CAE Inc.

Good day, ladies and gentlemen. Welcome to the CAE first quarter conference call. Please 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 fiscal year 22, and answers to questions contained forward-looking statements. These forward-looking statements represent our expectations as of today, August 11, 2021, 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 CEE's annual MD&A, available on our corporate website and on our filings with the Canadian Securities Administrators on CDAR and the U.S. Securities and Exchange Commission on EDGAR. On the call with me this afternoon are Marc Perrin, CEE's President and Chief Executive Officer, and Sonia Brenko, our Chief Financial Officer. After the remarks from Marc and Sonia, we'll take questions from financial analysts and institutional investors and 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 Mark.

Thank you, Andrew, and good afternoon to everyone joining us on the call. Our positive momentum continued into the new fiscal year, and I'm pleased with our strong first quarter performance. Even in the midst of a pandemic, we've been able to drive results by being adaptive and agile through some of the most rapidly changing circumstances. We reported top and bottom line growth across all three business units during the quarter, and on a consolidated basis, we generated 37% year-over-year growth and 19 cents of adjusted earnings per share. In civil, first quarter average training center utilization was 56%, which is 1% higher than last quarter, and much higher than the 33% in the first quarter last year. We also delivered 11 full-flight simulators to customers around the world. On the orders front, we signed training solutions contracts valued at $338 million, including five full-flight simulator sales, new four-year business aviation training agreements with Journey Aviation and Gamma Aviation, and a three-year business aviation training agreement with Apcon Jet. We also succeeded to penetrate more share of the traditionally insourced airline training market with two new 10-year exclusive aviation training agreements with Scandinavian Airlines, SAS, and WestJet. We were also selected as partner of choice to aircraft OEMs in the emergent advanced air mobility market. We're leading the design and development of the Jaunt Aircraft Systems Integration Lab for the company's new all-electric vertical takeoff and landing, or EVTOL aircraft, the Journey aircraft. And just at the end of the quarter, we announced a strategic partnership with Volocopter to develop, certify, and deploy an innovative pilot training program and courseware development for EVTOL operations. On the M&A front, we expanded our position in civil maintenance training with the acquisition of Global Jet Services, a proven leader in aviation maintenance training. This tuck-in acquisition expands our capabilities with increased addressability of business aircraft and helicopter platforms for maintenance training through world-class regulatory-approved training programs. By leveraging our experience in pilot training, we expect this to enable rapid growth for CA in the maintenance training market. In defense, we booked orders for $152 million including newly awarded contracts to the United States Army to provide a new and upgraded maritime integrated training system and the SOSEC Consortium to design and develop the initial prototype HH-60W virtual mixed reality air crew trainer for the United States Air Force. Other notable contracts include continuing to provide upgrades and updates on C-130J training systems for the U.S. Air Force, as well as KDC-130J training systems for the U.S. Marine Corps, continuing to provide a range of in-service support solutions for the Royal Canadian Air Force's CF-18 aircraft, and continuing to provide management and support of Royal Australian Air Force aerospace simulators. Defense also received an order to provide a new part-task trainer, a range of updates, and additional training support services for the PC-21 ground-based training system supporting pilot training for the French Air Force. I'm especially pleased with the speed at which the team concluded right after the end of the quarter our acquisition of L3 Harris military training, having obtained all regulatory approvals and meeting all other closing conditions. We're excited to welcome some 1,600 members of the L3 Harris military training team and to leverage our combined expertise to support the mission of our defense and security customers. Our combined teams are now squarely focused on integration efforts and seizing on our expanded market opportunities. As testimony to how our position has already been substantially augmented by L3 Harris military training, since the end of the quarter, defense won key positions on three major IDIQs, and two noteworthy prime contracts that together significantly expand SEAS customer base and market reach. Specifically, we won the largest IDI2 contract in SEAS history with our prime position on the U.S. General Service Administration, or GSA, ASTRAL IDI2 vehicle for data operations, aircraft, development, and systems integration support and training pools. We gained access to four of the five pools because of the three L3 Harris military training acquisitions, which in total represents a budget of several billions of dollars over a 10-year period. We also won a prime contract on the Multiple Award Task Order Contract, or MATOC, IDIQ, to provide mission support services for the United States Army Futures Command. Defense also won a position in an important growth domain as a key partner to small businesses, on the National Cyber Range Complex, IDIQ. Furthermore, Defense won a competitive prime contract with expected lifecycle value of $90 million U.S. over eight years to develop simulators and training for the U.S. Air Force Joint Terminal Attack Controllers. And in another first for CA, Defense won a three-letter agency prime contract with the GSA, expanding our market penetration into synthetic environment enhanced multi-domain operational support and training. In healthcare, I'm encouraged by the double-digit year-over-year growth that we have in the quarter, which is driven by our core healthcare simulation and training business. We continue to bring highly innovative solutions to market with the release of CE Vimix 3.2, an advanced software technology that makes our platform the industry's first ultrasound simulator with 3D, 4D ultrasonography, and multi-planar reconstruction for improved fidelity and realism. We also launched CAICCU, which is a digital portfolio of learning solutions targeting critical care clinicians for ultrasound education. With that, I'll now turn the call over to Sonia who will provide additional details about 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. Our results continue to reflect the success of the measures we've taken to strengthen the company both externally in terms of expanding our reach and adapting to dynamic market conditions, and internally to lower our cost structure. Consolidated revenue of $752.7 million was 37% higher compared to the first quarter last year. Adjusted segment operating income was $98.4 million compared to a loss of $2.1 million last year. Quarterly adjusted net income was $55.6 million, or 19 cents per share, compared to negative 11 cents in the first quarter last year. Cash used in operating activities this quarter was down 46% to $129.1 million, compared to $88.4 million in the first quarter of fiscal 2021. Free cash flow was negative $147.6 million, compared to $92.7 million last year. We usually see a higher investment in non-cash working capital accounts in the first half of the fiscal year, and as in previous years, we expect the portion of the non-cash working capital investment to reverse in the second half. We continue to target 100% conversion of net income to pre-cash flow for the year. Growth and maintenance capital expenditures total $73.9 million this quarter, mainly for growth and specifically to add capacity to our global training network to deliver on the long-term exclusive training contracts in our backlog. Our growth capex is directly linked to our opportunities to invest incremental capital with attractive returns on free cash flows. With several attractive market-led expansion investment opportunities on the horizon, we are in good positions to play more organic capital, and so we are raising our expectations for total capital expenditures to more than $250 million in the fiscal year 2022. Income taxes this quarter were $10.3 million, representing an effective tax rate of 18%, compared to 24% for the first quarter last year. Income tax was impacted by restructuring costs this quarter, excluding which the rate would have been 19%. On this basis, the decrease in the tax rate was mainly attributable to beneficial impact of certain tax assets, partially offset by the change in the mix of income from various jurisdictions. Our net debt position at the end of the quarter was $1.6 billion for net debt to capital ratio of 33.9%. And net debt to adjusted EBITDA was 2.43 times at the end of the quarter. All told, between cash and available credit, we have approximately $2.6 billion of available liquidity. On the restructuring front, we continue to make very good progress. The program is enabling CE to best serve the markets by optimizing our global asset base and footprint and adjusting our business to correspond with the expected level of demand and the structural efficiencies that will be enduring. We continue to expect significant annual recurring cost savings to a wrap-up of a run rate of approximately $65 to $70 million by the end of the current fiscal year. We began executing our restructuring program in the second quarter last year, and as at the end of June 2021, we had incurred a total of $136.2 million of restructuring expenses for the entire program, including $12.2 million this quarter. We expect to incur total restructuring expenses related to this program of approximately $50 million in fiscal 2022. Now turning to our segmented performance. In civil, first quarter revenue was up 75% over Q1 last year to $432.9 million, and adjusted segment operating income was up to 85%. was up $85.9 million over the first quarter last year to $69.7 million, for a margin of 16.1%. The civil book to sales ratio for the quarter was 0.78 times, and for the rolling 12-month period, it was 0.88 times. In defense, fourth quarter revenue of $288.2 million was up 3% over Q1 last year, and adjusted segment operating income was up 37% over last year to $23.7 million, for a margin of 8.2%. The defense to book the sales ratio for the quarter was 0.53 times and 0.87 times for the last 12 months. And in health care, fourth quarter revenue was $31.6 million, up 42% from $22.3 million in Q1 last year. Adjusted segment operating income was $5 million in the quarter, compared to a loss of $3.2 million in Q1 of last year. With that, I will ask Mark to discuss the way forward.

