CAE Inc.

Good day, ladies and gentlemen. Welcome to the CAE fourth 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. Please go ahead.

Good afternoon, or I should say good morning, 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 FY23 and answers to questions, contain forward-looking statements. These forward-looking statements represent our expectations as of today, June 1st, 2022, 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 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 morning are Marc Perrin, CEE's President and Chief Executive Officer, and Sonia Branco, 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. Good morning to everyone joining us on the call. Before Sonia and I get into the results, I want to first say how proud I am of our 13,000 CA employees who exemplified our one CA culture and delivered a truly outstanding performance in fiscal 2022. We set a number of order intake records this year, culminating in record bookings of $4.1 billion and a record backlog of $9.6 billion. These numbers are especially impressive considering that our industry is still in the early days of a cyclical recovery. We're winning market share by innovating and delighting our customers, and this is because of the great dedication of our people. Testament to their passion and commitment is that employee engagement has never been higher. Even with the added complexities of managing through a pandemic. I'll talk more about the way forward at the end of the call, but these are some of the most important factors that underscore my enthusiasm and outlook for a bigger, stronger, and more profitable CA in the period ahead. Turning now to our results. On a consolidated basis, we grew fourth quarter revenue by 25%, and annual revenue by 23%. before the contribution of our Ventilator Humanitarian Initiative last year. We delivered 32 percent higher adjusted earnings per share in a quarter, and for the year, it was up 79 percent. Testament to the quality of these results, we generated a healthy $188 million of free cash flow for the quarter and $342 million for the year. In civil, We had strong performance with double-digit growth in revenue and adjusted segment operating income, and we generated margins north of 20% for the second quarter in a row. Despite Omicron disruptions during the fall and winter and continued market weakness in Asia, fourth quarter average training center utilization reached 69%, which is up about 55% last year. Training demand in the Americas continues to be the strongest in the quarter, easily absorbing the capacity we've deployed recently into the region to meet our customers' increased needs. We also had strong demand for new pilot training with record monthly hours flown at our flight school in Phoenix, Arizona. Training utilization in Europe improved in the quarter, with airlines having become more confident about the summer travel period. Asia Pacific was a bit better, with some easing of travel restrictions in Singapore and Malaysia, but remained at a much lower level compared to 2019. In business aviation, training demand was robust and reflects the high level of business aircraft flight activity, which is well above 2019 levels. We overcame market and logistical challenges to deliver seven civil full-flight simulators in a quarter and 30 for the year. We had strong order activity in civil overall in the quarter, booking training solutions contracts valued at $517 million for a book-to-sales ratio of 1.19 times, including 15 full flight simulator sales. Annual orders reached $2 billion for a book-to-sales ratio of 1.25 times including comprehensive long-term training agreements with airlines and business jets operators worldwide, and a total of 48 full-flight simulator sales for the year, which is testament to the increased demand for pilot training. This is a big step up compared to only 11 orders for all of the previous fiscal year. Civil concluded the year with a healthy order backlog of $4.9 billion. We also expanded our horizons during the year by partnering with four of the leading electrical vertical takeoff and landing developers to provide a range of solutions, including simulators, pilot and maintenance training programs, and aircraft systems engineering support. Additionally, we concluded the acquisition of Sabre Air Center's airline operations portfolio during the quarter, giving us a valuable suite of flight and crew management and optimization solutions and a highly talented workforce, who we welcome warmly to C8. The acquisition is part of a strategy to extend civil beyond training and access an even larger portion of the civil aviation market that we already address. We continuously innovate to earn the right to be our customers' training partner of choice, and now we're expanding our aperture to also become their technology partner of choice. I'm very encouraged by the positive customer response we've had already, with airlines and business jet operators greeting CE as a highly logical partner for these solutions. In defense, we also had double-digit growth in the quarter with the contribution of L3 Harris military training, and I'm especially pleased with the acceleration in order intake with bookings totaling a record $751 million in a quarter for a 1.6 times book-to-sales ratio. Notable wins in a quarter include a contract with the Government of Canada to extend and expand the NATO Flying Training in Canada program through 2027. Defence also broadened its customer access with a US $250 million ceiling US Naval Air Systems Command contract for rapid acquisition, prototyping, integration, and development, which is an IDIQ win. Defense concluded the year with a record $1.9 billion in orders, including competitive prime awards across all five domains, that being air, land, sea, space, and cyber. This higher level of activity contributed to a $4.7 billion defense backlog, representing 1.2 times book to sales for the year. Notably, this is the first time our annual defense book to sales ratio has been above one in the last four fiscal years, and it's key to driving higher performance in the years ahead. We also concluded the year with a record $8.6 billion of defense bids pending customer decisions. Turning now to healthcare, we delivered our fifth consecutive quarter of double-digit year-over-year revenue growth excluding ventilators, and we generated sequentially higher profitability in the fourth quarter. One noteworthy order during the quarter included a collaboration between healthcare and defense to win a