CAE Inc.

Good day, ladies and gentlemen. Welcome to the CAE Third Quarter Financial Results for Fiscal Year 2025 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 to ask questions from analysts. To join the question queue, you may press star, then 1 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 thank you for joining us. Before we begin, I'd like to remind you that today's remarks, including management's outlook and answers to questions, contain forward-looking statements. These forward-looking statements represent our expectations as of today, February 14, 2025, 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 CAA's annual MD&A, an MD&A for the three months ended December 31st, 2024, 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. On the call with me this morning are Marc Pellin, SEAS President and Chief Executive Officer, and Constantino Malatesta, our Interim Chief Financial Officer. Nick Liamtidis, SEAS Chief Operating Officer, is on hand for the question period. After remarks from Mark and Constantino, we'll open the call to questions from financial analysts. Before we begin, I'm sure you've all seen the news release we issued yesterday afternoon alongside our Q3 results. It announced the appointment of four new directors to CAA's board, with Kaylin Robinescu as the new chair. The other appointees are Peter Lee, Catherine A. Lehman, and Louis Tétude. These changes come after consultations with our stakeholders, focusing on the board's ongoing review of its composition and a transition towards renewed board leadership. The four appointments are being made in conjunction with the retirement of four directors, Alan N. McGibbon, who has served as chair of the board since 2022 and as a director since 2015, Margaret S. Bilson, Francois Olivier, and David G. Perkins. We extend our gratitude for their exceptional service and valuable contributions during their tenure, and we look forward to welcoming our new board members to CAE. Let me now turn the call over to Mark.

Thank you, Andrew, and good morning to everyone joining us on the call. Let me first say that I certainly echo Andrew's comments, and in particular, I want to express my heartfelt gratitude, Alan, for steadfast leadership and commitment to our shared vision for CAE. I'm also grateful to the other departing board members, Francois, Peg, and David, for their continued support and advice through the years. As we embark on the next chapter, I'm looking forward to working with our new board members in the coming months, and I'm confident that together, we'll continue to build on our success. Before I move to our quarterly results, I also want to take a moment to share how Proud I am that CA has been recognized as one of Canada's top 100 employers for the third consecutive year and has earned a spot on Forbes Canada's best employers list for 2025. These honors reflect the collaborative, innovative, and empowering culture that we've built at CA, made possible by the dedication of our 13,000 employees. This strong foundation of talent and commitment continues to drive our success, as reflected in our outstanding third quarter performance. During this quarter, we generated a record $410 million in free cash flow, while further securing CEE's future with $2.2 billion in new orders, culminating in a record adjusted backlog of $20.3 billion. In several We finalized the purchase of an increased stake in our SimCom joint venture and extended our exclusive long-term training agreement with FlexJet and its affiliates, initiatives that generated more than $500 billion in additional order intake and backlog in our highly desirable business aviation training segment. In total for civil, we booked $1.5 billion in orders for a two times books to sales ratio on revenue that's 21% higher than Q3 of last year. We ended the quarter with a record $8.8 billion total civil adjusted backlog, which is up 44% over year, year over year. In products, we received orders for 15 full flight simulators bringing the total to 42 as of the end of the third quarter. We delivered 20 full-flight simulators this quarter, a notable increase from our first-half cadence and from 13 in the same quarter last year. Combined commercial and business aviation training center utilization reached 76%, consistent with last year's performance, although some softness persisted longer than we expected in commercial aviation training in the Americas. Pilot hiring remained modest in that region, and some of our airline customers deferred their training bookings due to ongoing short-term aircraft supply chain challenges. Partly offsetting this headwind was the continued positive momentum in business aviation training, driven by higher utilization and profitability as we ramped up our newly deployed simulators and training centers. We also continued to make excellent progress in a market for our flight services software solutions. We signed orders for more than $60 million with major airlines in the Americas and Asia, and we just announced Turkish Airlines as another customer who will be adopting SEA's next-generation unified task board and crew management solutions. The market is responding very positively to this SEA innovation, which provides airline operations control centers with enhanced situational awareness and disruption management capabilities. We're also proudly inaugurating our first air traffic services training center in collaboration with NAV Canada. Located in our main campus in Montreal, this newly opened training center extends CAA's core mission of making the world safer. As a pilot, I could personally attest to the vital role that CLEAR Effective communication between flight crews and air traffic control personnel plays in ensuring the safety of every flight. By leveraging SEAS expertise in competency-based train design, advanced instructional delivery, and data-driven technologies, we're helping to prepare the next generation of air traffic professionals for this critical responsibility. In defense, Performance tracked ahead of our expectations as we made more progress towards becoming a low double-digit margin business. This was driven by strong execution, risk reduction, significant backlog growth, and improving backlog quality. During the quarter, we made excellent strides in advancing growth and expanding margins, including successfully completing another legacy contract from our backlog, our second this year. Orders included a contract under the Canadian Future Air Crew Training Program, optional awards to extend our support for U.S. Army fixed-wing training and the KC-135 program for the United States Air Force, as well as ongoing modifications and updates for F-16 fighter training devices. These agreements reinforce our commitment to the long-term success of our defense customers. For the quarter, We recorded a total $707 million in defense orders, achieving a book to sales ratio of 1.5 times, contributing to a record $11.5 billion in defense adjusted backlog, up 104% year over year. Over the last 12 months, the defense book to sales ratio stood at an impressive 2.19 times. With that, I'll turn the call over to Dino, who will provide additional details about our financial performance. Dino?

