CAE Inc.

Good day, ladies and gentlemen. Welcome to the CAE fourth quarter and full year financial results for fiscal year 2024 conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity for analysts to ask questions, followed by a Q&A for members of the media. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star, then zero. I would now like to turn the conference over to Mr. Andrew Arnovitz. Please go ahead, Mr. Arnovitz.

Good morning, everyone, and thanks for joining us. Before we begin, I'd like to remind you that today's remarks, including management's outlook for fiscal 25, and answers to questions contained forward-looking statements. These forward-looking statements represent our expectations as of today, May 28, 2024, and accordingly are subject to change. Such statements are based on assumptions that may not materialize and are subject to risks and uncertainties. Actual results may differ materially, and listeners are cautioned not to place undue reliance on these forward-looking statements. A description of the risks, factors, and assumptions that may affect future results is contained in CA's annual MD&A, available on our corporate website and on our filings with the Canadian Securities Administrators on CDAR Plus and the U.S. Securities and Exchange Commission on EDGAR. With the divestiture of C's healthcare business, all comparative figures discussed here and in our financial results have been reclassified to reflect discontinued operations. On the call with me this morning are Marc Perron, C's President and Chief Executive Officer, and Sonia Branco, our Chief Financial Officer. Nick Leontidis, CA's newly appointed Chief Operating Officer, is also on hand for the question period. After remarks from Mark and Sonia, we'll open the call to questions from financial analysts, and at the conclusion of that segment, we'll open the lines to members of the media. With that, let me now turn the call over to Mark.

Thank you, Andrew, and good morning to everyone joining us on the call. As you'll have seen from our earnings release, Fourth quarter results are unchanged from last week's pre-announcement, which was mainly intended to communicate the rebase finding of our defense business and the appointment of Nikki Otidis, a proven CA veteran, as our chief operating officer. To provide additional context, last week we also offered an earnings preview in our preliminary fiscal 2025 outlook. This morning, Sonia and I will provide a bit more color on our performance and our very strong financial position. Last week, we took decisive action to establish a clear path for margin improvement in our defense business. I certainly recognize that our defense performance has significantly fallen short of our expectations and understand and share investors' frustrations. The impairments and accelerated risk recognition on the legacy contracts that we announced last week are disappointing but necessary steps towards putting the overhang of these past issues behind us. These actions were made possible by renegotiating agreements with our customers and our suppliers, adjusting the scope and the timing of these contracts for our mutual benefit. Ultimately, this enables us to address the programmatic risks that have been affecting our business. Alongside the baseline of the defense business was the acceleration of risk recognition on legacy contracts and execution of a leadership or reorganization and implementation of targeted operational enhancement at both the segment and corporate levels. These initiatives are designed to fortify our execution capabilities and foster greater synergies between our defense and our civil businesses. I fully expect these changes to enable greater focus through the simplification of our operating structure with our COO, overseeing the five P&Ls that encompass CEA's entire business scope. This new structure and recent upskilling of talent in defense will further enhance the execution and oversight of major defense programs and facilitate the exploration and realization of synergies between our civil and defense operations. Also, and in the vein of further bolstering CEA's future, Our fourth quarter and full year results reflect continued strong growth in our core markets, robust order flow, and consistent cash generation. For CA overall, we grew adjusted backlog by approximately 13% year-over-year with $1.6 billion in orders in a quarter, or a 1.38 book-to-sales ratio. And for the year, we booked over $4.9 billion in orders, for a 1.15 times book-to-sales ratio. As of the end of March, we had a record backlog of $12.2 billion. We also further strengthened our financial position, having generated $418 million of free cash flow during the fiscal year, and together with proceeds from the sale of health care, we reduced leverage below three times net debt to adjusted EBITDA, excluding legacy contracts. In civil, we booked orders in a fourth quarter fiscal quarter for $832 million, including contracts for seven full-flight simulators. This brings the total civil order intake to a record $3 billion for the year, including 64 full-flight simulator sales, demonstrating the sustained high demand for pilot training solutions and our flight solutions software platform. Civil concluded the year with a record-adjusted backlog of $6.4 billion. Notable contracts in the quarter included a multi-year commercial aviation training agreement with ITA Airways and a first-of-its-kind partnership in Canada, where CA instructors will deliver initial training for NAV Canada flight service specialists and air traffic controllers. And testament to our progress in flight solutions, we announced yesterday the signing of European ultra-low-cost carrier Wizz Air as a new partner under a multi-year supply agreement. We'll be supplying Wizz Air with CA's operational control and crew management software and CA's recovery manager solutions for operational and crew destructions. Average trading center utilization was strong at 78% for the fourth quarter and 76% for the year, up from 72% the year prior. In products, we deliver 17 civil full-flight simulators a quarter and 47 for the year, compared to 46 deliveries in the prior year. As disclosed last week, this is a bit lower than the approximately 50 that we had expected, with timing difference due to customer requests to postpone deliveries because their own facilities weren't ready to receive the full-flight simulators as originally planned. Taking time delays from last year into account, We expect to deliver more than 50 offline simulators in fiscal 2025. Turning to defense, at the same time as we've been taking actions to re-baseline the business, we've continued to make headway with our transformation strategy. We reached $1.9 billion of adjusted order intake on an annual basis, involving training and simulation solutions for 1.04 times book-to-sales ratios. This contributed to a $5.7 billion of adjusted defense backlog. In the quarter, we had orders totaling $718 million, including a transformative win involving a contract with General Atomics to support the remotely piloted aircraft system or RPAS program for delivering air crew and maintenance technician training and supporting training devices and courseware to meet Canada's RPAS requirements. This, to me, is a prime example of a kind of larger and more differentiated program that we're in a position to address that will ultimately drive the defense transformation that we've been expecting. With that, I'll turn the call over to Sonia who will provide a detailed look at our financial performance. I'll return at the end of the call to comment on our outlook. Sonia?