contract to support the German Armed Forces by providing patient simulators, user training, and maintenance support. This collaboration is a great example of CE's cross-business synergies and is testament to a unique one CA culture. Our good progress in healthcare during the year reflects a clear focus on achieving greater scale and the ramp up of our re-energized organization. We began worldwide deliveries of our newest pediatric patient simulator, CA AREA, and we launched updates to expand the future set and functionality of some of our main product solutions, including Vividix, our ultrasound education platform, C-Cath Lab VR, and C-Learning Space. With that, I'll now turn the call over to Sonia, who'll provide a more 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 morning, everyone. I first want to thank our stakeholders for their patience in the delay in getting the results out to you. Our auditors required more time than anticipated to complete the technical tasks involved in the normal course audits. Turning now to results, we delivered a strong performance in the fourth quarter and for the year, having worked diligently to overcome the ongoing COVID-related challenges and delivered double-digit revenue and adjusted segment operating income growth and higher margins. We also generated excellent free cash flow and helped to secure future growth with record order bookings and backlogs. We have effectively deployed growth capital, seizing on opportunities to expand our market reach and we achieved our targets on restructuring programs to lower our cost structures by approximately $70 million annually. We also continue to be on track with the integration of our acquisitions and the realization of planned cost synergies within the expected timeframe. Looking at our results on a consolidated basis, revenue of $955 million was up 25% compared to the fourth quarter last year, excluding $130 million of revenue for ventilators. Adjusted segment operating income was $142.7 million compared to $106.2 million last year. Quarterly adjusted net income was $92 million, or $0.29 per share, compared to $0.22 in the fourth quarter last year. For the year, consolidated revenue was up 13% at $3.4 billion and was 23% higher, excluding $230.6 million of revenue last year from the ventilator contract. Adjusted segment operating income was up 58% to $444.5 million, and annual adjusted net income was $261 million, or $0.84 per share, which is up 79% compared to $0.47 last year. We incurred restructuring integration and acquisition costs of $36 million during the quarter related to the L3 Harris Military Training and Air Center acquisitions and our enterprise-wide restructuring programs. Net cash provided by operating activities was $206.8 million for the quarter compared to $174.6 million in the fourth quarter last year. And for the year, we generated $418.2 million from operating activities compared to $366.6 million last year. We had a strong free cash flow in the quarter of $187.6 million and $341.5 million for the year for an annual cash conversion rate of 131%. Uses of cash involve funding capital expenditures for $74.7 million in the fourth quarter and $272.2 million for the year, which is in line with our outlook of total CapEx of more than $250 million. CAES growth CapEx is mainly driven by the expansion of our civil aviation training network and typically generates 20% to 30% range of incremental return on capital employed within the first few years of deployment. These opportunities translate to some of the best examples of growth compounding at CAE. Looking at fiscal 2023, we continue to expect capex of approximately $250 million, reflecting a large pipeline of attractive market-led expansion investment opportunities on the horizon. Our net debt position at the end of the quarter was approximately $2.7 billion for a net debt to adjusted EBITDA of 3.6 times. This compares to net debt of $2.3 billion and 3.2 times net debt to adjusted EBITDA at the end of the preceding quarter. During the last two fiscal years, we made several growth investments to expand our capabilities and reach, including nine acquisitions totaling $2.1 billion and capital expenditures for some $380 million. We're continuing to focus on attractive growth opportunities, and at the same time, we expect to reduce leverage with net debt to adjusted EBITDA decreasing to below three times within the next 18 months. Income tax expense this quarter was $3.7 million, representing an effective tax rate of 6% compared to a negative effective tax rate of 21% for the fourth quarter of fiscal 2021. The tax rate was mainly impacted by restructuring, integration, and acquisition costs. Excluding the effect of these elements, the income tax rate would have been 15% this quarter and 14% for the year. Reflecting some of the recent changes we have seen to global tax regimes, we expect effective income tax rates to be approximately 22% going forward. Also below the line, non-controlling interest was $2 million for the quarter and $8.3 million for the year. We expect NCIs to continue to increase commensurate with the growth rates of CAE's adjusted segment operating income. Now to briefly recap our segment performance. In civil, fourth quarter revenue was up 11% year-over-year to $432.7 million. and adjusted segment operating income was up 45% year-over-year to $96.3 million for a margin of 22.3%. For the year, civil revenue was up 15% to $1.6 billion, and adjusted segment operating income was up 92% to $314.7 million for an annual margin of 19.5%. In defense, fourth quarter revenue of $469.5 million was up 40% over Q4 last year, which includes $146.9 million from the integration of L3Harris military training in our financials. Adjusted segment operating income was up 59% over last year to $36.8 million for an operating margin of 7.8%. For the year, defense revenue was up 32% to $1.6 billion, including $409.9 million from the integration of L3Harris military training and adjusted segment operating income was up 37% to $119.2 million, representing a margin of 7.4%. And in healthcare, fourth quarter revenues was $52.8 million, up 27%, excluding the ventilator contract last year. Adjusted segment operating income was $9.6 million in the quarter, compared to $16.4 million in Q4 last year. For the year, healthcare revenue was $151.4 million, up 25%, excluding the ventilator contract last year, and adjust their segment operating income with $10.6 million for a margin of 7%. With that, I will ask Mark to discuss the way forward.

