CAE Inc.

Good day, ladies and gentlemen. Welcome to the CAE first quarter conference call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Mr. Andrew Arnovitz. You may now proceed, Mr. Arnovitz.

Good afternoon, everyone, and thank you for joining us today. Before we begin, I'd like to remind you that today's remarks, including management's outlook and answers to questions, contain forward-looking statements. These forward-looking statements represent our expectations as of today, August 9, 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, and listeners are cautioned not to place undue reliance on these forward-looking statements. A description of the risk factors and assumptions that may affect future results is contained in CA's annual MD&A, available on our corporate website and in our filings with the Canadian Securities Administrators on CDAR and the U.S. Securities and Exchange Commission on EDGAR. On the call with me this afternoon is Marc Parent, SEAS President and Chief Executive Officer. Sonia Branco, our Chief Financial Officer, is unfortunately under the weather today, so I'll be covering off her remarks. Also on hand with us is Constantino Malatesta, our Corporate Controller. After remarks from Mark and me, we'll open the call to questions from financial analysts, and at the conclusion of that segment, we'll open the line 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. We're off to a strong start to the fiscal year with first quarter results driven by double-digit year-over-year growth in civil, continued strengthening and transformation in defense, and increased profitability in healthcare. We've made excellent progress to secure CEE's future growth with over a billion dollars in total order intake for a record $11.2 billion backlog. We also further bolstered our financial position and we're on track to meet our leverage targets by mid-fiscal year. In civil, our markets are thriving and we're addressing a greater share of our customers' training and operational needs as evidenced by our long-term training services agreements that now include nearly every major U.S. airline. We booked $730 million of orders with customers worldwide for a 1.35 times book-to-sales ratio, including 22 full-flight simulator sales and a range of multi-year training contracts in commercial and business aviation. We delivered six full-flight simulators during the quarter, and average training center utilization was 77%, up from 71% last year. As this increase suggests, commercial and business aviation train demand was strong across all regions, particularly as customers got their required training sessions done ahead of the busy summer travel period. While airlines in Asia Pacific are still not yet back to full capacity on international routes, they continued to make rapid progress to restore their operations to 2019 levels and beyond. During a recent Paris Airshow, several of our airline partners inked sizable aircraft orders to be able to execute on their growth plans and were excited to be in a position to serve their needs over the next several years. Also significant during the airshow was our announcement of a strategic alliance with Boeing whereby CA will become a Boeing-authorized training provider and the first to offer its competency-based training and assessment curriculum. With this arrangement, Boeing and CA will expand accessibility to high-quality, innovative flight training to commercial aviation customers worldwide. We're immensely proud of this collaboration with Boeing, first and foremost in our mission to advance safety by bringing forth solutions that will revolutionize the future of training. As you can imagine, we welcome any and all opportunities to help advance the industry forward. We also use the occasion of the Paris Airshow to release our 2023 Aviation Talent Forecast, which anticipates the global need for 1.3 million new aviation professionals to join the industry as pilots, aircraft maintenance technicians, and cabin crew over the next 10 years to support the expected growth of the commercial and business aviation markets. In defense, performance was in line with our expectations, and we're making excellent progress to transform our business, as particularly demonstrated by our recent large strategic program wins and record $5.4 billion defense backlog. These involve larger and more profitable opportunities that we now have the capabilities to bid and win. This quarter, we booked the orders across multiple domains for training and mission support solutions, with the funded Porschup orders valued at $238 billion, 4.5 times booked to sales. Given the large size and number of major program wins in the U.S. this quarter, the unfunded Porschup contracts awarded was even more significant and more than three times the funded Porschup. In total, These represent an additional $779 million contribution to adjusted backlog. Notable awards include the contracts we announced in May to support FSTSS at Fort Novosel, Alabama, and the U.S. Air Force IFTR contract for initial helicopter flight training out of our existing training center in Dalton, Alabama. Both programs involve delivering simulation and training solutions that are very similar to what we offer in commercial aviation, except, of course, for defense customers instead of airlines. Additionally, defense was recently awarded a contract in the land domain that is critical to the U.S. Army's mission, namely phase two of their rapid prototyping effort supporting the soldier virtual trainer program for the replacement of 800-plus legacy training systems. Since the end of the quarter, Defense has continued to leverage DOLTHIN Training Center and our industry's leading business aviation training expertise to provide mission-critical solutions for the U.S. Army with a contract for simulation-based training for the Army's key next-generation ISR system called HADES, meaning the High Accuracy Detection and Exploitation System, which is based on the Bombardier Global 6500 business jet, a platform for which we are the global authorized training provider in civil aviation. At the end of July, the Government of Canada announced the selection of Skyline, a partnership between CAE and KF Aerospace, as the preferred bidder for the Future Aircrew Training Program, or FACT, to provide next-generation pilot training and aircrew training for the Royal Canadian Air Force. This is a major development for CAE and underscores my excitement for our future in this space. We're now entering discussions with the Canadian government and our partners, and the award is anticipated in 2024. In context of securing CAE's future growth, we expect the FACT program to become our largest contract win to date, representing a multi-billion dollar generational training opportunity that will ensure work for CAE over the next quarter century. Turning now to healthcare, we continue to gain share in the simulation market, delivering above-market revenue growth and higher profitability with our dynamic team and highly innovative solutions. We had notable contract awards for our Learning Space Center management solution for the Thomas F. Frist Junior College of Medicine in Nashville, Tennessee, and a contract from the University of North Dakota for a multi-SIM sale to outfit their simulation and motion mobile education system. And by leveraging our technology and subject matter expertise, healthcare delivered or entered an agreement with Abbott Laboratories to develop a training program to support the launch of a new commercial pay space. With that, I'll now turn the call over to Andrew who will provide additional details about our financial performance. Andrew?

