CAE Inc (CAE) 2024 Q1 法說會逐字稿

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

Good afternoon, everyone, and thank you for joining us today. Before we begin, I'd like to remind you that today's remarks, including management's outlook and answers to questions contain forward-looking statements. These forward-looking statements represent our expectations as of today, August 9, 2023, and accordingly, are subject to change. Such statements are based on assumptions that may not materialize and are subject to risks and uncertainties. Actual results may differ materially and listeners are cautioned not to place undue reliance on these forward-looking statements.

A description of the risk factors and assumptions that may affect future results is contained in 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 afternoon is Marc Parent, CAE's President and Chief Executive Officer. Sonya Branco, our Chief Financial Officer, is unfortunately under the weather today, so I'll be covering off her remarks. Also on hand with us is Constantino Malatesta, our Corporate Controller. After remarks from Marc and me, we'll open the call to questions from financial analysts. And at the conclusion of that segment, we'll open the line to members of the media.

Let me now turn the call over to Marc.

Thank you, Andrew, and good afternoon to everyone joining us on the call. We're off to a strong start to the fiscal year with first quarter results driven by double-digit year-over-year growth in Civil, continued strengthening in transformation and defense and increased profitability in Healthcare. We've made excellent progress to secure CAE's future growth with over $1 billion in total order intake for a record $11.2 billion backlog. We also further bolstered our financial position and we're on track to meet our leverage target by mid-fiscal year.

In Civil, our markets are thriving and we're addressing a greater share of our customers' training and operational needs as evidenced by our long-term training services agreements that now include nearly every major U.S. airline. We booked $730 million of orders with customers worldwide for a 1.35x book-to-sales ratio, including 22 full-flight simulator sales and a range of multi-year training contracts in commercial and business aviation. We delivered 6 full-flight simulators during the quarter and averaged training center utilization was 77%, up from 71% last year. As this increase suggests, commercial and business aviation training demand was strong across all regions, particularly as customers got their required training sessions done ahead of the busy summer travel period.

While airlines in Asia-Pacific are still not yet back to full capacity on international routes, they continue to make rapid progress to restore their operations to 2019 levels and beyond. During the recent Paris Air Show, several of our airline partners inked sizable aircraft orders to be able to execute on their growth plans and we're excited to be in a position to serve their needs over the next several years. Also significant during the Air Show was our announcement of a strategic alliance with Boeing, whereby CAE will become a Boeing authorized training provider and the first to offer its competency-based training and assistant curriculum.

With this arrangement, Boeing and CAE will expand accessibility to high-quality, innovative flight training to commercial aviation customers worldwide. We're immensely proud of this collaboration with Boeing, first and foremost, in our mission to advance safety by bringing forth solutions that will revolutionize the future of training. As you can imagine, we welcome any and all opportunities to help advance the industry forward.

We also used the occasion of the Paris Air Show to release our 2023 aviation talent forecast, which anticipates the global need for 1.3 million new aviation professionals to join the industry as pilots, aircraft maintenance tacticians and cabin crew over the next 10 years to support the expected growth of the commercial and business aviation markets.

In Defense, performance was in line with our expectations and we're making excellent progress to transform our business, as particularly demonstrated by our recent large strategic program wins and a record $5.4 billion defense backlog. These involve larger and more profitable opportunities that we now have the capabilities to bid and win. This quarter, we booked orders across multiple domains for training and mission support solutions with the funded portion of orders valued at $238 million or 0.5x book-to-sales.

Given the large size and number of major program wins in the U.S. this quarter, the unfunded portion of contracts awarded was even more significant, has more than 3x the funded portion. In total, these represent an additional $779 million contribution to adjusted backlog.

Notable awards include the contracts we announced in May to support FST at Fort Novosel, Alabama, and the U.S. Air Force ISTR contract or initial helicopter flight training out of our existing training center in Dothan, Alabama. Both programs involve delivering simulation and training solutions that are very similar to what we offer in commercial aviation, except, of course, for defense customers instead of airlines.

Additionally, Defense was recently awarded a contract of a land domain that is critical to the U.S. Army's mission, namely Phase 2 of their rapid prototyping effort supporting the soldier virtual trainer program for the replacement of 800-plus legacy training systems. Since the end of the quarter, Defense has continued to leverage CAE's Dothan training center and our industry's leading business aviation training expertise to provide mission-critical solutions for the U.S. Army with a contract for simulation-based training for the Army's key next-generation ISR system called HADES, meaning the high accuracy detection and exploitation system, which is based on the Bombardier Global 6500 business jet, a platform for which we are the global authorized training provider in civil aviation.