Thank you, Mark, and good morning, everyone. Looking at our fourth quarter results, On a consolidated basis, revenue of $1.1 billion was down 6% compared to the fourth quarter last year. Adjusted segment operating income was $125.7 million, or $216 million, excluding the impact of the legacy contracts, compared to $193 million last year. Quarterly adjusted EPS was $0.12 per share, or $0.37, excluding the legacy contracts, compared to $0.33 in the fourth quarter last year. We incurred restructuring integration and acquisition costs of $55 million during the quarter in connection with the previously announced restructuring program related to portfolio shaping actions, including the sale of healthcare, and to the continued integration of Air Centre. The Air Centre integration is progressing as planned and is expected to wind down by the end of June. The restructuring program is related to portfolio shaping actions and to streamline CAE's operating model and portfolio optimize our cost structure, and create efficiencies. Total restructuring costs incurred since the start of this restructuring program this quarter amounted to $39.3 million, and we expect to record approximately $10 million of additional restructuring expenses over the next two quarters in light of the organizational and operational changes announced last week. To replace the defense business, further strengthen our execution capabilities, and drive additional synergies between CAE's defense and civil aviation businesses. For the year, consolidated revenue was up 7% at $4.3 billion, adjusted segment operating income was up 2% to $549.7 million, and annual adjusted net income was $276.8 million, or 87 cents per share, which is stable compared to 87 cents last year. Excluding legacy contracts, adjusted segment operating income was up 19% to $640 million, and annual adjusted net income was $355.3 million, or $1.12 per share, which is up 29% compared to last year. Net finance expense this quarter amounted to $52.4 million, which is stable from the preceding quarter and up from $50.4 million in the fourth quarter last year. I expect our annual finance expense in fiscal 2025 to be similar to fiscal 2024 on lower interest expense on debt, offset by higher lease expense related to recently deployed training centers in our global training network in support of growth. Income tax recovery this quarter was $80.6 million, representing an effective tax rate of 14% compared to an effective tax rate of 24% in the fourth quarter last year. The adjusted effective tax rate, which is the income tax rate used to determine adjusted net income and adjusted EPS, was 47% this quarter compared to 23% in the fourth quarter last year. The increase in the adjusted effective tax rate was mainly due to the derecognition of tax assets in Europe, partially offset by the change in the mix of income from various jurisdictions. On the same basis, the adjusted effective income tax rate for the year was 17%. The annual effective income tax rate in fiscal 2025 is expected to be approximately 25%, considering the income expected from the various jurisdictions and the implementation of global minimum tax policy. With the closing of the sale of our healthcare business, net income from discontinued operations was $20.5 million this quarter compared to $4.8 million in the fourth quarter last year. The increase compared to the fourth quarter was mainly attributable to the after-tax gain on the disposal of discontinued ops of $16.5 million in relation to the sale of the healthcare business. Net cash provided by operating activities was $215.2 million for the quarter compared to $180.6 million in the fourth quarter last year. And for the year, we generated $566.9 million from operating activities compared to $108.4 million last year. We had free cash flow in the quarter of $191.1 million and $418.2 million for the year for an annual cash conversion of 151%. We continue to target an average 100% conversion rate going forward. Uses of cash involve funding capital expenditures for $91.7 million in the fourth quarter and $329.8 million for the year, driven mainly by the expansion of our civil aviation training network in lockstep with secured customer demand. These opportunities translate to some of our best returns as our simulator's assets ramp up within the first few years of their deployment. Commensurate with our ongoing success to capture market opportunities and training, I expect total capex in fiscal 20 to 25 to be 50 to $100 million higher than fiscal 2024. Approximately three quarters of this relates to organic growth investment in simulated capacity to be deployed to our global network of primarily civil aviation training centers and backed by multi-year customer contracts. Our net debt position at the end of the quarter was $2.9 billion for net debt to adjusted EBITDA of 3.17 times, excluding legacy contract leverage was at 2.89 times at the end of the same period. We're prioritizing a balanced approach to capital allocation, including funding accretive growth, continuing to strengthen our financial position commensurate with our investment grade profile, and returning capital to shareholders. Given our progress in strengthening CE's financial position, as we announced last week, we are reestablishing a normal course issuer bid as part of our capital allocation strategy. The NCIB is currently intended to be used opportunistically over time with excess pre-cash flows. Given our outlook and the cash-generative nature of our highly recurring business, CE's Board of Directors will also continue to evaluate the possibility of reintroducing a shareholder dividend. At the same time, I expect that we'll maintain a very solid financial position, bolstering our balance sheet through ongoing deleveraging, consistent with our investment-grade profile. Now to briefly recap our segmented performance. In civil, fourth quarter revenue was up 6% year-over-year to $700.8 million, and adjusted segment operating income was up 17% year-over-year to $191.4 million, for a record margin of 27.3%. For the year, civil revenue was up 12% to $2.4 billion, and adjusted segment operating income was up 13% to $548.9 million, for an annual margin of 22.5%. In defense, as we disclosed last week, we accelerated the recognition of risks associated with our legacy contracts in the fourth quarter, following revised agreements on scope and timing with customers, suppliers, and other stakeholders. These actions resulted in profit adjustments associated with the reassessment of our estimated costs. Fourth quarter defense revenue of $425.5 million was down 21% over Q4 last year. This includes a $54.3 million impact from the accelerated risk recognition on legacy contracts, and the conclusion of certain service contracts we decided to no longer pursue. Adjusted segment operating loss was $65.7 million, and adjusted segment operating income, excluding legacy contracts, was $24.6 million, compared to an adjusted segment operating income of $30.5 million in the fourth quarter last year. For the year, defense revenue was stable at $1.8 billion, and adjusted segment operating income was down 98% to $0.8 million. Adjusted segment operating income, excluding the legacy contracts, was up 72% to $91.1 million. With that, I'll ask Martin to discuss the way forward.