Thanks, Mark. Consolidated revenue of $1.05 billion was 13% higher compared to the first quarter last year. An adjusted segment operating income was $145.1 million, compared to $60.9 million in the first quarter last year. Our quarterly adjusted EPS was $0.24 compared to $0.06 in the first quarter last year, which included a $0.07 negative EPS impact from contract profit adjustments in defense. We incurred restructuring integration and acquisition costs of $15 million during the quarter, relating mostly to the air center acquisition. Net cash from operating activities this quarter was negative $49.3 million, compared to negative $162.6 million in the first quarter of fiscal 2023. Free cash flow was negative $104.9 million compared to negative $182.4 million in the first quarter last year. The increase was mainly due to higher cash provided by operating activities and a lower investment in non-cash working capital. Free cash flow performance in the quarter was in line with our expectations and outlook. We usually see a higher investment in non-cash working capital accounts in the first half of the fiscal year. And as in previous years, we expect a portion of this to reverse in the second half. And we continue to target 100% conversion of adjusted net income to free cash flow for the year. Capital expenditures totaled $90.6 million this quarter, with approximately 60% invested in growth to specifically add capacity to our civil global training network to deliver on our long-term training contracts that are in our backlog. Income tax expense this quarter was $8.2 million for an effective tax rate of 11 percent. The adjusted effective income tax rate was 13 percent, which includes a one-time favorable impact to income tax expense from a tax court decision related to the SADI program. This, by the way, was offset by a one-time negative impact from higher interest expense related to the very same matter. As such, net finance expense this quarter amounted to $54.1 million, which is up from $51.4 million in the preceding quarter and $36.2 million in the first quarter last year. The increased finance expense relative to both prior periods mainly reflects the impact of higher interest rates on our variable rate debt instruments and also the aforementioned tax court decisions. Our net debt position at the end of the quarter was approximately $3.2 billion for a net debt to adjusted EBITDA of 3.22 times at the end of the quarter. With this continued strengthening of our financial position, we're on track to meet our expected leverage ratio of about three times net debt to adjusted EBITDA by the middle of the fiscal year. Now turning to our segmented performance. In civil, first quarter revenue was up 12% to $540.3 million, compared to the first quarter last year, and adjusted segment operating income was up 37% to 119 million versus the first quarter last year for a margin of 22%. As we expected, we're seeing the benefit of some mixed improvements in the quarter with a greater proportion of revenue coming from training services overall. Compared to Q1 last year, we had higher training utilization and increased volume from some of the recently deployed simulators in our network. This was partially offset by lower simulator deliveries, which, as we previously indicated in our outlook, are profiled more to the back half of the fiscal year. In defense, first quarter performance was in line with our expectations and outlook for the fiscal year. We generated revenue of $471.7 million, which is up 14% over Q1 last year, and adjusted segment operating income was $24.3 million for the quarter, giving us an adjusted segment operating income margin of 5.2%. This compares to a loss of $21.2 million in the first quarter last year. Defense revenue growth stems mainly from a higher level of activity on programs, while the higher adjusted segment operating income reflects the adjustments that we made last year and also the ongoing progress we've been making to execute on legacy contracts and mitigate costs, as well as the effects of a gradually easing of economic headwinds. And in healthcare, first quarter revenue was $42.4 million, up from $39.6 million in Q1 last year. Adjusted segment operating income was $1.8 million in the quarter for an adjusted segment operating income margin of 4.2%, which is up quite nicely from Q1 last year. With that, I'll ask Mark to discuss the way forward.