Thank you, Mark. Good morning, everyone. Consolidated revenues of $1.22 billion was 12% higher compared to the third quarter last year, while adjusted segment operating income was $190.0 million, up 31% compared to $145.1 million in the last quarter Our quarterly adjusted EPS was 29 cents compared to 24 cents in the third quarter last year. Net finance expense this quarter amounted to $56.6 million, which is up from $52.9 million in the preceding quarter and $52.4 million in the quarter last year. The higher level of finance expense is mainly the result of higher lease liabilities in support of our training network expansions and additional borrowings to finance the SimCon transaction this quarter. This was partially offset by lower finance expense on long-term debt due to a decreased level of borrowings during the period aligned with our ongoing deleveraging objectives. All things considered, we now expect that net finance expense for the year to be approximately $10 million higher than last year. Income tax expense this quarter was $34.8 million, or an effective tax rate of 17%. The adjusted effective income tax rate was 29%, which is the basis of the adjusted EPS. We continue to expect a run rate effective income tax rate of 25%. I'm especially pleased with our strong cash flow performance this quarter. Net cash from operating activities was a record $424.6 million, compared to $220.8 million in the third quarter of fiscal 2024. Free cash flow was our record $409.8 million compared to $190 million in the third quarter last year. The increase was mainly due to a higher contribution of non-cash working capital and higher net income. All told, we expect to generate strong free cash flow for the year. with a conversion of adjusted net income of over 150%, which is an increase from our previous conversion target of approximately 100%. Capital expenditures totaled $97.6 million this quarter, with approximately 80% invested in growth, mainly to add capacity to our global training network to deliver on long-term training contracts in our backlog. We expect total capex for fiscal 2025 to be approximately $30 million higher than fiscal 2024 capex of $330 million, which is lower than our previous expectations. Our net debt position at the end of the quarter was approximately $3.4 billion for a net debt to adjusted EBITDA of 3.36 times. Before the impact of the legacy contracts, net debt to adjusted EBITDA was 3.08 times. We remain focused on further strengthening our financial position, and we continue to expect to be below three times net debt to adjusted EBITDA by the end of the fiscal year. Now, turning to our segmented performance. In civil, third quarter revenue grew 21% year over year to $752.6 million, while adjusted segment operating income rose 21%, $250.8 million, resulting in a 20% margin. This excludes a net measurement gain of $72.6 million on our SimCom transaction, which effectively marked up our previously held equity interest in the joint venture to fair value. As Mark highlighted earlier, with 20 FFS deliveries this quarter, we saw a notable shift in revenue mix, with a higher proportion for products compared to last year. Defense revenue remained stable at $470.8 million this year, while adjusted segment operating income increased 88% to $39.2 million, delivering an 8.3% margin, thanks to strong execution from the team and lower net R&D expenses. Legacy contracts remain on track, with costs and schedules well managed. As planned, we concluded another one of our legacy contracts this quarter. And we are on track to finalize a third one at the end of the fiscal year. This quarter, legacy contracts contributed around seven basis points of margin dilution. Without this impact, the adjusted segment operating income margin for defense would have been 9%. With that, I will ask Mark to discuss the way forward.