Thanks, Sonia. As we look forward, we continue to see a clear path to emerge from the pandemic, a bigger, stronger, and more profitable CA in the years ahead. We're adeptly playing offense in a disrupted market, by seizing on highly strategic growth opportunities to expand our capabilities and market reach. In parallel, we significantly lowered our cost base and continued to innovate ways to revolutionize our customers' training and critical operations with digitally immersive solutions to elevate safety, efficiency, and readiness. Despite a still challenging environment, there's no doubt our strategies bearing fruit with several record milestones already reached in the early stages of a cyclical industry recovery. Our recent results and the expanded set of opportunities before us add to my conviction that CAE is poised to experience new heights as we recover from the cyclical downturn and ultimately benefit from secular growth in our end mark. In civil, we see pent-up demand for air travel as an important driver in the near term And the rate of civil recovery, the pre-pandemic levels and beyond is expected to continue to be driven in large part by the easing of travel restrictions, particularly in our key Asian markets. We also expect more demand from airline customers wanting to see support as partner of choice to secure and train new pilots. They have acute needs arising from the challenges associated with restoring and growing flight capacity in a competitive market for pilots and flight crews. This dynamic, the strength of civil training recovery in the Americas, and the sharply higher full flight simulator order activity this past year provide a compelling blueprint for the potential for a broader global recovery. And in business aviation, we remain bullish on the long term, and we believe the market is experiencing a structural expansion as evidenced by the record 3.3 million flights worldwide last year. In fiscal 2023, in addition to continuing to grow our share of the aviation training market and expanding our position in aviation digital solutions, we expect to maintain our leading share of full flight simulator sales and to deliver upwards of 40 full flight simulators to customers worldwide. From a profiling standpoint, we're planning a higher proportion of deliveries in the second half of the fiscal year. Overall, we expect continued recovery and growth in civil in the year ahead. In defense, we're on a multi-year journey to becoming bigger and more profitable, and the first and most critical link in that chain involves winning orders. Our record order intake this past year makes it clear that we're indeed on the right path to growth. Furthermore, our record level of defense bids and proposals is a result of bidding more and bidding larger. With our increased capabilities across all five domains and a critical mass that our transformed defense business now possesses, there's no program in our addressable market that's too large or too complex for CH to bid on with a high probability of success. Our defense business is now closely aligned with our customers' utmost priorities, which at their foundation are about defending freedom in the face of near-peer threats. While we could not have known how or when such geopolitical threats would manifest, they have. And we're extremely proud of CEA's role in helping prepare NATO and allied nations to defend freedom. We're also very proud of our noble purpose to help make the world safer, and in the last two years, has enabled that purpose by establishing its position as the world's leading platform-agnostic global training and simulation pure play defense business. Russia's invasion of Ukraine over the last three months has galvanized national defense priorities, and we expect increased spending, and specifically the prioritization on defense readiness, to translate into additional opportunities for CE in the years ahead. We also expect continued strong momentum with the integration of L3-Harris military training in the year ahead and to fully realize $35 to $45 million of cost synergies by fiscal year 2024. We look forward to continued growth in the year ahead. A few headwinds still exist for the international defense business in terms of travel restrictions, but we view them as temporary. We're also continuing to work our way through some of the lagging effects of a historically less than one book-to-sales ratio, beyond which we expect higher growth from integration synergies and a translation of our recent record order intake and bid activity into revenue. And lastly, in healthcare, the long-term potential is increasingly evident for this business to become a more material and profitable part of CE as we gain share in the healthcare simulation and training market and continue to build on the great momentum created by the re-energized team over the last 18 months. For CAE overall, based on everything we see at present, we're targeting consolidated adjusted segment operating income growth in the mid-30% range in fiscal 2023, weighted more heavily in the second half of the year. In summary, our opportunity set for CAE is highly attractive, and I continue to be very excited about our future. We expect to continue making excellent progress in a year ahead and beyond, and we look forward to sharing more about this with you at our investor day on June 7th in New York. The CA management team and I will be on hand to present why we believe CA is so well positioned for superior growth and higher profitability. We'll also showcase some of the latest technological solutions and provide a view on CA's multi-year growth potential. C is a highly unique company whose cutting edge training and critical operations solutions empower pilots, crew members, defense forces, and healthcare practitioners to perform at their best every day and when the stakes are the highest. We equip those in critical roles with the skills and expertise needed to move our world forward safely. We also enable our customers to perform their complex tasks more efficiently and with a lower carbon footprint. At the very core, CA's mission is to make the world safer. In addition to sharing a compelling financial picture, we hope investors will come away from our investor day with an even greater appreciation of CA's known purpose, a major driver for all of us. With that, I thank you for your attention. We're now ready to answer your questions.

Thank you, Mark. Operator will now be ready to take questions from analysts and institutional investors.

Thank you. If you would like to register a question or comment, please press the 1 followed by the 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 followed by the 3. One moment, please. The first question comes from Kevin Chang of CIBC. Please go ahead.

