CAE Inc.

Ladies and gentlemen, welcome to the CAE fourth quarter and full fiscal year 2023 conference call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Mr. Andrew Arnovitz. Mr. Arnovitz, please proceed.

Good afternoon, everyone, and thank you for joining us today. Before we begin, I'd like to remind you that today's remarks, including management's outlook for fiscal year 24, and answers to questions contain forward-looking statements. These forward-looking statements represent our expectations as of today, May 31st, 2023, 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 in listeners or cautions 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 CE's annual MD&A, available on our corporate website and on our filings with the Canadian Securities Administrators on CDAR and the U.S. Securities and Exchange Commission on EDGAR. On the call with me this afternoon are Marc Perrin, CE's President and Chief Executive Officer, and Sonia Branco, our Chief Financial Officer. After remarks, from Mark and Sonia will open the call to questions from financial analysts. At the conclusion of that segment, we'll open the lines to members of the media. Let me now turn the call over to Mark. Thank you, Andrew, and good afternoon to everyone joining us on the call.

I'm pleased with CE's accomplishments at fiscal 2023, having CE's opportunities to expand our position in growing markets with our digitally immersive training and operational support solutions. We did so while navigating through some macroeconomic and legacy-related challenges, and over the course of the year, we delivered sequentially stronger quarterly results. We had an excellent fourth quarter with over 40% adjusted segment operating income growth, leading to 23% growth for the year as a whole. As a testament to quality, we generated strong free cash flow with 120% conversion of annual adjusted net income. We also expanded our global reach and secured future growth with a record $5 billion in annual orders for a record $10.8 billion of adjusted backlog. In civil, we launched several new training centers and deployed 23 full-flight simulators during the year to our global network to support the major customer outsourcing agreements we secured in the US, Europe, and Australia, and increased pilot training demand across all segments of aviation. Exemplifying our more efficient cost structure, we eclipsed prior peak civil margins even before the market fully recovers to pre-pandemic levels in key regions like Asia. We also booked a record $2.8 billion in annual civil orders for a 1.3 times book-to-sales ratio, demonstrating the sustained high demand for pilot training solutions and our next generation digital flight services. These included comprehensive long-term training agreements with airlines and business jet operators worldwide and a total of 62 full flight simulator sales for the year. We also made excellent progress expanding our reach in digital flight services with the ongoing integration of AirCenter and the adoption of our next generation solutions by our longstanding airline customers. Civil concluded the year with a record adjusted backlog of $5.7 billion. Among the more notable developments for Civil of the Quarter was the announcement of our joint venture with Aegean, Greece's largest airline. New centers expected to begin pilot and cabin crew training by the end of 2023 and will be the most advanced flight training hub in southeastern Europe, powered by green energy. Since the end of the quarter, we inaugurated our Las Vegas Business Aviation Training Center, and we announced plans for another new business aviation training facility, this time in Vienna, as our base in Central Europe, slated to open in the second half of calendar 2024. Fourth quarter average training center utilization was strong at 78%, which is up from 69% from the same period last year. For the year Utilization was 72%, which is up from 60% a year prior. Training demand in the Middle East was the strongest in a quarter, followed by the Americas and Europe. Asia has been recovering rapidly since the start of fiscal year, with Q4 training center utilization substantially improved in that region. In business aviation, training demand was also strong, reflecting a high level of training demand and pilot turnover in that segment. In products, we delivered 17 civil full-flight simulators in the quarter and 46 for the year compared to 30 deliveries in the prior year. In defense, we made good progress fueling our multi-year transformation with a record $2 billion of annual adjusted order intake involving training and simulation solutions for a 1.1 times book-to-sales ratio. This contributed to a $5.1 billion of adjusted defense backlog. In a quarter, we had orders totaling $565 million, including a U.S. Navy foreign military sale to Korea for an MH-60R tactical operational flight trainer, as well as extensions and expansions with the U.S. Army for fixed-wing flight training at the CA Dalton Training Center, and with the U.S. Air Force for initial flight training at the CAE Pueblo Training Center. We also delivered or entered a new agreement for comprehensive training and support services under the Australian Defense Force Assist Program. A few more recent wins since the end of the quarter really served to underscore the progress that's being made to renew our defense backlog with larger and more profitable programs. As an example of our continued growth and capabilities In connection with U.S. Army Aviation, Defense was awarded a contract to support flight school training support services at Fort Novosel, Alabama. The FSTSS contract is the world's largest helicopter simulation training program. And our $450 million U.S. training contract is for training and simulation capabilities that will be used to prepare initial entry-level and graduate-level rotary wing flight training. By leveraging our expertise from our civil aviation training outsourcing business model, we'll be building and deploying CA-owned full-flight simulators over the contract term for the CH-47F and UH-60M platforms to meet the U.S. Army Aviation Center's of Excellence rotary wing simulation services requirements. Also, building on our prominent flight training position in Lower Alabama, Defense was competitively awarded the U.S. Air Force's rotary wing introductory flight training contract worth a maximum of approximately U.S. $111 million over the total contract term. Under the IFTR contract, we'll be leveraging our existing training center in Dalton, Alabama. Another favorable development that supports future growth was the affirmation in early April of the Bell V-280 Valor in selection for the U.S. Army's future long-range assault aircraft, or FLARA. This is noteworthy because CAE is part of Team Valor and is a key partner in the provision of training and simulation solutions for this next-gen platform. These program awards and developments demonstrate our expanded market reach with national defense departments and OEM. We're able to achieve this by leveraging defense's enhanced capabilities and scale vertically and by drawing technology, processes, and people laterally across the whole CAE enterprise. These are prime examples of the kinds of larger and more differentiated programs that will drive the multi-year defense transformation that's currently underway. Turning now to healthcare, we gain share in the simulation market and continue to deliver double-digit revenue growth with our dynamic team and highly innovative solutions. Here, too, we've been harnessing the power of our one CAE mindset with a joint civil and healthcare presentation on parallels between aviation and healthcare training to elevate quality and safety. Our teams recently collaborated at the industry's largest simulation event, the International Meeting of Simulation in Healthcare, and it's a great demonstration of CAE's unique culture. Before turning the call over to Sonia, I want to highlight a notable development on the technology application front, which is a real-world example of what we mean when we say that we're revolutionizing aviation training in civil and defense markets. We conducted a field study with the Japan Air Self-Defense Force to validate the potential for more effective training by leveraging CE's latest virtual reality and artificial intelligence-enabled digital solutions. The study revealed a near full grade of proficiency score improvement across all JSS-DF participants. Our innovative training solution incorporated TA-RISE, which we originally conceived for civil aviation, to provide more effective training to real-time objective assessment. It also included defense patented biometric feedback technology, enabling instructors to modulate complexity based on students' stress, engagement, and cognitive workload levels. These data-driven and AI-enabled technologies are important building blocks that will drive greater levels of training efficacy and safety. With these CE innovations, we expect to further widen our competitive moat, unlocking a greater share of our addressable markets and developing new revenue streams. With that, I'll now turn the call over to Sonia, who will provide a detailed look at our financial performance, and I'll return at the end of the call to comment on our outlook. Sonia?

