CAE Inc (CAE) 2022 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the CAE Fourth Quarter Conference Call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Mr. Andrew Arnovitz. Please go ahead.

Good afternoon -- or I should say good morning, everyone, and thank you for joining us today. Before we begin, I'd like to remind you that today's remarks, including management's outlook for FY '23 and answers to questions contain forward-looking statements.

These forward-looking statements represent our expectations as of today, June 1, 2022, 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 CAE's annual MD&A, available on our corporate website, and in our filings with the Canadian Securities Administrators on SEDAR and the U.S. Securities and Exchange Commission on EDGAR.

On the call with me this morning are Marc Parent, CAE's President and Chief Executive Officer; and Sonya Branco, our Chief Financial Officer. After remarks from Marc and Sonya, we'll take questions from financial analysts and institutional investors. Following the conclusion of that Q&A period, we'll open the call to questions from members of the media. Let me now turn the call over to Marc.

Thank you, Andrew. Good afternoon -- good morning, again, to everyone joining us on the call. Before Sonya and I get into the results, I want to first say how proud I am of our 13,000 CAE employees who exemplified our One CAE culture and delivered a truly outstanding performance in fiscal 2022.

We set a number of order intake records this year, culminating in record bookings of $4.1 billion, and a record backlog of $9.6 billion. These numbers are especially impressive considering that our industry is still in the early days of a cyclical recovery.

We're winning market share by innovating and delighting our customers, and this is because of the great dedication of our people. Testament to their passion and commitment is that employee engagement has never been higher even with the added complexities of managing through a pandemic.

I'll talk more about the way forward at the end of the call, but these are some of the most important factors that underscore my enthusiasm and outlook for a bigger, stronger and more profitable CAE in the period ahead.

Turning now to our results. On a consolidated basis, we grew fourth quarter revenue by 25% and annual revenue by 23% before the contribution of our ventilator humanitarian initiative last year. We delivered 32% higher adjusted earnings per share in the quarter. And for the year, it was up 79%.

Testament to the quality of these results, we generated a healthy $188 million of free cash flow for the quarter and $342 million for the year. In Civil, we had strong performance with double-digit growth in revenue and adjusted segment operating income, and we generated margins, north of 20% for the second quarter in a row.

Despite only pronged disruptions during the fall and winter and continued market weakness in Asia, fourth quarter average training center utilization reached 69%, which is up from 55% last year. Training demand in the Americas continues to be the strongest in the quarter, easily absorbing the capacity we've deployed recently into the region to meet our customers' increased needs.

We also had strong demand for new pilot training with record monthly hours flown at our flight school of Phoenix, Arizona. Training utilization in Europe improved in the quarter with airlines having become more confident about the summer travel period. Asia Pacific was a bit better with some easing of travel restrictions in Singapore and Malaysia, but remain at a much lower level compared to 2019.

In Business Aviation, training demand was robust and reflects the high level of business aircraft flight activity, which is well above 2019 levels. We overcame market and logistical challenges to deliver 7 Civil full-flight simulators in the quarter and 30 for the year. We had strong order activity in Civil overall in the quarter, booking training solutions contracts valued at $517 million for a book-to-sales ratio of 1.19x, including 15 full-flight simulator sales.

Annual orders reached $2 billion for a book-to-sales ratio of 1.25x, including comprehensive, long-term training agreements with airlines and business jet operators worldwide, and a total of 48 full-flight simulator sales for the year, which is a testament to the increased demand for pilot training.

This is a big step-up compared to only 11 orders for all of the previous fiscal year. Civil concluded the year with a healthy order backlog of $4.9 billion. We also expanded our horizons during the year by partnering with 4 of the leading electrical vertical takeoff and landing developers to provide a range of solutions, including simulators, pilot and maintenance training programs and aircraft systems engineering and support.

Additionally, we concluded the acquisition of Sabre AirCentre's airline operations portfolio during the quarter, giving us the valuable suite of flight and crew management and optimization solutions and a highly talented workforce who we welcome warmly to CAE.

The acquisition is part of a strategy to extend Civil beyond training and access an even larger portion of the civil aviation market that we already addressed. We continuously innovate to earn the right to be our customers' training partner of choice, and now we're expanding our aperture to also become their technology partner of choice.

I'm very encouraged by the positive customer response we've had already, with airlines and business jet operators treating CAE as a highly logical partner for these solutions.

In Defence, we also had double-digit growth in the quarter with the contribution of L3Harris Military Training, and I'm especially pleased with the acceleration in order intake with bookings totaling a record $751 million in the quarter or a 1.6x book-to-sales ratio.