Thanks, Andrew. Our outlook continues to be bullish for the fiscal year and beyond. We're delivering tangible success and driving strong order flow with a significant and growing backlog. Our customers in each of our markets have a greater need for innovative training and operational support solutions to succeed in ever more complex environments. As we look into the period ahead, we continue to be highly encouraged by the secular tailwinds in all segments and the growth that we expect to deliver by harnessing our global market technology leadership and the power of one CAE. And Sybil, if you've traveled at all over the last few months, you'll know firsthand that demand for air travel is as strong as ever. For the first quarter of this calendar year alone, worldwide passenger traffic increased by 58% compared to last year. And in the United States, the TSA reported a new daily record for passenger screening at the end of June. And yet, not all of our airline customers are back to their 2019 operating levels. Specifically in Asia, where international traffic is still lagging at nearly 75% of pre-pandemic activity. We see significant demand ahead for air travel in the remainder of the cyclical recovery and beyond. We're proud to be the world's largest provider of civil aviation training services, and we're on track this year to deliver approximately 1.2 million hours of training in our broad global network of training centers. No matter where you fly, chances are that your pilot or first officer has been trained in a flight simulator designed and built by CAA or in one of our training centers around the world. Our highly differentiated solutions in the aviation market, including the most extensive global training network, world-leading simulation products, unique technology and software solutions, and strength in training partnerships with operators and OEMs, positions us very well for the long term. We expect the pace of change in aviation to be substantial over the next few years. The demand for trained aviation professionals is greater than ever and continues to be driven by air traffic growth, personnel retirement, and by the number of new aircraft deliveries. Consider the fact that over half the commercial and business pilots who will be active a decade from now have yet to even begin their training. These growth dynamics in a highly regulated market together with our ability to win a bigger share of our customers' training needs, are indeed very significant drivers for CE. Given that context, we expect our civil business to continue growing at above market rate for the foreseeable future. And in fiscal 2024, we maintain our expectations for low to mid-teen percentage annual growth at civil adjustment segment operating income. With a higher level of flying activity this summer, especially in Europe, We also continue to expect a more typical seasonal pattern for train demand this fiscal year weighted more heavily to the second half. Additionally, we still plan for about three-quarters of our approximately 50 annual full-flight simulator deliveries to occur in the second half. Turning to defense, we expect to continue executing on our multi-year transformation, which we expect to culminate in a substantially bigger and more profitable business. As we've shown with the recent FSTSS and HADES wins with the U.S. Army, we're uniquely positioned to leverage the full range of SEAS civil aviation training expertise in the defense market. In fact, the solutions that we're providing on these two contracts are very similar to what we deliver to our airline and business jet customers. We're in a very good position with our recent strategic and generational wins record $5.4 billion adjusted backlog, 8.8 billion pipeline of bids and proposals outstanding, and continued order of momentum. To me, these are all positive signs of the transformation that is underway. As we looked at a remainder of fiscal 2024, we continue to expect defense to renew its backlog with larger and more profitable programs, while simultaneously working its way through a critical mass of lower 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 in healthcare, simulation-based training is one of the most effective ways to prepare healthcare practitioners for the moments that matter, treating patients handling critical situations and enhancing patient safety. We're the path to accelerate value creation by continuing to gain share in a simulation training market and driving top and bottom line growth. We have a very strong team and I expect to see healthcare's positive momentum continue. In summary, I continue to be excited about the future and we're on track to our targeted three year EPS compound growth rate in the mid 20% range. I'm very pleased with the important progress we've made in the first quarter and expect this to continue for the fiscal year and beyond. With that, I thank you for your attention, and we're now ready to answer your questions.

Thanks, Mark. Operator, we'll now open the line to members of the analyst community for questions.

Thank you. If you are an analyst and 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 followed by the 3. One moment, please, for the first question. Our first question comes from Conrad Gupta with Scotiabank. Please proceed.

Thanks, Alfred. Good afternoon, everyone. Hi. Yeah, good afternoon. My first question on the defense contracts, Mark, you mentioned about a couple of these big wins recently. They had very similar attributes to airline training contracts. Can you explain us what the similarities are? Is it in respect of margin profiles in terms of execution or customer quality? Any background on that, please?

