CAE Inc.

Good day, ladies and gentlemen. Welcome to the CAE second quarter conference call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Andrew Arnovitz. Please go ahead.

Good afternoon, everyone, and thanks for joining us. Before we begin, I'd like to remind you that today's remarks, including management's outlook and answers to questions, contain forward-looking statements. These forward-looking statements represent our expectations as of today, November 10, 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 the annual MD&A available on our corporate website and in 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 Caron, C's President and Chief Executive Officer, and Sonia Branco, our Chief Financial Officer. After remarks from Marc and Sonia, we'll open the call for questions for financial analysts, and at the conclusion of that segment, we'll open the lines to members of the media. Let me now turn the call over to Marc.

Thanks, Andrew. And good afternoon to everyone joining us on the call. We had strong performance in the second quarter, led by double-digit growth in civil and sequentially better results in defense. We also delivered another quarter of double-digit revenue growth in healthcare with higher profitability. We continued to secure C's future with nearly $1.3 billion in total orders for a record $10.6 billion of adjusted backlog and 1.3 times book-to-sales ratio. In civil, we made excellent progress converting our large opportunities pipeline into $751 million of orders, resulting in a 1.48 times book-to-sales ratio. This is especially impressive considering that revenue is 40% higher than last year. Orders include long-term training agreements with airlines and business aircraft operators, including a new 15-year pilot training and operations agreement with Qantas, one of the world's most renowned airlines, and like CAE, a name synonymous with safety. We also secured training agreements with Virgin Australia, JetSmart Airlines, DHL Air UK, and American Airlines. Demand for full-flight simulators was robust, with 18 sales in the quarters. we sold another five full-flight, and actually bringing our total year-to-date tally to 29. Since the end of the quarter, we sold another five full-flight simulators for a total of 34 sales since the start of the fiscal year. Civil's financial and operational performance was also strong in the second quarter with double-digit growth across all metrics. We delivered 10 full-flight simulators in a quarter and averaged training center utilization with 66% up from 53% last year. This reflects the air traffic recovery in select regions and a measure of summer seasonality. Commercial aviation training demand in the Americas continued to be very strong, while Europe was seasonably lower on a sequential basis. In Asia, the reopening of Japan has been a positive catalyst, but the region overall remained well below pre-pandemic levels, due to the ongoing travel restrictions in China. In business aviation, training demands continue to be robust throughout our network, reflecting a high level of pilot training to support business aircraft flight activity, which has shown signs of stabilization at approximately 20% above pre-pandemic levels. In defense, as we've been saying for some time, The earliest signs of our progress towards a larger and more profitable business is order intake. And testament to that, this past quarter marks another step in the right direction. We booked orders for training and mission support solutions valued at $500 billion for a 1.13 times book to sales, which marks the fifth consecutive quarter that this ratio has been above one and situates us with a book to sales ratio of 1.33 times on a trailing 12-month basis. We're now sustaining higher order intake, replenishing our backlog with new and more profitable defense contracts. Defense quarters this quarter reflect our capabilities across all five battle space domains. In the air domain, we signed a contract with Piaggio Airspace for the P180 Avanti full-flight simulator for the Italian Air Force. and we expanded our relationship with Lockheed Martin for system trainers and modifications evolving C-130 platforms. A key tenet of our strategy is to develop strategic relationships with platform OEMs, and these agreements, in addition to our recently announced MOU with Boeing for global collaboration, are notable signs of progress. In the land domain, we expanded our capabilities with a prototype development award under the U.S. Army Soldier Virtual Trainer Contract. A component of the synthetic training environment, the Soldier Virtual Trainer Contract, or SVT, continues the expansion of synthetic training environments with a platform to empower soldier-led training. Defense also won a contract in the sea domain with the Platforms and Systems Training Contract to support the Royal Australian Navy And this program is strategically significant in the context of Australia's defense modernization priorities in light of geopolitical tensions in the Indo-Pacific region. Under a five-year agreement, we'll be supporting the future training transformation of Royal Air Navy mariners across four sea platforms, on-site and port NSC. We're leveraging our experience training mariners worldwide including the U.S. Navy on multiple naval aircraft platforms, bridge training for the littoral combat ship, and the U.S. Army Maritime Integrated Training System. In the space and cyber domains, we received additional awards from our key space and missile defense customer, along with cyber technology updates on our core platforms and systems from various customers within the U.S. Department of Defense. Our unique combination of experiences Digital technology and subject matter expertise also provided new opportunities this quarter with strategic customers for prototype development. They included authorization from the Air Force Research Lab to develop and demonstrate innovative, mission-effective unmanned air vehicle capability to assist with unmanned teaming, along with an aviation mission planning prototype for a sensitive customer. Both are U.S. national defense priorities and leverage capabilities across CA's business units. Our financial performance for defense in the quarter improved sequentially, consistent with our expectations. This performance is a result of our heightened operational focus in the face of the challenges that we highlighted last quarter, namely the prevailing supply chain and labor headwinds and order delays, all of which are pervasive across the defense sector and broader economy. With that, I'll now turn the call over to Sonia, who will provide additional details about our financial performance. Sonia?