Thanks, Dino. The investment thesis for CE remains as compelling as ever. And our record-setting $20 billion backlog reinforces my confidence in the company's bright future. A common driver across both our civil and defense segments is the sustained high demand for pilots and pilot training, both to support industry growth and to replace retiring personnel. We're in an excellent position in strong markets. And these structural factors continue to fuel long-term demand for our training and operational support teams. While commercial OEM aircraft supply disruptions have persisted, recent optimism surrounding production rate recovery and a return to service of aircraft have been grounded by engine issues as encouraging. Although some airline customers in America deferred initial training reservations this quarter, Those same airlines are now actively engaging with us to plan the timing and scale of their pilot hiring ramp-up and associated training needs. This isn't a question of if or when. Looking ahead, the demand for air travel, ongoing pilot requirements, and the delivery of nearly 15,000 aircraft on Boeing and Airbus' combined backlog over the next decade position us as a key player in a long-term secular growth story. Similarly, the outlook for business aviation training remains highly positive, especially as we continue strengthening our presence in this critical segment. Building on our increased investment in SIMCOM, FlexJet, one of the world's largest fractional jet operators, announced last week a $7 billion aircraft order and projected fleet expansion to approximately 600 aircraft by 2031. This move underscores the accelerating shift towards fractional jet ownership, which has been growing much faster than the overall market. As FlexJet's exclusive training partner, CA is well-positioned to benefit from this initiative. In defense, demand for our training solutions remains robust, driven by a global shortage of uniformed personnel, prompting militaries to turn to CA to support Red Enix. We're very well-positioned in a strengthening market as the sector enters a prolonged growth cycle with rising budgets across NATO and allied nations. Geopolitical tensions and evolving security threats are driving defense modernization efforts, increasing the need for the training and simulation solutions that we provide. These factors are creating substantial growth opportunities for SEAD as governments and defense forces see innovative solutions to enhance mission readiness and operational effectiveness. A prime example is a strategic partnership we announced yesterday between CAE and the Government of Canada. Through this partnership, CAE will leverage its chief expertise to work alongside the Royal Canadian Air Force in designing and co-developing the Future Fighter Lead-in Training Program, or FIT program. This initiative will play a critical role in preparing pilots for the transition to Canada's next-generation fighter jets, ensuring the long-term success of the CF-35A program. By integrating cutting-edge technology and advanced training methods, future FLIT will equip fighter pilot candidates with the skills required to operate a highly sophisticated CF-35A in increasingly complex operational landscapes. Looking ahead to the remainder of this fiscal year, In civil, the ramp-up of commercial aircraft deliveries is taking longer than expected, and this is a key driver of initial training demand for newly hired pilots. With the short-term impact that this is having on incremental training demand in America, we now expect annual civil adjusted segment operating income growth to be modestly below our previous outlook for approximately 10%. Also, Since product deliveries are expected to account for a higher proportion of civil revenue than initially planned, we expect the annual civil segment operating income margin to be modestly below our previously expected range of 22% to 23%. Looking beyond this period, we continue to foresee ample room for margin expansion in future years on volume, efficiencies, and mix. With the benefit of our re-baselining last fiscal year and the higher cadence quality of execution, we now expect to achieve high single-digit percentage revenue growth per year, which is up from our previous expectation in the low to mid-single-digit percentage range. We're also expecting the annual defense adjusted segment operating income margin to be modestly above the previously indicated range of 6 to 7 percent. This puts us solidly on the path to becoming a low double-digit margin business. Taking our civil and defense outlook together, we remain on track to meet our previously stated three-year EPS target while achieving strong order intake, backlog, and free cash flow. With that, I thank you for your attention, and we're now ready to answer questions. Thanks, Mark.

Operator, please open the line to questions from financial analysts.

Will do. We'll now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then 2. Our first question is from Connor Gupta from Scotiabank. Please go ahead.

Hi, this is Ellie filling in for Conrad. Good morning, everyone. My first question is on the CapEx. Yeah, my first question is on the CapEx targets reduction. Was it more a function of delays in demand in certain areas or just more prudent?

I think it's prudent that we always align, you know, basically capacity with demand. So we always stay in lockstep and that's what you see reflected here.

If I can add to that, I think we, I just wanted to add effectively that this is lower than previous market expectations. So, again, a continued example of disciplined approach to capital allocation and cash management. This, along with the $410 million of free cash flow, I think is evidence of our disciplined approach to capital allocation and our focus on driving free cash flow up.

Okay, thank you. That's helpful. And maybe just one more question. How is your training utilization trending in the Americas versus Europe and Asia?

Well, look, I think, look, let me start with maybe the flight activity, which leads to that. Maybe look at year-over-year figures. I think what drives everything is the commercial flight activity, right, so airline passenger traffic. So in the Americas, what we've seen is about 7% growth over year-over-year, and that's driving, actually, perversely, what you see in America is, as we've talked about, we're seeing a utilization. Our training centers was down slightly, and that's driven by the lower pilot hiring in the United States. If I look at in Europe, Middle East, passenger traffic is up 5%, and in that case, we're seeing corresponding utilization, Increased in India, we're up about 7%. Anything you'd add to that?

No, I think the U.S. utilization is down year over year, and it's really just a function of the hiring demand that is supposed to be happening right now.

Okay, thanks, guys. I appreciate the time. That's all my questions.

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

Hey, good morning. Congrats on a good quarter, and thanks for having me on. Thank you. On the impact from potential tariffs, can you just discuss a little bit how you're positioned to react in the event we have tariffs that are sustained? And have you seen any shifts in your customers' decision-making from tariffs, delaying orders, looking for other options? I understand it's only been a few weeks, but any call you can provide would be very helpful. Thanks.

Sure, thanks for the question. Look, it's obviously a situation that we, like everybody else, hope reaches, you know, constructive and bilateral conclusions through negotiations. But look, I think as we've said in the past, we don't, we don't, we certainly don't expect to see a material impact in the short term, certainly, sort of next few months to a year from this on our business as a whole. But it's definitely something that we're monitoring closely. If any kind of tariffs become more lasting beyond that, beyond getting to more than a year or two, obviously we would adapt. And we have the capacity to adapt. I mean, bear in mind, if you think about our business, it's a business that's changed a lot over the last 20 years. And more than two-thirds of our revenue is generated from services. And we deliver that in-country. So that's not an issue. And So the main product that we sell into the United States is the full flight simulator. There's already a big proportion of that, which is US or EU origin. That's one factor. But again, I think there's a lot of ways for us to mitigate things if things, again, should last beyond, should I say, next few months to a year. Again, if I look at conversely what we're seeing this year, we're particularly not affected because with the lower pilot activity, the hiring activity that we've seen this year on the back of OEM delays, we've actually had relatively few sales to our U.S. customers this year. So we've only got a few deliveries going there this year, although relatively similar sales themselves remain strong. They're just coming from other parts of the world.