At the end of July, the government of Canada announced the selection of SkyAlyne, a partnership between CAE and KF Aerospace as the preferred bidder for the Future Aircrew Training program, or FAT, to provide next-generation pilot training and aircrew training for the Royal Canadian Air Force. This is a major development for CAE and underscores my excitement for our future in this space. We're now entering discussions with the Canadian government and our partners and the award is anticipated in 2024.

In context of securing CAE's future growth, we expect the FAT program to become our largest contract win to date, representing a multibillion-dollar generational training opportunity that will ensure work for CAE over the next quarter century.

Turning now to Healthcare. We continue to gain share in our simulation market, delivering above-market revenue growth and higher profitability with our dynamic team and highly innovative solutions. We had notable contract awards for our learning-based center management solution for the Thomas F. First Junior College of Medicine in Nashville, Tennessee and a contract on the University of North Dakota for a multi-sim sale to outfit their simulation and motion mobile education system.

And by leveraging our technology and subject matter expertise, Healthcare delivered or entered an agreement with Abbott Laboratories to develop a training program to support the launch of a new commercial pacemaker.

With that, I'll now turn the call over to Andrew who will provide additional details about our financial performance. Andrew?

Thanks, Marc. Consolidated revenue of $1.05 billion was 13% higher compared to the first quarter last year and adjusted segment operating income was $145.1 million compared to $60.9 million in the first quarter last year. Our quarterly adjusted EPS was $0.24 compared to $0.06 in the first quarter last year, which included a $0.07 negative EPS impact from contract profit adjustments in Defense.

We incurred restructuring integration and acquisition costs of $15 million during the quarter relating mostly to the Air Center acquisition. Net cash from operating activities this quarter was negative $49.3 million compared to negative $162.6 million in the first quarter of fiscal 2023. Free cash flow was negative $104.9 million compared to negative $182.4 million in the first quarter last year. The increase was mainly due to higher cash provided by operating activities and a lower investment in noncash working capital.

Free cash flow performance in the quarter was in line with our expectations and outlook. We usually see a higher investment in noncash working capital accounts in the first half of the fiscal year. And as in previous years, we expect a portion of this to reverse in the second half. And we continue to target 100% conversion of adjusted net income to free cash flow for the year.

Capital expenditures totaled $90.6 million this quarter, with approximately 60% invested in growth to specifically add capacity to our civil global training network to deliver on our long-term training contracts that are in our backlog. Income tax expense this quarter was $8.2 million for an effective tax rate of 11%. The adjusted effective income tax rate was 13%, which includes a one-time favorable impact to income tax expense from a tax court decision related to the SADI program. This, by the way, was offset by a one-time negative impact from higher interest expense related to the very same matter.

As such, net finance expense this quarter amounted to $54.1 million, which is up from $51.4 million in the preceding quarter and $36.2 million in the first quarter last year. The increased finance expense relative to both prior periods mainly reflects the impact of higher interest rates on our variable rate debt instruments and also the aforementioned tax court decision.

Our net debt position at the end of the quarter was approximately $3.2 billion for a net debt to adjusted EBITDA of 3.22x at the end of the quarter. With this continued strengthening of our financial position, we're on track to meet our expected leverage ratio of about 3x net debt to adjusted EBITDA by the middle of the fiscal year.

Now turning to our segmented performance. In Civil, first quarter revenue was up 12% to $540.3 million compared to the first quarter last year and adjusted segment operating income was up 37% to $119 million versus the first quarter last year for a margin of 22%. As we expected, we're seeing the benefit of some mix improvements in the quarter with a greater proportion of revenue coming from training services overall.

Compared to Q1 last year, we had higher training utilization and increased volume from some of the recently deployed simulators in our network. This was partially offset by lower simulator deliveries, which, as we previously indicated in our outlook, are profiled more to the back half of the fiscal year.

In Defense, first quarter performance was in line with our expectations and outlook for the fiscal year. We generated revenue of $471.7 million, which is up 14% over Q1 last year and adjusted segment operating income was $24.3 million for the quarter, giving us an adjusted segment operating income margin of 5.2%. This compares to a loss of $21.2 million in the first quarter last year. Defense revenue growth stems mainly from a higher level of activity on programs, while the higher adjusted segment operating income reflects the adjustments that we made last year and also the ongoing progress we've been making to execute on legacy contracts and mitigate costs as well as the effects of a gradually easing of economic headwind.