Thanks, Sonia. As we look at the period ahead, I expect our positive momentum to extend throughout the fiscal year and beyond. Eighteen months ago, we were just beginning to confront the most severe shock a company had ever faced. And yet, despite the many uncertainties at that time, we were resolute in our determination to not only recover from the pandemic, but to emerge from it as an even stronger company. We're still in the pandemic, And despite that reality, we've gotten stronger. I'm really encouraged by everything that we've done to reinforce CA's base over the last year and a year and a half, actually, to expand our horizons for long-term sustainable growth. The slope of our recovery to pre-pandemic levels and beyond continues to depend on the timing and rate at which border restrictions can be safely lifted and normal activities resume in our end markets and in the geographies where we and our customers have significant operation. But notwithstanding the really disparate global vaccination rates and the volatility of border restrictions, which continues to obscure usual market visibility, we still expect strong growth in our core markets this fiscal year, coming mainly in the second half. We draw confidence from several important moves that we've made to expand and solidify our leadership position, including pursuits of a growth opportunities pipeline that has so far netted five acquisitions in civil to consolidate our position and expand into growth adjacencies and our largest ever acquisition, namely L3 Harris military training and defense, which doubles our presence in the U.S. defense market and accelerates our defense and security strategy. At the same time, as expanding C's reach externally, we embarked on enterprise-level projects to substantially lower our cost structure and achieve even greater levels of operational excellence. You heard Sonia reiterate our expectations that we'll reach an exit rate this fiscal year of $65 to $70 million for annual recurring cost savings from those initiatives. We're in an excellent position to benefit from a broader market recovery which so far has been more narrowly led by domestic air travel, specifically in regions with relatively high vaccination rates and cargo operations. The rebound in domestic operations demonstrates the pent-up demand for air travel and the potential for a rapid ramp-up when restrictions ease. Cross-border and transcontinental operations have continued to lag as they're much more tied to the easing of border restrictions but we believe considerable pent-up demand exists there too. At the same time, as a broader market recovery looks to take hold in commercial aviation, we intend to continue expanding our market share and securing new customer partnerships drawn from a large pipeline of airline prospects. We're also succeeding to expand our civil addressable market by over $1 billion to over $6 billion by extending beyond pilot training solutions into the rapidly growing market for digitally enabled crew optimization services and aircraft maintenance training services. In business aviation, demand has rebounded at a very rapid pace with current flight activity in the U.S. now exceeding 2019 levels and approaching the prior levels in Europe. This bodes very well for pilot hiring and business aviation training demand in this highly important segment of the civil training market. Much of the current demand is coming from first-time consumers of private aviation, and we believe the market has structurally expanded as a result. Civil full-flight simulator sales are driven by new aircraft deliveries, which are showing signs of improvement. The total market for simulator products remains small at present, but we expect to maintain our leading share of available full-flight simulator sales We still expect to deliver upwards of 30 in fiscal year 2022, driven mainly from backlog. We're also expecting to build on our initial successes in the emerging advanced air mobility market, which we see as a new potential secular driver for pilot training, and see as expertise in modeling simulation. Already with selections by OEMs, including John Air Mobility and Volocopter, we see an important leadership role for CAE helping to shape the training standard for an estimated 60,000 new pilots by 2028 in support of this entirely new modality of air transportation. In defense, the rapid closing of the L3 Harris Military Training Acquisition provides greater definition to the remainder of fiscal 2022 and beyond, and our focus will be on successful integration of this acquisition. International opportunities are somewhat slower to materialize in the current environment, but we see this headwind as temporary, and we have a strong pipeline with some $5.8 million of bids and proposals pending customer decisions. From a balance standpoint, having now substantially augmented our presence in the defense segment, and in the United States in particular, we expect defense to benefit from the greater government budgetary stability that this provides. CA's defense business has become the world's leading platform-agnostic global training and simulation pure play, and we're very excited about the increased potential that that brings to capture business around the world, accelerated with the expanded capability and customer set that we now possess. Our new prime positions on major IDIQs and our contract to develop simulators and training for United States Air Force Joint Terminal Attack Controllers are all perfect examples of what we mean by synergies and how L3Harris military training expands our core offerings across multi-domain operations and brings access to new customers and programs. Our defense priorities are focused on the long term and investing in our leading position as a training and mission support partner with leading edge capabilities in digital immersion. We're also enhancing our positions by laying the groundwork to strategically team with major OEMs on next-generation platforms. With our expertise in the integration of live, virtual, and constructive training, along with our newly expanded capabilities to address mission and operations support, we believe we'll make significant inroads into a broader defense market in the years ahead. And lastly, in healthcare, I believe we have the right team in place, including a reinvigorated front end to fully leverage the greater market appreciation of the benefits of healthcare simulation and training to improve safety and to help save lives. We're making deliberate moves to increase our addressable market and access the larger pools or the largest pools of value in healthcare training, like nursing and in the military. Here, too, we expect good momentum, and I look forward to gaining substantial sustainable scale with our innovative solutions to make healthcare safer. In summary, CAE is poised to benefit from how the world is changing in a post-COVID-19 environment, and we adapted our growth strategy to seize on the opportunities presented by these new realities. We've made several important moves over the last year and a half to expand and strengthen our position, and the investment thesis for CAE is more compelling than ever. We look forward to strong growth for the year ahead and superior and sustainable growth and strong free cash flows over the long term. With that, I thank you for your attention, and we're now ready to answer questions.

