CAE Inc.

Good day ladies and gentlemen. Welcome to CAE's first quarter and full year FY2027 financial results and conference call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity for analysts to ask questions. 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 today. Today's remarks, including management's outlook and answers to questions, contain forward-looking statements, which represent our expectations as of today, August 13, 2026, and accordingly are subject to change. Thank you very much. All of which are 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 from CAE are Calin Rovinescu, Executive Chairman, Matthew Bromberg, the company's President and Chief Executive Officer, and Ryan McLeod, our Chief Financial Officer. After formal remarks, we'll open the call to questions from financial analysts. Let me now turn the call over to Calin.

Good morning, everyone. Before Matt and Ryan take us through the Q1 results and discuss progress against the transformation plan, I'd like to briefly share a few observations. CAE's transformation plan is continuing at pace. As we announced with the year-end results, The work is centered on sharpening our portfolio, strengthening capital discipline and enhancing operational and financial performance with several clear objectives. Increase long-term resilience, improve execution against plan and support sustainable cash generation, profitability and returns. We wanted to start some of the heavy lifting required by the transformation plan right away So we chose not to wait for an investor day to launch it. The board receives regular updates on the plan and we're encouraged by the progress being made across its multiple work streams. Fundamentally, I believe CAE's long-term growth prospects remain strong. Our civil business continues to benefit from durable long-term aviation demand growth, As expanding air travel and higher aircraft deliveries will continue to require more of CAE's training services and simulation products. In defense, CAE is benefiting from generational upturn in defense spending happening around the world, especially in NATO countries, including, of course, here in Canada. Across the expanding defense ecosystem, we continue to see CAE's heritage, strategy, technology, and broad set of capabilities drive increased interest from governments and global OEMs, resulting in an expanded opportunity set. Overall, CAE has strong positions in two secular growth markets and an attractive long-term outlook supported by the idiosyncratic benefits of the transformation plans. Improve free cash flow generation, higher returns on invested capital, and significant opportunities to invest accretively across the business and provide better returns to shareholders. To support the execution of the company's long-term strategy, we are implementing a revised executive compensation framework that ensures incentives are aligned with transformation goals. Our short-term incentive program is now focused on free cash flow and adjusted segment operating income margin. Our long-term incentive program will center around adjusted return on invested capital and adjusted earnings per share to emphasize efficiency, profitability, growth, and long-term value creation. Additionally, as disclosed in the proxy circular, I announced my intention to transition to the role of non-executive chairman of the board effective January 1, 2027. This reflects our confidence in Matt and the rest of the leadership team and their ability to drive CAE's next chapter of growth and value creation, as well as the significant progress that the company has made in developing and beginning to execute the transformation plan and long-term strategy. I look forward to continuing to support Matt and the leadership team in this evolution while remaining involved in engagements with key stakeholder groups involving government partners, customers, and shareholders. Matt, over to you.