Thank you, Mark, and good afternoon, everyone. Looking at our results on a consolidated basis, revenue of $1.3 billion was up 32% compared to the fourth quarter last year. Adjusted segment operating income was $201.9 million compared to $142.7 million last year. Quarterly adjusted net income was $110.9 million, or 35 cents per share, compared to 29 cents in the fourth quarter last year. For the year, consolidated revenue was up 25% to $4.2 billion. Adjusted segment operating income was up 23% to $548.1 million. And annual adjusted net income was $279.2 million, or 88 cents per share, compared to 84 cents last year. We incurred restructuring, integration, and acquisition costs of $15.3 million during the quarter related mainly to the integration of Air Center acquired last year. Net cash provided by operating activities was $180.6 million for the quarter compared to $206.8 million in the fourth quarter last year. And for the year, we generated $408.4 million from operating activities compared to $418.2 million last year. We have strong free cash flow in the quarter of $172 million and $335.7 million for the year for an annual cash conversion rate of 120%. We continue to target an average of 100% conversion rate going forward. Uses of cash involve funding capital expenditures for $62.9 million in the fourth quarter and $268.8 million for the year. driven mainly by the expansion of our civil aviation training network in lockstep, which secures customer demand. These opportunities translate to some of our best returns as our simulators assets ramp up within the first two years of their deployment. With a record order backlog and the large number of agreements we announced over the last year to secure airline outsourcing and training network expansions in commercial and business aviation, we are expecting a higher level of organic growth investment in fiscal 2024. We currently expect total CapEx to be approximately $50 million higher than last year, mainly in support of these accretive investments. Our net debt position at the end of the quarter was $3 billion for net debt to adjusted EBITDA of 3.4 times. This compares to net debt of $3.1 billion and 3.7 times net debt to adjusted EBITDA at the end of the preceding quarter. Our leverage ratio has been improving rapidly since the middle of fiscal 2023, and we continue to expect it to be below three times by mid-fiscal 2024, taking into consideration our expanding EBITDA and ongoing funding of accretive organic growth investments. Income tax expense this quarter was $33.3 million, representing an effective tax rate of 25% compared to 6% for the fourth quarter of fiscal 2022. Normalized, the effective tax rate would have been 24% this quarter and 15% in the fourth quarter last year. On the same basis, the effective tax rate for the year was 22%, which we continue to expect going forward. Net finance expense this quarter amounted to $51.4 million, which is up from $48.8 million in the preceding quarter and $32.5 million in the fourth quarter last year. Consistent with our growth investments, priorities and non-cash working capital seasonality patterns for fiscal 2024, we expect quarterly finance expense run rate of approximately $50 million, at least for the first half of the fiscal year. Now to briefly recap our segmented performance. In civil, fourth quarter revenue was up 53% year over year to $661.4 million, and adjusted segment operating income was up 69% year over year to $162.9 million, for a margin of 24.6%. For the year, civil revenue was up 34% to $2.2 billion, and adjusted segment operating income was up 54% to $485.3 million for a record annual margin of 22.4%. The higher revenue for both periods was driven by higher training volume and a higher number of FFS deliveries compared to the prior year period. we achieved a record margin for the year, despite, as Mark referenced, not having fully recovered to 2019 levels in all regions. That's because of the excellent work that was done over the last couple of years to lower our recurring cost base, and we're also benefiting from some mixed improvements from the structural expansion of business aviation and a greater proportion of revenue coming from training services overall. In defense, fourth quarter revenue of $536 million was up 14% over Q4 last year. Adjusted segment operating income was down 17% over last year to $30.5 million for an operating margin of 5.7%. For the year, defense revenue was up 15% to $1.8 billion, and adjusted segment operating income was down 55% to $53.1 million, representing a margin of 2.9%. Over the course of the year, we had sequentially stronger quarterly results as a function of execution on legacy contracts, cost mitigations, and some gradual improvements in the economic headwinds that we've been facing. And in healthcare, fourth quarter revenue was $59.1 million, up 12% compared to last year. Adjusted segment operating income was $8.5 million in the quarter compared to $9.6 million in Q4 of last year. For the year, healthcare revenue was $192.7 million, up 27%, and adjusted segment operating income was $9.7 million for a margin of 5%. With that, I'll ask Mark to discuss the way forward.