Thanks, Mark, and good afternoon, everyone. Consolidated revenue of $993.2 million was 22% higher compared to the second quarter last year. Adjusted segment operating income was $124.7 million compared to $90.7 million in the second quarter last year. And quarterly adjusted net income was $61.5 million, or 19 cents per share, compared to 17 cents in the second quarter last year. We incurred restructuring integration acquisition costs of $22.6 million during the quarter, relating mostly to the L3Harris military training and air center acquisitions. Net cash provided by operating activities this quarter was $138 million, compared to $30.9 million in the second quarter of fiscal 2022. Pre-cash flow was $108.4 million compared to $19.4 million in the second quarter last year. The increase was mainly due to higher cash provided by operating activities and lower investment in non-cash working capital. CAE usually sees a higher level of investment in non-cash working capital accounts during the first half of the year and tends to see a portion of these investments reverse in the second half. Capital expenditures totaled $68.6 million this quarter with approximately 80% invested in growth specifically add capacity to our civil global training network to deliver on the long-term training contracts in our backlog. Income tax expense this quarter was $14.5 million for an effective tax rate of 24%, which is higher than our annual outlook of 22%, which remains our expectation going forward. Our net debt position at the end of the quarter was approximately $3.2 billion for a net debt to adjusted EBITDA of 4.17 times at the end of the quarter. We continue to expect net debt to adjust at EBITDA of below three times by the middle of next fiscal year. Now turning to our segmented performance. In civil, second quarter revenue was up 40% to $507.2 million compared to the second quarter last year, and adjusted segment operating income was up 60% to $104.4 million versus the second quarter last year for a margin of 20.6%. Our stronger year-over-year civil performance was mainly due to higher training, network utilization, and simulator deliveries. And we also integrated into our results the air center results, which represented approximately 7% of civil revenue in the quarter. In defense, second quarter revenue of $442.4 million was up 6% over Q2 last year. Adjusted segment operating income was $18.4 million for the quarter, down from $26.7 million in the second quarter last year. The revenue growth stems from higher level of activity on programs, while the lower adjusted segment operating income reflects higher costs associated with supply chain and labor shortages, partially mitigated by our cost reduction initiative. And in healthcare, second quarter revenue was $43.6 million, up from $34.9 million in Q2 last year, mainly due to increased sales of patient simulators. Adjusted segment operating income was $1.9 million in the quarter compared to a loss of $1.3 million in Q2 of last year. With that, I'll ask Mark to discuss the way forward.