Thanks, Sonia. I'm going to separately address the outlook for two segments, but before I offer any numbers, I'd like to mention that our combination of our civil and defense businesses have significant strategic advantage. Now, let me reiterate that and be very clear that our defense performance in terms of profitability certainly hasn't met my expectations so far, but our strategy remains solid. Over the past two years, we've achieved some 20% growth in adjusted backlog and expanded our pipeline with bid opportunities that align very well with our core strengths in training and simulation, offering attractive risk return profiles. Our simulators and our training products are very complimentary for both civil and defense purposes. The synergies are strong in terms of technology, manufacturing, as well as go-to-market approach. There's hardware and software commonality in the products And increasingly, there's operational synergy in how we optimize training across the two businesses. I'm very confident that Nick Leontidis will strengthen our execution capabilities and drive additional focus and synergies between both of our business segments. For Civil, the secular demand picture for aviation training solutions remain very compelling, underpinned by growth in air travel, demand for pilots, And they need for them to stay current with always advancing aviation technology and regulation. 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. And 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 will be active in a decade from now have yet to even begin their training. With that background, I expect low double-digit percentage civil annual adjusted segment operating income growth in fiscal 2025 and continued margin strengthening with an annual segment operating income margin of approximately 23%. The expected increase in civil margins reflects the ongoing ramp-up of newer training centers and recently deployed full-flight simulators, partially offset by the SaaS conversion that's currently underway in our flight operations solution software business. As in previous years, I expect annual civil performance to be more heavily weighted to the second half. In defense, we're also in a secular growth market. as the sector enters an extended upcycle marked by rising budgets across NATO and allied nations. Key trends include heightened focus on near-peer threats, greater government commitments to defense modernization and readiness amid geopolitical tensions and a growing demand for the training and simulation solutions that we provide. Our expertise in both civil aviation and defense positions us well to meet those needs. And specific to CAE, we're seeing a consistent demand driver across regions for our training solutions, a shortage of uniformed personnel for defense, which has led militaries to rely on industry partners like CAE for training solutions to ensure readiness. This aligns perfectly with our core strengths and our defense transformation strategy over the past few years has focused on expanding our leadership position on integrated training and simulation solutions. This strategic focus has allowed us to streamline our project selection to ensure a better risk return balance. Moreover, we've renegotiated favorable terms such as cost plus contracts for development work and tighter pricing bans on service contracts while leveraging civil life business models in defense. These improved terms will positively impact our risk-adjusted returns as newer contracts ramp up. This approach has already resulted in significant backlog growth with larger, more profitable programs, and we anticipate even greater growth since fiscal 2025. Our expectations for fiscal 2025 reflect the rebase signing of the business and the enhanced visibility that this obviously gives us. We're extremely focused on acting on what we can control. It will prove it through execution in the coming quarters. We expect annual revenue growth in the low to mid single digit percentage range and annual defense and SOI margin to increase to the six to 7% range and like civil to be more heavily weighted to the second half. We have large multi-year programs currently in negotiation that should add significantly to our backlog soon. Beyond our selection on transformational defense contracts in Canada, we're well positioned over the next year on several strategic programs across the Indo-Pacific regions, Europe, and in the United States. In particular, the demand for air crew training programs similar to Canada's SPAC in our past across the Five Eyes and NATO partners, as well as the Allies, continues to increase. These programs require the type of technologies and proficiency that are CA's strengths. We intend to leverage our position on these generational programs in Canada to enable multi-domain training in secure, synthetic environments across our global network. With that, I thank you for your attention, and we're now ready to answer your questions. Thank you, Mark.