Thanks, Sonia. We continue to have a highly positive outlook for fiscal 2024 and beyond, notwithstanding some of the macro-level turbulence in the general economy. We see clearly defined secular trends that are highly favorable across all of CEA's business segments. In civil, we've shown over the last year that there's indeed a growing desire by airlines to entrust CEA with their critical training in digital operational support and crew management needs. Demand for air travel continues to thrive, and our business is driven primarily by the regulated training required to maintain the pilots and crews who operate the global in-service fleet of commercial and business aircraft. As an additional secular driver, we expect to sustain high level of pilot movements from the growth and replacement of the active pilot population. According to our estimates, over half the commercial and business jet pilots who will be active in a decade from now have yet to even begin their training. Given that backdrop, we expect our civil business to continue growing at an above-market rate, driven by the remaining stages of cyclical recovery, primarily in Asia, and to sustain high-level demand for pilots and pilot training across all segments of civil aviation. In fiscal 2024, we expect low to mid-teen percentage annual growth in civil adjusted segment operating income generated at the current higher margin level and driven by higher training and product volumes and the ongoing simulator deployments to expand our global training network. We expect to see a more typical seasonal pattern for training demand this fiscal year weighted more heavily this second half. We also expect about three-quarters of our approximately 50 annual full-flight simulator deliveries to occur in the second half. Turning to defense, the sector is already in the early stages of an extended upcycle, driven by increased commitments by governments to defense modernization and readiness in support and in response to geopolitical tension. Secular tailwinds that favor our business include the increased focus on near-peer threats, and a greater need for the kinds of digital immersion-based synthetic solutions that draw from SEAS advances in civil aviation simulation and training. Our defense segment is in the process of a multi-year transformation, which we expect to culminate in a substantially bigger and more profitable business. It's already become the world's leading pure-play, platform-independent training and simulation business providing solutions across all five domains, air, land, sea, space, and cyber. We're uniquely positioned to draw on sea's innovations in commercial aviation to transform training with the application of advanced analytics and leading-edge technology. This is expected to bring potential to capture business around the world, accelerated by an expanded capability and customer set. Our recent wins and a record-adjusted backlog, $9.3 billion pipeline of bids and proposals outstanding, and trailing 12-month book sales ratio demonstrate that our strategy is bearing fruit. In fiscal 2024, we expect defense to continue renewing its backlog with larger and more profitable programs, while simultaneously working its way through a critical match of low-margin legacy contracts. We're highly focused on execution, and for the fiscal year, we expect defense to drive continued year-over-year quarterly performance improvements with a heavier weighting to the second half consistent with its historical seasonality. And finally, in healthcare, we see potential to accelerate value creation as we gain share in the healthcare simulation training market and continue to build on our top and bottom line growth momentum. In summary, I continue to be excited about our future. I'm pleased with the important progress that we made last year and expect to continue making excellent progress in the year ahead and beyond. We're on a clear path to an even bigger, stronger, and more profitable CAE in the future, and we remain well on track to our targeted 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.