Well, I think there's elements of all that. Let me just illustrate a little bit. If you think about, first of all, let me just go back a step to the story, which I really love and excited about is what we're doing in lower Alabama. That's, you know, big training base for the U.S. Army. It's called Fort Novosel and right down the road is our training center in Dothan, Alabama. So I go back to that, you know, a few years ago, as you'll remember, it's like 2015. We invested to create a turnkey training facility where we put a green field, because literally it was a peanut field when we set it up. We put buildings there, we put simulators, we bought aircraft, and we won the contract to train all of the U.S. Army's fixed-wing plants. Recently, this year, we won the re-compete after that, after seven years, so that's good. So we're good for another seven years there. And it was a strong win. you know, so basically a credence to kind of the expectations we have with regards to margin expectations that we set out there in the market. Now, think about what we're doing now. The recent contract that we've won, let me start by just the contract that we won with IFTR. IFTR is now with the Air Force, U.S. Air Force now. We've won the contract to train all of their rotary wing pilots, and we'll be doing that at our facility at Dothan. So imagine now the synergistic benefits of using our existing facilities, whether it be hangers, personnel, management, all that. So the synergistic benefit of now throwing more training at the same facility. So that's one example. Now think about the next one I talked about, Haiti's contract with the U.S. Army. A different contracting authority, by the way, different customer, part of the U.S. Army. That's exciting in itself. But what we're going to be doing here, this is a – the training is for a Global 6500 business aircraft where we've done – we do the simulators. We're the authorized training provider for Bombardier customers of that aircraft. And so we are basically going to put – we're basically going to put a Global 6500 simulator in Dothan, Alabama, and we're going to be now selling trainings. okay, to the U.S. Army, you know, for literally years to come. So, again, leveraging our assets, leveraging what is a commercial simulator, you know, built here in Montreal, you know, and you can expect that the kind of, you know, margin profile that we met because we are putting our assets there that we can derive a better margin because this is a – it's, you know, basically we are furnishing the – we are – basically, furnishing the assets. So, in all of this, it's more business, you know, using this quasi-same asset.

That's a very good color mark. Thanks so much. And then, if I can just quickly follow up, some of your peers have publicly mentioned about how they want to kind of move away from fixed price contracts and defense, and obviously, you guys and a lot of other guys are trying to, you know, cover the cost of inflation and talking to customers. Any updates on those fronts? How are you positioning on the new contract events with respect to firm fixed price or cost class?

Well, I think the first thing I'll tell you is, you know, our bid discipline is very stringent. And, you know, there's no secret that we talked about in the past year that, you know, we execute a contract and we still have some of our backlogs. that were executed at the time, that were bid at the time where that was below hyper or quasi hyperinflation, part shortest, things like that. So you can expect that as we bid now, especially in a fixed firm price contract, we're either going to have escalation criteria that protects us for any scenario, or we will basically execute it with having so many elements as pass-throughs.

Okay, thank you. I appreciate it. Thank you.

Our next question comes from Noah Poponek with Goldman Sachs. Please proceed.

Hey, good afternoon, guys. Good afternoon, Noah. Mark, how should we be thinking about the top line growth rate civil can see into the medium term? You know, you've alluded to not having yet recovered all the pre-pandemic and you have some exposure to geographies that have been a little slower to recover. And then once we kind of click back into six, 7% air traffic growth, you're taking market share, you're training a lot of new pilots, you're growing a software business that's become organic. I mean, do we see multiple years beyond this year of continued double-digit organic revenue growth from civil?

Well, I don't know if I can go out there and say double-digit, but I can tell you I see very, very good years for civil aviation for years to come. Absolutely.

Okay. On the margin in the segment, I wondered if you could just spend a second on the shape of the year because – it seems like given the full-year target and the first quarter being the same number, the seasonality this year is maybe a little different than in the past. Is that down sequentially and then higher in the back half, or just anything you could share on the shape of the year and the civil margin?

Well, look, I tell you that, as you said in your question, it's Q1. So we'll get ahead of ourselves, although I'm obviously very pleased with the results that we have in our civil business in Q1, as in all of our business in Q1. And so, look, yeah, to repeating, again, what I said, and you've emphasized, again, in the question, though, is that we're in a more kind of, let's call it normal kind of flying activity now, meaning that, you know, anybody goes to the airport sees it, right, that airplanes are full and flights are full. So what you're seeing is You know, when all the airlines are flying and having trouble meeting the demands that's out there, you know, we're seeing less training, and that's across commercial and business aviation in the summer, as we always do in a more normal environment. What I would tell you, though, is the bookings towards the third and fourth quarter are strong and indicative of it's going to be another good year. But, you know, I'm not going to get ahead of myself to chew on here.

Okay. Thanks a lot. I appreciate it.

Thank you.