Thanks, Calin, and good morning, everyone. Overall, Q1 was a strong start to the year with good progress across the transformation plan, continued improvement in our defense segment, and civil performance in line with expectations. While only one quarter into the year, we feel very good about our initial progress the full year and how the transformation plan will strengthen CAE. By segment, defense delivered a strong quarter of revenue growth and adjusted segment operating income margin expansion while growing our long-term pipeline of training and mission rehearsal opportunities. The transformation plan focused on improving our internal cost structure and focus is necessary to improve our performance to streamline our portfolio and focus on where we can differentiate and win. It'll strengthen our capital discipline by right-sizing our training network and footprint and allow us to make key investments in internal systems in our factory and ERP which are required to drive operational performance. As we do this, we are pivoting the culture to one centered on operations, continuous improvement, discipline investment and strong cash flow generation. This will allow CAE to properly grow for years to come. The transformation plan is progressing well. The projects are progressing to plan and we will see returns start to mature in fiscal 2028 and beyond. We are committed to deliver the $125 million to $150 million of structural cost reduction by fiscal 2030. In terms of the $150 million savings, Roughly 50% of our savings will come from improved labor productivity as we optimize our organizational and operating model, outsource non-core processes, leverage automation, improve systems and tools, and consolidate our global footprint. Approximately 30% of the savings will come from reduced square footage. Including the portfolio actions, we are expecting square footage to decrease by almost 1.7 million square feet, which represents approximately 17% down from the end of fiscal year 2025. And finally, approximately 20% will come from early efforts at driving operational improvements, including our digital factory project, which will drive lean manufacturing to lower waste, improve quality, and streamline and automate processes. Another example is on our ERP landscape. We're moving from five ERP systems to two, which will reduce our technical debt and reduce expenses. As these work streams advance, we will continue to provide updates Thank you for joining us today. We remain confident that the strategic review process will result in a positive outcome for both FlightScape and CAE and will update you at the appropriate time. The other reviews are also progressing well. In our civil training network, the capacity rationalization is also progressing well. We remain committed to retire the 25 commercial simulators. We now have more visibility and confidence as to the benefits of this project. There have been many questions about customer retention. As I've said before, maintaining our customer intimacy is job one. Based on customer discussions to date, we expect to retain almost all of our customer contracts as we transition them to other CAE facilities. As of today, customer attrition will be less than 1% of our civil revenue. This is a testament to our customer-facing teams. Not only will we retain the majority of our contracts as we retire the 25 commercial simulators, We are also able to close between four and six of our civil training centers and remove the support infrastructure costs associated with those facilities. All in, we expect this work stream to lead to the removal of approximately 500,000 square feet, which is roughly 10% of our civil network capacity. This will not only improve the utilization rate of our network, it will also improve our civil margins, and these savings are included in our $150 million target. Going forward, will be more disciplined about incremental capacity and ensure that we consider regional options before adding square feet and devices. Overall, I continue to be very pleased with the progress we are making across all key transformation work streams. And while there is significant work ahead, the actions we are taking are, in real time, reshaping how CA operates, how we allocate capital, and how we position ourselves to create long-term, sustainable shareholder value. Thank you for joining us. We are remaining focused on driving growth across our end markets. Now let's look at some of the key business developments in the quarter. We recently attended the Farm Bureau Air Show, where we had meaningful engagements with customers, partners, governments, and suppliers. The show was indicative of the strong demand outlook across our civil and defense markets. On the civil side, Boeing and Airbus released their 20-year Commercial Market Outlooks These long-term secular trends drive stability, visibility, and confidence in the long-term demand outlook for trained pilots, and by extension, CAE's training and simulation products and services for many, many years to come. As an example of CAE's ability to position ourselves to grow in commercial aviation markets and alongside partners that are seeing meaningful expansion is our 15-year training agreement with WestJet, which was finalized in the quarter. With nearly 200 aircraft in service and an order book of more than 100 aircraft for delivery into the 2030s, WestJet is positioned to realize continued growth in their capacity and network in Western Canada and beyond. Thank you very much. We announced a multi-year contract with Turkish Airlines to deliver five full-flight simulators and two flight training devices with options for two additional full-flight simulators. Turkey is one of Europe's most attractive aviation growth markets, with capacity expanding at high single-digit competitive growth rate over the last 15 years. It's led by a rapidly expanding international passenger volume and a growing backlog of aircraft deliveries. Turkish Airlines is the largest airline in Turkey, and is expecting to continue to grow significantly. The airline is targeting a fleet of over 800 aircraft in the 2030s, up from more than 500 today. And our agreement builds on a longstanding partnership of more than 20 years and supports Turkish Airlines fleet and network expansion plans across Airbus and Boeing fleets. Shifting to the defense side, we've had several busy months of business development activity and have made a number of significant announcements that expand our long-term opportunity pipeline and enable us to capture growth opportunities in Canada, expand internationally across NATO and other partners, and meaningfully grow our addressable market by solidifying our position in large growing domains such as naval and maritime activities. Here in Canada, there's a clear shift towards bolstering sovereign capability, advancing collaboration with industry, and fostering innovation to strengthen defense readiness. Canada's defense strategy and its related defense industrial strategy is rapidly advancing, and the country plans to spend approximately $500 billion on defense investment over the next decade. We believe that the country's defense modernization priorities represent a multi-decade opportunity for CAE, as our capabilities and priorities align directly with the defense industrial strategy and where spending is going. We are continuing to work closely with the government of Canada to expand and create new Canadian franchise programs. We believe that we can successfully utilize our Canadian heritage and our expertise in training, mission readiness, and operations to support and deepen relationships with OEMs and platform providers, which embed mission-enabling synthetic environments and simulation at the earlier stages of OEM procurement and throughout the program lifecycle. Over time, this will enable CAE to expand our business in Canada but also around the world with key international partners including NATO, in particular NATO countries where European defense spending will reach approximately 800 billion euros annually by 2030. I'm extremely pleased with the progress we've made on this front since the start of the fiscal year. I'm excited to share some of the important developments for our business that occurred. These include the M346 partnership with Leonardo, the partnership with Saab on Global Line Gripen, and the partnership with TKMS on the Canadian Patrol Submarine Program and broader maritime opportunities. All in all, over the long term, these opportunities enable international and domain expansion, establish new franchise programs for CAE and represent more than $5 billion of potential pipeline value. It's a subset of a rural defense pipeline. For reference, our defense pipeline represents the collection of defense opportunities and potential future adjusted order intake that we're actively pursuing across customers, programs, and geographies. This pipeline, to be clear, spans from early proposals, qualification, and early submittals, and there's time for it to evolve for bids and final contract. The conversion rates and timing can vary depending on the specific opportunity and the country involved. But our total defense pipeline is growing, and as our current defense adjusted backlog is 10.7 billion, this new pipeline represents a significant opportunity to grow that further in the years to come. And strategically, these new platforms are new franchises and new domains and new countries that can stand decades for CAE. Let me go into a little bit more detail. First, we announced the expansion of our collaboration with Leonardo around the next generation M346 Block 20 training ecosystem. The M346 is one of the most advanced jet fighter training platforms in the world. And while the timing of future opportunities for this platform are dependent on different decisions by customers such as Canada, this agreement should open significant opportunities over the coming years as it further expands our role in military pilot training and Rhea Forces, CA's position as a trusted training and simulation partner to major defense OEMs. This includes developing training architectures to prepare pilots for increasingly networked, data-driven and autonomous operational environments, including those associated with fifth and sixth generation air operations. The partnership builds on the proven successes of the International Flight Training School in Sardinia, Italy, a joint venture between us and Leonardo and the Italian Air Force that brings together live flying advanced simulation and Mission Rehearsal Capabilities and expands the scope of collaboration into future integrated training capabilities across global campaigns. We also strengthened and solidified our partnership with SOP, announcing a teaming agreement to support Canada's Airborne Early Warning and Control Program based on SOP's Global Eye platform and an MOU to collaborate on advanced training, simulation and mission support for the GRIP and FIGHTER. The Global Eye Agreement builds on our worldwide cooperation agreement established in November of 2025, which positions CAE as Saab's preferred partner for training and simulation solutions across its airborne early warning and control platforms, and this is a global partnership. In addition to the Canada program, CAE sees significant international pipeline for Global Eye opportunities, with multiple countries and geographies interested in the program, overlapping where both Saab and CAE have capability and expertise, and Simulation Flight and Mission Rehearsal. For the Gripen, which is targeting an annual production of between 25 and 30 aircraft, a level that will almost certainly double current capacity, our agreement enables CAE to support potential future fighter capability, including training, mission support and sustainment in Canada and other international markets. Another example that I'm particularly proud of is our partnership activity with TKMS to support the largest defense procurement program in Canada's history, The Canadian Patrol Submarine Project, or CPSP. This program is expected to reach approximately $100 billion over its life cycle, and Canada has announced that TKMS and their 212CD submarine has been selected as the preferred supplier. As part of this program, CAU's position is to deliver training operation, advanced simulation systems, digital and physical training infrastructure, and facility management, including long-term sustainment support. Beyond the domestic Canadian submarine program, our partnership with TKMS also opens avenues for CA to support international naval customers with advanced naval training, simulation, and mission readiness solutions for TKMS submarine and surface ship programs around the globe. This further expands our pipeline, solidifies our position in the naval domain, and represents a potential long-term opportunity set that is in excess of the individual Canadian patrol submarine project opportunity. and as we look to the future and add domains, we're excited with the recently announced partnership with Shield AI to support their development of the CCA or Collaborative Combat Aircraft. Companies like Shield AI and their defense tech rely on the capability that CAE has to bring training, simulation, mission rehearsal capability to their advanced platforms. We're excited by this and other developments to come. Overall, these specific exciting opportunities represent a subset of our current defense pipeline and we believe they align directly with CA's core competencies and support our long-term growth strategy. As you can see, many exciting announcements across both the civil and defense landscape are painting a future of growth for years to come. With that, I'll turn the call over to Ryan to discuss Q1 2027 financials and our fiscal 2027 outlook in more depth. When Ryan concludes his remarks, I'll provide some closing thoughts. Ryan?