Notable wins in the quarter include a contract with the Government of Canada to extend and expand the NATO Flying Training in Canada program through 2027. Defence also broadened its customer access with a USD 250 million ceiling U.S. Naval Air Systems Command contract for rapid acquisition, prototyping, iteration and development, which is an IDIQ win.

Defence concluded the year with a record $1.9 billion in orders, including competitive prime awards across all 5 domains that being air, land, sea, space and cyber. This higher level of activity contributed to a $4.7 billion Defence backlog, representing 1.2x book to sales for the year.

Notably, this is the first time our annual Defence book-to-sales ratio has been above 1 in the last 4 fiscal years and is key to driving higher performance in the years ahead. We also concluded the year with a record $8.6 billion of Defence bids pending customer decisions.

Turning now to Healthcare. We delivered our fifth consecutive quarter of double-digit year-over-year revenue growth, excluding ventilators, and we generated sequentially higher profitability in the fourth quarter.

One noteworthy order during the quarter included a collaboration between Healthcare and Defence to win a contract to support the German armed forces by providing patient simulators, user training and maintenance support. This collaboration is a great example of CAE's cross-business synergies and is testament to our unique One CAE culture.

Our good progress in Healthcare during the year reflects a clear focus on achieving greater scale and the ramp-up of our reenergized organization. We began worldwide deliveries of our newest pediatric patient simulator CAE Aria, and we launched updates to expand the future set and functionality of some of our main product solutions, including Vimedix, our ultrasound education platform, CAE CathLabVR and CAE LearningSpace.

With that, I'll now turn the call over to Sonya, who'll provide a more detailed look at our financial performance, and I'll return at the end of the call to comment on our outlook. Sonya?

Thank you, Marc, and good morning, everyone. I first want to thank our stakeholders for their patience in delay and getting the results out to you. Our auditors required more time than anticipated to complete the technical tasks involved in the normal course audit.

Turning now to results. We delivered a strong performance in the fourth quarter and for the year, having worked diligently to overcome the ongoing COVID-related challenges and delivered double-digit revenue and adjusted segment operating income growth and higher margins.

We also generated excellent free cash flow and helped to secure future growth with record order bookings and backlog. We have effectively deployed growth capital seizing on opportunities to expand our market reach and we achieved our targets on restructuring programs to lower our cost structure by approximately $70 million annually.

We also continue to be on track with the integration of our acquisitions and the realization of planned cost synergies within the expected time frame. Looking at our results on a consolidated basis, revenue of $955 million was up 25% compared to the fourth quarter last year, excluding $130 million of revenue per ventilator.

Adjusted segment operating income was $142.7 million compared to $106.2 million last year. Quarterly adjusted net income was $92 million or $0.29 per share compared to $0.22 in the fourth quarter last year.

For the year, consolidated revenue was up 13% to $3.4 billion and was 23% higher, excluding $230.6 million of revenue last year from the ventilator contract. Adjusted segment operating income was up 58% to $444.5 million, and annual adjusted net income was $261 million or $0.84 per share, which is up 79% compared to $0.47 last year.

We incurred restructuring integration and acquisition costs of $36 million during the quarter related to the L3Harris Military Training and AirCentre acquisition and our enterprise-wide restructuring program.

Net cash provided by operating activities was $206.8 million for the quarter compared to $174.6 million in the fourth quarter last year. And for the year, we generated $418.2 million from operating activities compared to $366.6 million last year.

We had a strong free cash flow in the quarter of $187.6 million and $341.5 million for the year for an annual cash conversion rate of 131%. Uses of cash involved funding capital expenditures for $74.7 million in the fourth quarter and $272.2 million for the year, which is in line with our outlook of total CapEx of more than $250 million.

CAE's growth CapEx was mainly driven by the expansion of our Civil Aviation Training network and typically generates 20% to 30% range of incremental return on capital employed within the first few years of deployment. These opportunities translate to some of the best examples of growth compounding at CAE.

Looking at fiscal 2023, we continue to expect CapEx of approximately $250 million reflecting a large pipeline of attractive market-light expansion investment opportunities on the horizon. Our net debt position at the end of the quarter was approximately $2.7 billion, for a net debt to adjusted EBITDA of 3.6x. This compares to net debt of $2.3 billion and 3.2x net debt to adjusted EBITDA at the end of the preceding quarter.

During the last 2 fiscal years, we made several growth investments to expand our capabilities and reach, including 9 acquisitions, totaling $2.1 billion, and capital expenditures for some $380 million.