Operator, we'll take our first questions from the financial community.

Great. So we'll begin the analyst question and answer session. As a reminder, you can press star 1 on your telephone keypad, and you will hear a tone acknowledging your request. To star your question, please press star then 2. The first question is from Kevin Chiang from CIBC. Please go ahead.

Thanks for taking my question, and good morning, everyone. We'll actually just start with a civil question. Just the slippage of some of the full flight simulators, it sounds like the client wasn't in a position to take those products. But I'm wondering if you're starting to see any impact on pilot training demand just with some of the aircraft delivery issues at the large OEMs. Is that impacting what you're seeing from the airlines in terms of the demand for training, maybe relative to what you would have been forecasting or expecting, let's say, six to nine months ago? Just wondering if you're seeing anything material there.

Okay, let me take it, Kevin. Look, I mean, first and foremost, you're right. I mean, the changes that we saw just relative to, you know, outlook, on delivery of simulators and therefore the adjusted operating income goals was purely because of those training centers that weren't ready or customer training centers weren't ready. And, you know, basically those simulators will deliver this year. So that's really what happened there. It's not a reflection of any type of demand, you know, change in the market. I mean, I could ask maybe Nick for more color if we require, but look, I mean, we've been living in the kind of environment of, lower than, let's say, lower than potentially anticipated deliveries of 737 MAX aircraft, as well as less activity because of the engine issue that's affecting mainly Airbus airplanes that, as you know, have literally hundreds of airplanes grounded around the world. So we've been living in that environment for quite a while, so really that isn't really changing. So I would say there's pockets, and I think There's pockets that you see that airlines are affected by the slowdowns. They're not able to get the airplanes that they want to secure the demand. The demand itself is very strong. What you see is airlines pulling airplanes out of malls, basically taking airplanes that are coming off-season, maintaining them on lease. But we're not really seeing a change in the demand environment at this time. We're watching it, and the guidance that we put or civil for this coming year reflects our cautious outlook in that regard.

That's helpful. And then just my second question. I appreciate all the color you provided in terms of the rebasing of defense. It also feels like a segment that feels like it's been in some sort of perpetual restructuring for quite some time now, or at least some sort of strategic repositioning with the acquisition of L3 Harris' military training division. Maybe if I were to ask, when you look out two years from now or whatever the timeframe is, what should defense look like? Does revenue need to be bigger in order to get the margins you want? And maybe do you risk the backlog in terms of, there's always risks around execution. Is it being more focused on the addressable markets you're trying to go after? I'm just trying to get a sense of, you know, if all goes well here in defense, you know, you fast forward two years, what exactly does defense look like? Is it a bigger business with better margins? Is it a smaller business with better margins? Any color there would be helpful.

Well, look, I think I would start by all of those, Kevin. Look, clearly, as I said, look, the numbers that we're printing now surely don't meet my expectation and neither do our investors, clearly. But I think what we've done here is re-baseline the business. We've been talking about the issues that are affecting us in defense for at least a couple of quarters here, at least in the detail. Last quarter, we gave you precision on that really there were eight contracts, we call the legacy contracts, that were really undermining the profitability of our business. I mean, those contracts all have the same kind of MO, signed prior to COVID. fixed firm price contracts, and they were very much adversely affected by supply chain issues, manpower issues, runaway inflation, of which we're not immune. You know, a lot of our defense clients and sister companies across the defense environment, particularly in, well, actually, I wouldn't say only in the United States, across the world, actually. I mean, those affected us. We ring-fenced them. And this quarter... What we've done here is basically work extremely hard to renegotiate with our customers in this regard to figure out exactly what the remaining scope on those programs is. The time it's going to take us to execute those contracts, the cost it's going to take us to execute those contracts, and the difference between that and the cost that we anticipate in the past is $90 million. And that's To a certain extent, maybe shouldn't be much of a surprise because if you remember in the third quarter, what we had said is that those eight contracts, we're really going to drag for next, you know, by two, 300 basis points for next six quarters while we execute those contracts. What we've done here is through the actions that we've taken, through the agreements we've made for our customers, we're able basically to take that risk, say, off the table or printable because we're taking it now. So that gives us a clear view of the future and the programmatic risk now going forward, not only in those eight programs, but overall across all the programs is balance. So that's one major component. The other component is, I'll go back to the success of the strategy on the front end. I'll reiterate The fact that when we look at the book of business, we are winning business. We are winning a larger business in the areas where we have core capabilities, training centers, training products, meaning full-flight simulators, where this is core to us. We know how to do that. We know how to do it well. We've signed them at margins that are recreative to the outlook that we have in defense, which is 10% or more in terms of profitability. Those programs are going to materialize in our backlog. I expect about 15% of those to materialize in our revenue this year. That's all going to contribute to the answer to your question is stable revenue growth, higher margins on the way to the low teens or north of 10% margins, I want this and generating stable cash flows, which you should expect out of a defense business because we're basically selling to customers with sovereign guarantees. So that's what I expect out of the defense business.