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

Hi. Good afternoon. Thanks for taking my question. Maybe just following up on some of the color you provided ConArc there on some of these recent defense wins, which look to be highly accretive. You get the leverage. some of the fixed assets you already have in place. Does that strategically change how you think about, I guess, the capital allocation in defense? I guess historically I thought of that as being more of an asset light business where your partner typically puts in the capital, but it seems like you're having some wins here where you've deployed capital and now you can leverage those fixed costs. Is there a bit of a change in thinking how you think about deploying capital into this segment?

Not really. No, I think we've done this before. As I was saying at the outset of the question at Conard, we deployed a few years ago our first facility in lower Alabama. And at that time, we had 0% market share with the U.S. Army. Today, I would tell you we have a very high market share in both road rate and fixed-wing contracts with the U.S. Army. So that's been a very, very attractive opportunity. It will be. literally for years and years to come. So look, it depends on the opportunity. What you're seeing here is really the, you know, we use the term, I use the term a lot, 1CE. And that applies to teamwork, but it also applies to how we go to market in leveraging, you know, our advantages, whether it be in civil, on defense, or defense on civil. So When you think about it, really, if you look at the model, go back to the Hades model, where we're putting a global 6500 simulator and we're selling training to this new part of the U.S. Army, we're doing it at margin expectations there that are going to be the kind of margins that we're more used to in civil. You know, I think it doesn't really change anything with regards to how we will market. It depends on the opportunity. And, I mean, you've seen in civil the kind of incremental returns that we get in training. And if we're deploying assets like that for this kind of opportunity, expect the same kind of return profile, which is part and parcel of the outlook that we've given for improving margins and defense, you know, per outlook that we've given.

That's helpful. Maybe just my second question, maybe just sticking with defense. I think if I go back to your last earnings call, you talked about some of these problem contracts and those broadly running off by the end of this fiscal year, which gave you that visibility to inflect into double-digit SOI margins, maybe sometime in fiscal 2025. Just Just an update there in terms of how that runoff is progressing. Is that still the broad timeline we should be thinking about in terms of margin progression in defense this year and into next year?

Yeah, well, I think the first thing I'll emphasize is, you know, those contracts that we talked about, you know, as being lower margin profile, in some cases very low margin, we're talking about a very small number of contracts, relatively speaking, compared to the hundreds of contracts that we execute at any given quarter in defense, and we're steadily closing out that work. We have been steadily closing out some of those programs or advanced the progress we've made on those programs in recent quarters, again this quarter. I would tell you, look, we're basically where we thought we would be and we're expected to be. We're continuing to work through our existing backlog. We're making very good progress as planned. And even more importantly, as we've answered the previous question, we're winning new profitable business. And with the bid discipline and the execution discipline, I fully expect to be able to execute those contracts at the margins at which we bid them, which, again, are clear to margin expectations that we've communicated. And if I'm looking at the year, I mean, look, it takes time for these new contracts to work themselves through. So, as we've said before, we expect, you know, a second-half performance in defense to step up. both in margin and absolute levels. I would expect Q2 to look similar to Q1 in broad terms. Again, things to step up in the second quarter, and as we expected, as we've communicated, a bigger inflection in margins next fiscal year.

Thank you for the call, and congrats on a solid start to the fiscal year here.

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

Hey, good afternoon, everyone, and thanks for taking my question. Of course. Good afternoon. Yeah, so I just wanted to ask a question on the civil segment and, you know, kind of the impact on potential slowdown in the economy. I know pilot training is regulated and, you know, travel demand is extremely strong right now. But, you know, would past recessions be a good indicator of, you know, what we could potentially expect on the civil side of the business if the economy potentially slowed? Or do you think some of those changes, you know, that you've made during the pandemic, some of the M&A that you did during the pandemic kind of changes the way you think the civil business would perform in the event of a potential slowdown?

Well, look, without being appeared to be Pollyanna here, You know, all I see out there is unmet demand. And I'm not seeing any slide of slowdown in terms of level of training activity in our forecast, either in commercial or business aviation training. So I don't want to really be, you know, be a hypothetical about the future. You know, look, I'll just give you an anecdotal evidence. Look, We're ramping up the satisfied demand, as you've seen. We deployed, I think, 23 full-flight simulators last year in both civil and, well, across civil. We've opened up new training centers. You know, I'm the CEO, and I got, anecdotally, this doesn't happen every day, but just to give you an idea, I got two text messages today during board meetings for people that I know looking for training spots. And obviously, if they're calling me, it's because You know, there's Sydney people that have flight departments or whatever. They're calling me to say, can you help me out? It's really, you know, if we have slots, we're filling them. And so I'm not seeing any signs of, you know, I'll basically slow down. And there are a lot of people out there that I talk to that actually would welcome a little bit so they could catch up.