Thanks, Sonia. The strength that we saw during the second quarter gives us the confidence to reaffirm both our fiscal 2023 outlook and our long-term targets. Our outlook for civil remains strong with its industry-leading positioning enabling us to grow significantly through the commercial aviation market recovery and beyond. Over the last two years, we've expanded our reach capabilities to better serve our customers while significantly improving our cost structure. We expect the rate of civil commercial aviation training recovery to continue to be driven in large part by the eventual easing of remaining travel restrictions, especially in Asia, where China remains a large component of any global recovery scenario. A potential recovery in China would also be expected to lead to further recovery in full-flight simulator sales. And on the macroeconomic front, we're watching the global energy situation closely, and particularly in Europe with respect to operating costs, which have already increased across our network and the potential for impacts on travel demand. In business aviation, the consensus view at the recent NDAA conference was highly positive, and we continue to see strong demand for pilot training. In response to market demand, we have new training capacity coming online to include our new business aviation training center in Las Vegas, which opened last month, and Singapore, which began operating this month. For the second half of the fiscal year, we expect Sybil to grow faster than it did in the first half and to be weighted more to the fourth quarter. We expect to deliver a higher number of full-flight simulators in the fourth quarter and to have a higher number of simulators, or SEUs, come online in our training network. In addition to continuing to grow our share of the aviation training market and expanding our position in digital flight services, We expect Sybil to maintain its leading share of full-flight simulator sales and to deliver more than 45 full-flight simulators to customers worldwide. This is up from our previous outlook for 40. In defense, our sequential growth paired with the significant bookings and improved backlog that we're experiencing gives us confidence for stronger near-term performance. In the last two years, Defense has become the world's leading pure-play, platform-agnostic training and simulation business. We're well-positioned to address larger, more profitable, and more comprehensive programs across all five battle space domains. We're closely aligned with national defense priorities focused on near-fear threats and the increased need for digital, immersion-based synthetic solutions. We're uniquely positioned in this regard being able to draw directly from CE's innovations to the commercial aviation, simulation, and training market. Defense represents a secular growth market for CE, as the sector is in the early stages of what we believe will be an extended upcycle, driven by geopolitical realities and increased commitments to defense modernization and readiness. The earliest indications of our success have been orders, leading us to build a more profitable backlog. We're bidding more and we're bidding larger. And what I see ahead is highly encouraging with a pipeline of multiple $100 million-plus programs and the number of billion-dollar-plus programs that we're bidding over the next three years. As we replenish our backlog, we expect defense will strengthen in the next couple of years to a low double-digit percentage adjusted segment operating income margin profile Currently, active bids and proposals awaiting customer decisions stand at approximately $8 billion, which is nearly double the amount outstanding three years ago. Looking to the remainder of the fiscal year for defense, we expect the current widespread macroeconomic headwinds, including supply chain and labor challenges, to persist for some time, and that order delays will continue to be a factor. We're focused on execution, and we're confident in our expected stronger second half performance, which we expect to be substantially weighted to the fourth quarter. Underlying this view is our expectation for select delayed program awards to come to fruition, and that we'll be able to execute on programs in backlog. We also expect to partially mitigate these headwinds with internal cost reductions and efficiencies, which are ramping up toward the end of the fiscal year. And in healthcare, we see potential for more value creation as it gains share in the healthcare simulation and training market and continues to build on its growth momentum and increased profitability. In terms of our capital allocation priorities, we've concluded a heavier than usual inorganic growth investment cycle, which spanned the last two years as we seized opportunities in a disrupted market to enable CA to become a bigger, stronger, and more profitable company for the future. We're now concentrating on organic investments that are made in lockstep with customer demand. We're also focused on reducing leverage. And as Sonia indicated, we're confident our net debt to adjusted EBITDA ratio will decrease to below three times by the middle of next fiscal year, which at that time will further increase our financial flexibility. These management and board of directors are also focused on reinstating and prioritizing return of capital to shareholders on a timely basis, which is a cornerstone of our main capital allocation priorities. In summary, the overall strength that we saw in the quarter and our current expectations for the balance of the year are what allows us to reaffirm our outlook for mid-20% consolidated adjustment segment operating income growth this fiscal year and to maintain our long-term target of a three-year EPS compound growth rate in the mid-20% range. With that, I thank you for your attention, and we're now ready to answer your questions.

Thank you, Mark. Operator, we'd now be pleased to take questions from financial analysts.

Thank you. For analysts wishing to ask 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 one followed by the three. One moment, please, for our first question. The first question comes from Kevin Chang of CIDC.

Please go ahead. Thanks for taking my question. Maybe just the first one here. I believe the U.S. Department of Defense issued a memo to contractors for equitable adjustments for cost overruns just given the unprecedented inflation. And I believe CAE has applied for some of these adjustments to maybe help offset previous inflation. Just wondering where that sits today. One, if I'm correct. Two, maybe where that sits today. And I know you're starting to see maybe some of those adjustments show up. either in the quarter that just ended or maybe in the back half of this fiscal year?