Thanks, Mark. Operator, would you now please open the call to questions from financial analysts?

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

Thank you. Good afternoon. I have a couple on the defense segment. The 2024 outlook for improving quarterly results year-on-year, I'm guessing that's based on the $82 million, which is corrected for the contract right off in the first quarter of last year?

I'm not, no, I think what I'd tell you about defense, I might be able to let Sonia pipe in after, but what I'd say, Fadi, is look, when I look at defense, there's no doubt we're going to have strong growth in defense in a year. And that's really, when we talk about continued year-over-year improvement each quarter of this year, it's exactly that. And, you know, we see a very good path to that. As you'll recall, I mean, it's all about working through the existing backlog of lower margin legacy contracts that, you know, we executed during the time of, you know, with still some effects of, you know, manpower shortage, part shortages, and delayed orders due to Ukraine. I mean, that's working itself through. We're quite well through it. And at the same time, restilling the backlog with larger, more profitable contracts. It takes phasing. It takes time. We're early in the year. I mean... Again, I'm quite confident in that, you know, strong growth this year. I think, as I said many times before in this business, look for the orders. Look at the orders, and you see the orders have been strong. We had another year of 1.1 book-to-bill, and since the end of the quarter, I can tell you I'm very excited about the contracts that we've announced. And, you know, I think, you know, one tidbit I'll give you now is that with the recent orders that we won... with the Air Force on the IFTR contract, with the U.S. Army with the FTSS contract, which is, as I mentioned, the largest simulation contract in the world for helicopter training with the U.S. Army. No exaggeration, we touched all 43,000 U.S. military pilots at some point in their career. I think it's pretty exciting going forward. So, I mean, that's a long answer. I don't know if you want to add anything there. So, that's it, Fadi.

Okay. Just, you know, maybe a couple of follow-up on this. I mean, the EPS CAGR guidance for 2025, you know, in the context that civil growth is now settling in somewhere in that low double-digit to mid-teens, that implies defense uh very significant ramp up in profitability of defense going into 2025 to somewhere near 200 million ebit contribution i just want to understand is this the framework that we are thinking about and maybe what is the cadence of that improvement is it more weighted to 2025 when you look at kind of the backlog and how the renewal of the pnl and overcoming some of these legacy uh you know contract margin issues that you have right now is it more 2025 weighted is it uh kind of more spread out in a linear fashion and the this improvement going into the next couple of years and and one last point is on the um on the contract you announced uh yesterday which uh it's a great contract contract on that by the way um what is the capex total capex that is required to invest toward that $455 million U.S. dollar revenue that you expect?

Okay, I'll start by the first part of that question there. I think that when I look at, you know, basically going back at every number you said there, it depends. Look, what we're going to see here, we'll see, again, strong growth in defense. We'll see more revenue improvement towards the second half. In terms of margins of defense, we'll start seeing a bigger inflection in the absolute margins themselves as we get into fiscal 25. That's what we'll see. But inevitably, that's going to support the EPS guidance that we have, as you outlined. With regards to CAPEX on FSTSS, look, we can't go into too much in terms of the contractual details for a few reasons. Again, I'm extremely excited about that contract. I think it's important to note It's got a similar financial profile to our civil training business. With respect to investment, we'll start to make investments later this year, but it's going to spread over multiple years, over the 12-year contract. It kind of looks like an airline training contract. That's what I would tell you at the moment.

Okay, thank you.

That's helpful.

Our next question comes from Karna Gupta with Scotiabank. Please proceed.

Karna Gupta Thanks, operator. Good afternoon, everyone. I just wanted to maybe follow up quickly on defense segment. We saw the continuation of the SOI rebound sequentially in the fourth quarter, but what really kept the margin intact at 5.7 percent? It wasn't a huge improvement from the previous quarter sequentially. And how do you see that margin, to your point, Mark, as you see growth and inflection point? Do you see margin and defense higher in fiscal 24?

Well, as I said, I think we'll get more of a bigger inflection in the actual margin performance, percentage margin, as we get closer to the end of this year into fiscal 25. What I do see... is obviously we're going to see growth year over year in the absolute numbers. So a quarter of a quarter year over year, you're going to see growth. I mean, we'll be marching itself. I would see an appreciation. I can't be precise to you because there's a lot of timing to this, I would tell you. Timing of ramp up a few programs and wind down of ones we have. So there'll be a crossover point, but it'd be hard for me to be more precise than that right at this moment in time.

Right. And to my question on the Q4 margin not improving much, was there the same legacy issues still continuing, or was there any improvement?