We're continuing to focus on attractive growth opportunities, and at the same time, we expect to reduce leverage with net debt to adjusted EBITDA decreasing to below 3x within the next 18 months. Income tax expense this quarter was $3.7 million, representing an effective tax rate of 6% compared to a negative effective tax rate of 21% for the fourth quarter of fiscal 2021.

The tax rate was mainly impacted by restructuring integration and acquisition costs. Excluding the effect of these elements, the income tax rate would have been 15% this quarter and 14% for the year. Reflecting some of the recent changes we have seen to global tax regime, we expect effective income tax rate to be approximately 22% going forward.

Also below the line, non-controlling interest was $2 million for the quarter and $8.3 million for the year. We expect NCI to continue to increase, commensurate with the growth rate of CAE's adjusted segment operating income. Now to briefly recap our segment performance.

In Civil, fourth quarter revenue was up 11% year-over-year to $432.7 million, and adjusted segment operating income was up 45% year-over-year to $96.3 million for a margin of 22.3%. For the year, Civil revenue was up 15% to $1.6 billion, and adjusted segment operating income was up 92% to $314.7 million for an annual margin of 19.5%.

In Defence, fourth quarter revenue of $469.5 million was up 40% over Q4 last year, which includes $146.9 million from the integration of L3Harris Military Training in our financials. Adjusted segment operating income was up 59% over last year to $36.8 million for an operating margin of 7.8%. For the year, Defence revenue was up 32% to $1.6 billion, including $409.9 million from the integration of L3Harris Military Training, and adjusted segment operating income was up 37% to $119.2 million, representing a margin of 7.4%.

And in Healthcare, fourth quarter revenue was $52.8 million, up 20.7%, excluding the ventilator contract last year. Adjusted segment operating income was $9.6 million in the quarter compared to $16.4 million in Q4 last year.

For the year, Healthcare revenue was $151.4 million, up 25%, excluding the ventilator contract last year and adjusted segment operating income was $10.6 million for a margin up 7%.

With that, I will ask Marc to discuss the way forward.

Thanks, Sonya. As we look forward, we continue to see a clear path to emerge from the pandemic a bigger, stronger and more profitable CAE in the years ahead. We're adeptly playing offense in a disruptive market by seizing on highly strategic growth opportunities to expand our capabilities and market reach.

In parallel, we significantly lowered our cost base and continue to innovate ways to revolutionize our customers' training in critical operations with digitally-immersive solutions to elevate safety, efficiency and readiness.

Despite a still challenging environment, there is no doubt our strategy is bearing fruit with several record milestones already reached in the early stages of a cyclical industry recovery. Our recent results and expanded set of opportunities before us, add to my conviction that CAE is poised to experience new heights as we recover from a cyclical downturn and ultimately benefits from secular growth in our end market.

In Civil, we see pent-up demand for air travel as an important driver in the near term. And the rate of Civil's recovery to pre-pandemic levels and beyond is expected to continue to be driven in large part by the easing of travel restrictions, particularly in our key Asian markets.

We also expect more demand from airline customers wanting CAE's support as a partner of choice to secure and train new pilots. They have acute needs arising from the challenges associated while restoring and growing flight capacity in a competitive market for pilots and flight crews.

This dynamic, the strength of Civil's training recovery in the Americas and the sharply higher full-flight simulator order activity this past year, provide a compelling blueprint for the potential for a broader global recovery.

And in Business Aviation, we remain bullish on the long term, and we believe the market is experiencing a structural expansion as evidenced by the record 3.3 million flights worldwide last year.

In fiscal 2023, in addition to growing -- continue to grow our share of the Aviation Training market and expanding our position in Aviation Digital Solutions, we expect to maintain our leading share of full-flight simulator sales and to deliver upwards of 40 full-flight simulators to customers worldwide.

From a profiling standpoint, we're planning a higher proportion of deliveries in the second half of the fiscal year. Overall, we expect continued recovery and growth in Civil in the year ahead.

In Defence, we're on a multiyear journey to becoming bigger and more profitable and the first and most critical link in that chain involves winning orders. Our record order intake this past year makes it clear that we're indeed on the right path to grow.

Furthermore, our record level of Defence bids and proposals is a result of bidding more and bidding larger with our increased capabilities across all 5 domains and the critical mass that our transformed Defence business now possesses.

There's no program in our addressable market that's too large or too complex for CAE to bid on with high probability of success. Our Defence business is now closely aligned with our customers' utmost priorities, which, at their foundation are about defending freedom in the face of near peer threats.