Well, I can certainly confirm that there's a lot of efforts going on in that very regard, Kevin, whether it be direct representation by us to lawmakers at the U.S. Capitol, I can tell you about that, and through combined efforts that we do with industry associations. And letters have gone out, and And I fully expect, you know, action to occur there. When it happens, when it, you know, I really can't tell you. But, you know, I've always been of the view that, and we've shared this on the last call, that, you know, we expect that we will have some measure of mitigation on some of these cost overruns that have occurred. We've made no real, we've taken no benefit of that so far, but I fully expect in the future that we'll get some.

Okay, that's helpful. Just my second question. On the last quarterly call, you provided a lot of detail on the problem contracts that resulted in the write-down. One of them was the legacy CAE defense contract. And I think one of the issues was just the expected renewal of that contract was maybe not coming in as fast as originally anticipated, which maybe drove some of that write-down. Just any update there in terms of the bidding process for that and maybe your confidence in being awarded the renewal?

Well, I would tell you that the RFP is out and we are bidding on it. So the nature of the contract has changed. I think it's a lot more attractive in terms of a contract. So, look, we'll see. I think we have a very attractive bid. We're the incumbents, so I have high hopes. But, you know, we'll be very prudent in that regard. And, you know, the one thing I'll tell you, which is very testament to what I was saying about, you know, in terms of changing nature of this particular contract and others, is you take what that contract looks like, it's changed from really being a lowest price technically acceptable contract that we saw initially to now a contract that's based more on best value. That plays very well into C-strengths, meaning not just around cost and the way we bid it, is for the terms that are in the contract, which includes specific banding around utilization rates. So the risk that we saw on that contract where we basically bid at a certain level of utilization and the amount of utilization the customer made of it was much higher, we wouldn't have that risk anymore. That's been completely taken out of the risk profile of the contract.

That's good to hear. I'll leave it there. Thank you very much. Thank you.

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

Good afternoon. Just one quick clarification first. Did I hear you mention that in civil you expect the growth in the second half to exceed the growth in the first half from an EBIT perspective? Is that the guidance?

Fadi Shamoon Yep, it is there, Fadi.

Fadi Shamoon Okay. Okay, so that's quite stronger than, I think what you're expecting, maybe at the beginning of the year, what's driving that specifically in aviation? I mean, you've had some decent amount of orders here to date, and it looks like, you know, sequentially in the second quarter, we've had a big jump, you know, more than seasonal jump, I would say, in the second versus the first. Like, is Asian market coming back a little bit stronger? Is there area that kind of surprised you on the positive side. I'm just curious about the performance.

I think as a general rule, it applies to consolidate the outlook that we've given for the back half. It's slightly steeper to normal, and particularly when we talk about civil, I'd say we're not yet in a normal environment. As I've said in the calls, China's still really not reopened. So that's putting a lid on things there. But what you're seeing in the back half is us, first of all, seeing the benefit of all the simulator orders that we've signed this year. We've had more than our fair share of orders there. Very happy to see that. And so we're seeing a lot of that order take translating to deliveries in the back half and specifically in the fourth quarter. So I have very high visibility on that. Plus, we're ramping up capital that we've already deployed in terms of simulators in both the commercial and business aircraft training networks. Specifically, as I mentioned in my remarks, you see that in the past month, we've opened our new Las Vegas Business Aviation Training Center. You'll see us very shortly in open our Singapore Business Aviation Training Center. So all those factors and the order intake, look at the order intake again this quarter at 1.48 times both the sales and civil on top of revenues that are 40% higher year over year. So I think that's all, that is what's translating into growth that you're seeing.

Okay, great. One question on the defense side. If I may, you know, we get a lot of this kind of question from investors. Are there in the backlog other contracts like this CAE legacy contract that you had last quarter where you are still expecting renewal, maybe contracts that are not performing to your expectation and you're still expecting renewal? Or is this kind of all behind us at this point?