Thank you, Matt, and good morning, everyone. As Matt noted, were consistent with our expectations and our full year outlook. Overall, execution was solid, free cash flow performance was strong, and our transformation activities progressed as planned. Consistent with our fiscal 2027 outlook and the fiscal 2030 targets we outlined in May, we remain focused on successfully executing the transformation to reshape the business and improve its long-term performance while simultaneously building growth momentum in the core business. In Q1, as part of our transformation plan, we incurred $48 million of expenses, of which $12 million were non-cash charges. This brings total spending on the transformation program to $133 million, of which $71 million is non-cash. The overall program is tracking to plan, and we are still expecting total costs of $200 million to $250 million with approximately $100 million in non-cash charges. Since our last update, we advanced across several of our key work streams in Q1, including retiring an additional simulator from our network, bringing the total to six. We are tracking to our plan of having 13 to 15 simulators removed by the end of fiscal 2027 and remain on pace to retire approximately 10% of the commercial full-flight simulator fleet. All in, The completion of these actions will enable CAE to close between four and six of our training centers. We anticipate closing one additional civil training center by the end of this calendar year, which will bring the total to two. As Matt discussed, we remain firmly on track for a fiscal 2030 target of $125 million to $150 million of transformation run rate savings. Turning to our results, and the first quarter consolidated revenues of $1.2 billion, increased 6.8% year over year. Adjusted segment operating income was $156.6 million, down 7.5% from 169.3 million in the first quarter last year and adjusted EPS was 26 cents compared to 26 cents a year ago. Our adjusted segment operating income reflected strong performance in our business aviation training and Defence Businesses, which was offset by higher costs related to credit charges, higher bid and proposal activities in our defence business, higher spend related to specific transformation initiatives and lower contributions from government R&D funding programs. Free cash flow was strong in the first quarter. We generated $104 million of free cash flow in Q1 under our updated definition that includes all capital and intangible investments Thank you for joining us today. We ended the quarter with net debt of $2.6 billion and a net debt to adjusted EBITDA ratio of 2.27 times, in line with our long-term leverage target. In Q1, we repurchased 1.1 million shares for $39 million under our NCIB program. With our improved cash and leverage performance, we have increased optionality to deploy cash towards incremental organic growth opportunities or, in their absence, return cash to shareholders. Our capital allocation commitment is to remain measured, disciplined, and transparent while ensuring that we maximize shareholder value and deliver on our plans. Turning to the segment results, in civil, first quarter revenues increased 5.6% year-over-year to $641.6 million. Adjusted segment operating income decreased 13.7% to $106.1 million, resulting in a margin of 16.5% Down from 20.2% in Q1 of last year. The decrease in civil adjusted segment operating income was as expected and was due to higher selling, general and administrative expenses driven in part by impacts from the conflict in the Middle East. Specific costs included credit related charges on financial assets, a lower contribution from simulator sales, and lower profitability in our joint ventures in the Middle East. The decrease was partially offset by a higher contribution from business aviation training services. Civil training center utilization was 72.2%, up from 68.8% in the prior year period, and reflected improvements in both commercial and business aviation training. As a reminder, we have updated and standardized the definition of utilization across our network. This resulted in an approximate 200 basis point decline and the comparative period percentage. On the commercial side, we saw increased utilization in India, Europe and the Americas, partially offset by weaker performance in the Middle East. Notably, in business aviation training, we were able to successfully offset some of the headwinds in our Middle Eastern operations by transferring the volume to other areas of our network and are working through other mitigation activities aimed at limiting the impact on our financial performance. In civil, we booked new orders worth $838 million in the quarter, representing a book-to-sales ratio of 1.31 times, including the finalization of the WestJet order that Matt discussed. In defense, revenues increased 8.3% year-over-year to $531.8 million, and adjusted segment operating income increased 9.1% to $50.5 million in a 9.5% margin. This performance was driven by higher profitability and activity on our contracts in U.S. and Canada, as well as the realization of program efficiencies resulting in completion of key program milestones partially offset by higher selling general and administrative expenses related to increased bid and proposal activity as we pursue growth opportunities. Our defense adjusted backlog sits at $10.7 billion, with a pipeline of global opportunities meaningfully larger than our current adjusted order backlog. As we indicated when we introduced our fiscal 2027 outlook, we do not expect quarterly performance to progress in a perfectly linear fashion. The second quarter will reflect the impacts of seasonality, notably in our civil business. Overall, we're encouraged by our start to fiscal 2027 and remain focused on delivering on our plans for the year. The transformation program Progressing as expected, our businesses are executing well against their plans and we've made no changes to the fiscal 2027 outlook or fiscal 2030 targets that we issued in May. We remain well positioned to achieve our goals. The work is well underway towards positioning CAE for stronger earnings growth, improved levels of profitability, higher free cash flow conversion, and better returns on invested capital. With that, We'll turn the call back to Matt.