Good morning. Thanks for taking my question. Let me just two for me. The first one on your, I guess, your recovered SOI margin target, you stuck to the 17%, which gives us a North Star as your revenues recovered here. But that number hasn't changed, I think, over the past few quarters here. Obviously, the inflationary environment I'm just wondering, you know, how do you see those margins progressing here, given the current inflation environment? Does the composition of the 17%, has that changed, or do you feel like the restructuring efforts more than offset the inflationary pressures, or maybe pricing power helps with another lever? Just wondering how that 17% comes about in a higher inflationary environment here.

It hasn't changed much, Kevin. No, it's, you know, although... We're certainly not unaffected like anyone else with the inflationary environment, but we've taken steps to protect ourselves from that through various mechanisms, some of which you mentioned, which is being able to pass on some of the cost-on-price increases to offset. We relentlessly reduce our costs, and that helps as well. We have built-in measures in our contracts for inflation to be able to cater for that as well in a kind of normalized fashion. And I think in terms of composition, it hasn't really changed. We're expecting higher peak margins in civil, and we expect certainly to get within our planning horizon to a low double-digit margin in defense. I think that composition hasn't really changed. That's still our north star.

That's super helpful. And maybe just a second one for me. A lot of headlines around the pilot shortage, especially in the U.S., and one of your partners, JetBlue, recently noted that one way they're combating this is leveraging, I guess, a gateway program, which I believe you have a partnership with them, and really they felt that focusing on onboarding cadets early was helping them get in front of the labor bottleneck, and So I'm wondering, as other airlines face this pilot shortage issue, are you seeing increasing conversations around setting up gateway programs with other U.S. airlines or global airlines with the idea that you can kind of get the cadet in early that might help alleviate the pilot shortage as you kind of look down the supply chain?

Well, I think first off, we're very proud of the relationship we have with JetBlue as well as other airlines in the United States and around the world with pilot programs like the Gateway program that we have with JetBlue. And yeah, we're seeing strong demand, as I mentioned in my notes, the enrollments in our flight schools, particularly the one that we have in Phoenix that caters for JetBlue amongst others, American, for example. seeing record order intake in terms of cadets. So look, we are basically seeing airlines being impacted by pilots, certainly in the United States strongly right now, and we're doing everything that we can to be able to support them with providing pilots through our park aviation business, for example, which we do. We supply pilots, and that's seeing some strong demand. We're also seeing, as I mentioned, the enrollment of pilot schools. Look, I think this is something that will continue to be a factor. The fact that airlines are in great need of pilots, to me, it means long-term business for CAE as the largest provider of pilot training in the world. We're going to continue to help our airline customers and expand those programs. Our Our own forecast on that is, I think we said it before, is that we estimate that over 264,000 new pilots are going to have to be created over the next seven to eight years to accommodate the retirement that we've seen, the attrition that we've seen, as well as the new growth that's going to come across, just assuming the growth that IATA is anticipating. So, look, I think we're going to have a lot of business going forward on this. Excellent. Thank you for taking my question.

Thank you. The next question comes from Konark Group at Scotiabank. Please go ahead.

Good morning, and thanks, everyone. Just one kind of follow-up on Kevin's question on pilot shortage. Is there a way, Mark, to quantify the population or the current population of pilots going through training at this time versus what it was prior to the pandemic? I'm just trying to get a sense on, you know, like if the pilot shortage is there, is it hurting the airlines from growing above and beyond the pandemic or is it Is it a hurdle for them to get back to the full pre-pandemic recovery?

I think it's definitely a headwind right now, and I think they're in a better position to be able to answer that question than I am. But it really depends on the airline, and you're really seeing that materialize itself mainly at feeders, feeders to the main lines, because largely the main lines have been able to cater it, although they're seeing some of that hit as well, some of our major partners in the United States. And don't forget, I think we're seeing an extraordinary level of demand right now in the United States specifically, we've talked about that before, which is benefiting our market quite substantially. That's why we're seeing very high levels of utilization in the United States specifically. That's a factor we've been talking about it. And there's a lot of delta trending being caused by the fact that you're bringing on more pilots. So, look, I think it's something that I don't think structurally is going to affect the recovery overall of the market in any sustained fashion. But there's no doubt that it's having an effect right now. As I think I've said many times before, I think it's a great time to start a pilot career. I think we'll have growth for the years to come. And I think that's going to be a strong driver for our business at CE. We're the largest trainer of pilots in the world.

Right. That makes sense.

Thanks for that. You see that, by the way, just in the, as I was mentioning in my notes, the strong demand that we've seen for full-flight simulators. I mean, all of last year, we had 11 full-flight simulator sales. And the past year that we just closed, we had 45. That is for the year. I mean, that is a huge ramp-up. So actually 48 for the full year. That's a huge ramp-up, something that we've never seen in terms of going from a downturn. Usually it's a two or three years lag. We've had no lag. This has been a huge V-shaped recovery. And, again, that is testimony to the airline stocking up on simulators so they can train, provide type ratings to new pilots.