Look, if you're referring to the charges, and I think they are that we recognized in the first quarter, I think as I've said at the time, you know, I really see those as unique and one-off in nature. They're really not typical of the risk profile of our business. And I've been, as you know very well, I've been at the business, you know, 17 years, and it's the first time that I've ever seen, you know, charts like that hit, you know, our P&L in a corner like that. It's not that we don't manage programs that are on watch. We've managed hundreds of programs. Some have a higher margin than others, but we manage them well. So, obviously, you know, an event like this forces you and you'd be foolish not to go back and even enhance your level of scrutiny. And, of course, we've done that, and I've been part of a lot of that. But, you know, I specifically, to your question, I don't see any similar risks in our backlog program, certainly are the ones that we see at that time. And to give you some more color, if I look at terms and conditions of contracts that we're bidding these days, I was giving the example of Sinatra there, and the discipline that we're applying to those bids, it gives me a lot of confidence in our current leadership team and the expected margins that we'll be able to execute on those contracts.

Okay, thank you.

Thank you. The next question comes from James McGarrigle, RBC. Please go ahead.

Hey, everyone. Thanks for taking my question. I just had a quick question on the increase on the defense backlog and some of the new contracts you're bidding on. Do you have any protection for any potential supply chain issues on those new contracts? I think, you know, supply chain, it's very uncertain as to when things are going to get better. And, you know, if supply chain issues were to persist, you know, just say for another year, another two years, could we see any risk to margins with those new contracts that you're bidding on? Or is there some protection kind of being built into those new agreements that you're working through right now?

Well, you can be sure that the contracts that we're bidding now take into account the situation that we see now, including you know, issues such as continued inflation at the levels that we've seen. And the customers, by and large, are, you know, understand that reality. So, you know, just a contract that I reviewed the other day where a fairly major contract where, you know, typically, as in previous contracts, what you would have seen, you would have seen fuel being an element that we would have costed there. But, you know, with... But with the price of fuel, the way it's escalated and the unpredictability of it, the customers themselves don't want us to bid to cover ourselves because we bid at a very high rate to cover ourselves. So what you see specifically in that contract, which is I think a very good example of the kind of things that we see, is we bid it basically with that component as an ODC or other direct cost. So it means it takes it out completely, it neutralizes it totally, and that's what you see happening. And, you know, by and large, in a previous answer, I was talking about this, that we're seeing a shift in contracts, and certainly the ones we're bidding on, going from really, you know, lowest price wins, what's called lowest cost, technically acceptable contracts, to best value in the United States Defense Department. So I'm pretty confident that you know, first of all, that the programs that we're winning, that are in a backlog, you know, certainly in the last five quarters where we've seen this strong backlog increase, are at profitability levels that support, you know, our objectives for low double-digit profitability. And we will, and I'm quite confident, we'll execute them at that margin profile.

I appreciate that. And, you know, my next question is on the civil business. The recovery there is obviously predicated, you know, obviously a recovery to pre-pandemic travel. And I know you don't operate in China, but your Asia business is affected by what goes on in that country. So, you know, how has that country's zero COVID policy affected your recovery? How are you kind of managing through that uncertainty going forward?

What I think I would start by saying is, is when you look at the margins that we're printing right now in civil without, you know, China and the Asian market really being back, and we're back to margins that are near pre-pandemic levels, you know, at near 21%. And that's what you're seeing, and obviously at a lower level of revenue than we saw pre-pandemic. And that's just showing you, you know, the cost savings that we've taken out out of our network coming to fruition. So expect, as the recovery continues to progress, which we fully expect that it will expect further margin progression in that regard. But going back specifically to your question, the way China affects us is historically we've had a very high market share of selling simulators in China. I fully expect that that will continue. Now, the market is low right now, so we're not selling a lot of simulators in China. Right now, nobody is. As I look at how else does that – how else does that – China's situation affect us is that all of our training centers in Asia Pacific, the anchor customers that we have that are training those locations, a lot of their flights are to and from China every day. So that obviously affects the amount of flight activity and therefore the amount of training activity, and that's where there's a lot of expected recovery in that regard.

I appreciate it, and I'll turn the line over. Thank you very much. Thank you.

Thank you. The next question comes from Kornrock Group. Scotiabank, please go ahead.