Operator, we'll now be pleased to take questions from analysts and institutional investors.

Thank you. If you would like to register a question, please press the 1-4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 for about a three. One moment, please, for the first question. Our first question comes from Connor Gupta with Scotiabank. Please proceed.

Thanks, and good afternoon, everyone. So maybe the first question on the order activity. The book-to-sales ratio was a bit low in the first quarter for both civil and defense segments. Did you see any delays or any cancellations that may have impacted the orders?

No, specifically no. No cancellations for sure, Conrad. Continued headwinds on timing of international orders in defense. I mentioned that on the call. There's still some COVID impacts there. Things are not back to normal, not only in civil but in defense overall because, again, of travel restrictions and basically just, you know, things just not being back to normal. So we're seeing that internationally. That's affecting things, but if you look at defense in particular, I've never been a fan, and I've said this many times before, to not look at orders on the defense side on a quarterly basis. I would look at a 12-month runway, and even on that base, you would come to the conclusion it's below one, but I would point to the recent orders that we've had and the really very, very encouraging you know, awards on, not only on orders, but on IDIQs that we've gotten since the quarter, specifically since we've done the, completed the acquisition of L3 Harris-Millser train. That is, you know, of course that doesn't materialize into order intake. It's kind of a license to play. But the fact that you selected prime on those IDIQs, is a very strong indication because that gives you access to literally billions of dollars over the next few years. So I'm very encouraged by that. So I'm not overly concerned, you know, on a sustained basis. On the silver side, I think what I'd point, a couple of things. If you look at, you know, we've made no secret that simulator orders are going to be slow in the quarter. So we didn't expect to have a book to bill anywhere near one on the product standpoint. at this time. And on sale, if I look at training itself, if you were to take training itself, a book-to-bill is higher than one. And I think that the important thing to note there as well is if you look at our business jet business, the book-to-bill, you know, business jets is largely a transactional business. So the book-to-bill is always around one. Kind of you... just because of the way we booked that business. So if we're above one, substantially it means that we're quite a bit above one in the commercial aviation training business. So that's the way I would look at things if that gives you a bit more color.