Thank you. And switching gears to defense, actually. So like the last quarter and the quarter before, like you've seen a pretty significant acceleration, I think, in defense order intake. And obviously now you have as well. So that kind of plays into the mix, too. But the bid pipeline here, what you're kind of suggesting is north of eight billion dollars. I don't think we have seen those kind of numbers before. Historically, it's probably more than twice. what we used to see prior to the pandemic. I'm just trying to figure out if there's any, you know, momentum in defense order intake or bid pipeline because of the recent announcements by global defense forces to increase defense spending, or that has still to play out. Like, where are we in terms of that cycle for global defense spending wrapping up?

I mean, to your question, that has still to play out. What you're seeing in the much larger backlog of bids is us bidding more and bidding larger with our combined capabilities of what we call its C legacy and our business combined with L3 Harris Military Training. That's what you're seeing here. We're seeing much more opportunities to bid. And as I said in my notes, there's almost... there is no contract that's too large or too complex in our addressable market for us to bid. So I think it's very positive. And again, as I said, you're seeing a much larger level of bidding activity and you're seeing the fruits of that. If you look at every quarter last year, we started a year with less than book-to-bill. Then you had, I think, Q2, you had pretty much one-to-one, then you have over one into Q3 and much higher than Q1 and Q4. I think that's a nice trend. And as I said, it doesn't turn into revenue immediately, but it definitely shows you that we're on the right path. Over the next few quarters, definitely that will start to make an impact to our results as it translates into revenue. That's for me. Thank you so much.

Operator, just to make sure that everybody has a chance to ask a question, maybe we'd ask a participant to stick with a single-part question, and we're happy to take more if time permits and just re-enter the queue. Thanks.

Thank you. Noted. The next question comes from Cameron Dorkson of National Bank. Please go ahead.

Yeah, thanks. Good morning. I had a question on the, I guess, the Air Centre acquisition. I mean, you closed that during the fourth quarter. I just wonder if you can comment on kind of your early thoughts on the business and how it's integrating into the existing CAE business. And can you also maybe talk a little bit about sort of the recovery pace for that air center business? How does that compare, I guess, with kind of the airline pilot training demand to just sort of compare and contrast those two?

Well, what I'd say, Cameron, is the integration is progressing very well since we closed the acquisition on March 1st. We've seen no surprises. I'm very excited about the potential as we move, as I've signed in my notes, from really being a training partner to the world's airlines, to a technology partner. I've been very, very happy about the reception of our customers. As we said, we talked about the acquisition. it's almost 100% overlap between those customers that we serve from a training or simulator standpoint to those that use any one of Sabre Air Centre's, what we used to call Sabre Air Centre, now it's Sea Flight Services software tools. So very, very pleased to have that going. I've got one of my top CE executives running that business, Pascal Grenier, and we're very excited about what we see. In terms of its growth, I think no surprises there. Look, the business is very highly correlated, the amount of planes flying, the amount of crews flying, and it's basically our performance being lockstep with those numbers. And we're very happy with what we're seeing before. I think more to come. I think the fact to me is like what's extreme positive about that is we're adding more You know, $2 billion of total accessible market now in civil and in a market where really we're talking about just growing the level of business that we do with our existing customers. So more to come, but so far, great start.

Okay, great to hear. Thanks very much.

Thank you. The next question comes from Fadi Shamoon, BMO. Please go ahead.

Good morning. Thanks for taking the question and congrats on strong orders. The civil aviation, Sonia, can you quantify for us like how much these re-measurement of royalty and reversal of few of the earn out contributed to the aviation in the fourth quarter?

Sure, Patty. So you're right. There was a higher level of gains this quarter, and this came from the re-measurement of royalties and contingent considerations. And the royalties themselves are pretty much a recurring item every year. If you go back to Q4, we had some last year as well. And it's really kind of based on 20-year-plus horizon estimates. So it flows through all three segments, but the larger proportion was in civil. Now the accounting presents that on the other gains and losses line. What it doesn't consider is that we did have a host of other higher than usual costs that are not necessarily kind of singled out in that separate line but are in cost of goods sold and SD&A. With the Omicron and the BA.2 wave, there was a significant ramp up in our COVID protocol and security costs, including like higher costs and productivity from impact from absenteeism. And also some unusual supply chain logistic costs that we see as temporary, but that increased in the quarter. So on a whole, it was not overly material to see, and it's a civil as a whole. So really not a major impact on dollar or margin. And while we're speaking about that, I just highlight that these gains are relatively non-cash. So despite that, we delivered a pretty strong cash conversion of 131%. So it kind of speaks to the operational performance and the quality of earnings in the quarter and the year.

And maybe I could add as well, Patty, that another confidence you might gain is the number that we have is the baseline for the growth forecast that we have at 30%. So that's the number we start with. We don't try to normalize it.

Yeah, the growth outlook that we give for next year in the mid-30% range is off the adjusted SOI of $445 million, and that includes all of these items.