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

The next question is from James McGarrigle from RBC Capital Markets. Please go ahead.

Hey, good morning, and thanks for having me on. Thank you. So just on the defense margin guidance, I'll pick up in the back half. So can you just talk to the visibility that you have into that higher margin in the back half? And is there any seasonality in the defense side going forward, or should we expect that back half margin to kind of be the exit rate for margin into the upcoming fiscal year?

Look, I think that if you look at our performance in the past few years, you always see that it's back half loaded. And there is reason for that. There are budgets in specific countries. There's programs that are ramping up. This year, I mean, we have high visibility of this year. The majority of the revenue, and ergo the profits, that we need to execute this year plan and meet the guidance of 67% that we put out there. We've already won those contracts. They're in the backlog as far as safety. We obviously have, you know, very high visibility on the legacy contracts that we talked about, having to re-baseline the programmatic risk there. What I'd say is basically, again, in terms of variability in the year, it's basically just the same way we've seen in the previous years. I think maybe to provide a little bit more color on it, I'd say that when we look at the year, the average margin we talked about would be 6% to 7%. I would expect that we'll start the year where we ended it in terms of profitability, so call it in the north of 5% range, was stronger in the second half. That's what I would say.

Thank you. And then as a follow-up on the civil side, you picked that a lot of that organic investment you're making this year is going to be in the civil business. You previously flagged really solid returns, 20% to 30% in that business, two- to three-year ramp-up. Does that mean we should be thinking about growth at current levels or even higher? kind of over the next two or three years? Can you talk to the visibility and the conversations you're having with your customers, you know, a little longer term on the civil side?

Well, look, I think that I fully expect that the demand environment in civil business is strong for years to come. I think maybe just a little bit, provide a little bit more color on civil. I think If you think about the civil business, you know, you saw the changes we've made under Nick now as CEO. We're giving more visibility on the leaders of that business, the three leaders that we have, you know, Alex Prevost running the business aircraft training, Michelle Azar running commercial aviation training and simulators, as well as Pascal Grenier. running the software business you know we'll be able to provide you you know i think more uh more a broader view of those specific you know individual businesses with civil but let me just have a shot at that maybe goes to the your answer here and to break down the revenue in our civil business about a third of it comes from selling simulators to world's airlines about a third of it comes training for the world's airlines for our training centers for airlines around the world. And a third of it comes from business aviation training. And the final really 10% comes from our software business. Each of these business has its own dynamics that drives margin. We talk a lot about utilization, which is a strong metric, but it's not the only metric and it is affected by seasonality, especially when you get into the second half where you have lower utilization in our training centers because the airline's Certainly in the Western Hemisphere, they're flying, so they're not training in a large part. Within our product segment, which is selling simulators, the margins and actually the revenue can be affected quite significantly by who's the customer, the product mix of that simulator, whether the equipment is supplied by the buyer in terms of the cost of the equipment, for example. There's an impact from joint ventures as well, because we do a lot of joint ventures, and in those cases, You don't see the revenue, but you'll see the income pick up. And finally, the software, that's really affected by the timing of the contracts, whether or not they're SAS contracts, which we are prioritizing, and that has a lower margin, at least while we're going through that SAS conversion process. And the reason I'm explaining all that, that's why we tend to drive, we guide on an annual basis in civil. So, look, I mean, going forward, the trend is going to be higher in civil in all of those segments. With the provisory, as I talked about, the SAS conversion, which is probably a two to three year, you know, basically ramp up as we go through the SAS conversions.

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

The next question is from Benoit Poirier from Desjardins Capital Markets. Please go ahead.

Yeah, thanks. Good morning, Mark. Good morning, Sonia. Yeah, just to come back on the assumption behind the 6%, 7% EBIT margin target for defense in fiscal year 25, I think I heard that about 15% The total revenue is expected to come from those transformative deals that are already in the backlog. So could you maybe provide some color about what was the contribution in Q4 and what makes you confident or the visibility you have with respect to the ramp up in the second part of the year?

I may not be as clear or maybe when I answer that question, it's not 50%. It's 1.5, 15% of the revenue that we're going to get this year comes from those transformational programs. And that's relative to 3% last year. So we had last year, we had like 20% of our backlog in defense was these new transformational programs. And was that translated in 3% revenue? Again, this year, that'll be 15% this year and obviously growing in the years to come as they ramp up. Okay.

And obviously you provide some color about fiscal year 25. Previously, you mentioned that it would take six to eight quarters to achieve the completion of those legacy contracts. How should we be thinking beyond fiscal year 25 and is the 10% target still achievable?

Well, the 10% margin is absolutely still achievable, and all the actions we've put in place is going to make that happen. Now, we have guidance next year. We haven't been precise, but it will happen within the planned period, so within the next few years, but we haven't gotten ahead of ourselves beyond this year.

Okay. And with respect to the appointment of Nick as a CEO, obviously he's been CEO for over 35 years. Could you talk maybe, Mark, about the strategy here, the action that Nick is going to undertake, and maybe more color about the expected synergies that he would like to extract between civil and defense?