And then another follow-up I had was on... you know, how your team is viewing some of the organic opportunities or, you know, potentially M&A in the current environment. Obviously, you know, you just said demands are very, very strong right now. We're seeing that in the results. So is this kind of creating any opportunities for additional organic investment or for M&A, you know, as we start to look into fiscal 2025? And, you know, if so, how would you kind of prioritize this investment spend, especially given some of the progress you're making on your balance sheet targets?

Well, look, I would tell you that there's maybe a question depends on timing. Right now, as we said before, our priority has been on deleveraging. And we're well down on the track that we've said to reach our deleveraging target this year. We've made excellent progress. I'm very happy to see down to 3.2 this quarter. And so I'm pretty confident. No big risk on us achieving our deleveraging target three times mid-year. So, look, that opens up possibilities for us in terms of capital allocation. Look, I think in terms of M&A, I'll say it again, there's nothing that we need to buy, okay? We have everything we have. However, if there's opportunities out there, we're always looking, obviously, but, you know, think about some of the acquisitions we've made that would be accretive to the growth that we have, consolidate our picture. I mean, there's not a lot of people that can bring the amount of synergy that we can bring to an acquisition. I wouldn't be looking for anything in the short term. What we will do is continue to deploy assets in line with the market. You've seen us do that, and again, just highlighting what we just said in the previous call, if you've seen some of the incremental returns that we're making out of both the commercial and business aviation training simulators that we put in the market, I think you would be pleased for us to deliver that capital. And as we said before, we don't deploy that capital unless we have long-term contracts to back them up. So look, I think we'll continue to look for a balanced capital allocation approach from us.

Awesome. I appreciate you taking the time, and I'll turn the line over. Thank you.

Thank you.

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

thanks very much good afternoon everyone um wondering first mark um the the award the boeing authorized training provider agreement um i i think seems to me like quite a quite an interesting kind of position to be taking on boeing and as we look you know about training into the future i'm just wondering if you could talk about what that agreement means to CAE and to the future of commercial training and the company's positioning?

Well, I think it's great. I mean, look, to me, I couldn't be, as I said, I couldn't be more proud of the partnership we're doing with Boeing here. And what this is about, you know, it's about safety. It's about safety. And you couldn't be more proud of the fact that the great company that is Boeing is basically entrusting us to deliver the training, you know, their new competency-based training curriculum to the airlines of which they sell aircraft. And this is a contract that is basically an umbrella contract covering the world, if like, but we're launching in India. And so we'll be delivering the competency-based, you know, training for Boeing in India. And as you know, there's a lot of airplanes that's sold in India. So that's going to be a good business. Again, it's about safety here, this long-term training agreement, and we're very proud of it, obviously.

Maybe if I could just follow on to that question. Is it about scale for Boeing, CEE helping them roll out their competency-based training to a bigger footprint through your assistance, or is it about Boeing wanting to be aligned with CEE because of the safety aspect of it, or is it both?

Look, I think it's Boeing recognizing who CAA is. What we do at CAA is simulation training aircraft. We'll do 1.2 million hours of training this year. So we'll imagine that the technology we bring to bear, the insights we bring to bear based on just the sheer amount of training that we do. You're right, part of it is like, Yeah, we're leveraging the installations that we have around the world. So, you know, they basically have, you know, facilities there with simulators there that are either there or we can deploy to deliver the training delivered using their curriculum. But we're able to, as well, provide objective database insights as to how well, for example, the curriculum has been assimilated so that it's, you know, around the world, you know, they're selecting C, to be able to make sure that safety remains paramount. And in fact, we're basically going to the next level of safety here. Again, leveraging data and data analytics-based insights.

Okay, that's really helpful. And then just my last question, rather broad question, and I guess I'm thinking more about the civil side of the business. I mean, your competitive position is, is quite something, is very, very good. Are you seeing any changes in the competitive environment? I mean, you know, the outlook is very strong. You're generating good results. The momentum is there. Is it attracting any moves on the competitive front that you're noting or are worth calling out?