While we could not have known how or when such geopolitical threats would manifest, they have. And we're extremely proud of CAE's role in helping prepare NATO and allied nations to defend freedom. We're also very proud of our noble purpose to help make the world safer and in last 2 years, Defence has enabled that purpose by establishing its position as the world's leading platform-agnostic global training and simulation pure-play Defence business.

Russia's invasion of Ukraine over the last 3 months has galvanized national Defence priorities and we expect increased spending specifically the prioritization on Defence readiness to translate into additional opportunities for CAE in the years ahead.

We also expect continued strong momentum with the integration of L3Harris Military Training in the year ahead and to fully realize $35 million to $45 million of cost synergies by fiscal year 2024. We look forward to continued growth in the year ahead. A few headwinds still exist for the international Defence business in terms of travel restrictions, but we view them as temporary. We're also continuing to work our way through some of the lagging effects of a historically less than 1 book-to-sales ratio, beyond which we expect higher growth from integration synergy and the translation of our recent record order intake and bid activity into revenue.

And lastly, in Healthcare, the long-term potential is increasingly evident for this business to become a more material and profitable part of CAE as we gain share in the health care simulation and training market and continue to build on the great momentum created by the reenergized team over the last 18 months.

For CAE overall, based on everything we see at present, we're targeting consolidated adjusted segment operating income growth in the mid-30% range in fiscal 2023, weighted more heavily in the second half of the year.

In summary, our opportunities set for CAE is highly attractive, and I continue to be very excited about our future. We expect to continue making excellent progress in the year ahead and beyond. And we look forward to sharing more about this with you at our Investor Day on June 7 in New York.

The CAE management team and I will be on hand to present why we believe CAE is so well positioned for superior growth and higher profitability. We'll also showcase some of the latest technological solutions and provide a view on CAE's multiyear growth potential.

CAE is a highly unique company who's cutting edge training and critical operational solutions empower pilots, crew members, Defence forces and health care practitioners to perform at their best every day and when the stakes are at the highest.

We've put those in critical roles with the skills and expertise needed to move our world forward safely. We also enable our customers to perform their complex tasks more efficiently and with a lower carbon footprint.

At the very core, CAE's mission is to make the world safer. In addition to ensuring a compelling financial picture, we hope investors will come away from our Investor Day with an even greater appreciation of CAE's noble purpose, a major driver for all of us.

With that, I thank you for your attention. We're now ready to answer your questions.

Thank you, Marc. Operator, we'll now be ready to take questions from analysts and institutional investors.

(Operator Instructions)

The first question comes from Kevin Chiang of CIBC.

Maybe just 2 for me. The first one on your -- I guess, your recovered SOI margin target. You stuck to the 17% which gives us a North Star as your revenues recover here. But that number hasn't changed, I think, over the past few quarters here, obviously, the inflationary environment has.

I'm just wondering how do you see those margins progressing here given the current inflation environment? Does the composition of that 17%, has that changed? Or do you feel like restructuring efforts more than offset the inflationary pressures or maybe pricing power helps with another lever? Just wondering how that 17% comes about in a high inflationary environment here.

It hasn't changed much, Kevin. Although, we're certainly not unaffected, like anyone else with the inflationary environment, but we've taken steps to protect ourselves from that through various factors, some of which you mentioned, which is being able to pass on some of the cost on to price increases to offset some of -- we relentlessly reduced our cost. That helps as well.

We have built-in measures in our contracts for -- to be able to cater for that as well in a kind of normalized fashion. And I think in terms of composition, it hasn't really changed. We're expecting higher peak margins in Civil.

And we expect, certainly, to get with our planning horizon to a low double-digit margin. It depends. I think that composition hasn't really changed. That's still our North Star.

That's super helpful. And maybe just a second one for me. A lot of headlines around the pilot shortage, especially in the U.S. And one of your partners, JetBlue, recently noted that one way they're combating this is leveraging, I guess, a gateway program, which I believe you have a partnership with them and believe they felt that focusing on onboarding cadets early was helping them get in front of the labor bottleneck.

And so I'm wondering other airlines faces pilot shortage issue. Are you seeing increasing conversations around setting up gateway programs with other U.S. airlines or global airlines, with the idea if you can kind of get the cadet in early that might help alleviate the pilot shortage as you kind of look down the supply chain?

Well, I think first off, we're very proud of the relationship we have with JetBlue as well as other airlines in the United States and around the world with programs like the gateway program that we have with JetBlue.

And yes, we're seeing strong demand, as I mentioned in my notes. So the enrollment in our flight schools, particularly the one that we have in Phoenix, that caters for JetBlue amongst others, American, for example, seeing record order intake in terms of cadets.