Thanks, Ryan. 2027 is a transformational year, and we are making rapid progress. We are building on CAE's iconic franchise and strong customer relationships. While we are simplifying our portfolio around core businesses, while we are rationalizing our network capacity to improve utilization and margins, and while we align a worldwide team on performance and cash flow generation, As we progress, we are pivoting to growth in our core areas and future opportunities across the defense tech ecosystem, which is increasingly exciting, including prospects in synthetic environments, autonomy, and multi-domain. We remain committed to our fiscal 2027 outlook and to our fiscal 2030 targets of reducing $125 million to $150 million of structural costs, while driving CAE to $950 million to $1 billion of adjusted segment operating income. We are seeing early indications of growth. The Alberta Training Center is an example where we will invest in regions that are expanding in need capacity. Our partnerships with Leonardo, Saab, TKMS, Airbus, Boeing, Bombardier, Embraer, and Shield AI continue to indicate the strength and value that CAE brings to the table to sort of world's leading platform companies and emerging defense tech startups. Our worldwide footprint gives us the opportunity to invest centrally but grow locally to support sovereign defense needs in over 40 countries. As we transform, we are evolving the culture from one that focused mostly on top-line growth at the expense of our balance sheet margins and returns to a team that is acting with discipline, focus and leveraging balanced scorecards to deliver what shareholders expect. We have the right strategy and the right team and we are aligned to run a clear plan motivated by updated incentives to act with speed and purpose. We have great businesses and attractive end markets, a rich heritage, exceptional people, differentiated technologies and trusted customer relationships. As we deliver on our transformation commitments, CA's next phase will be defined by accelerating our growth. Thank you for your continued support and we look forward to updating you on our progress next quarter. With that, we'd be happy to take your questions.

