future, new pilots. And I would add to that that we're the largest company in the world in terms of training pilots to become pilots. So not using simulators, but using our training aircraft and our various training operations. And what I can tell you is none of the airlines that we train, and we train a lot of cadets for airlines, none of them have reduced their level of activity, which, again, is testimony to the fact that, yes, there's a tough time right now. And there's aircraft being parked, so there's furloughs, there's early retirements, but If you like, if you thought about what we're talking about literally in February is where are we going to get all these pilots? Now we have a situation of furloughs, but things will come back. And it takes two, depending on where you are in the world, it takes two to three years to train a new pilot. So, you know, we see renewed demand. I think if the youngster wants to be on pilot, it's still a good time as far as I'm concerned.

Okay, operator, I see there are no more questions queued up. And so I want to thank everybody for joining us this afternoon, for listening to our remarks. If you'd like to get a transcript of today's remarks, they will be made available on CAE's website at cae.com. And again, thanks for joining us.

Thank you very much. Thank you, everyone. That does conclude the conference call for today. We thank you for your participation. Please disconnect your mics. Have a good rest of the day, everyone.

Thank you.