That's very helpful, Mark. Thank you. And you mentioned the three IDIQ contracts. So congrats on that and the two prime contracts as well. Just to clarify, do these five contracts belong to the acquired L3 Harris business, or is it for the existing business in defense?

Well, they don't belong to us because we own the L3 Harris military training business, and it was bid by L3 Harris Link, and Link is now owned by us, so they're our contracts.

They're our RDIQs. No, I'm sorry, just to be clear, I wanted to understand, is it related to the L3 Harris asset that you acquired, or is it outside of that asset?

Okay, well, yes, part of it is, like, I'll give you the IDIQs, for example. On those IDIQs, there's various pools. One of them is training, okay? So there was five pools. I won't go through the details of all the pools, but L3 Harris Link bid on five of those pools. and they were selected as prime on five out of the ten pools. We were selected on one of those CAE legacy, let's call it legacy for a moment. We were selected on one of the pools which was training as prime contractor. So as a result of this, and what we get from the acquisition is obviously a prime position on those other pools which directly come across come about as a result of the acquisition. The other order that I would point to is the $90 million order for the train system for the JTAX, US Air Force JTAX. That comes from the link acquisition as well.

That's great, sir. Thanks. And last one for me before I turn it over, maybe for Sonia. So you raised the CAPEX guidance slightly, and you are still expecting 100% free cash flow conversion. Should we interpret that as you're expecting higher net income versus your prior expectations this year, or is it the better working capital performance that you're expecting?

So free cash flow is netted up in the quarter and really driven by non-cash working capital here. And really what we see there is the usual seasonality. There's usually a larger amount of kind of annual payments in the first and in the first quarter, in the first half, and also maybe a bit of volume shift from Q4 to Q1. Really, the variation here is that we expect this to reverse in part in the second half, as we've done before, because we keep a continued laser focus on working capital metrics and optimizing that, and really still guiding to the 100% net income, the free cash flow conversion. Now, I just kind of highlight that the free cash flow, as we've defined it, does not include the growth CapEx, right? So the CapEx increase to over $250 million is not included in that free cash flow. And if I may, on the CapEx, one of the reasons that we have raised our view on that is really, I think, a positive development. And to tag on to what Mark was saying, we are seeing some good orders on the training side, on the commercial side, as airlines need and request more capacity. So they're not only asking for more capacity, but some of these airlines that we're working with, we're seeing some changed behaviors, whereas they would have purchased the simulator prior to COVID, we're entering into long-term training agreements. And that's one of the reasons that we've increased our view on the CapEx. And I'll remind you that the organic CapEx is really the most accretive capital and growth investment that we have delivering 20 to 30% incremental returns in the first two to three years, and the best example of growth compounding that we have.

If I can clarify, Sonia, why would you need to invest into incremental capacity when your utilization levels are still below 60%, let's say? I mean, should you not have excess capacity in your training centers already? I'm like, where is the demand coming from?

Well, you know, it goes, I'll answer that one in the corner, it goes directly to the question of different behaviors being exhibited by airlines, which we've pointed to, you know, that airlines are basically looking to, you know, change from a traditional in-source kind of model to looking more at an outsource model. You know, we keep on commenting on that, that we have more conversations to that extent, just to that result. So, you know, we announced like two two outsourcing this quarter where we've got two 10-year contracts with two separate airlines on those type of deals. So what you see is airlines investing in new capacity, mainly for new aircraft, and rather than going through the model of basically investing in the simulators, they're turning over and signing long-term contracts with us. So that's what you're seeing here. So a lot of that incremental traffic is exactly for that kind of for that kind of behavior. And, you know, as we were saying, that, as we've said many times and we've demonstrated, investing in that type of CapEx is the best example of growth compounding that we have because we won't invest in it unless we see the type of return accretion that, you know, basically we've presented a streak, which is very quite nice, thank you. So that's the kind of, that's what we're seeing. And to your question of You know, we're still operating at, say, 56% capacity. Well, once the market is back to normal and we fully expect a return, let's say apples to apples, on the same level, let's say the same level of capacity, well, what we're talking, this capex investing is incremental to that.

Yeah, and I just add that the demand is linked to either new platforms or platforms where we don't have excess capacity. Of course, if we have simulators that are underutilized and that's part of the restructuring program, we move them around to match up with demand. And so these contracts are for platforms either that are under or already all utilized or new.

I appreciate the time. Thank you.

Our next question comes from Kevin Chang with CIBC. Please proceed.

Thanks for taking my question. Maybe just two for me. It does seem like during this pandemic you've invested in some of these adjacent services. You talked about the maintenance training acquisition. You've been growing the crew management. Just wondering how you think about the adjacent service opportunities you can bolt on into civil, I guess, over the medium to longer term. Are there areas you still want to focus on that you don't offer now? And then are you seeing benefits from cross-selling? I presume that's the end goal here where someone comes to you for pilot training, maybe maintenance training, and to manage their crews as well. Is that kind of the best-case scenario as you bring this all together?