So look, we are basically seeing airlines being impacted by pilots certainly in the United States strongly right now, and we are doing everything that we can to be able to support them with providing pilots through our park aviation business, for example, which we do. We supply park -- pilots and have seen some strong demand. We're also seeing, as I mentioned, the enrollment in our pilot schools.

And look, I think this is something that will continue to be a factor. And the fact that airlines are in great need of pilots. To me, it means long-term business for CAE as the largest provider of pilot training in the world. So we're going to continue to help our airline customers and expand those programs.

And our own focus -- our own actually forecast on that is -- I think we said it before, is that we estimate that there are over 264,000 new pilots are going to have to be created over the next 7 to 8 years to accommodate the retirement that we've seen, the attrition that we see as well as the new growth that's going to come across just assuming kind of the growth that IATA is anticipated. So look, I think we're going to have a lot of business going forward on this.

The next question comes from Konark Gupta at Scotiabank.

Just wanted to kind of follow up on Kevin's question on pilot shortage. Is there a way, Marc, to quantify the population or the current population of pilots going through training at this time versus what it was prior to the pandemic? I'm just trying to get a sense on like if the pilot shortage is there -- is it hurting the airlines from growing above and beyond the pandemic? Or is it a hurdle for them to get back to the full pre-pandemic recovery?

I think it's definitely a headwind right now, and I think they're better positioned to be able to answer that question than I am. But -- it really depends on the airline. And you're really seeing that materialize itself mainly at feeders. Feeders to the mainlines because largely the mainlines have been able to cater it.

Although, they're seeing some of that hit as well, some of our major partners in United States. And definitely, I think we're seeing extraordinary level of demand right now in the United States specifically. We've talked about that before, which is benefiting our market quite substantially. That's why we're seeing very high levels utilization in the United States specifically, that's a fact that we've been talking about it. And there's a lot of delta training being caused by the fact that you're bringing on more pilots. So look, I think it's something that I don't think structurally is going to affect the recovery overall of the market in a sustained fashion. But there's no doubt, that it's having an effect right now as I think I've said many time before. I think it's a great time to start a pilot career. I think we will have growth for the years to come. And I think that's going to be a strong driver for our business, the CAE, we're the largest trainer of pilots in the world.

You see that, by the way, just in the -- as I was mentioning in my notes, the strong demand that we've seen for full-flight simulators, I mean all of last year we had 11 full-flight simulator sales. And in the past year that we disclosed, we had 45. That is for the year.

I mean, that is a huge ramp-up, so actually 48 for the full year. That's a huge ramp up, something that we've never seen in terms of going from a downturn, usually 2 or 3 years lag. We've had no lag. This has been a huge V-shape recovery. And again, that is testimony to airline stocking up on similar just to like a train-type range to new pilots.

Okay. And switching gears to Defence actually. So like the last quarter and the quarter before, like you've seen a pretty significant acceleration, I think, in Defence order intake. And obviously, now you have L3Harris as well to that kind of place into the mix too. The bid pipeline here, what are you kind of suggesting is north of $8 billion. I don't think we have seen those kind of numbers before historically, it's probably more than twice what we used to see prior to the pandemic.

I'm just trying to figure out if there's any momentum in Defence order intake or bid pipeline because of the recent announcements by global Defence forces to increase Defence spending or that has still to play out like where are we in terms of that cycle for global Defence spending ramping up?

I mean, to your question, that has built to play out. What you're seeing in the much larger backlog of bid is us bidding more and bidding larger with our combined capabilities of what we call it legacy and our business combined with L3Harris Military Training.

That's what you're seeing here. We're seeing much more opportunities to bid. And as I said in my notes is almost there is no track that's too large or too complex in our addressable market for us to bid. So I think that's very positive. And again, as I said it, you're seeing a much larger level of bidding activity, and you're seeing the fruits of that through.

If you look at every quarter last year, we started the year with less than book-to-bill than you had, I think Q2, you had pretty much one-to-one, then you have over 1 in Q3 and much higher in Q1 and Q4. I think that's a nice trend. And as I said, it doesn't happen -- it doesn't turn into revenue immediately. But it definitely shows you that we're on the right path and over the next few quarters, definitely that will start to make an impact to our results as it translates into revenue.

Operator, just to make sure that everybody has a chance to ask a question, maybe we ask participants to stick with a single part question, and we're happy to take more if time permits and just reenter the queue.

The next question comes from Cameron Doerksen with National Bank.