Thank you, Matt.

Operator will now open the lines to financial analysts. 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 are using a speakerphone, please pick up your hands before pressing any keys. And to withdraw your question, please press star, then 2. Your first question comes from Konark Gupta with Scotiabank. Please go ahead.

Thanks, and good morning, everyone. My first question is on the civil margins. I understand that they met expectations you had, but can you just explain some of the transitory costs during the quarters, especially the credit related charges and the transformation related Thank you very much.

So we said we're happy that we're able to work with a lot of our airlines to reroute their training to put them in other facilities. But that has a cost as we move their training centers and sometimes instructors to other facilities. And so while we capture the revenue, the cost is a little higher. That's temporary. and then, yes, the Middle East is causing disruption in fuel prices around the world and that's affecting some of our customers. So, two-thirds of the impact is Middle East driven and we're mitigating it and we view it as temporary. The other third is related to some heightened costs and I'll turn to Ryan now to give you a little detail on.

Yeah, thanks, Matt. So, the other items, we talked about this leading into the quarter. So, with the transformation, there's some discrete investments that we're making in the business. that are going to serve the business long term and be margin accretive over time. And we've also talked about lower government funding in our R&D program. So that's really the other third. But as we said in the prepared remarks, we're really pleased with performance in the civil business. Business aviation had good growth in the quarter. Utilization is trending in the right direction. So overall, we're very pleased.

Again, thanks for the color. It is good to see, I guess, you know, with Calin, you know, at the helm as a director, new executive conversation structure in place. I'm pretty interested in the ROIC. I think you guys have pivoted from ROCE to ROIC now. Any guideposts you guys are looking at for the next few years in terms of how ROIC should be and what's the right ROIC level for CAE?

Yeah, Carter, so I'll start. So we haven't put out targets on this. And a couple comments. First, this has primarily been an internal driver of how we look at investment and projects. When we look at the calculations, The other comments I'll make is We're going to get towards the high single digits. We'll approach low double digits. But it's really going to be the pace of change as we start to see the benefits from the transformation program. We're here to see the benefit in our ROIC.