Thanks, operator, and good afternoon, everyone. I just wanted to first, you know, I'm trying to make sense of the defense SOI for second quarter, which was, I think, $18 million, still kind of down below the normal levels that you had before the last quarter. So I understand, like, you have supply chain issues you mentioned and the labor issues and some order delays and all those things. But would you say, you know, like, even if you strip out those issues, the contract adjustments that you took in fiscal Q1, that would have still, you know, like, showed up at the new margin level in fiscal Q2, and that should continue? I'm like, I'm just trying to understand, like, how defense SOI can go from 18 and Q2 to, you know, like significantly higher numbers in Q3 and Q4?

Well, I think, look, I start by saying our Q2 performance was as we expected it to be. And as I said, it would be on the last call, sequentially ahead of last quarter. Of course, adjusted for the discrete charges that we saw in Q1, of course, which are, as I said, 1-0. Look, we're not alone in this. Like our peers, we continue to feel the effects of very real labor and supply challenges across the industry. And I think we're managing them well. But as well, we do see select award delays on order intake. So we're continuing to work these. And specifically with regards to labor and supply changes, the way we're managing it, of course, has the effect on our company. We see these abating by the year end, not going away totally, but certainly abating us. And that's where you're seeing that plus specific orders that we see coming in that we have high visibility on gives us the confidence that we can achieve the ramp up in defense numbers in terms of profitability in the third and especially in the fourth quarter. Now, of course, one thing that I think, like me, you'll be excited about is the order intake. which continues to be very strong. You've got five quarters of book-to-bills higher than one with 12 months trailing book-to-bill higher than 1.3. That really points to strong and improved performance in the future.

That's helpful, Mark. Thanks so much. And one more perhaps for Sonia. I think in your comments you mentioned that you want to reinstate shareholder returns over time. So, A, like, two-part question there. Like, A, does that mean dividends or buybacks? And would you have to wait until the leverage ratio going down below three times before you reinstate those things?

So, as we mentioned, our first priority is to delever. And we continue to be on track to bring our net debt to adjusted EBITDA down to below three times by mid-next fiscal year. And then we believe we'll then be in a position to consider... return of capital to shareholders. So too soon to really speak to the form, but with the added, you know, once we reach kind of a normalized balance sheet and that financial flexibility, you know, we'll turn to returning capital to shareholders.

Okay. Thanks, Sonia.

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

Hey, good afternoon, everyone. Hello. Hi. Hey, Mark, maybe circling back on defense, you know, you've highlighted some of the puts and takes there, but can you provide a more detailed bridge on how you get from 4% margin where the business is today and how you get to a high single digit or potentially low double digit at some point? How much of this margin expansion is a function of lower margin contracts rolling off or better execution or better volumes absorb some overhead or anything like that? Any more detail would be appreciated because it seems like there are a lot of moving pieces in terms of that recovery.

Well, I think the components are exactly what you said. If you look at our business, and we've been talking about this for a while, we've just come up off before the five quarters of you know, book to bills higher than one. We, the pandemic, three years before that, we were at book to bills below one. So we're running out of backlog. That's inherently inefficient, okay, by itself. COVID affected us. We are working through labor supply chain challenges that the industry itself is facing. So for us, it's really rolling off contracts that are lower profitability, replacing them with contracts that we've been winning, again, going back to the order intake, and the orders that we're winning are accretive to the objectives that we have of low double-digit return on the DOI, operating income, sorry. And so to me, look, again, I said continue to watch order intakes. So order and take is the one to watch. I've been saying this for two quarters now. And order and take is very, very good. As I said, we're bidding more. We're billing larger. And just look at, you know, we've now got outstanding bids and proposals over $8 billion, which is a very substantial increase. So all those other factors that are going to be that bridge that you're looking for.

I see. And then, Mark, would you quantify how much of that lower margin defense revenue is rolling off this year, you know, to help us with modeling?

We can't be that specific, really, at this time. Sonia, anything you would add? No. No, I think you'd have to leave it to what we've said already.