I had a question on the, I guess, the AirCentre acquisition. I mean you closed that during the fourth quarter. Just wonder if you can comment on kind of your early thoughts on the business and how it's integrating into the existing CAE business? And can you also maybe talk a little bit about sort of the recovery pace for that AirCentre business? How does that compare, I guess, with kind of the airline pilot training demand and just sort of compare and contrast those two.

Well, what I'd say, Cameron, is the integration is progressing very well since we closed the acquisition on March 1. We see no surprises. I'm very excited about the potential as we move, as I say in my note from really being a training partner to the world's airlines to a technology partner, I've been very, very happy about the reception of our customers.

I think we said when we talked about the acquisition, there's almost -- it's almost 100% overlap between those customers that we serve training from a training or simulator standpoint to those that use any one of Sabre AirCentres, what we use to call Sabre AirCentres, now it's CAE Flight Services with software tools.

So very, very pleased on how that's going. I've got one of my top 3 executives run that business, Pascal Grenier, and we're very excited about what we see. In terms of its growth, I think no surprises there. Look, it's -- the business here is very highly correlated to the amount of planes flying, the amount of crews flying and it's basically our performance be in lockstep with those numbers.

And we're very happy with what we're seeing before, I think more to come. I think the fact to me is like what's extremely positive about that is we're adding $2 billion of total accessible market now in Civil. And in a market where really we're talking about just growing the level of business that we do with our existing customers. So more to come, but so far, great start.

The next question comes from Fadi Chamoun with BMO.

Congrats on strong orders. The Civil aviation. Sonya, can you quantify for us like how much these remeasurement of royalty and reversal of few of the earn-out contributed to the aviation in the fourth quarter?

Sure, Fadi. So you're right. There was a higher level of gains this quarter. And this is -- this came from the remeasurement of royalties and contingent considerations. And the royalties themselves are pretty much a recurring item every year. If you go back to Q4, we had some last year as well.

And it's really kind of based on a 20-year-plus horizon estimate. So it flows through all 3 segments, but the larger proportion was in Civil. Now the accounting presents that on the other gains and losses line. What it doesn't consider is that we did have a host of other higher-than-usual costs that are not necessarily kind of singled out in that separate line, but are in cost of goods sold and SG&A.

So for example, with the Omicron and the BA.2 wave, there was a significant ramp-up in our COVID protocol and security costs, including like higher cost and productivity from impact from absenteeism and also some unusual supply chain logistic cost that we see as temporary, but that increased in the quarter.

So on a whole, it was not overly material to see and it's Civil as a whole, right? So really not a major impact on dollar or margin. And while we're speaking about that, I just highlight that these gains are relatively noncash. So despite that, we delivered a pretty strong cash conversion of 131%. So it kind of speaks to the operational performance and the quality of earnings in the quarter and the year.

And maybe I could add as well, Fadi that, another confidence you might gain is the number that we have is the baseline for the growth forecast that we have at 30%. So that's the number we start with. We don't try to normalize it.

Yes. The growth outlook that we give for next year in the mid-30% range is off the adjusted SOI of $445 million, and that includes all of these items.

Okay. And that gross number for next year is applied the same kind of to Defence and Aviation? Mid-30% growth?

Yes.

Okay. Okay. Is that an organic growth number within the Aviation that you're assuming? Because I know you bought kind of -- will have a full contribution next year and you've had some cost restructuring initiatives and all that. Like, what would be the organic growth you're assuming?

We factored all of those elements, whether it's the -- as we integrate really, it'll be driving organic and revenue and cost synergies as well as the impact of the structural cost savings and the ramp-up whether on recovery and expansion of our market position with customers.

The next question comes from Benoit Poirier of Desjardins.

This is Michael on behalf of Benoit. Congratulations on the good quarter. I just -- can I have a little more color on the cloud computing and transition adjustment in -- for EBIT? Was it just a matter of fact of moving legacy systems and software to the cloud from the previous system?

No, not an operational item at all. Frankly, it's just new guidance coming out of IFRS on how to account some criteria for cloud computing and SaaS as we -- companies have growing ERPs that are either kind of housed, in-house or on SaaS applications. So new or revised guidance on that front. And so that we're just applying the updated guidance as an accounting change. And so it's really non-recurring in nature, but nothing operational.

And the next question comes from Benoit Poirier of Desjardins.

Congrats for the quarter. Marc, looking at the global Defence budgets, obviously, trending upward. Could you provide some color about the timing of when we might see the potential implications and whether do you see greatest opportunities either on the service or product side?