Conor, it's Kalen here. Thanks for that comment. Look, I think as you know, I spoke with a lot of investors and with all the analysts in the earlier days of my appointments. and this is one of the recurring themes that we have been hearing is that a greater focus on ROIC and how we compare ourselves to organizations that are best in class or better in class than CAE was and this cash on cash return dynamic that Ryan just indicated was a big driver of that and so we're sort of looking to upscale, I would say, the way we are dealing with these long, with these sort of LTIP, these long-term incentive programs and we think that these are much better indicators and will drive better behavior as well.

Great. Thanks for the color, Calin and Ryan. Appreciate the time. Thanks.

Your next question comes from Daryl Young from Staples. Please go ahead.

Good morning, everyone. I wanted to ask on the defense business, and the $5 billion pipeline is obviously very impressive, but I'm just wondering if the mix of training versus product development coming down the pipeline is, if there's any skew there, and I guess how we should think about the product development risk for some of these new mega project opportunities, and I'm thinking specifically things like the Canadian submarine opportunity with TKMS, just I don't think you've worked with that partner before, so how should we think about the product development risk, I guess?

Yeah, good morning. Thanks for the question. Two parts, really. The first is how do we think about the pipeline going forward and what's the mix? So we feel good about these partnerships. If you've been tracking, we selected a partnership with Leonardo M346, and that's the platform chosen by Canada to be its next training platform. We have a partnership with Saab on... GlobalEye, that's also the platform that Canada and NATO has selected to support their upcoming needs. And then obviously the partnership with TKMS leverages a decision on Canada for that platform as well. What's special about these arrangements is we will do the NRE once. We will do it with the OEM in collaboration, and then we will use that to develop training centers. Thank you very much. and that's part of the strategy to an upfront engineering and development program which has inherent development risks but it's one that we're well suited to manage and then use that as a basis and then we reproduce the training centers where they're needed around the world. So that's why we view the NRE as acceptable. It's going to be a far less percentage of the overall program than in other programs in the past. And then if you ask me about the mix, it's going to be depending on the installation It is going to be more services, training services and product because we'll develop these training centers and then put them in place and operate them.

Got it. That's great, Colin. Thanks. And then one other around capital allocation that's two-part. So the flightscape, the commentary you gave around strategic review progressing well, sounds like you're seeing bids that are acceptable valuation to you. But the proceeds of a potential transaction there, Would that be something you could immediately turn around and buy back on the NCIB, or will the NCIB be more programmatic or opportunistic, I guess?

Yeah, thanks for the question. First, it's early in the process. We've seen strong buyer interest, and that makes us excited about where we are in the strategic review. And that process is underway, and we'll inform everyone about the results at the appropriate time in the future. In terms of the proceeds, it's too early to predict exactly what they'll be, but in large part we think the proceeds will fund the transformation at a minimum, and that is a great return on capital. Anything we do to fund the transformation is going to increase immediately shareholder value. As we've said, our average return is two to three years. After that, we'll pursue other capital allocation decisions in the same disciplined approach that we've been talking about.

It's Calin here, and as we've said previously, people have asked about the reinstating of the dividend and this sort of thing. We haven't made any announcement on that. We haven't made any decision on that. But obviously, once we get into a healthier dynamic, the leverage ratio is at the level we've said. We've got additional proceeds coming in. We will assess all of these capital allocation decisions then and look to deploy it in the best fashion. But as Matt says, the Transformation is the first order of business here.

Got it. That's great. I'll jump back in the queue. Thanks very much.

Your next question comes from Cameron Darkson with National Bank. Please go ahead.

Thanks. Good morning. I guess a question on the optimization in the network. I mean, it's very good to see that the attrition on revenue from moving customers' contracts is going to be very minimal. So that's good to see. I guess the question I have is around pricing. I know this is one of the things you've been also focused on is maybe upgrading the quality of revenue with some of the customer Can you update us, I guess, on any progress you're making there, and I guess the reception from customers on future contract renewals on perhaps having to pay a little higher price than what they've been paying?

Yeah, look, I appreciate the question. It's early, to be fair, and airlines are sophisticated buyers, and airlines around the world are struggling with fuel prices and traffic disruptions, and these are our key partners, so we're going to work cautiously through this. But the counter side of that is we want to get the right economic value for our products and services around the world. The approach isn't disciplined. We're starting with our aftermarket products and services, which is a small portion of our civil business, and putting in the discipline, the vocabulary, the tools to price that effectively. And we'll start to see the potential benefits of that as we close out the year. We then move to our product side for the same evaluation and improvement, and then obviously from there to our business and commercial training network. So it's still early. Thank you very much. Okay, that's great. I'll leave it at one question. Appreciate the time.