You're going to have to ask. asked me to put Nick on the spot, but before I do, let me talk about how I view things. Nick, as you said, Nick is a veteran of this company. And interestingly, you may or may not know, actually, Nick started his career in defense. So having led, starting as an engineer, like I was, by the way, but having led some major defense contracts, including the most complicated, the more extensive that we have ever had, probably before FACT, which was putting together the first PFI contract in the UK in defense, which was standing up our Benson Training Center, where we train all medium helicopters for all airports. I think you may have visited at one point that training center that we have in the Royal Air Force, which is still one of the most prestigious and technology advanced in the world. So Nick put that together. So And just suffice to say, you know, having known Nick and Nick has worked for me directly ever since I've been at CA in various roles, Nick understands the business. Nick has a very strong operational mindset and focus on execution as well as strategy. And that's basically the reason I put him in charge of his fence over 10 years ago. And, you know, I think he's done a pretty good job as tripling the operating in civil operations. in that period and building us the franchise that we have in defense. He's going to put those strengths to focus in defense. Beyond that, I mean, specifics. Look, I think there's a lot of simplification here that can be had through greater force. It's very clear to me that one of the reasons, certainly not the only one, but key reasons that we've been successful in civil is to focus. I talked about the three P&L leaders that are fully accountable and have all the tools to be able to execute in their business. We're providing through the changes we're making here, we're enhancing the focus here to very specific P&L leaders in the United States, the largest business, the largest military market in the world by far, very specific focus with Jason Goodfriend, as interim president there, working through the U.S. board for Nick and with Marco de Villas-Savoy running all of our international programs, including Canada, where we have some very large contracts that I announced today. So number one is greater focus. That's very important. And beyond that is synergy capture. It's clear to me that there's a lot of synergy left to be had by leveraging our scale and technology across the entire enterprise. And that's going to be key to Nick's responsibility. But beyond that, Nick, maybe a couple words from your side.

Yeah, I was just going to reinforce, I mean, the simplification and accountability. I think we went a little bit astray trying to do all of that under the guise of the two business units. I think the... You know, we have go-to-market business units in business aircraft, in commercial, in DNS, U.S., DNS international. And then we'll drive synergies across that. Of course, there's going to be some, you know, some restructuring. I'll use the word restructuring, of course, because we have some duplication, which were necessary at the time. But I think, you know, it's one of those things when you look at it, And you say, okay, well, you know, we need to make change. And, by the way, that's my – right now I'm just asking questions. You know, I ask questions about everything. Why is this like this? Why is this like that? And it's amazing the answers that you get. So I think a lot of times it's, you know, we get people working on this. The people know what to do. I'm just going to enable them to do it. And as I tell other people, we play as a team, and we're going to have to do this together as a team. And people know where the inefficiencies are, and they know what they need to stop doing.

That's great color, gentlemen. And maybe a very quick one for Sonia. Just looking at your capex that is expected to be up 50 to 100 million, How should we be thinking about the sustainable capex? It seems a bit elevated versus the story. So I'm just wondering, I understand the growth opportunities, but just want to try to look beyond fiscal year 25 about what could be kind of this sustainable level of capex. Thank you.

Yes, and thanks for the question. So the CapEx is really a direct reflection of the success that we've had with all of the orders we've secured to outsource more training. So three-quarters of this CapEx is simulators to our network. So whether it's Quanta, it's AGN, we've got plenty in Las Vegas, Savannah, plenty of examples through that record order intake that we've got in the years. So we don't deploy simulators to our network on a speculative basis. Every single one of them are backstopped by signed long-term recurring revenue customer contracts. So, you know, what we see this year's CapEx is really a reflection of the secured order intake that we have, and this is to deliver to growth and our customers. And, frankly, we have a proven track record of delivering, you know, really accretive returns on this organic CapEx, 20% to 30%. range of incremental return on capital on our organic growth. So, we're not necessarily going to guide beyond that year, but it will be a function of the level of orders and market capture that will succeed.

Thank you very much for the time.

The next question is from Connor Gupta from Scotiabank. Please go ahead.

Thanks for taking my question. Just on the defense, I'm wondering, Mark, how does the re-baselining of legacy contracts affect your market position and your ability to structure future bids appropriately?

I think it reinforces them because I think what's important here is that, to me, this is a very successful renegotiation that we've done. The teams have been on this for quite a while. Obviously, we have Tiger teams on every one of those programs for obvious reasons, but you know, focus on execution of those contracts. But, you know, what I talked about in the previous quarter when I said that we're going to take every effort to be able to accelerate the recognition of risk on those programs. So really scope out the remaining work here. I mean, and I had talked about the time that, look, you know, we're going to have to have tough negotiations here. And it could lead to, in some cases, basically having to accept penalties, for example, because we're late on contracts, as just one example. But the reality is we haven't had to do that in any one of these cases. So we're going to do what CE always does. We are going to execute on those contracts, and the customers, every one of them, on these eight contracts are very happy with the outlook that we now have on those programs. So we will deliver what we committed on those contracts. And the timeline and the scope of what we'll do is in line with the expectations of the client to have with us. So our reputation that CEA has of always delivering is intact. And in some cases, actually, in some of these programs, that's really why I talk about it as particularly successful, in some cases, we have negotiated additional scope on those contracts, so follow-on contracts as a result of negotiations. So long answer, but this is a, if anything, this enhances our reputation.