No. Look, I don't see a difference. I would tell you that, Kirby, before I concentrate on customers and meeting customers' demands across our business, that's what I'm focused on. That's what we're focused on. You know CE, our mantra is not to satisfy customers, it's to delight customers. What we do see is, and you've seen it, airlines are much more amenable to outsourcing because we provide them the only real global alternative, globally-based alternative to be able to outsource their training and deliver training that is to the level that an airline would provide leveraging not only meeting regulatory requirements, The requirements of the airlines themselves, their standard operating procedures, as an example. I'll just point to the fact that six out of the top seven U.S. airlines now are not training within our network. That's burst against zero before the pandemic. You see this now do a deal for training Aegean, the largest Greek there, training with Qantas. I mean, these are marquee airlines there. So that's the dynamic that we see. So the competitive regard, to me, I mean, look, I don't see any difference in the competitive environment from that standpoint.

Okay, that's great. Thank you very much, Mark.

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

Yeah, thanks. Good afternoon. Just a question on full-flight simulator orders, 22 in the quarter, obviously very strong. I just wonder if you can talk about the outlook for order activity there for the remainder of the year, because it does seem like you would be, you know, I know it's only one quarter, but very much on pace to exceed last year's total, which was also pretty strong.

It's been a long time since we haven't had an A question on the number of full-flight similar deliveries. I like that. But, look, I expect it to be elevated. Look, we've got 22 so far. You know, what we're always focused on is maintaining our share, our leading share. And, you know, we're not going to take every order if it doesn't make sense. It has to be accretive to our expectations. But, you know, by and large, look, with the commanding market share that we have, you can well imagine that it's not a commodity game here. We basically compete on... The fact that, you know, again, our sims are going to be out there for decades, and we're going to be supporting them because that's what we do. So, look, I would expect it to remain elevated. I said we'll deliver probably over 50 full-flight simulators for the year. I'm not going to get ahead of myself for the demand, but I can tell you that the demand is still pretty – the demand out there in terms of what we see in the market is still pretty high.

Okay, great. That's good to hear. I just have a second question on the future air crew training contract that you've been selected as preferred bidder for. Obviously, you know, a huge contract over a long period of time. You know, assuming that that contract actually gets awarded in 2024, I just wonder if you can talk a bit about how that kind of scales up. I mean, is that something where you'd start to see workflow in to CAE, you know, fairly quickly after contract award?

Well, I think the short answer is yes. Okay. And it's going to last for quite a long time. It's really, I'm really talking a generational contract here. No exaggeration. You know, I'm pretty darn sure. I can tell you, I was in Moose Jaw just last Friday with our team. And that's going to be a contract that we're going to hire people that extend their whole careers on this contract. No exaggeration. I'm very proud of that, the fact that we're creating such an opportunity. Uh, so I look, I can't go in and I think you would understand. I'm not going to go into specifics of contract because now we've got to move from being selected to negotiate terms and, and get, get the contract signed. So can't go into detail, but look, this, what I would tell you is that it's a meaningful expansion of the work that we do today. Uh, it, it will start to deliver fairly early because, you know, there's a lot of work to be done to prepare, uh, new buildings, new aircraft, new, uh, a lot of new things, new simulators. but I won't get into absolute details right now.

Okay, fair enough. Thanks very much.

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

Great. Hey, good afternoon, guys. Mark, you know, the pilot shortage issue in the industry has been longstanding for the past few years now, and here we are, it seems like, You know, there's still tightness in the industry, and this could get worse. So maybe a three-part question, and I apologize in advance. So first, how far along is the industry in addressing this? Are we in the second inning, the seventh inning, or are we spring training? Second, you know, when you talk to airline customers about their needs, what's the level of urgency that they have in trying to attract new pilots to the industry? versus where they should be if they want to address the problem. And the third portion of this question would be, if the industry were to act with appropriate urgency and actions to fully address this issue, what does that look like for CAE?

Okay, a lot of questions here, but, yeah, look, for your question on the baseball analogy, I think we're still in the early innings with customer market. That's a way to characterize it. There's lots of time to play this out. And, you know, of course, people are focused on the United States, but it's a global situation with different dynamics depending on where you are. I can tell you there's lots of urgency amongst our customers out there, whether business aircraft, commercial airline customers, for sure. There's lots of urgency out there. And, you know, for us, You know, airlines are doing a lot to attract and retain pilots. You see it everywhere. And for us, look, you know, without putting a finer point on it, we just put out, as I was saying, you know, our aviation professionals forecast at Paris Airshow, and there's going to be a lot of pilots, a lot of air crews, a lot of maintenance technicians going to have to be trained over the next 10 years and That's our business. That's what we do. And we're number one in the world at it. So, you know, I'm bullish almost any scenario.

Great. And in terms of the actions that they take, if they actually take those, I mean, what does that mean for CAE? Would you need to open up new aviation training facilities? Like, can you size the market and the opportunity if they actually take that action today?