And in Healthcare, first quarter revenue was $42.4 million, up from $39.6 million in Q1 last year. Adjusted segment operating income was $1.8 million in the quarter for an adjusted segment operating income margin of 4.2%, which is up quite nicely from Q1 last year.

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

Thanks, Andrew. Our outlook continues to be bullish for the fiscal year and beyond. We're delivering tangible success and driving strong order flow with our significant and growing backlog. Our customers in each of our markets have a greater need for innovative training and operational support solutions to succeed in ever more complex environments. And as we look to the period ahead, we continue to be highly encouraged by the secular tailwinds in all segments and the growth that we expect to deliver by harnessing our global market technology leadership and the power of One CAE.

In Civil, if you traveled at all over the last few months, you'll know firsthand that demand for air travel is as strong as ever. For the first quarter this calendar year alone, worldwide passenger traffic increased by 58% compared to last year. And in the United States, the TSA reported a new daily record for passenger screening at the end of June. And yet, not all of our airline customers are back to their 2019 operating levels, specifically in Asia, where international traffic is still lagging at nearly 75% of pre-pandemic activity. We see significant demand ahead for air travel in the remainder of the cyclical recovery and beyond.

We're proud to be the world's largest provider of civil aviation training services and we're on track this year to deliver approximately 1.2 million hours of training in our broad global network of training centers. No matter where you fly, chances are that the pilot or first officer has been trained in a flight simulator designed and built by CAE or at one of our training centers around the world.

Our highly differentiated solutions in the aviation market, including the most extensive global training network, world-leading simulation products, unique technology and software solutions and strength in training partnerships with operators and OEMs positions us very well for the long term. We expect the pace of change in aviation to be substantial over the next few years.

The demand for trained aviation professionals is greater than ever and continues to be driven by our traffic growth, personnel retirements and by the number of new aircraft deliveries. Consider the fact that over half the commercial and business pilots who will be active a decade from now have yet to even begin their training. These growth dynamics in a highly regulated market, together with our ability to win a bigger share of our customers' training needs, are indeed very significant drivers for CAE.

Given that context, we expect our Civil business to continue growing at above market rate for the foreseeable future. And in fiscal 2024, we maintain our expectations for low- to mid-teen percentage annual growth at Civil adjusted segment operating income. With the higher level of flying activity this summer, especially in Europe, we also continue to expect a more typical seasonal pattern for training demand this fiscal year weighted more heavily to the second half. Additionally, we still plan for about 3/4 of our approximately 50 annual full flight simulator deliveries to occur in the second half.

Turning to Defense. We expect to continue executing on our multi-year transformation, which we expect to culminate in a substantially bigger and more profitable business. As we've shown with the recent FSTSS and HADES wins with the U.S. Army, we're uniquely positioned to leverage the full range of key civil aviation training expertise in the defense market. In fact, the solutions that we're providing on these 2 contracts are very similar to what we deliver to our airline and business jet customers. We're in a very good position with our recent strategic and generational wins, record $5.4 billion adjusted backlog, $8.8 billion pipeline of bids and proposal outstanding and continued order momentum. To me, these are all positive signs of the transformation that is underway.

As we look to the remainder of fiscal 2024, we continue to expect Defense to renew its backlog with larger and more profitable programs, while simultaneously working its way through a critical mass of lower-margin legacy contracts. We're highly focused on execution. And for the fiscal year, we expect Defense to drive continued year-over-year quarterly performance improvements with a heavier weighting to the second half, consistent with its historical seasonality.

And in Healthcare, simulation-based training is one of the most effective ways to prepare health care practitioners for the moments that matter, treating patients, handling critical situations and enhancing patient safety. We're in a path to accelerate value creation by continuing to gain share in the simulation and training market and driving top and bottom line growth. We have a very strong team and I expect to see Healthcare's positive momentum continue.

In summary, I continue to be excited about the future, and we're on track to our targeted 3-year EPS compound growth rate in the mid-20% range. I'm very pleased with the important progress we have made in the first quarter and expect this to continue for the fiscal year and beyond.

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

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

(Operator Instructions) Our first question comes from Konark Gupta with Scotiabank.

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

Well, I think there are elements of all that. Let me just illustrate a little bit. If you think about -- first of all, let me just go back a step to the story, which I really love and excited about is what we're doing in Lower Alabama. That big training base for the U.S. Army. It's called Fort Novosel, and right down the road is our training center in Dothan, Alabama. So I go back to that a few years ago, as you remember that 2015, we invested to create a turnkey training facility where we put a greenfield because literally, it was a peanut field where we set up. We put buildings there, we put simulators, we bought aircraft and we won the contract to train all of the U.S. Army's fixed wing pilots.