Great. And if I could add one more, maybe, on a commercial. You know, you've taken a few restructuring costs. Going forward, can you share the magnitude of what these costs would entail next year? And also, when you think about the, once you fully realize the cost benefits of these actions, how we should think about incremental margins? So, Christine, I'll take this one. But the restructuring program is ended. So the costs are behind it. It ended in Q1. And as you can see, it's It's, you know, being realized already as we see it go through the civil margins, right? So if you had committed to $70 million plus of recurring structural savings, then we see it, and we see it in those margins. What's left in those accounts is really the integration costs of the major acquisitions, and on the L3 Harris military training, that will be trailing off in the second half, and Air Center will continue the integration for the next two quarters. Great. Thank you, Mark. Thank you, Sonia.

Thank you. The next question comes from Anthony Valentini of Goldman Sachs. Please go ahead.

Hey, guys. This is Anthony Antonella. How are you?

Hello. Good.

Thank you, Anthony. I just wanted to focus on the civil segment for a second. If I'm looking at the metrics correctly here, it looks like the simulator deliveries were flat quarter over quarter, utilization was down, and there's less simulators in the network. Yet revenues are up 6% sequentially. So can you just like help to bridge that for me?

Well, I think maybe some give you some more color. But I think, as I've said in the past, that first of all, margins and utilization aren't perfectly correlated. You see a lot of mix. Not all simulator orders are created equal either. They can depend quite substantially from one quarter to the next. Just specifically, for example, if the data is supplied directly by the airline as an example. Sonia, you want to expand on it or anything to expand on it?

Yeah, absolutely. So, you know, despite the deliveries being flat, you know, I think product mix was favorable, was even more favorable in quarter. And, you know, mix matters in terms of the training as well. So, you know, less seasonality on the business jet side than the commercial side. So that helps the margin. And you spoke to the SIMs in the network. While the absolute number of SIMs was lower because we – did a bit of a rationalization. The SEUs, which drive the revenue, so which simulators are active for revenue generation, actually went up quarter to quarter.

Okay, that's helpful. And in terms of the mix, can you guys comment on the amount of deliveries that are wide-body and the amount of orders that you guys are getting that are wide-body versus narrow?

We don't actually break it out, frankly. I think we could follow up, but, you know, I don't think that's, I don't even, we don't have actually that data. We don't break it out that way.

Yeah, we don't necessarily break it out, but you can assume that it's mostly narrow bodies.

Okay, great. And then last one on this for me is how much is the revenue and SOI contribution in the quarter from SABR?

7% in revenue?

Yes, so 7% is civil revenue, so that equates to about $35 million and a pretty strong accretive margin to the business.

Great. Thank you so much.

Thank you. The next question comes from Michael Capuros of Desjardins. Please go ahead.

Thank you for taking the question. Maybe just on the announcements with Qantas and Virgin, do you expect further outsourcing of training across the airline industry, given that they're facing higher costs right now in other parts of their business?

Yes. I think this is a continued good time in the future for outsourcing, as we've predicted all along. It's just a natural evolution of the business we've created. They're really the only real global third-party way to be able to do training, and we're the largest training network in the world, training over a million hours of training a year. So we provide huge synergy there and huge benefits to airlines that want to do it. So, yes, I continue to see more opportunities out there. We announced the big ones, like you were talking about Qantas, but there's a lot that we will do overflow training. And that's been a factor as well. We're putting simulators out there on contracts to do just that. And when we do that, we get long-term contracts that's going to be good going forward. So I continue to see that as being a trend going forward.

Perfect. Thank you. That's a great color. And maybe just on the fixed price contracts, I saw Boeing at their investor. They came out and said that going forward, they have no longer appetite for fixed price programs. maybe just your opinion in the industry, aerospace industry as a whole, do you share that view and if the industry is maybe stepping away from that moving forward?

Look, I can only comment about us. You know, we bid on the contracts that fit our strategy and the capabilities that we have and a lot of them are fixed price contracts and we're good at executing those kind of contracts. As I said, notwithstanding the what happened specifically for one-off reasons last quarter, we have a very good track record going over multiple years. And, you know, I'm very confident that we can execute contracts that are fixed firm price in the future. And I think going back to what I was saying a while ago in a previous answer, what we see specifically in the U.S. market is a shift to best value contracts. And that's that is very positive for CE, you know, with our specific differentiation in the market. So, and I think the last thing to say is, and again, as an answer to previous questions, the government, you know, wants to create an environment in which case, you know, the risks are well managed, and I was using the example of fuel prices, that taking that out of the equation. So, I think that In summary, we'll continue to bid on contracts, whether fixed firm price or not, and we'll execute them well. I'm quite confident with that.