Your next question comes from Sheila Kailu with Jefferies. Please go ahead.

Good morning, guys, and thank you so much for the time. Maybe I wanted to ask two questions as simple as possible on just the revenue outlook, you know, from start to the year, but the guidance suggests flat to start way down. You know, I guess even with some of the headwinds like the product business, Middle East, and of course the transformation, How do we think about the remainder of that business from a civil and business aviation market perspective for the rest of the year?

Thanks, Sheila, for the question. If you look at the civil market through one quarter or one month, it often appears discombobulated. It can be difficult to understand what's going on. If we step back from it, we still see a long-term growth trajectory of 4%, which we think is a very attractive market. We are the market leader in there. We started this year Thank you for joining us. but again if you step away from this quarter or the next couple quarters the long-term outlook of the industry is strong it's incredibly resilient and we're well positioned with our product sales and our training network to continue to grow.

That's super helpful and I guess if I could ask on the margins as a follow-up the color was super helpful on maybe seeing two-thirds of the impact on relocate reallocation but I guess how do we think about pricing with your civil customers how's that going because The airlines are seeing big pricing benefits. Is there some of that, especially given less than 1% attrition as you move simulators around?

Yeah, I think in terms of, Sheila, there's probably two answers to your question. In terms of moving customers and maintaining them as we go through the network rationalization, each time we assess the decision, it's going to be incrementally beneficial to us. That's why we're going through the rationalization exercise. and so each contract, each customer is approached with a unique solution but we have to make sure it's incrementally better. This is about driving improved productivity and improved margin and that's why we're going through this exercise and it's hundreds of customers across the four to six sites and all the training centers so the intent is to make incremental margin as well as drive utilization and I think the other part of your question would go back to the earlier comment about We're approaching pricing diligently across portfolio, recognizing airlines are in a challenging year, and we work with them on a one-off basis there as well.

Great. Thank you so much.

Your next question comes from Team James with TD. Please go ahead.

Thanks very much. Good morning. Just in terms of the Middle East and the impact that conflict there is having on the business, obviously it sounds like it's created some unexpected headwinds, or at least some that may be carrying on further in the fiscal year. Has there been some unexpected positives in other parts of the business that offset that Middle East impact and that allows you to kind of maintain your full year guidance? Or is the Middle East conflict... Impact is not material enough to kind of bump you off your expected guidance range.

Yeah, I appreciate the question. We anticipated at least a half year of impact in the Middle East, and we're seeing it. It's difficult to predict exactly when the Middle East issue will fully subside. And then there will be a tale of activity as fuel prices and other things manage their way through the system. It's a long-cycle business. So we are seeing training reroute to other parts of the network is one of the advantages of having a worldwide network. We can support our customers anywhere. Initially, that's having some incremental costs associated with the movement, but we have mitigation procedures in place, and it's working. So I don't see incremental headwind in the year. I do see us being cautious as we go through the seasonality of the Middle East effects, which will take another quarter or two to subside. But we don't see incremental risk in the year. We're mitigating it appropriately. Okay.

Okay, great. Thank you. And then just one follow-up question. I want to tie it back into an earlier question about your backlog and your pipeline and defense. Correct me if I'm wrong, Matt, but I think you suggested training is the real powerhouse behind that backlog strength. Can you provide any insight as we think about longer-term margins and the difference between Products, business, and equipment in defense versus training opportunities. Just what the, you know, the differences are at a high level between the margin profile and those two revenue streams.

Yeah, it's a great question. So, you know, a healthy defense business will operate, as I've said many times before, in that low teens margin, and that's where we're driving. Thank you very much. Thank you.

Next question comes from Christine Luag from Morgan Stanley. Please go ahead.

Hey, good morning, everyone. I want to dive in a little bit on civil as you go through this transitory period. I was wondering, can you provide more detail regarding your expectations for customer retention during this transition? Also, for your customers, what are the key factors that could cause them to switch? Are there significant number of alternatives that they could go to? And how are those initial conversations going?