Well, I think I'll always start that question to say that the day that these revenues are a proxy for the growth of the U.S. Defence budget or any budget I'll be very happy. So that's not the case. We're still -- although, we're very big in our space, I think the size of that budget dwarfs any aspiration.

So the fact that they're going up is a good sign. But I think we can do very well, thank you and grow beyond the levels of growth for those inherent budgets, and that's certainly our growth outlook. I think we'll do well. We're very well aligned with the priorities that are inherent in the Defence budgets, which, as I said, is to make sure that the readiness for the near peer fight.

That's what we do. And that's been made even much stronger now with our combined business with L3Harris Military Training business. So look, I think it's going to be a combination of both products and services. When I look at the backlog that we see, it's basically a mix of the 2.

So I wouldn't go too much beyond that except that, again, we're forecasting strong growth in Defence, and we're well on the path to be able to do that. And I think don't look at -- continue to look at Defence on a 12-month basis. That's what I will always look. The orders that we've won in the past year, which is very, very encouraging. I expect will continue.

Again, look at this on a 12-month basis, it will translate to revenue in the upcoming periods, and we're well on the way to the target that we have so strong growth and low double-digit margins, depends -- that's where I'll see it, Benoit.

The next question comes from Noah Poponak of Goldman Sachs.

A lot of questions in the marketplace about the assumptions behind the '23 framework of segment EBITDA up mid-30%. Appreciate that different companies are providing different versions of guidance and that you've given us some framework. But perhaps you could just put a little more detail behind that in terms of what you're seeing in the segments, what kind of utilization rates you're assuming, what kind of growth you're assuming in the segments maybe?

And I guess, particularly on the margins, the margins changed through the year a lot last year. So how do maybe the margins compared to the exit rates of 2022? Anything that stands out, I guess, would be helpful.

Well, I don't think -- when I look at the base of the question, I'm not sure too much will stand out, except maybe perceived lumpiness through quarters. I've said many times, and I've said it again in the -- in our notes, we expect more of a back-ended 2022.

And there's a reason for that. Reason for it. If I look at Civil specifically, first of all, I'll tell you that the higher utilization rates are a factor. We're seeing sequentially higher utilization rates, and we're going to continue to see that with very high level of airline-based activity in the U.S. We're seeing much stronger in Europe.

We're starting to see, although, it's much slower, we're starting to see Asia open up. It's very, very good that now we see Shanghai -- not Shanghai, but we see Singapore opening up, we see Malaysia opening up. That's very good, although you can well imagine that there's a lot of travel that's China dependent. So that's still pretty low with the lockdowns in Shanghai that are just now opening up.

So that's going to have some lag effect for quite a while, I think. And for that, I mean, we continue to look at the IATA forecast as the basis for our forecast, which is RPK growth and how that translates into utilization. So if I come out with that stronger utilization as a whole, that's -- we're definitely seeing the leverage effect.

I mean, if you look at the fact that the margins we're making in Civil overall, at still a much lower than peak utilization. I think you're seeing there both the benefits of the leverage effects on our -- that is translating to the bottom line there in Civil. And you're also seeing the benefits of our cost savings that we put through a restructuring program that are definitely panning fruit.

That's very clear. That will continue. So I think you will expect to see a higher margin there. But what you got to look -- or won't have to look at is that similar deliveries from the factory, also a big factor in that, and I see those being more biased to the second half. And that's just a consequence of where they are in the production line.

And typically, in the summer period, we have, for example, we have -- we tend to shut the factory for maintenance. I think that's not going to be any different this year. The other thing is you have to look at airlines in the first -- in the second quarter -- very much in the second quarter, they're flying, and therefore, they're not training.

That's definitely going to be a factor this year. We haven't seen that seasonality as much during COVID for obvious reasons, but we're going to see it this year. So I think that's the color I would give. In terms of Defence what I would see is those orders that we've seen, okay, they're going to take time and we have this which I like to say we have like this big animal that's making its way through the snake right now, those big orders.

And that's going to go to translate. That's inevitably going to drop to the bottom line. I expect that it's not going to happen overnight, okay? But it definitely is going to start affecting the year. I think that against it the back half. And that -- combining all that, that translates into the outlook that we've given in terms of tight 30% growth.

The next question comes from Kristine Liwag of Morgan Stanley.

Marc, aviation is the safest form of mass transportation today. So when we kind of look at this pilot shortage issue, some were advocating for the reduction of the number of pilots in either some of the long-haul flights or for freight especially as we're seeing more automation in the cockpit.