Perfect. Well, that's great. Thanks. And if I can follow up quickly with Nick. You know, Nick, you talked about, you know, obviously some of the low-hanging fruit there from Synergy's standpoint, from technology, etc., duplication, all that. Any specifics you can share? I know it's early, but anything you can tell about what best practices can you bring to the defense segment to derive or support some of the synergies?

Well, I think I can give you a lot of examples, but I prefer not to right now. But I can say that in the L3 acquisition, for example, and the legacy CAE business, There's a lot of overlap in technologies. The best example I can give you is the contract we won called CarPass. Both teams have products, so these things have to be rationalized. They don't have to be done – I mean, we're supporting customers, we're supporting, but we need to build up the synergies and develop a strategy where the whole company has one product in some of these areas. Same on the civil side. There are opportunities for the defense guys to offer solutions like Gulfstreams and Globals because, as you know, these aircraft are used for missionized missions, if I can use those words. So right now, you know, it's very much not... You know, they don't know what the civil guys do, and we don't know what these defense requirements are. But for sure, the customer is interested in having these solutions. And as we know, especially on some of these programs like the Globals and the Gulfstreams, these are very good programs for us. And, I mean, basically, we lift and shift a training program. We lift and shift a simulator and instructor training, and we have a program. You can have a Gulfstream program anywhere you want. So I think, you know, that's the kind of stuff that I think we're going to pursue more of. Because obviously we will always have these programs that, you know, are a little bit more complicated. And yes, we'll protect for all the obvious stuff. But, you know, we need a base of business which is a little bit less volatile. And I think these are, you know, a couple of examples of things that I think we can do to make ourselves more successful.

That's really great for us. Thanks so much and congrats on the new role, Nick. Thanks.

Thank you. The next question is from Cameron Dirksen from National Bank Financial. Please go ahead.

Thanks. Good morning. Maybe just a couple of balance sheet cash flow questions from me for Sonia. Can you just talk about what your expectation is for debt reduction? this fiscal year, and maybe you can just update on what sort of the target leverage for the company is over the next few years.

Yes, so thanks, Cameron. As part of our continued balanced capital allocation, we're going to continue to focus on deleveraging. We had always said that the three times was really just a waypoint on the way to a lower leverage, so that's a continued focus. We haven't necessarily set A target, it's going to be a balance, but something in line with our investment grade. So I'd say, you know, two to two and a half times is a usual for an investment grade. It gives us flexibility, and it gives us flexibility to bring back current returns and support our organic investments in CapEx. So longer term, that's what I'd be targeting. But ultimately, over the next year, it's really continuing on the deleveraging profile while we continue to invest in accretive organic investments. and bringing back some shareholder returns.

Okay. And on the working capital, you had a pretty big cash tailwind in fiscal 24 that followed a significant investment in fiscal 23. I'm just wondering if you could maybe talk about what your expectation is for fiscal 25 as far as the working capital investment and maybe talk about how it sort of changes through the year quarter to quarter.

Sure. I'm really pleased with the progress on the non-cash working cap for the year. So it's really the result of continued focus on efficiency of our key metrics, whether it's DSO, inventory management, deposits, and unbuilt sales. So it resulted in a strong reversal and an overall reduction in non-cash working cap on the balance sheet. So the focus is continuance. For the year, I'd expect the historical trends to continue, both on a seasonality, H1, H2, that trend continues, although more abated. And for the year, training is still the bulk of our business, and that's generally billed after execution. So as it grows, it's slightly non-cash working capital. investments, but we continue to focus on the metric, on the efficiency of those metrics, and overall, we target 100% conversion of net income to free gas.

Okay. That's helpful. Thanks very much. Thanks.

The next question is from Tim James from TD Securities. Please go ahead.

Thanks very much. Just one question here. Sonia, you mentioned that Expansion of the training network will be in lockstep with customer demand. And then you mentioned you look to sign long-term contracts for recurring revenue with customers. Is it possible to outline hurdle rates that accompany that approach? And what I'm trying to get at is just a sense or a comfort level for an outcome where customers – maybe their own demands change from what they contract with CE? And how do you manage that? And how are you insured against changes in their own activity levels that they want to put through a specific full-flight simulator in the future?

I'll hand it off to Nick to give a bit of color. But, you know, the hurdle rates are high. The capital investment, ultimately, as I said, we never deploy speculatives. And so these are all backed by at least one, if not several, customer contracts. And ultimately, the proof is in our results, right? So driving 20% plus margins on the civil network and the ramp-up of these incremental return on capitals of 20% to 30% within two to three years. So you can see, you know, not only what we expect, but what we deliver on the CapEx. And on the outsourcing profile, Nick?