Well, absolutely. I mean, that's definitely a big part of it, Kevin. It's traditional, basically, you know, enlarging the traditional share of wallet. We like to, in all of our transactions with our customers, and that's been our model all along, is always to try to make ourselves, you know, more relevant and more important to our partners and being a trained partner of choice, but moving into more of what we call mission operations and defense, In civil, it's capturing more of their needs around the pilots, around the technician, around their operations. So maintenance training is a natural one. We've done it. We have a very nice franchise of doing that in business aircraft. In commercial aircraft, we basically embarked on that in a relatively good way with Pellicis, for example, when we acquired that, and we're expanding upon it here with this acquisition that we're doing in this bolt-on in the United States. I feel very good about the growth of that market. The technician market is one that is poised to grow for the same reason that the pilot, the need for pilots is going to grow. It's a tenured, on an average basis, it's a very tenured workforce. It's a regulated market in terms of, especially in Europe where you need technicians with certification. So it's a natural market for us. Beyond that, Again, we're moving into more software-enabled solutions. That was what we did with Merlot, with Roster Buster, and RB Group. Again, we're making ourselves more essential to our customers. And they already outsource these solutions or they're open to outsource the solutions because we're able to address hot buttons that basically are not core to them.

And maybe just to clarify, have you been able to cross-sell some of these newly acquired services within your core customer base? And when you think about the addressable market now, I think earlier this year you talked about Civil being a $6.1 billion addressable market. Now with the maintenance training capabilities, do you have a sense of how big that pie is today?

Well, at the moment, when I talk about $6 billion, it's about the market that we see. including those adjacencies. Okay. Okay.

I think the second for me, just turning to healthcare, in your outlook in your press release, you highlighted the growing nurse shortage in your outlook as I think it's a long-term tailwind for healthcare and the services you provide. I'm just wondering, when you talk to healthcare customers, are you seeing, I guess, a similar realization like you see in civil and defense whereby healthcare they recognize that simulated training can help free up labor, or is it something you have to educate these customers on? And so, you know, that might extend out into, you know, that might extend out the, you know, this labor shortage issue in terms of, you know, a revenue recognition opportunity for you over at CAU.

Well, for sure. And look, at a macro level, and I was saying in my comments, we definitely see, the nursing shortage that exists and is poised to increase as a catalyst for our business. It's a catalyst for our business because, you know, if you're talking about you need more nurses, you need more courses for nurses, you need more slots in nursing schools, who do we sell our products and solutions to? To nursing schools, to training hospitals, those kind of things. So just that's the first order response to that. Beyond that, it's the fact that you can, by using simulation-based training, you can make them more effective, you can provide value to those schools, whereas by using their product, they can then make themselves more relevant, you know, in a lot of cases, for example, in the United States, there are more for-profit operations, so if they can have a nursing program that is steeped in modern technology using medical mannequins and digital solutions, that is more appealing, for example, students who are looking to get a degree in that particular market. So all of it contributes to, you know, how we see the market in healthcare. But that's just one of the components. It's a good one. It's an important one. But if I look at all of the catalysts basically for our business, they're just coming out of the pandemic. I mean, healthcare is I mean, there's never been a time where healthcare is more on everybody's mind. And, you know, we're reinvigorating the whole organization. We're basically concentrating on the core business, which, you know, as you commented in nursing, for example. But we see opportunities, big opportunities, for example, in the military, on government or para-government organizations, like, for example... the FEMA in the United States, for example, Federal Emergency Management Agency, where we can bring simulation-based training solutions to the fold. So we are ramping up in health care, and I'm very confident of a nice growth profile that will be good for our business.

That's great, Colin. Thank you very much for taking my questions.

Our next question comes from Tim James with TD Securities. Please proceed.

Thanks very much. Mark, I'm just wondering if you could talk for a minute about type certification versus ab initio versus recurrent training activity that you're seeing throughout the network, and maybe just commenting on how each is faring relative to, if we use, say, fiscal 2020 as kind of a baseline. I'm just trying to understand how the relative strength of their rebounds have been?