As we balance out like the safety requirement of the industry and the shortage issue, can you comment on how credible you think the reduction of pilots would be in either the cockpit or the requirement in a flight? And if we do see this reduction, where you think that could come out first?

Well, look, I don't -- well, first of all, I've been around in the industry for over 35 years. I used to -- before the -- I used to design airplanes, airplanes that are transport category airplanes. I'm pretty well versed as, call it, an expert in this domain of what's required to certify our place to be able to safely transport passengers.

And it's not -- I would say, it's not the technology that doesn't exist. The technology exists and the world's defence forces do it every day. In fact, we have high expertise in doing it for years, we've been conducting to train, for example, on U.S. Air Force flying creditor flying reefers, for example. We have strong capabilities in that where we deploy and we bid around the world in defence.

First of all, in Civil Aviation, you nailed on the head that overwhelming priming consideration is the safety of the traveling public. And this is, as you said, again, the safest order transportation in the world.

And that -- the reason for that is because the regulatory framework for the design of aircraft continues to relentlessly advance based on the lessons learned of incidents that happened, the reports that come out of natural transportation, safety board recommendation, which translates into changes to path by FAA by EASA, for example. Then there's -- and which -- so therefore, the airplanes get safer and safer all the time.

Also inherent in that is the safety of the air crews themselves. That's where we come in. As we come in as, obviously, the leader in the world, working with the world's regulators to ensure that the training of those pilots is at the utmost standard. Airlines are not getting -- airplanes are not getting less complex, automation is not getting less complex. So the pilots have to be trained effectively.

So going straight to your question, I don't see anything within the planning horizon which tells me that we will have a single pilot airplanes or certainly no pilot aircraft in conceivable future, so it's a very long time.

Don't forget that I think even if you -- let's say, if you were to assume that 1 pilot, if you have a plane flying with 1 pilot, then you have to certify the airplane assuming there is no pilot because, well, just to use an easy example, 1 bad hamburger and that pilot can be incapacitated, therefore, you have no pilot.

So in the fundamental concept of design of airplanes for flying passengers around the world is that no single failure could result in the loss for the aircraft. So obviously, if you have 1 pilot flying the aircraft and he or she is incapacitated, then you violated that rule.

So if we do see it one day, and I think it's a long way off, I would anticipate that it will happen on long-haul flights involving cargo. That's where I could see it. But again, I don't see that for a long time.

The next question comes from Tim James, TD Securities.

It's Tim James here. Sonya, I'm just wondering if you could provide some additional color on the CapEx plans for fiscal '23. And maybe just talk about a bit of a breakdown or give us a sense for CapEx in Defence versus Civil and maybe any specifics on sort of markets or product lines or service lines with each -- within each segment. And as part of that, is it possible to get a bit of an idea of what expected growth in [SEUs] is and how CapEx drives that -- this fiscal year?

Okay. Well, I think the split of our projected CapEx not going to be overly different than what you've seen historically. The lion's share really goes to Civil and expanding our Civil Aviation network. And I said it in my remarks, I'll say it again, this is growth CapEx that is linked to direct market demand, customer order intake, new orders that we see or long-term contracts that we find that have accretive returns and cash flow.

So wherever we can secure long-term recurring regulated revenues that are -- can be 20% to 30% incremental return accretive within a couple of years. This is some of the highest growth accretive investments that we can make. In terms of color, once again, it will be really focused on deploying that Civil -- or expanding that Civil network.

A lot of opportunities on the business jet side with kind of significant activity and structural expansion. So we do see a large portion on that CapEx going in business jet, including 3 new training centers that we're opening up, Savannah and Las Vegas or West Coast one, specifically a larger one.

And also a lot of opportunities on commercial side. Marc was speaking to the recovery in that market, which is really a blueprint for what we hope the broader recovery will look like as the other regions kind of catch up. But those are some commercial deployments on -- especially on the U.S. side.

So where we can, as part of the restructuring program, we are redeploying underutilized assets or assets with lower recovery profiles and moving them over to the U.S., but also deploying new opportunities as we're signing contracts with customers. So a focus on that and definitely a high proportion of all of that investment being in the Americas that we see for next year.

That was our final question from financial analysts.

Thank you, operator. We'll now open the lines to members of the media.

(Operator Instructions)

And our first question comes from Julian Anaso of (inaudible).

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And that was our final question. I'll turn the call back over to our speakers for any closing remarks.

Thank you very much, operator. And I want to thank all our participants for joining us today and remind you that there will be a transcript of today's call on CAE's website at cae.com. Thanks very much. Have a good day.

Thank you. This does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you, and have a good day.