Yes. I mean, it's essentially the same issues. As we said before, there's no surprises. As I said before, there's not going to be. We're continuing executing on the programs that we have. And those are legacy programs that are being gradually replaced with the ones that we see as accretive to the margin objective that we have.

Okay, thanks. And just a quick follow-up on civil. So you guys are expecting a pretty decent growth here in fiscal 24 on SOI for civil, low to mid-teen. But you're also saying at the same time the percentage margin is going to be steady-ish relatively. at high levels where you are right now. Is there any change in mix that you anticipate in fiscal 24, like business jet training is kind of maybe not growing as fast and the simulator sales are growing, and is there any change we should be mindful of with SpectraMix?

Well, definitely it's not because business aircraft is not growing as fast, I can tell you that. Quite confident about that. It's really a question about the ramp up of new simulator deployments. As you saw, we deployed, I think it's 23 full-flight seminars last year. We opened up our new training centers, for example, in Las Vegas, very successful. But, you know, inevitably, I mean, they create great incremental margins within two, three years, but initially they're low margins as we ramp them up. So that's really what you're seeing right now. And, you know, there's room for margins to grow and beyond that, that's for sure. But, you know, I think... Margin, you know, 22% range is, I think, in the range that we would expect at the moment. Wait, that's it for me.

Thanks for the call.

Our next question comes from James McGarrigle with RBC Capital Markets. Please proceed.

Hey, thanks for taking my question. So I just wanted to ask a question on the civil outlook You know, quarter came in great. The fiscal 2024 outlook was very strong as well. But, you know, I wanted to ask a question about, you know, the longer term strategy, you know, where you potentially see some growth there, you know, post 2025. And, you know, more specifically on your position in India, you know, what's your position in that country? If you can talk about some of the relationships you have with the country's major airlines and, you know, any color on your strategy there.

Well, I can tell you we have a very strong position in India. We have training centers in multiple locations there. I'm pretty sure that I'm correct in saying that we have a strong relationship with every carrier that is in India. Of course, we have a long-term partnership with Indigo Airlines there, where we provide not only training, but provide all of their aboriginal cadets. just right there, and it goes like 50% of the lift in India, for example. And so I feel very comfortable. And in terms of the long term, look, there's going to be a need for pilots just to fuel the growth in civil aviation, both in airline traffic, in business aircraft, for years to come. And with the dominant position that we have in this market, and the relationships that we have with the world airlines, I see it has very good growth potential. And I put on top of that that I'm very happy with what we're seeing is the growth of our flight services business, which remember that in our flight services business, our training business, there's a huge amount, over 90% customer overlap. And as airlines seek to modernize their infrastructure, whether it be on crew management, on flight planning, uh, and, and those kind of, uh, you know, infrastructure needs, I think we're invested in a business at the right time.

No, I appreciate the color and, uh, just, uh, kind of a longer term question on the defense side as well. You know, one of the things that's come out of the Ukraine war is the need for some, some common common standards, excuse me, you know, which, uh, NATO could potentially help set, you know, for, for example, I know you guys don't produce ammunition, but. We have British tanks with certain types of guns, and they can't fire ammunition for a smoothbore German or American tank. But I think this is really highlighting some of the growing importance of data and weaponry, potentially some open architecture software that could potentially allow some plug-and-play kits. So could you just share your thoughts on this opportunity for CAE? if NATO countries potentially move to more common standards, and how your business is set up to compete, if that were to be the case?

Well, I think what I would say at the aggregate level is that we've got a long history of supporting allied forces, and our support is training, and that's what we do. And when you think about what do militaries do when they're not in operations, they train. That's all they do. for conducting their missions and accomplishing, you know, what we see as part of our noble mission is making sure that the men and women in uniform are able to execute their missions and return home safely. That's what we do. We do it across, you know, a host of platforms in aviation and in the army, on the naval side. In fact, in all five battle domains. And then, you know, maybe to a broader, you know, point to your question is that the nature of warfare is a lot more complex. It involves warfare in contested environments. And you need to be able to train in a very realistic manner. And there is no better, more realistic way, the only real way to be able to do it involving all five battle space domains than virtually. And for us, being the dominant virtual training provider in the world, I think we're in very good positions to support that growth in the years to come.

Thank you, and I'll turn the line over.

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

Thank you very much. Good afternoon, everyone. Maybe a question here for Sonia, I suppose. Just thinking about the investment that the company has been making in intangible assets since And that's been kind of ramping up with company growth over the last four or five quarters. I'm just wondering how we should think about the cash requirements for intangibles in fiscal 24 and beyond and sort of what those investments will be focused on.