Okay, and that growth number for next year is applied the same kind of to defense and aviation? Mid-30% growth, okay. Okay, is there an organic growth number within the aviation that you're assuming? Because I know you bought kind of paper will have a full contribution next year and you've had some cost restructuring initiative and all that. What would be the organic growth you're assuming?

We factor all of those elements, whether it's as we integrate, really you'll be driving organic and revenue and cost synergies as well as the impacts of the structural cost savings and the ramp-up, whether on recovery and expansion of our market position with customers.

Okay, great. Thanks. We'll see you next week, I guess. Thank you.

Thank you. The next question comes from Benoit Poirier of Desjardins. Please go ahead.

Yes, hi, this is Michael on behalf of Benoit. Congratulations on the good quarter. I just can have a little more color on the cloud computing and transition adjustment for EBIT. Was it just a matter of fact of moving legacy systems and software to the cloud from the previous system? Thank you.

No, not an operational item at all. Frankly, it's just new guidance coming out of IFRS on how to account criteria for cloud computing and SaaS as, you know, companies have growing ERPs that are either kind of housed in-house or on SaaS applications. So new or revised guidance on that front, and so we're just applying the updated guidance as an accounting change, and so it's really non-recurring in nature but nothing operational.

Thank you. Appreciate it.

Thank you. And the next question comes from Benoit Poirier of Desjardins. Please go ahead.

Okay. I was finally able to join, so good morning, everyone, and congrats for the quarter. Marc, looking at the global defense budgets obviously trending upward, could you provide some color about the timing of when we might see the potential implications whether you see greatest opportunities either on the service or product side? Thank you.

Well, I think I'll always start that question to say that the day that Steve's revenues are a proxy for the growth of the U.S. defense budget or any budget, I'll be very happy. So that's not the case. We're still Although we're very big in our space, I think the size of that budget dwarfs any aspiration. So the fact that they're going up is a good sign, but I think we can do very well, thank you, and grow beyond the levels of growth of those inherent budgets, and that's certainly our growth outlook. I think we'll do well. We're very well aligned with the priorities that are inherent in the defense budgets, which, as I said, is you know, make sure that the readiness for, you know, the near-peer fight. That's what we do, and that's been made even much stronger now with our combined business with L3S military training business. So, look, I think it's going to be a combination of both products and services. When I look at the backlog that we see, it's basically a mix of the two. So I wouldn't go too much beyond that, except that, again, we're forecasting strong growth in defense, and we're well on the path to be able to do that. And, you know, I think don't look at – continue to look at defense on a 12-month basis. That's what I would always look. The orders that we've won in the past year, which is very, very encouraging, I expect will continue. Again, look at this on a 12-month basis. It will translate to revenue. in the upcoming periods, and we're well on the way to the target that we have, or strong growth and low double-digit margins.

Okay, thank you very much. That's the way I'll see it. Okay, that's the right caller. Thank you very much.

Thank you. The next question comes from Noah Popanak of Goldman Sachs. Please go ahead.

Hi, good morning, everybody. Good morning. Good morning. A lot of questions in the marketplace about the assumptions behind the 23 framework of segment EBIT up mid-30%. Appreciate that, you know, different companies are providing different versions of guidance and that you've given us some framework, but perhaps you could just put a little more detail behind that in terms of what you're seeing in the segments, you know, what kind of utilization rates you're assuming, what kind of growth you're assuming in the segments maybe. And I guess particularly on the margins, you know, the margins changed through the year a lot last year. So, you know, how do maybe the margins compare to the exit rates of 2022? You know, anything that stands out, I guess, would be helpful. Female Speaker Well, I don't think

You know, when I look at the basic question, I'm not sure too much will stand out, except maybe perceived lumpiness through quarters. You know, I've said many times, and I've said it again in our notes, to expect more of a back-ended 2022. And there's a reason for that. Reason for it, if I look at civil specifically, First of all, I'll tell you that the higher utilization rates are a factor. We're seeing sequentially a higher utilization rate, and we're going to continue to see that with a very high level of airline-based activity in the U.S. We're seeing much stronger in Europe. We're starting to see, although it's much slower, we're starting to see Asia open up. It's very, very good that now we see Shanghai, not Shanghai, but we see Singapore opening up. We see Malaysia opening up. That's very good, although you can well imagine that there's a lot of travel that's China dependent, so that's still pretty low with the lockdowns in Shanghai that are just now opening up, so that's going to have some lag effect for quite a while, I think. For that, we continue to look at the IATA forecast as the basis for our forecast, which is you know, RPK growth and how that translates into utilization. So if I come out that stronger utilization as a whole, we're definitely seeing a leverage effect. I mean, if you look at the fact of the margins we're making in civil overall, at still a much lower than peak utilization, I think you're seeing there both the benefits of the leverage effects on, you know, and our... that is translating to the bottom line there in civil. And you're also seeing the benefits of our cost savings that we put through the restructuring program that are definitely panning through. That's very clear. That will continue. So I think you'll expect to see higher margins there. But what you've got to look at is that similar deliveries from the factory also are a big factor in that. And I see those being more profitable more biased to the second half, and that's just a consequence of where they are in the production line, and typically in the summer period we have, for example, we have, you know, we tend to shut the factory for maintenance, that thing, and that's not going to be any different this year. The other thing is you have to look at that airlines in the second quarter, very much in the second quarter, they're flying, and therefore they're not training. That's definitely going to be a factor this year. We haven't seen that seasonality as much during COVID, you know, for obvious reasons, but we're going to see it this year. So I think that's the color I would give. In terms of defense, what I would see is those orders that we've seen, okay, they're going to take time, and we have this, you know, which I like to say, we have like this, you know, big animal that's making its way through the snake right now, those big orders, and that's going to go to translate. That's inevitably going to drop to the bottom line. I expect that. In fact, it's going to happen overnight. Okay, but it definitely is going to start affecting the year. I think that, again, split it back half. And that combined all that, that translates into the outlook that we've given in terms of, you know, 30% growth. Okay, I appreciate that detail, Mark.