Hey, thanks for the caller. And then on the defense results, you know, the margins obviously came in really strong in the quarter. Guidance, you know, maybe implies a little bit of a step down next quarter. You know, so anything to call out there in terms of one-time items in Q3, you know, was there seasonality that might have helped the results in the quarter? Just trying to get a, you know, see how things might evolve a little bit longer term. And then, Nick, you know, you've been looking at this business for a few quarters now. The team highlighted in the release margins are expected to continue to expand. So can you just talk about your level of confidence in that and, you know, anything in particular that you see as an opportunity, you know, into fiscal 2026? And after that, I can turn the line over. Thanks.

Okay, good. So we'll tag team this. Okay, I'll kick it off, turn it over to Dino, and then finish off with Nick. Look, I think what you reflect here is we're feeling very good about the direction of the business, and certainly the team in place of which Nick is leading, very good job, and the momentum at the front end. You just look at the order intake. I think it's nothing short of outstanding, and the geopolitical environment, for unfortunate reasons, is shielding demand for the products and services that fees are good at. So the team is executing extremely well. There's nothing really extraordinary in it. I'm sure that's what Dino's going to say. It really comes down here to execution, strong performance all around by the team. At the same time, there's risk reduction. Risk reduction is rampant. We're taking a very, very disciplined approach. And, you know, when we look at the fourth quarter, I think you always got to remember that defense is always, you know, shall we say a lucky business. A quarter-to-quarter has the potential to be, as we execute... contracts, you know, in any given time, you could generate plus or more revenue in a single quarter. So as we talk about, you know, we are raising the outlook, and I think we're still being prudent about this business as a whole, but we remain very confident.

So let me just turn it over to you, Dino. Thank you, Mark, and I would echo that. I'm really, really pleased with 8.3%. That's why margin performance is quarter. It's an increase year-over-year, quarter-over-quarter. Again, you're right. I think you see a lot of this being a direct result of the process changes and changes that we've made to the team showing through in the performance and execution. We also closed off another legacy contract. We expect another legacy contract to fall off by the end of next year. So feel good about that as well. There was a little bit of help there. higher than usual R&D tax credits in the quarter. Nothing overly significant. Contributed maybe a half a percentage point to the margin. And that's just usual timing that we see sometimes in quarter two, three. But overall, really strong performance in the margin and really good work done by the team.

Yeah, just to echo the comments already, in terms of performance, I think the teams and, you know, certainly we have a different attitude towards performance you know, executing on the programs, you know, per the plan. I think also the mix is better. So, you know, legacy contracts, low-margin contracts, I mean, there's always some of that. But the pipeline also, because you would have seen the order intake and the performance on new orders this year for defense has been quite strong. So, you know, that's also going to help us as we look out in the future. So I, you know, I think, you know, we're, certainly I'm pretty confident that, you know, we can maintain and or exceed this level of performance.

Thank you very much.

The next question is from Fadi Shamoon from BMO Capital Markets. Please go ahead.

Yes, good morning. Mark, I was wondering if you can kind of offer some perspective on the board changes that were announced. Are there any specific kind of governance variable items that the board is focused on, you know, to the extent that you can share with us, even from a high level, kind of what does this change kind of mean for? And my second question, I apologize, I missed it. the beginning of the call a little bit. We had another call going on, but the puts and takes in terms of the organic growth in the civil aviation market going forward, I'm guessing the U.S. market is a bit of a drag right now, but how should we think about the relationship in that market recovering to the delivery of the Boeing starting to ramp up? Is there a lag effect between the two that we should think about? And if you can offer kind of some, you know, maybe even high-level perspective, like what does the rate of organic growth look like when you put all things together between business aviation and what you're seeing on the commercial aviation side?