Well, we are doing it. I mean, you saw us. I think we launched 23 new simulators last year. I think we've either launched or broke ground on eight new centers in the past few months. So we're moving, and we'll continue to move in lockstep with demand. That's what we've always done, and that's what we'll continue to do. But again, I emphasize that if we're going to deploy that capacity – We're going to do it with, it's not a question of, you know, that we're going to, like, build it and it will come. It will be, we could see that demand for years to come, and it'll be, and the contracts will be based on us being able to, you know, support that capacity profitably in line with the expectations that we have for those, for those segments.

Great. Thank you, Mark.

Thank you. Our next question comes from Ron Epstein with Bank of America. Please proceed.

Hi, good afternoon. This is Jordan on for Ron. I just had a question. So on the about 800 million in unfunded backlog, could you guys give more color on when you expect that funding to come through?

Well, you know, when we talk about unfunded backlog, really what you're talking about is I'm sure you know, but it's really, if you win, let's say you win a seven-year contract in the United States, well, we'll only take the first year because that's the funded part of the U.S. government. So, you know, we fully expect the full contract to be realized, and I don't think I've ever seen a contract, certainly the U.S., on that definition that has gone anywhere but that way. So I'll give you an example. We were selected on the FSTSS contract. That's a used contract. where, you know, we'll be deploying, you know, new simulators for, you know, all the U.S. Army training in Fort Rucker, or now Fort Novosel, which would be for us, like, U.S., like, $455 million a contract, and now it's deployed over 12 years. So right now, we're not, our order to take is not $455 million. It's a very small, actually, very small part of that. is in our order intake, but of course it would be reflected in unfunded backlog.

Got it. Thank you. And then just one quick follow-up, too. On the $8.8 billion that you guys have out for bids and proposals, what do you guys see as your competitive advantage for those proposals to turn them into wins?

Well, I think the first thing I would say is that We wouldn't bid them if we didn't think that we have a pretty good shot at winning them because, you know, if they get defense proposals, they're very costly and timely to bid, and they require a lot of manpower, expertise. So you want to make sure that your expertise, your resources are deployed on the ones that you think you can win. So, look, I think that being – so we expect to win them. We have a pretty darn – Good shot. So for us, beyond that, what are our advantages? Well, scale, for sure. The technology, the market leadership that we have, and the fact that you look at CAE in the market, we're really the only pure play platform independent, which is important because that makes us objective defense simulation training company. So that's very attractive in the market out there.

Great. Thank you guys so much.

Thank you.

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

Thanks, and good afternoon. Maybe on the Indigo order for 500 A320s, I know CAE currently has some exposure through the Indigo Cadet Pilot Program. Maybe just when should we expect any civil top line or simulator deliveries to be potentially impacted by this order? And is it possible that Indigo, the airline, kind of front runs this training to be ready for when the fleet capacity actually starts to be delivered?

Well, I think we're very well exposed to that because Indigo is, we're a partner with Indigo and we have been partners since the beginning and launched the aircraft. So it's not only on Ab initio, but it's on all their simulator-based training centers that they do. So a very strong exposure to that. So we're very, very happy to see that. I mean, Indigo, look, they basically carry 50% of passengers, over 50% of passengers to India, and they fly to every airport in India. I know them well, great airline. And, you know, again, it's going to be very good for them. It's going to be very good for us.

Thanks. That's a great color. And maybe just on the India market in general, maybe some of the potential advantages that that has over Asia or China where you can actually provide both on-premise training as well as the Bolivia simulators.

Well, we have a number of training centers in India right now, in Bangalore, in the two centers in Delhi. Right off the bat, we have abdication operations there as well. So we're well exposed on the ground in India right now.

Perfect. That's great. And maybe just quickly a quick one on the fence. Your margin came in slightly below sequentially at 3Q and 4Q of last year. Is that mostly due to seasonality or was there any type of one-time costs or other elements that impacted that?

No, it's in line with our expectations. What we said, it's certainly not a drop or anything. No, it's basically what I thought it would be as we basically talked about what the margin profile should be this year. All right. Thanks a lot. That helps.

Thank you. Operator, I think that's all the time we have for financial analysts. We do want to open the lines in the minutes remaining to members of the media, so I'd ask you to please openly cue to members of the media.

Thank you. If you're part of the press or media, please press the 1-4 on your telephone.

Operator, are there no questions from the media?

There seems to be no questions at this time.

Okay. Well, that being the case, we will conclude the conference call. I want to thank those participants who joined us today and remind you the transcript will later be posted on CA's website. Thank you. Au revoir.

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