Hey, Tim. So, yeah, we have seen a bit of a ramp up, and that was expected. It came along with our commitment to develop on the civil flight services business. As you'll remember, we bought it at quite an interesting multiple, knowing that, you know, we would develop and take and advance the technology on that front. So, that's been the driver, and I expect that to be similar this year.

Okay. Thank you. My second question. Thinking about it, I'm not sure you can parse it out this way, but let me ask the question. Could you talk about your exposure to regional aircraft training, really where I think the pilot shortage is maybe most acute or maybe most evident? Are you seeing that drive ab initio enrollments or kind of demand throughout your business where you can kind of point specifically to that part of the market?

Well, I can take it. I mean, I appreciate the question because we're very strong in training regional airlines. I think we're by far the largest provider of training for regionals in the United States, all of them. And as well, very, very strong on the flight services side. You've seen us just recently, the last few days, sign a landmark agreement with SkyWest And that was on top of a deal that we signed a few months ago with Frontier, which is not a regional airline, but you gave the point. So, look, if I could tell you if I could have another couple of CRJ simulators ready today, I would put them in right now. So the amount of demand is quite unprecedented. And I could tell you our training center is supporting – regional aircraft are very busy. And yes, to your point, that is driving activity from an STO standpoint, flight training organization, those who have an issue.

Great. Thank you very much.

Our next question comes from Christine Lawag with Morgan Stanley. Please proceed.

Hey, thanks. And Mark, maybe going back to defense and security margins, you know, you've been very clear about you've been filling the defense backlog with more profitable contracts. But can you help us quantify how much of these, the composition of the fiscal year 24 revenue will be? How much of that is from legacy less profitable contracts versus the more profitable ones that you've been booking? Is that 50% more or less? that would really help us understand the bridge. And then also any indication for what that looks like for fiscal year 25 would be really helpful.

Well, it's always getting much more in fiscal 25 as we, there's, you know, some certain programs that we call drag programs that were executed years ago that, you know, are at, you know, low, quite low margins. So, I mean, it's offsetting itself over the next 12 months. Being more precise to you on exactly where does that happen, how much percentage, look, I would hazard a guess at 50-50. And when I say guess, it's a pretty educated guess as I look at that. But I think look at margins, you know, start getting towards our target as we get into the latter end of the year.

Thanks, Mark. And if I could ask another one on civil. Last quarter, you mentioned that the Sabra Air Center was about 10% of civil revenue. What was it this quarter? And then also, how should we think about the margin composition for air center versus the overall civil business? Is that accretive or dilutive to the segment margins?

So I'd stick around. It's around 10% still, Christine, so holding around that. And as we've said before, it's accretive to the civil margins as well.

Great. Thanks, Mark. Thanks, Sonia.

Our next question comes from Ron Epstein with Bank of America.

Please proceed. Hey, good afternoon, guys. Just maybe a bigger picture question looking at the longer-term guide. How should we think about growth? In fiscal 24, you're looking for mid- to low-teens growth in the civil segment, but then the longer-term growth for the business you're looking at in the 20s, So does that mean we're seeing that kind of the growth's going to be kind of rear-end loaded? I mean, how should we think about that transition from fiscal 24 to your longer-term guide?

I don't see it back-end loaded, Ron. I'm not sure I either rise to that conclusion, but we definitely don't see it back-end loaded.

No, it's going to be a progression in margins. We always said in that three-year guidance that civil margins would expand, but it's also volume. So with all of these agreements and outsourcing and the additional organic capex, it's also higher margins on higher volume. So both take you there.

But that gets you to that kind of mid-20 growth or whatever, kind of 20-plus growth? Yes. Okay, great.

Thank you. That's all.

Thank you. Our next question comes from Michael Kipras with Desjardins Capital Markets. Please proceed.

Yes, hi, and thank you for taking my question. Maybe in defense, the active bids and proposals jumped from $7.3 billion to $9.3 billion over the last quarter. Maybe just any additional color on that, the bidding pipeline, and maybe any delay expectations related to the current U.S. budget negotiations that are ongoing?

Look, I'm going to answer the last part of your question, but what I always like to say is that the day that the CIA's defense business is a proxy to U.S. government budget, I'll be very happy. Having said that, look, you can always, you can, the only concern that you would have that that might be short-term is if something dramatic happens that, you know, stops new orders from happening. I don't see that. That would just be timing on short-term. To me, the position we have in the market is very, very strong. And the backlog that we see in terms of actually the bids outstanding is just basically the fact that with our position in the market, we see opportunities to bid a much larger group of business. And that's right in our sweet spot. And we, as I've said many times before, We don't prepare bids on U.S. military or any military contract unless we think that we have a pretty good chance to win because preparing those bids is very manpower intensive. It's very labor intensive. It's costly. So if we bid on them, it's because, as I said, we think the probability of win is high. And it's just a reflection of what CA looks like post the L3 Harris contract. acquisition where we've really transformed this business to become the number two OEM independent training provider in the world for simulation. So the scale that we have is really unprecedented. And the number of platforms, I mean, aviation platform and platforms of all segments are much higher than they were at any time before. And again, all of that contributes to the amount of business that we can go out after with a reasonable and high level of probability of win.