I was just going to say, a lot of our contracts... in particular our big clients, people like LATAM. I mean, these are secured capacity. So the exchange there is, okay, you secure me X number of simulators of capacity because I need that just to be able to keep all the pilots current in their aircraft or training on another aircraft or whatever. And then in exchange for that, I will pay you a certain amount of money to keep that capacity. Now, of course, you know, like COVID is a good example, right? We had COVID, customers came back and said, hey, we need some relief, whatever. Okay. But contractually, we have the, you know, we have the hammer. I hate to use that word, but we have the hammer. And then the question becomes, okay, if an airline wants to change their capacity. Now, you got to remember, you know, these are a lot of ways they're like, I don't want to use the word mathematical, but you have so many pilots, You need so many hours of training. You're going to have so much churn. You're going to have so much. I mean, it's not, you know, the airlines are very good at predicting their demand. So we contract on that basis. So then, you know, your fluctuations tend to be a little bit less pronounced, especially on the commercial side.

Okay, that's helpful, Nick. Thank you. Sonia, if I could just return. So you mentioned the 20% to 30% return on capital target within, correct me if I'm wrong, you said two to three years. Can you just remind us on the, is that return on capital calculation mimic what you, I think, publish as a consolidated target? Is that how we should think about the kind of the numerator and the denominator in that metric when we're thinking about an individual dollar invested in a full-flight simulator?

So that incorporates all of that calculation. So ultimately, we look at it simulator by simulator, and this is the aggregate of all the simulators we've deployed, and ultimately track the contribution of that simulator over its capital cost. And so we're measuring the incremental accretive benefit of that growth investment.

Thank you.

The next question is from Jordan Leone from Bank of America. Please go ahead.

Hey, good morning. Could you just give some color on what you're seeing for utilization rates going into the summer and then BizJet activity at the Vegas facility?

Did you say the Vegas facility? Yeah, well, maybe turn over to Ian. Go ahead.

Well, the Vegas facility is, you know, is ramping up this year. We'll have a We'll have pretty close to a steady state year. This train center has been open now for a couple of years. In fact, I just did a review with the team, and they've got a good plan to bring it up to what we would call a steady state. And more generally, of course, Q2 will always be a little bit quieter, especially in places like Europe, because we have some big customers like EasyJet who are basically forbidding anybody to train. You know, they just want everybody flying for the summer season. So we'll see some slowdown there. In the U.S., maybe less because there's still a lot of hiring going on. So that's not as affected by seasonality. But in Europe, definitely we see a lot of seasonality.

Got it. Thank you.

As a reminder, any analyst who wishes to ask a question may press star then one. The next question is from Noah Popanek from Goldman Sachs. Please go ahead.

Noah Popanek Hi, good morning. Good morning. In the use of the term re-baselining, I'm trying to better understand how much you have actually reset schedule scope And if you've had any price reset in these eight legacy contracts versus, you know, the charges just reflect the mark to market of the reality of the current margins on those eight contracts.

Well, it's really back, as I was mentioning, Noah, in each one of these eight contracts, there have been substantial and extensive renegotiations on every part of those contracts. Okay, and that's really to define the remaining work that we have to do on those contracts. The time is going to take us, and the very specific cost is going to take us. I would tell you, still on top of that, as you would expect, on every one of those contracts, on top of those expenses, we put the usual, you know, contingencies that associate with any remaining what I would call normal risk on those programs. Because you can never fully eliminate risks. There's always some risks, but we have contingencies against those. And we have on top of that management reserve on top of those individual programs and through our whole, you know, defense backlog as a whole. So if anything, when I look at those contracts, you know, I would feel good that, you know, we shouldn't be in a position to, that we're in a situation that we haven't been in quite a while here, certainly on those programs, where basically we don't have to use any size and part of those contingencies. We want to outperform all those programs very clearly. That's really what we mean by rebasifying here. It's put this overhang behind us. We still have to execute on those contracts. We're not walking away from anything here. We're still largely going to be executing on those contracts to bring them to a close over the next six-day quarter. A couple of them probably will go into the next year just because of the timeline. But, again, you know, we predicted what the cost was going to be on those programs, so I feel very good about the execution and the visibility that I have on those programs.

Okay. Have you actually been given higher prices by your customer on some of them, or is it sort of the same price and just – resetting all of the other inputs.

I was mentioning a number of contracts that we've actually been successful in getting follow-on work. What I mean by that is ECPs or engineering change proposals on a couple of them, and on one in particular in Europe, we actually got a follow-on contract, which is definitely at better pricing in Turks.

Okay. And how many of the eight are unprofitable?

I mean, going forward, all of them are being – well, not all of them. I think most of them are instituted at zero margin because we're sitting in there because we've taken the charges on them. There's about – there's three of them that are operating at a very slight profit going forward. So that's the situation on them. Okay. Thank you.

Welcome. Operator, I see we've used the full hour and then some, so I think we'll close the call here. I want to thank participants for joining us this morning and remind you that a transcript will be available shortly of the call on CEA's website. Thank you and have a good day.