Thank you.

Thank you. The next question comes from Christine Lewag of Morgan Stanley. Please go ahead.

Hey, good morning, guys. Mark, you know, aviation is the safest form of mass transportation today. So when we kind of look at this pilot shortage issue, some are advocating for the reduction of the number of pilots in either some of the long-haul flights or for freight, especially as we're seeing more automation in the cockpit. As we balance out, like, the safety requirement of the industry and the shortage issues, Can you comment on how credible you think the reduction of pilots would be in either the cockpit or the requirement in a flight? And if we do see this reduction, where do you think that could come out first?

Well, first of all, I've been around in the industry for over 35 years. Before SEAST, I used to design airplanes that are transport category airplanes. I'm pretty well versed as, you know, Clay called it, an expert in this domain of what's required to certify airplanes to be able to safely transport passengers. And it's not, I would say it's not the technology that doesn't exist. The technology exists and the world's defense forces do it every day. In fact, we have high expertise in doing it. You know, for years we've been, you know, conducting the training for, for example, US Air Force Flying Predators, Flying Reapers, for example. We have strong capabilities in that where we deploy and we bid around the world in defense. First of all, in civil aviation, you nailed on the head that the overwhelming priming consideration is the safety of the traveling public. And this is, as you said again, the safest border transportation in the world. And the reason for that is because the regulatory framework for the design of aircraft continues to relentlessly advance based on the lessons learned of You know, incidents that happen, reports that come out of National Transportation Safety Board recommendations, which translates into changes to your graph by FAA, by EASA, for example. So therefore, the airplanes get safer and safer all the time. Also inherent to that is the safety of the air crews themselves. That's where we come in. as we come in as obviously the leader in the world working with the world's regulators to ensure that the training of those pilots is at the utmost standard. Airplanes are not getting less complex, automation is not getting less complex, so the pilots have to be trained effectively. If going straight to your question, I don't see anything within the planning horizon which tells me that we will have single pilot airplanes or certainly no pilot aircraft in the conceivable future. So it's a very long time. Don't forget that I think even if you, let's say if you were to assume that one pilot, if you have a plane flying with one pilot, then you have to certify the airplane assuming there is no pilot because, well, just to use an easy example, one bad hamburger and that pilot can be incapacitated, therefore you have no pilot. And the fundamental concept of design of airplanes for flying passengers around the world is that no single failure can result in the loss of the aircraft. So obviously if you have one pilot, find the aircraft and he or she is incapacitated, then you have violated that rule. So if we do see it one day, and I think it's a long way off, I would anticipate that it will happen on long-haul flights involving cargo. That's where I could see it. But again, I don't see that for a long time.

Thanks, Mark.

Thank you. The next question comes from Tim James, TD Securities. Please go ahead. Mr. James is here on mute. We are unable to hear you at this time.

Oh, hi, sorry. It's Tim James here. Sonia, I'm just wondering if you could provide some additional color on the CapEx plans for fiscal 23 and maybe just talk about a bit of a breakdown or give us a sense for CapEx in defense versus civil and maybe any specifics on sort of markets or product lines where or service lines within each segment. And as part of that, is it possible to get a bit of an idea of what expected growth in SEUs is and how CapEx drives that this fiscal year?

Okay. Well, I think the split of our projected CapEx is not going to be overly different than what you've seen historically. The lion's share really goes to civil and expanding our civil aviation network. And, you know, I said it in my remarks, I'll say it again, this is growth gap X that is linked to direct market demand, customer order intake, new orders that we see or long-term contracts that we've signed that have accretive returns and cash flow. So, you know, wherever we can secure long-term recurring regulated revenues that can be 20% to 30% incremental return accretive within a couple of years. This is some of the highest growth accretive investments that we can make. In terms of color, once again, it'll be really focused on deploying that civil or expanding that civil network. A lot of opportunities on the business jet side with significant activity. and structural expansion. So we do see a large portion on that capex going in business jet, including three new training centers that we're opening up, Savannah and Las Vegas, or West Coast one, specifically a larger one. And also a lot of opportunities on commercial side. Mark was speaking to the recovery in that market, which is really a blueprint for you know, what we hope the broader recovery will look like as the other regions kind of catch up. But so some commercial deployments, especially on the U.S. side. So where we can, you know, as part of the restructuring program, we are redeploying underutilized assets or assets with lower recovery profiles and moving them over to the U.S., but also deploying new opportunities as we're signing contracts with customers. So, you know, a focus on BATS. and definitely a high proportion of all of that investment being in the Americas that we see for next year.