I would say that, well, first of all, type rating, basically our business in commercial aviation training, it's pretty much operating in lockstep with the flying activity. And that's what commentary around, that's the first order catalyst. So when you think about the utilization in our overall training centers, I would say that business aircraft is doing pretty darn well because of the level of activity there. In the U.S., we're doing very well. The training center is in high levels of operation. The rest of the world in commercial aviation, not so much because of still border restrictions and very uneven levels of vaccination. So Europe, if you take... you know, average 56%, you know, significantly lower than that. Asia, I would tell you, is still, you know, quite a bit behind because of, again, that, you know, the level of very low level of vaccination. So in just the past few weeks, we've had closures of centers in Vietnam and Kuala Lumpur and Australia even. So it's still, so the fact that, and I see that as, you know, perversely might say very positive because we're able to make the amount of return that we're making on 56% utilization with those dynamics, I feel pretty darn good as the rest of the world recovers like the United States does, which will happen. That's not a question. And, you know, having traveled internationally myself recently, and I don't know if you have, but the level of hoops that you have to go through to fly internationally, you really don't want to. So when that starts getting reduced, I think we're going to see a lot of pent-up demand. In terms of ab-initial activity, it's actually very strong. We haven't really reduced the level of flying activity. The only areas where we have to reduce is, for example, in Australia because, you know, a very strict lockdown forces to close our schools back up now, but that's the kind of activity. In fact, what you see is airlines that are anticipating a renewed pilot shortage and increasing. So we're seeing orders from major airlines increasing their number of cadets in our flight schools in a significant manner. So that's a positive for sure. I don't know if that gives you a – or products, but it's what I said. You know, whenever – and this is historical – whenever there's a crisis, even though the products or simulator deliveries are tied highly to deliveries, there's always a lag. When you have a shock, and of course this is the mother of all shocks, there's always a lag before airlines start to buy simulators in earnest. So we're seeing that. That's why we anticipated that we're not going to get back to the level of orders that we had pre-pandemic for some time. But we're starting to see a recovery. We had five and a quarter, which I wouldn't call it a run rate, but I'm encouraged by that and I'm encouraged by the level of activity I think airlines are seeing it come back. You know, Airbus is increasing deliveries next year. You know, we see the big four U.S. airlines, you know, recall 3,500 pilots, 6,000 flight attendants. We saw United Airlines ordered 200 MAXs and 78 321s. And, of course, again, you know, TSA passenger throughput in the U.S.A. continued to reach very high levels. We're back at 80% pre-COVID. So it's all pretty positive signs. I don't know if that gives you a good answer, Tim.

No, that's very helpful, Mark. Thank you. Very helpful. Just on the 737 MAX, I know when the issues were kind of working their way through, I guess we've got to go back more than a year ago now, C was building some simulators, some MAX simulators in anticipation of demand and maybe not based on contracts in hand. How does the... How do those simulators and if you're carrying any of those or have all those MAX simulators more or less been spoken for and are we kind of back to a normal trend in terms of MAX simulators that would be being produced in CAE facilities?

Yeah, no, we have nothing. We have no backlog. The 737 MAX are all delivered and I anticipate good demand for 737 MAX. Okay, great.

And then my last question, and there's great color on sort of where defense orders are coming from. I'm just wondering specifically that, you know, there was a very nice increase, as you've talked about in the bid pipeline, I guess over a billion dollars relative to the end of fiscal 21. This is on the defense side, of course. Are there any platforms or... you know, trends you're seeing or areas that account for that big step up in the bid pipelines? Any, you know, warfare types, any kind of markets you could point to, or is it really across the board?

Well, it's across the board, but obviously the U.S. is the largest defense market in the world, so you'd expect that's a high level. But having said that, you know, the contracts that we go after internationally are large contracts, that basically establishes turnkey training centers for fighters, that kind of thing. We have a number of countries that we're looking to do that. Specifically, some of those talks are going slow because of the pandemic, but that's where we're seeing some of that order activity is a bit protracted. But if your question is, I mean, is that order pipeline If you like, you know, is it sensitive to one or two major bids? I would tell you no. That's across the board.

Okay. Thank you very much.

Our next question comes from Fadi Shamu with BMO. Please proceed.

If you're talking, Fatih, we can't hear you.

Hi. I was on mute. Apologies. Good afternoon. So, I was wondering, on the SAS and WestJet, were there asset commitments on your part toward these outsourcing deals, or is it purely kind of service side?

It's asset commitments, but asset that we put in the asset, and it's part of the increased capex that we're talking about on both airlines. So, you know, it's basically they don't invest in the simulator, but, you know, we get, in these two cases, 10-year exclusive contracts for training on those platforms for those airlines. That's essentially it.

Okay. My second question is... As you look at this year, can you give us an idea about what is the contribution that you're expecting in terms of maybe revenues or operating income from the acquisition that you've made? And also, if you can give us an idea about how much contribution you expect to realize on a full year basis from that $65 million, $70 million restructuring program?

Well, I'll let Sonia talk a bit more specifically. The biggest one, obviously, is L3 Harris. Well, we're very, very happy to close this, you know, after giving us really, I guess, pretty much three, four quarters. So, you know, what we said in the past, that's probably a $500 billion business, so we get nine months of it, so... a quick mask that tells me what we should be able to get. But having said that, you can well imagine that having closed it early brings its own share of complexities. And we're going through putting these two sets of numbers together, the teams together, so we're solely focused on integration right now. So the heavy lifting before we can be very definitive, but I think that's what we, just on that big one, which is, of course, the big dog in this, we would get. Sonia, maybe you'll comment on the others.

Yes, so Mark, as Mark mentioned, completely focused on the integration. You know, we had said it would be immediately the accretive, double-digit EPS accretive in the first full year of operation, so that's FY23, and working up to a run rate of synergies of $35 to $45 million also in that EPS accretion in the first full year after closing. So I would go with those metrics. On the restructuring program study for full year, what we've given as guidance is $65 to $70 million of recurring structural savings. And we're building up to that run rate over this year. So this quarter alone, we've kind of filled through about 15% of that annual target. And that's already kind of, I think, good progress. And we continue to advance on that progress as we optimize locations and continue relocations of simulators. So we'll see that wrapping up throughout the year and a little bit more in the second half as well.