Well, maybe let me just start with that last question, not to deflect the first one, but just basically to get my head around that one. Look, I think civil aviation, Notwithstanding the softness that we've seen in the quarter, again, in the U.S., as you said, and it's quite right, I mean, the civil had excellent results this quarter, and it reflects the diversification in our civil business in itself. And you highlighted a lot of the components there. Look, in this quarter, what we saw is basically the continuation of what we saw in previous quarters and And this year in pilot hiring in the U.S. is basically a fraction of what it was just last year. And actually, third quarter was our worst quarter in that regard. And that's just basically because we saw continuation and perhaps more than that. Well, certainly more than we anticipated. I think we're not alone in that. And the amount of airplanes that were delivered by OEMs and the amount of disruption caused by groundings of aircraft across the world that affected customers of Airbus aircraft primarily. So for us, how that reflects itself in the United States is that you don't have strong pilot hiring, you don't have a lot of new aircraft being delivered to airlines, you see the airlines basically essentially They increased pilot hiring substantially over the last couple of years, and now basically they have, if you like, for a short amount of time, too many pilots hired for the needs that they have on the aircraft that they're flying. So typically when they stop hiring pilots, what happens is that the large carriers are taking pilots when they hire to take them from the regionals, And the regionals themselves, they're basically hiring new pilots, and that creates a disproportionate amount of training in our training centers for regional aircraft in the United States. So centers like, for example, we have a strong center for, you know, regional pilot training in Minneapolis, for example. And although that's not a very big impact in terms of revenue itself, it kind of has a disproportionate effect in, margins because the training we do on the type of aircraft that the regional fly regional aircraft carriers fly are aircraft like crjs like dash h which those airplanes have got have been along around for a long time and so have our simulators so they tend to be far down the depreciation curve and therefore we make you know a larger amount of profit on it so That's what you see happening here. And it's the same factor we had before. What's changed in this particular quarter is that because of the sustained situation around OEMs, we've seen actually airlines actually canceling or deferring their training slots in the quarter. Now, as I said in my remarks, you see those same airlines with the positive news that we're seeing now. You saw Boeing just recently announced that they and delivered 40 airplanes in a quarter. So that's resulting, you know, obviously, in people saying, okay, well, there's renewed optimism happening here. So, look, again, as I said, watch the deliveries, and as they recover, I mean, the utilization in our U.S. training center should follow, and they should follow relatively quickly behind. Of course, that's not the only story. We're talking about commercial aircraft, Sales of simulators are still very strong, and you see just testimony of the strong order intake. You see that certainly people's, the airline's enthusiasm for the future is certainly not dampened. That's testimony by the book to build that we have. As well, of course, business aircraft. Well, business aircraft is doing extremely well. We continue to ramp up more recently deployed training centers, for example, like Humvee. our new training center with SimCom that now is wholly owned by us in Orlando, our training center in Las Vegas, and we're seeing higher utilization and growth in all of those cases. And you just look at the order intake, and we just added $500 million to the order intake in business aircraft as a result of the SimCom acquisition and associated flagships. You know, orders that are, delivery's going to come out of that in terms of training slots. So look, I think, as I said in my remarks, it's not a question of if, there's a question of when, and we're going to see strong demand. Sorry, going back to your previous question. Look, I think what you're seeing here, and I'm not going to answer for the board, but what you're saying is a function of ongoing board renewal. You have my succession, and at the same time, You have a new chairman coming in, and Alan has done an outstanding job leading his company over the last few years. We've worked very well together. And I think there's a very, you know, I think smart timing in terms of transition, my transition with, you know, bringing on a very, very strong, I'm sure you will recognize, very strong new chairman in Taylor and Robin Eskew, but with his background in Air Canada, chairman of IATA in the past, to be able to be someone that's going to be able to play a very, very strong role in terms of certainly hiring my successor and having a very effective transition with, you know, the current board and leading the board into the future. So, I think we're all very encouraged by it.

Appreciate it. Thank you, Mark.

The next question is from Kevin Chang from CIBC. Please go ahead.

Good morning. Thanks for taking my question. I apologize if you went through some of this in your prepared remarks. I was also on a call earlier. But just on the, I guess, on the announced flex chart order with Embraer, obviously a pretty large order for them. I'm just wondering, you know, how you see that opportunity for CAE post the SimCom deal. And I know it's probably early days, but... Are there any investments you think you'd be required to make to support training related to that large fleet order on the business aviation side?

I'll start it off and maybe hand it over to Nick. It's extremely positive for us because, again, we're exclusive to FlightJet. We know them very, very well because we've been training them for years. What's positive is not only the amount of aircraft that they're buying, but they're buying the mix of aircraft, which really basically grows the accessibility that we have of training on the whole fleet of flight jet aircraft. So, again, I couldn't be more happy with that order, but maybe if you want to add.

Yeah, I mean, the flight jet placed in order for 180-plus craters and phenoms, those are aircraft that – We currently serve in the training center. I mean, we don't have enough capacity to deal with 183 aircraft with what we've got right now. So, yes, there will be investment in more crater capacity and more phenome capacity. But there's no need for anything beyond that. Like, NONA can take that capacity in terms of space and deliver the training. And, you know, this is part of the... part of the reason why you saw the order intake and you also see the, you know, the order intake as a function. Because one of the things we did was, so this contract when we originally consummated the JV was a 15-year agreement. We were five years in. So the agreement was reset to 15 years. And so this justifies the investments for the next batch of aircraft.

No, that definitely makes sense. Seems like a pretty nice tailwind for you, especially post the SimCom transaction. Maybe to my second question, I generally think of CAE as broadly immunized from kind of marginal change in U.S. spending or broader U.S. budgets, just given the type of stuff you do. Just wondering if that's changed as a new administration. They're obviously looking at cost-cutting maybe in a different way than previous administrations. Just wondering if you see anything at risk or anything that might have been impacted within your backlog given the change in administration.