Thank you. I appreciate it.

Thank you. The next question comes from F.A. Lee of Odlam Brown. Please go ahead.

Hi. Thank you. It's Bob here. Just a clarification on the civil utilization rate. The rental decline was 71%. The last quarter is now 66. Is that declining due to seasonality, COVID, or are there some other factors involved there?

Mainly seasonality.

Seasonality? Okay. Okay. And in terms of looking longer term at that utilization rate, I think prior to COVID it was around the mid-70s range. Do you expect to get back to that kind of range longer term, or do you expect it to be higher or kind of lower?

Can't see any reason why not. We're operating in the U.S. at a much higher rate than that right now. And so, look, there's no natural reason why that would stop. It's really going to be a, you know, linked as it always is to the amount of flying that are done by the airlines and business aircraft. So, and that's at a very high rate. As I said, you know, business aircraft stabilizing at flight levels, flight activity about 20% over prior to COVID period. And I see that continuing. So I think that's going to be pretty good. And historically, I think the reason I use that example for business aircraft is usually that'll be a lower utilization by the very nature that, you know, we don't train as much, you know, on a back end of the clock, if you like, in business aviation. So inherently brings the utilization level down, even though it's still very good revenue.

Right. Okay. Thank you.

Operator, I want to thank members of the investment community for their questions, and now we'd like to open the line to members of the media. If there are any questions for media, please go ahead.

Thank you. As a reminder, if you would like to register a question or comment, please press the 1 followed by the 4 on your telephone. Once again, to register a question or comment, the 1, 4. One moment, please. The first question comes from Stéphane Roland of La Presse canadienne. Please go ahead.

Yes, hello, Mr. Parent. Thank you for taking my question. I wanted to see with you, well, the results are very good. The civil aviation sector also, people continue to travel despite inflation. Have you seen lately signs of a slowdown on the aviation side?

No, we don't see any sign of slowing down. On the contrary, we can see the growth and we can see how it manifests in our results. Because even if we have very good results, an increase in our civil results of 40% increase in our revenues and 60% improvement in our profits, in surplus, OK.

Peut-être, je sais que vous l'avez expliqué un petit peu en anglais, mais bon, les résultats ont été meilleurs que ce à quoi s'attendaient les analyses. Ça avait été un peu plus difficile avec la chaîne d'approvisionnement, puis les charges que vous aviez prises pour la défense. Qu'est-ce qui a changé en trois mois qui fait en sorte que vous êtes en meilleure posture?

Les résultats sont les résultats qu'on s'attendait. we still have challenges that are not just challenges of CE but of the industry as a whole, in the defense sector, in terms of the workforce, and in terms of the supply chain. So, it continues to affect us in the second quarter. It will continue to affect us. We still see that on the CE side, the effects will go by manualizing towards Certainement notre quatrième quart. Pour nous, c'est vraiment ça comment ça nous affecte. Mais nos résultats étaient de façon séquentielle dans le deuxième quart, étaient les résultats qu'on s'attendait.

OK. Dernière question, quand vous dites que vous prévoyez que ça va s'améliorer au quatrième quart, est-ce que c'est le ralentissement de l'économie qui fait que c'est plus facile de garder vos employés? Qu'est-ce qui fait en sorte que vous pensez que ça va s'améliorer?

It's our particular efforts, because the effect for the industry as a whole is those of the labor and those of the supply chain. But if we look, when we look in the months to come, we can see which labor, how our labor needs will be satisfied, so we have a nice visibility on that, the same way for the parts. So, when we look at that six months in advance, we are able to predict that we will be able to carry out our programs because we will have the money and we will have the money. At that moment, that's why we are able to give this provision.

Okay. Thank you for taking my questions.

Thank you. Thank you. That was our final question. I'll turn the call back over to our host for any closing remarks.

Thank you, Operator, and thanks to everyone for joining us on the call today. I'd remind you that a transcript of today's call will be located on CAE's website for future reference. With that, I wish everyone a good afternoon.

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.