Okay. And maybe follow-up on this question, specifically on the aviation side. You know, now that you've kind of overlapped the hardest quarter last year, your run rate EBIT in that business is about $250 million for the last four quarters. You know, based on what you're seeing in both delivery of full-flight simulators and opportunities on the services side, like, would you kind of maybe give us maybe an overall range of what do you think organic growth will look like as we go into the next nine months and year?

So we didn't give specific financial guidance really because the visibility is still quite opaque on, I think, the level of the border restrictions, the volatility on travel restrictions, and that's the main driver to drive a lot of the recovery there. But what we said is that we expect very strong year-over-year growth. So on recovery, on the flow-through of those cost savings, You know, we have got about, we delivered about $20 million of SOI this quarter at a 16% margin, and that's at 56% utilization and 11 deliveries in the quarter. And Mark went into some detail on kind of the volatility that we see across regions. So, you know, as that recovery ramps up and the rest of the cost savings ramp up, we'll see the SOI follow and the margins as well.

Yeah, if you say to break it down, Patty, a little bit, think about just, as you say, you're looking civil along. If you break it down, if they, you know, revenue and earnings from simulators, well, I mean, we've said, well, we expect to deliver about 30 for backlog. Okay, so you can make your mind up what that looks like. Then you look at, we talked about our level of training activity in our flight training, our SDOs. And I talked about that. That's pretty even because you don't see big swings about that because that's kind of a, you know, you basically book your revenue as you're flying, so you don't see huge swings, but I would tell you it's on the increase. And when you look at the rest, business aviation training is doing very well because business aircraft training is on a high. We're in our Q2. That's seasonably below quarter, so you would expect it to go in Q2, Q3, Q4. And then you have commercial. Commercial is the one that is the wild card because that's the one, as Sonia was saying, that is really exposed to, you know, the variability in the vaccination rates and border restrictions. That's the one that caused the most headache in predictability. U.S., you know, doing great, doing really good. So Europe is still low, but, you know, we're seeing signs of promise there. And Asia, well, I think it's tied to the vaccination rates. So I guess that's the best crystal ball I can give you.

Okay, great. The SAS and WestJet go into effect now, basically? Well, no, we have to.

Well, the agreements are signed, and we're going to build the simulators to deploy.

Okay. Okay, thank you.

Our next question comes from Cameron Dirksen with National Bank Financial. Please proceed.

Yeah, thanks very much. Good afternoon. Just one question for me. I'm just wondering if you can expand a little bit more on the latest R&D program that you've announced. I know you've kind of highlighted the advanced air mobility and AI and some other things in there, but just wondering if you can provide any more specifics and just wondering what kind of new capabilities are are you looking to develop at CAE that maybe you didn't have before or maybe that you were underrepresented in before?

Well, a lot of it is to do with furthering the core competencies that we have. I mean, some of the new areas, specifically like development of capabilities among urban air vehicles, we're talking about electric hybrid aircraft, green technology, that's another one. Others are continuing the path we were on on, everything digital in our business, basically using data, using the data that we get from our business to basically develop technologies that allow us to be more important to our customers and get data-enabled revenue streams from that. And a lot of it has to do with furthering our expertise around the experts in the world in creating these technologies synthetic environments that are so important to warfare specifically. That's what I talked about specifically. One of the great outcomes coming out of the acquisition of L3 Harris is we now have strong capabilities in all five domains. And because the military is now focused on basically preparing for a near-peer fight. Again, what does the military do when they're not in operations? Well, they train for operation. They train for war. So what do they train for? They train for what they call the near-peer fight. And the near-peer fight is one that you can only really do virtually. And in order to be able to do that, you have to create an environment which is a synthetic environment in which the military can exercise in. We are world-class at that. But Again, nothing stands still in life, and we basically continue to invest in R&D to make sure that we continue to hone those skills that makes us the best in the world and more relevant to our customers. Those are some of the things that I was talking about.

Okay. That's helpful. Thanks very much.

Our next question comes from Benoit Poirier with Desjardins Capital Markets. Please proceed.

Yes. Good morning. Good afternoon, everyone. During the quarter, we've seen some big aircraft orders. Could those initial steps, could they lead to some sizable training opportunities?

Well, for sure. For sure, Benoit. As you said before, to the extent that they're going to translate into incremental deliveries and you see, as I was mentioning, Airbus increasing their production rates. then that's going to inevitably result in more simulators needed in the market, and we fully expect to maintain our market lead. Specifically, we've gotten more lead in that market with the acquisitions of troops, so I think that will be good for us as well, the training market as well. They're going to need incremental capacity, whether that gets deployed in terms of simulators or basically outsource training.

Okay. And Sonia, with respect to your increased capex guidance this year, could you maybe provide some color on how it will flow to return on capital employee matrix over time, and whether the ramp up in accretive contribution is over a few years?

Absolutely. And so, you know, as we were talking and great examples is that these are all market-led, you know, contract-secured opportunities. And so that means the ramp-up is much faster. Now, there's some commercial, of course, as we've talked about in some of the contracts that we've signed, but also a good amount of investment in business jet-side and deploying SEMSTAR Network in line with that. strong demand and that market that's recovering nicely. So, you know, the growth capex, organic growth capex is the most accretive capital that we deploy. And generally, I mean, we've seen historically and in what we see ahead, I have a high incremental return on capital. Often within the first couple of years, they're in the 20 to 30% return on capital range. So this is very much in line with those metrics and those expectations.