The first thing I'll say to that one is, as I've always said, is the day that SEAS forces will be a proxy to the U.S. defense budget, I will be very happy. But that's not the case. I think the reality is What you see is a focus in the United States and all of its allies, Canada and NATO, NORAD, is a strive to increase readiness of forces. And readiness means training. When you think about what a military does when they're not in a situation of conflict, they train. That is all that they do. And with increasing readiness, what that means is more demand for the kinds of services and products that we do. And you see that as reflected in very strong order backlog that we've already won. And the opportunities that we have out there in terms of the bids that we have out there for, you know, basically selection by customers. So I am not, I mean, what you could see, I mean, is short-term variations like, If we see some, for example, like a shutdown of the U.S. government, well, that could have, and I'm not saying it will, I have no crystal ball to that, or if you have continuous resolutions that that, you know, has been somehow the norm in the past few years, that can cause short-term disruptions. If we're basically, let's say we're on a, we've won a new contract, which we have won a lot, and And you get into a situation, for example, of a continuous resolution, where in that particular case, what happens is the government is precluded to be able to start activity on a new contract. But those are short-term issues and not reflective of long-term trends. And finally, I think the big thing about it is in defense, as a civil, we enjoy the benefit of having very long-term contracts. So the backlog that you see goes on many, many years.

Thank you very much and have a good weekend.

The next question is from Sheila Kayalu from Jefferies. Please go ahead.

Good morning and thank you. Maybe if I could ask a two-part question in terms of simulator deliveries, how you're thinking about about this year with 50 as your previous guidance being weighted for Q4, but obviously there was a pull forward into Q3, and how we think about the exit margin rate for fiscal Q4 given potentially less simulator deliveries that are implied and what it means for fiscal 26.

Want to handle it, Nick? Sure. I mean, on the simulator deliveries, I mean, obviously we're not changing any of our guidance. We have the same, it's going to be, I think, as we said, more than 50 SIMs. And obviously, you'll see the actual number. You know, some of this just depends when we're on the edge of March 31st. You know, some may be delivered in next fiscal year. But I don't see an issue with the guidance that we've given today. In terms of Q3, maybe I'll let the Constantino. Q4, excuse me.

So what I think we'll see is, again, products being a higher proportion of the revenue mix going forward, and that's why we've also adjusted the guidance to say that we'll be modestly below the 22% to 23% of the adjusted SOI margin range for the year.

Okay. That makes sense. And then maybe just Another question on, again, we're seeing a growing divide among operators outlining expectations for GTF AOGs over the coming years. Some suggest AOGs should be unwinding from peak levels steadily, in line with RTX's own commentary. Others, like Wiz, are talking about beyond 2026. So just maybe if you could touch on a GTF and what you're seeing for 2026, how we should be thinking about framing that.

Maybe, I think, yeah, I think we can talk about it because typically some of our large customers, like Indigo Airlines, are a bad issue.

Yeah, I mean, the overall, I mean, we do track the, you know, the aircraft grounded, the 320 NEOs. So the number is going down. I mean, it's certainly coming down from where it was. I mean, we have, you know, Indigo, as an example, they're the largest, you know, Airbus operator, of NEOs and have the largest fleet of grounded aircraft. And they are, I mean, they are improving. So I think it's just a question of time as they catch up on some of the capacity issues they have to service all these engines in a timely manner. But definitely, you know, I mean, they're a barometer to how this is going. And their fleet is improving. And we can see it through, obviously, training. So So, you know, this, you know, how long it's going to take, it's not really for me to say, but I think the, you know, we definitely see improvement.

Great. Thank you.

Thanks, Philip.

The next question is from Matthew Lee from Canaccord Genuity. Please go ahead.

Hey, thanks for taking my question. I noticed in the quarter you didn't really touch the NCIB, and, you know, I joined this call late, but... you know, just given the focus on deleveraging and maybe opportunity for tuck-ins as well from the CapEx you mentioned, how much of a priority is buying back shares at this juncture?

I think, Webby, I'll just kick it off. I mean, we've always had the same priority that we've had, that we've prioritized the creative growth, but deleveraging is close behind. So, let's pick up on that one. I mean, in the end of the day, I think with We've said that NCIB, we would use it opportunistically, and we did. But I think today, I think we reflect where the stock is at, that we thought we had better opportunities to use our cash flow a bit. Pick up on it, Dino?

Yeah, no, thanks, Mark, and good morning, Matthew. So, you know, we do, we continue to talk, to take a real balanced capital allocation approach, organic investments, where it makes sense, and then further bolstering your our financial position through the leveraging. So we look at NCIB effectively, like Mark said, opportunistically, over time, excess free cash flow. You saw in Q3, we did not purchase any additional shares because our focus is the leveraging.

Do you guys have a target for the year in terms of NCIB usage or something we can point to in that regard, or is it just more opportunistic?