I appreciate the question. Thank you. So as I mentioned before, as we take out 10% of our capacity, we're going to retain more than 99% of our contracts. The attrition is less than 1% at the civil level. We feel very, very good about that. But it is an airline-by-airline discussion involving where they operate, the regional capacity we have that's near, and what arrangement we make to work with them. There are alternatives out there. There's no other provider with a network as capable, as widespread, and as professional as ours. and we're going to leverage that to ensure we provide the right solution but it's a competitive industry and there's small players out there that provide training on a one-off basis and so we're being very diligent about handling our customer relationship. That intimacy is job one. So the conversations are going well. That's why we're able to characterize attrition to be less than 1% of our overall revenue base but we've got to continue to work to earn their trust every day.

Great, super helpful. And for that 99% confidence, is that down back with long-term agreements signed with these customers? How should we think about the risks related to that?

Most of our contracts with customers, it's a mix of joint ventures with some airlines, term agreements, master service agreements with others in long terms. So it varies significantly. And that's why from a From a company perspective, our job is to maintain and earn that trust every single day and continue to provide the best full flight simulators with the best technical devices and the best instructors and the best courseware. So we never take a contract for granted. Every day we're there to earn and re-earn our customer trust.

Thank you very much.

Next question comes from Christa Friesen with CIBC. Please go ahead.

Hi, thanks for taking my question. Just one on the defense side. You talked about higher bid proposal costs in the quarter. Just wondering how we should think about that for the remainder of 2027 and when you think that could subside. Thank you.

Yeah, good morning, Krista. This is Ryan. So, I think we're going to continue to see some of that throughout the balance of the year. There's, as Matt talked about in his remarks, there's a very healthy pipeline of opportunities, and this is a key growth area for the business. So, we do expect to see that spend continue through to most of the balance of the year.

Thank you. Maybe if you can just speak to, obviously you've announced a lot of partnerships on the defense side recently. Are there a lot of other large partnerships that you're targeting at this point, or are you pretty happy with where you sit right now? Thank you.

Yeah, thanks for the question. The answer is yes, we're targeting many other partnerships. We're really feeling to be in a unique position. We're the largest independent organization and many countries for sovereign solutions. So we're just getting started.

Thank you. I appreciate the color. I'll turn back to you.

Once again, if you have a question, please press star, then 1 on your telephone keypad. Your next question comes from Andrew Steinhardt with Bank of America Canada. Please go ahead.

Hi. Good morning. and Ron Perron. Thanks for taking my questions. Just piggybacking off the last question on the Shield AI partnership, you know, obviously it's early, but I was wondering if you could just talk a little bit about what that work has looked like so far and, you know, how will that build as PCA actually progresses here?

Yeah, thanks for the question. Shield AI has positioned itself as a very interesting provider of AI or autonomy solutions in the defense ecosystem, trying to work across a variety of platforms. And that autonomy solution, that algorithm needs to be trained, and it needs to be able to work in a synthetic environment, and it needs to work side by side with humans. And that's where we come in. So they have the algorithm, but we come in to help them provide that training ecosystem that surrounds it so that not only does the algorithm operate the way Shield AI intends, but we can get humans that will inevitably work with it to operate as well. So it is because of the CCA platform that we're working on, but we're excited with the partnership with Shield that could expand beyond that. These systems that are being built in the defense ecosystem are increasingly complex. and for operators to understand how to work with them, whether they're side by side as a CCA or remote, as a remote piloted vehicle or a drone, is where the future lies. And it's something we've been doing for the past 15 years. We have fantastic relationships with companies like General Atomics and we provide that training ecosystem today and we're excited with the partnership of Shield as they continue to drive their algorithm, we'll provide the training ecosystem with them.

Gotcha. I appreciate that, Collier. And I guess just a follow-up, you know, what portion of that $5 billion pipeline is related to CCA or other types of drones, I guess?

A very small portion of the $5 billion. The $5 billion that I articulated is driven mostly by the Leonardo, the Saab Global Eye, and the TKMS Maritime Submarine. As we get more granular on other partnership opportunities or sovereign, then we'll start to articulate more fidelity around the pipeline. But the $5 billion is a conservative pipeline estimate around primarily those programs.

Got it. Thank you very much.

We have no further questions. Mr. Arnovitz?

Operator, thank you very much. I want to thank all of the participants on the call this morning and remind you that a transcript of the call and the Q&A can be found later on CAA's website. The team and I are, of course, at your disposal. Should you have any follow-up questions, please do reach out. Thanks very much. Have a great day.

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