Thank you. That's it.

Thank you. Thank you.

There are no further questions at this time.

Operator, if there are any further questions, what do people need to press?

As a reminder, to register a question, please press the 1-4 on your telephone. We do have a question from Noah Poponek with Goldman Sachs. Please proceed.

Hi. Thanks for that because I missed the 1-4 instruction the first time. Good afternoon, everybody.

Thanks, Noah. We got your email. Thank you.

Awesome. I had understood your prior comments to suggest that with a quarter under your belt here, you know, civil a little firmer, Bizjet a lot firmer, the L3 deal closed, that you would maybe be providing more formal guidance and outlook commentary this quarter. And I'm just curious, you know, did I interpret that incorrectly, or did Delta variant or the end market keep you from doing that? And, you know, when do you think you might have enough visibility to provide a more formal outlook?

Male Speaker No, I think you're right, Noah. That's what we said. We, you know, last, when we were there last last quarter at the same time, I fully expected to be able to provide more specifics to that. I mean, to what level of specifics? You know, to be honest, more than now, more than now. But I don't know how much more. But, look, the reality is that the – I think we're not – basically not alone in this. To me, we still don't have enough visibility of the recovery and vaccination and, you know, basically resultant. you know, reduction in travel restrictions out of that market. And even Europe is a bit challenging to predict right now. So I know enough to be able to predict that it's going to be, we're going to see strong growth, and specifically in the back half. We're in a seasonably low quarter now for flying activity. This year is no, if I talk about commercial aviation, that's no different than the other year somewhat affected by covid but the the the traditional patterns that we see where airlines in the summer are flying in the western hemisphere and they're they're not training we see some of that so but that's going to recover in q3 q4 but to provide any you know uh guidance that's going to be to me that i can really hang my hat on that it's neither going to be uh over the top or underwhelming I need more specifics. We tend to be, you know, and I think we've always been that way, a bit conservative with regards to providing any outlook on that basis.

Has the actual business not evolved quite how you thought it would in terms of utilization rate or order flow or customer activity, or is this really, you know, that COVID has progressed in a way that just hasn't become – as incrementally visible as you thought it might? I think the latter.

The latter. It's basically that. The business is going the way I would have anticipated it. Okay. In fact, business aircraft is doing better, specifically in the United States.

Right. Okay. Okay. That's a good clarification. And, Mark, you've mentioned a few times how you're in the seasonally light quarter for civil aircraft. And we can see that in the model going back over time. That's usually the case. It's not always the case, but it's usually the case. Are you expecting that to be the case this year? Because you have the normal seasonality, but then you just have the, you know, working off the very low base that COVID has created. So are you expecting that to be the case?

No, definitely. That's going to be the case. I can tell you that's the case right now in business aircraft. Even though we have a lot of training going on, it's not as much training as we could. And the reason for that is because the level of flying activity is higher than it was prior to COVID. So when pilots are flying, they're not training. I'm a business aircraft pilot myself, and I can tell you it takes time. You've really got to plan to be able to manage your schedule and book off a week to go do training, which is what you have to do. So we see those dynamics, and we expect to see it. Again, we see it again this year. It's somewhat skewed, as mentioned, by COVID, but the season pattern still is there. And that's part of the reason why we're basically giving more of the growth towards the back half. Got it. By the way, as well, I would comment that we're going to see the seasonal variability with regards to our deliveries as well, because same as last year, or every year we have it shut down in our factory, and this year we really, really shut it down for an extended period because of COVID-related issues. So that means you're not building simulators. So when we talk about 30 simulators for the year, you know, you're going to be a worse steward to the back half, even though they're coming from backlog. Makes sense.

And I'm just going to sneak in one more. I'm a little surprised by the rate of change in civil – EBIT dollars compared to revenue dollars sequentially, just given BizJet is stronger and that's higher margin, and then typically with the utilization rate, or we've seen with the utilization rate being kind of flatter sequentially that that's the phenomenon of the JVs that you have that flow through EBIT differently than revenue dollars. So can you, is there a way to help me square up the variance there? Maybe Sonia, why not?

Yeah, well, on the margin front, it's really a question of mix. Q4 had a very strong BAT contribution or proportion, and so BAT with the highest margin kind of creates some volatility in the margins, and as we've discussed with the JVs. In terms of the top and the bottom line, so both top and bottom line growth, on both sides, and several variables here. You saw growth from utilization, and also on the cost side, you saw growth or profitability growth coming from some of the cost savings. So a lot of the restructuring program is across the board on the company, but a large proportion goes to the civil side. But you also saw that the deliveries were lower quarter over quarter. So where you had some progress on those fronts, you had a bit of lower deliveries in Q1 versus Q4.

Okay. Okay. I'll leave it there. Thanks so much.

Great. Operator, I want to thank everyone in the financial community for participating and for their questions. And with the time remaining, we'll open the lines to members of the media should there be any additional questions from members of the media. We're ready to take them.

As a reminder, to register a question, please press the 1-4 on your telephone.

Okay, well, if there are no questions remaining, we'll conclude the call. And again, thank everyone for joining us today. A transcript of today's call can be found later this afternoon on the CA's website. Thank you.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.