Great. Thank you, Sonia. That's very helpful.

Thank you. That was our final question from financial analysts.

Thank you, operator. We'll now open the lines to members of the media.

Thank you. As a reminder, you may press the 1 followed by the 4 if you would like to register a question or comment. Once again, that is the one followed by the four. And our first question comes from Julian Arsenault of La Presse. Please go ahead.

Yes. Hello, Mr. Parent. Can you hear me well?

Yes, thank you.

Perfect. Hello. Thank you for taking our questions. Listen, I just wanted to ask you, Mr. Parent, regarding what happened with the delay of the presentation of the results. Obviously, there was no bad surprise for investors, but can you give a little detail on what happened? Why was it the day before the date that was initially planned? Is it because CAE was very active in the last year with acquisitions and there was a large volume of figures to be dealt with? We would like to know a little more about what happened.

Well, listen, what I was saying, it's obviously an unusual identity.

Listen, we asked and we gave them more time to publish the results in the required deadlines. That's really the only thing I can say at this moment.

It's true that there was more activity, definitely, because of the acquisitions that we did.

On the other hand, it was not the first quarter where it was a realization. It was already three quarters when we had, let's say, made the acquisition of L3 Harris, which was obviously the biggest. Yes, we needed more time. I think that a more in-depth question would come from them.

A more in-depth answer would come from them, I think. Were you surprised?

We were talking about the lack of accountants and verifiers. Were you surprised that this kind of situation happens? Well, listen, that's what I would tell you. If I repeat, it's very unusual.

Okay. Just on the defense sector, Mr. Parent,

You said in your opening notes that you have to see this, and I will translate it for you, as an adventure of several years. Well, I assume that when you decided to make, let's say, a turn, I would say big acquisitions in the defense to expose you more to the sector, you certainly did not plan an armed conflict as is currently happening with Russia and Ukraine, Est-ce que c'est juste de dire que ça va venir jouer un rôle, ça risque de jouer un rôle d'accélérateur sur votre stratégie? Je ne veux pas dire que vous profitez de la guerre ou du malheur des autres, mais que ce genre de situation-là, le timing pour vous tombe bien quand même?

Bien, comme vous disiez, une situation comme ça ne tombe jamais bien pour personne. Ça, c'est sûr.

Écoute, on était la stratégie des forces armées, certainement de... les États-Unis, ses alliés, qui inclut le Canada, étaient déjà pour se préparer pour éventuellement un conflit qui serait contre des adversaires qui seraient des adversaires de taille égale. Il appelait ça en anglais near-peer. C'était déjà la stratégie. Donc, nous, quand on a fait l'acquisition de... L3 Harris Motor Trading, which was the question we were talking about, the biggest in our history, it was really to align what we do at CER with this strategy. Because if we take a little step back, what do the armed forces do when they are not in a conflict situation? They train. That's what they do, in a constant way. They train to do it. So, On a vu un changement dans les dernières 3-4 ans dans la stratégie, c'est un virement des forces armées contre ce qui était s'entraîner pour un conflit qui était un conflit asymétrique. Et ce qu'on veut dire par asymétrique, c'était comme celle qu'on a vu au Canada contre l'Afghanistan. Qu'on n'avait pas des adversaires... qui étaient les adversaires qui contrôlaient l'espace aérien, qui contrôlaient l'espace dans l'espace, l'environnement cybernétique. Là, ils s'entraînent pour ça. Donc, nous, maintenant, nous, CE, on est en plein, totalement liés avec leur stratégie. Puis, malheureusement, ce qu'on voit avec la guerre en Ukraine, c'est qu'on voit maintenant que, cette sorte de conflit-là, malheureusement, peut se réaliser. On espère que non, mais ça peut juste monter le niveau d'expressibilité qu'il faut être prêt. Il faut être prêt, puis on aide nos forces alliées, c'est ce qu'on fait à CAE.

Mais quand même, les budgets de défense, on regarde l'Allemagne, des pays comme ça qui ont décidé vraiment d'ouvrir les vannes du côté des défenses militaires, à un moment donné, ça va... Vous êtes le genre d'entreprise à qui ça va profiter à travers le monde? Si les budgets militaires augmentent, ça va vous aider?

C'est clair que si les budgets augmentent, ça va inévitablement être favorable pour les compagnies dans le secteur de la défense.

Inévitablement, oui.

OK. Parfait. Ça va se traduire sur plusieurs années. OK. Merci.

And that was our final question. I'll turn the call back over to our speakers for any closing remarks.

Thank you very much, Operator, and I want to thank all our participants for joining us today and remind you that there will be a transcript of today's call on CAE's website at cae.com. Thanks very much. Have a good day.

Thank you. This does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you and have a good day.