Absolutely more opportunistic. We focus on capital allocation, looking at all opportunities depending on excess free cash flow, but definitely more of an opportunistic approach. All right. Thanks, guys.

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

Yeah, thanks. Good morning. Just a quick question on working capital. Obviously, a significant positive working capital reversal in Q3. Just wondering if there's anything, I guess, that you've are doing differently to manage your working capital flows to, I guess, improve over time? Just something you can point to specifically that maybe is a change from past practices to improve cash flow from working capital.

Cameron, thank you for asking the question. I'm particularly pleased with our record-free cash flow generation, $410 million this quarter. I think what you're seeing here really is the direct benefit of strong executions. That's especially in defense. This is allowing us to hit our building milestones, right? And then we use our levers that we have at our disposal to unlock and reduce non-cash working capital to generate cash. You know, alongside continued strict inventory management, discipline, organic investments, obviously lockstep with the market. You know, this is a disciplined approach to managing our cash, and it's giving us continued confidence that we will meet our leveraging commitments. So, you know, I think you saw in the guidance, we expect to deliver a cash conversion rate exceeding 150% in N.25 compared to our previous stated conversion rate target of about 100%. So this really is because we're focused on cash generation.

Okay, that's helpful. And maybe just as a follow-up, I mean, on the defense side, and this question for Mark, just on the – future lead-in fighter program in Canada, obviously, you know, CAE selected to, I guess, to manage that program and run cements you as the, you know, for that future program. Can you just talk a little bit about what exactly your role is here on this program and kind of what the timeline might be for this to start actually contributing financially?

Yeah, thanks for the question, Cameron. I'm particularly very pleased of that particular announcement. I mean, this is just Another really great example of just how well CE's positioned in a growth market. So what you see here, and I can tell you, and this, I've been having personally these in-depth discussions with the government and Minister Blair specifically in defense. Canada is looking, is stepping up, the government is stepping up significantly its expenditures in defense to maintain the preparedness and readiness of Canadian troops. And basically, again, that's Canada joining the Corps of Nations. They're doing just that. So what you see here is definitely a shift in previous practice. This is government putting a new mechanism in play to accelerate the procurement of military programs. And I can tell you, I've had a very personal role in working with government to make that happen. And I think this is This is a, I would tell you, I mean, I'm very excited about this. It's good for Canada. It's good for CAA. It's good for the Canadian industry, you know, in a very, very big way. And what you see here is we're becoming a key strategic partner. And what we're going to be doing here is being recognized as a strategic partner on this program, Future FLIT, is, to essentially design and assist their project team in finalizing the requirements, accelerating the procurement process beyond anything that's been done in the past on the future fighter leading program, which, of course, as I said, is going to prepare and train us for the transition to the CF-35A. So, you know, the... We had the announcement this week with the Minister of Public Works responsible for the acquisition. So, I mean, just follow what they said. You know, they've got a budgeted $5 billion program, and that covers the acquisition of aircraft, training, courseware, procurement, instructors, and on-site support for daily train delivery, you know, asset management, Base support, you know, by the way, all of the kind of stuff that we do, not only in Canada, but around the world. I mean, if you look at a huge contract that we signed just recently, the FACT contract in Canada, we're doing exactly that for, if you like, the phases of training that are before food surplus. Totally to stay as to basically get very precise with regards to, you know, the timelines here, except that we're obviously starting, like, immediately on this program, and the whole idea is to accelerate the procurement of this program so that the basic capability will be there on this CF-35 inter-service.

Okay, that's great detail. I appreciate it. Thanks very much. Thank you.

The next question is from Nero Popanak from Goldman Sachs. Please go ahead.

Hey, good morning, everyone. just wanted to go further on the civil margin appreciate all the detail you've provided thus far I know you've expanded business jet capacity pretty significantly is that is that full or are you in the process of filling that such that there's a utilization you know temporary issue in the margin and then If we look at the aggregate acquired revenue in civil of the last five years, has that been accretive or dilutive to the margin?

I'll turn it over to Nick. The last question, I'd definitely say accretive, but go ahead, Nick.

In your first question, so yes, we do have a couple of training centers that are ramping up at the moment, namely Las Vegas and Savannah. We are, as you saw from the announcement, but, you know, the training center in Lake Nona is also in, I would say, almost at capacity. So I think there is definitely some drag that is coming from the ramp up of those two training centers. And come next year, come in April, we will be also opening Vienna. So there will be some there as well, although Vienna will be ramped up quickly because we're just moving a lot of the assets that are going into Vienna initially are going to be assets that we already own and just moving around. So it shouldn't be too disruptive to the numbers themselves.