Thank you. That's very helpful. And maybe just a quick one on the flight operating solution contract you signed with SkyWest. There's been some other airlines in the U.S. that are budgeting large budgets for IT overhauls. Do you see anything picking up in that space as maybe government regulation on cancellation service increases, or is it still a steady state as usual?

Well, we're seeing a lot of activity, and we have a lot of discussions with airlines as they want to renew and modernize their infrastructure. They all have to do it. They all realize that we have, in order to keep up with the enhanced demand that there is out there, they are having to modernize their platform. So that's what we're seeing. So, you know, to me, I see lots of potential for growth in this in this sector you know and we're doing well in it so i'm quite quite pleased as i said not only a result where we are into liberation and the timing of our investment in flight service that's very helpful thank you our next question comes from noah popnick with goldman sachs please proceed hello ron i know

Mark, you answered to a prior question about the mix of defense this upcoming year. That's high margin programs versus what you call drag programs. And you tossed out 50-50. Are you saying that half of the defense business is what you call a drag program? Or you're saying half of what's been a drag program is gone or is rolling off? in 2024?

No, definitely not. Our programs are dragged forward. No, not at all, no.

So you're saying that half of what's been a drag is rolling off in 2024? Or what does 50-50 mean in that context?

Yeah, you know, I think I'm going to bring it back to what the outlook is in defense. What we're going to see is strong growth in a year of defense. we're going to have continued year-over-year improvement in the amount of SOI that we generate every quarter relative to the same quarter the year before. And we have a very good path on that, and that's why I'm comfortable guiding to that today, even though it's pretty early days in the year. And, you know, in terms of the margin itself, as new programs come on replacing the other ones that are dragging, and dragging doesn't mean zero necessarily. just dragging to the marriages that we're targeting to do. So the margin reflection starts happening later in the year and certainly as we begin in fiscal 25.

How many programs in defense approximately would you call a drag program at this point?

I won't get into that because then I have to define to you what exactly is a drag program. We execute, you know, literally... probably in a region of five or six hundred programs at once in defense at any given time that's about the number that we have that we're executing at this at this moment time and uh maybe leave it at that noah okay yeah i mean you know it's been asked about a bunch i don't want to keep asking the same question but um my understanding of what happened there was you acquired a business realized there were just a handful of bad contracts written

and that those just need to roll off. And I appreciate the reasons you wouldn't want to get into all the detail of this on this call, but at the same time, you know, the kind of reluctance to give the specifics here, I think, risks just leaving everybody still confused as to exactly what's gone on and when it looks better, other than just kind of taking the high-level word for it. You see what I mean?

It's such a It's not just the business we acquired. Don't forget that we've been winning contracts. We've been executing programs both from legacy CAE, whether it be U.S. and international, as well as the L3 Harris contract under an environment where we had, you know, just like the rest of the industry, pretty significant part shortages, issues, manpower shortages, and delays in orders, which we expected to get. that were literally delayed because of, you know, focused on the Ukraine war, which in a longer term obviously drives budgetary pressures higher, which is a good thing, but in the short term certainly affected the amount of contracts that were worked on that we could translate into revenue for us because we just got delays in orders. I mean, in terms of specific, you know, drag programs, as you might want to think about it, very, I mean, very low profitability, you know, that's a very small number of contracts.

Okay. Okay. That's helpful. Thank you. The capital expenditure increase this year, what's that for? And then should we be thinking of that as a new base that you, you know, then grow off again beyond 24? Or is there a sort of one-time step up this year?

A lot of it has to do with the success that we've had in convincing airlines to convert more of their training to us. You look at, for example, four out of five major airlines in the U.S. are now training with us. That's a big step up. And once you do that, I've never seen it go the other way. At the same time, you see this deploy new centers for business aircraft, which are highly accretive, very good margin performance aircraft. in a market which, you know, I see a structurally higher going forward. That's really what you're seeing right now. I'm not going to get beyond this here, but that's really a bulk of it.

Okay. Great. Thank you so much.

Welcome. Our next question comes from Fai Li with Odlem Brown. Please proceed.

Thank you. Mark, I just have a couple questions on civil aviation. The utilization rate this quarter was 78%, but Asia isn't fully recovered. I'm just wondering in terms of how should we be thinking about where the utilization could settle in under a more, I guess, call it normal utilization in Asia?

Well, I think there's room to grow still in Asia. It has been recovering rapidly, you know, since the start of fiscal year. And our 2.4 utilization in Asia was certainly substantially improved versus the start of the year. So there's still room, gas in the tank, if I should say, on that one. I mean, utilization is not a perfect number, I would say, because don't forget the You know, as we ramp up new simulators, we've ramped up a lot of simulators, that will kind of sort of depress the utilization in the short term because obviously if you ramp a new training center or a new simulator up, it's not going to be a full utilization right off the bat. So, and maybe just Asia Pacific, you know, in terms of China, I would add that that's mainly a simulator market for us. We typically, you know, sell maybe six to eight full-flight simulators a year to China. Over the last couple of years, you know, we've only sold three in total. But we're definitely seeing a pickup in sales-related activity in China. Okay.

So in terms of, like, you know, I know there's some noise on the simulators, but in terms of, like,

utilization rate on a more normalized longer-term basis or it's a pot it sounds like a scope for it to go up maybe in the 80s is that kind of the way to think about maybe mid 80s at a maximum or on a normal hand it it certainly can uh you know we're operating a very high level now uh if you look at the global fleet uh at those kind of levels but you know we have printing centers that operate at north 100 percent because you know there's that's I mean, practically, you know, to operate the whole fleet of 300-odd simulators at that level, it would not be tenable because you have to have time to maintain them, that kind of thing. But you definitely could see it go up above 70%. That's definitely possible. And don't forget, we always work on making sure that we get the best returns out of utilization we get.

Okay. And just to follow up on, in the guidance, you mentioned that civil is going to continue growing at a quote, above market rate, unquote. I'm just curious what, I know you gave guidance on the SOI and where you think that's going, but I'm just wondering what is that market rate that you're talking about?

Well, we're talking about the underlying rate of growth of mainly airline passenger travel, RPKs. Okay. Got it. Thank you.

Operator, I think that's all the time we have for members of the analyst community. We'll now open the line to members of the media if there are any questions there.

If you're part of the media and would like to register a question, please press the 1-4 on your telephone. We have a question from . from the Canadian press. Please proceed.

Yes, hello, Mr. Parent. Thank you for taking my questions. Can you hear me? Yes. Yes, excellent. Thank you. Maybe on the... I listened to the analyst conference. There were a lot of questions about the 2025 provisions and the path to get there. Maybe you can explain to me in French, in your words, How do you plan to move forward? Where are you now in terms of the forecasts you have for exercise 2025?

Well, listen, it's based on the order list we've already won and the orders we expect to win this year. We have a very high confidence in winning them. That's really what we're basing ourselves on for our projections of achieving our results. We have also deployed several simulators in our network this year. We have opened new training centers for civilian aviation. We have made contracts, for example, where we also do training sessions for aerial companies like Qantas. in Australia, like Agen, the largest airline company in Greece. We are now doing training for four of the five largest airlines in the United States versus what we were not doing at all before the pandemic. All of these factors give us, if you will, the path to get to the margins of growth in the profit by action in 2025.

Okay, okay. I felt from the analysts that there was a certain part that was not quite clear for their part and that they were missing information. For what reason can you not give them this information? I understood that it's because of commercial secrets in the defense. Did I understand correctly?

Definitely, when it comes to questions about contracts where we ask exactly how much capital we are going to have to deploy for certain defence contracts, yes, it's part of the... I wouldn't say state secrets, but commercial secrets, yes. We can't really be transparent in that sense at the moment. Okay, okay. I understand.

Maybe a question on another subject. In the past, you talked about the risk of a shortage of pilots in Canada and elsewhere. I wanted to focus on Canada. Has the situation been restored since the pandemic? I'm asking myself the question with the festival season. I know you don't have control over all the elements, but I was wondering, with the information you have on the shortage of pilots, I think there's still a big demand for pilots, not just in Canada, but all over the world.

We are part of that solution. We are probably one of the world's largest pilots schools. We have hundreds of planes. We are known as a simulator company, but we also have a lot of planes where we train pilots We have agreements with a lot of airlines to provide them with pilots directly. So, we are part of the solution. One of the solutions that I always take is the fact that only 5% of the pilots in the world are women. So, we encourage a lot. We have bursaries, for example, we want to partner with Air Canada. entre autres pour augmenter le nombre de bourses et vraiment encourager des femmes à devenir pilotes aussi, parce que ça, ça irait loin pour régler le problème.

OK. OK. Parfait. Ça complète mes questions. Merci d'avoir pris notre temps pour les questions des médias. C'est apprécié. Merci.

OK. Operator, you have further questions. Yeah, thank you. I want to thank all participants today, financial analysts and members of the media for joining the call. I remind you that a transcript of today's discussion can be found on CA's website. Thank you.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Thank you.