Maybe just adding to just basically look at the market itself. The global business jet fleet itself is expanding, right? The deliveries of aircraft out of the business jet OEM expect to be 12% higher year-over-year 2025. And consistent with basically previous forecasts, the proportion of that, that's large jets. And I say large jets because that's what we're disproportionately, that's what disproportionate amount of training we lose on large jets like, they'll go change fountains, they'll go to expenses. They're expected to account about two-thirds of all expenditures of new business jets for the next five years. So if you look at the market, I mean, that's, you can see about a four, I mean, I think I'm just reading for me just the forecast here, 4.7% higher of large cabin business jets forecasted between the next five years versus about 2.9% CAGR for median cabin. And I think even another factor that's, you know, particularly important, you know, for us, and in concert of the SimCon acquisition, is the fractional and charter operators, you know, fractionals such as FlexShed, of course, continue to show extremely strong performance on a year-over-year basis, growing much faster than the market itself. I mean, just look, fractional owner flight activity To give you an example, it's up 65% from 2019 levels, obviously prior to COVID. So, and year over year, just, I mean, even on, to take closer, closer to now, I mean, year over year, black fractional owners, fractional operators are up 11%. Of course, all of that reflects in the amount of expenditure we've made expanding our business centers, like the ones that you mentioned, that Nick mentioned, Las Vegas, and of course, the acquisition of Simcom.

So I guess, um without putting a specific year on it but if we just think about the period of time in the future when you have the full utilization of the business jet expansion you've done and then you do not face you know boeing and airbus are delivering somewhere near demand you don't have engines uh grounding airplanes so so the that market's normal um again not putting a year on it but just in in the period of time in the future when all of your inputs are relatively normalized, what do the civil margins look like?

Higher? No, look, I mean, we're not going to get into the outlook today, but I think I said in my notes, I think I used the words and I'll repeat them. I think we have ample rooms to grow beyond that for the factors that you mentioned. And of course, you know, more absorption of overhead and, or the lever defect in our training centers. So I think all things being equal, I think the factors you mentioned will inevitably and quite deliberately make margins go higher.

Okay. And then I just also wanted to ask a little bit more about the defense margin. Did I hear correctly you say that there's only one more legacy challenge contract that rolls off in your fiscal 26th?

In fiscal 25, by the end of fiscal 25, there's one more that we expect to roll off. Okay.

No, that will leave five contracts going into next fiscal year.

We started with eight. We'll have taken out three in the fiscal year.

And maybe just add a bit of color. Yeah, yeah, go ahead. No, no, I was just going to ask, maybe, Nick, you want to add color on how you feel about those five programs?

Yeah, I mean, I think... I don't see, at least for now, I mean, we're on track with the remainder. Some of them are out next year or the year after. But, I mean, they roll off as planned. And, you know, we feel pretty good about all the provisions that we've taken to manage the remaining work and to manage the risk with the customer. So, you know, it's... It's good that we have three out of the way, but we still have five, and we still need to pay close attention to execution on those programs. But I don't see, at least at the moment, I don't see any issues.

Okay. Understood. Thank you very much.

Thank you. Operator, we'll take just one more question as we come up on the hour.

Sounds good. Our last question is from Benoit Poirier from Desjardins Capital Markets. Please go ahead.

Yes. Good morning, everyone. Just obviously on the free cash flow side, better than expected. Dino, you provide great color around the working cap for Q3. But when we look in terms of capital deployment, you intend to be below three times by year-end, so it's going to be a great achievement. Could you remind us your targeted level in terms of leverage longer term? And given the nice inflection on free cash flow discipline around CapEx, I'm just wondering how you see capital deployment once you're at the targeted level.

Benoit, thanks for the question. So effectively, like I said, I'm really proud of the free cash flow conversion this year. this quarter, the origin of $10 million. So when we look at CapEx, again, it's a matter of working and talking to deploying FFSs on the market based on what we see and from the situation we see with our customers. We don't want to be ahead of our customers. That's the approach we've been taking. We don't deploy FFSs in our marketing on-spec. We invest organically to keep pace with the growth of our existing customer base. So that's why we constantly monitor the market situation. We are taking a focused approach, pro forma leverage. We want to make sure we continue to focus on investor grade performance. And we're looking to be below the 2.5 times net debt adjusted EBITDA range by the end in the next fiscal year. So continue to focus on generating free cash flow, disciplined approach to CapEx, working lockstep with the market going forward.

Okay. Okay. Sorry, Dan, really quick. Yeah, really quick. Just in terms of defense margin, obviously, when we look at fiscal year 26, you're going to ramp down further legacy contract, but also at the same time, you'll be ramping up new business that I would assume will be accretive to margin. So can you point out to some direction we might see on defense for margins for fiscal year 26? That's it.

It does sound glib, but higher, obviously, than what I mean for the factors that we've talked before. I mean, as you said, we're winning a lot of backlog here, and we're replacing the new backlog as very creative to the margin target that we have, you know, below double digits. And I've always said that 10%, you know, is a waypoint, not a destination. But, you know, we're not going to get into your outlook today. You saw the strong execution. We're being very prudent of how we execute business for obvious reasons. So, look, I think that we'll give you, as usual, our book as we get into next quarter. Thank you for the time.

All right. Thanks very much to everyone joining us on the call today. I'll remind you that the transcript will be available later on our website, and we'll talk to you after the fact should you have any additional questions. Thanks very much.

That brings a close to today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.