Recently, this year, we won the re-compete after that after 7 years. That's good. So we're good for another 7 years there. So -- and it was a strong win. So basically accretive to kind of the expectations we have with regards to margin expectations that we set out there in the market. Now think about what we're doing now. The recent contracts that we've won, let me start by just the contract that we won with ISCR. ISCR now is the Air Force, U.S. Air Force now. We've won the contract to train all of their rotary-wing pilots and we'll be doing that at our facility at Dothan.

So as well as imagine now the synergistic benefits of using our existing facilities, whether it be hangers, personnel, management, all that. So the synergy benefits -- benefit of now throwing more training at the same facility. So that's one example. Now think about the next one I talked about, HADES contract with the U.S. Army, a different contracting authority by the way, different customer part of the U.S. Army, that's exciting in itself.

But what we're going to be doing here, this is a -- the training is for a Global 6500 business aircraft, where we've done -- we do the simulators, we're the authorized training provider for Bombardier customers of that aircraft. And so we are basically going to put that, we're basically going to put a Global 6500 simulator in Dothan, Alabama. And we are going to be now selling training, okay, to the U.S. Army for literally years to come. So again, leveraging our assets, leveraging what is a commercial simulator built here in Montreal. And you can expect that the kind of margin profile that we've made because we are putting our assets there that we can derive a better margin because this is -- it's -- basically, we are furnishing that -- we are basically furnishing the assets. So in all of this, it's more business using this quasi same assets.

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

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

Our next question comes from Noah Poponak with Goldman Sachs.

Marc, how should we be thinking about the top line growth rate Civil can see into the medium term? You've alluded to not having yet recovered all the pre-pandemic and you have some exposure to geographies that have been a little slower to recover. And then once we kind of click back into 6%, 7% air traffic growth, you're taking market share, you're training a lot of new pilots, you're growing a software business that's become organic. I mean, do we see multiple years beyond this year of continued double-digit organic revenue growth from Civil?

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

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

Well, look, I'd tell you that, as you said in your question, it's Q1. So won't get ahead of ourselves, although I'm obviously very pleased with the results that we have in our Civil business in Q1, as in all of our businesses in Q1. And look, yes, to repeating again what I said and you've emphasized again in the question, though, is that we're in more kind of, let's call it, normal kind of flying activity now.

Meaning that anybody goes to airport sees, right, that airplanes are full and flights are full. So what you're seeing is when all the airlines are flying and having trouble meeting the demands that's out there, we're seeing less training. And that's across commercial and business aviation in the summer, as we always do in a more normal environment. What I would tell you, though, is the bookings towards the third and fourth quarter are strong and indicative of it's going to be another good year, but I'm not going to get ahead of myself of Q1 here.

Our next question comes from Kevin Chiang with CIBC.

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

Not really. No. I think we've done this before, as I was saying at the outset of the question of Konark. We deployed a few years ago our first facility in Lower Alabama. And at that time, we had 0% market share with U.S. Army. Today, I would tell you we have a very high market share in both rotary and fixed-wing contracts with the U.S. Army. So that's been a very, very attractive opportunity. It will be literally for years and years to come.

So look, it depends on the opportunity. What you're seeing here is really the -- we use the term and I use the term a lot One CAE and that applies to work, but it also applies to how we go to market and leveraging our advantages, whether be in Civil on Defense or Defense on Civil. So when you think about it, really, if you look at the model and go back to the HADES model, where we're putting a global 6500 simulator and we're selling training to this new part of the U.S. Army, we're doing at margin expectations there that are going to be the kind of margins that we're more used to in Civil.

So I think -- so it doesn't really change anything with regards to how we will market. It depends on the opportunity. And I mean you've seen in Civil the kind of incremental returns that we get in training. And if we're deploying assets like that for this kind of opportunity, expect the same kind of return profile, which is part and parcel of the outlook that we give for improving margins in Defense the outlook that we've given.

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

Well, I think the first thing I'll talk about, I'll emphasize is in all of those contracts that we talked about as being a lower margin profile in some days, very little margin, we're talking about a very small number of contracts relatively speaking compared to the hundreds of contracts that we execute at any given quarter in Defense. And we're steadily closing out that work. We have been steadily closing out some of those programs or advance the progress we've made on those programs in recent quarters, again this quarter.

I would tell you, look, we're basically where we thought we would be and we're expected to be. We're continuing to work through our existing backlog. We're making very good progress as planned. And even more importantly, as we've answered in the previous question, we're winning new profitable business. And with the bid discipline and the execution discipline, I fully expect to be able to execute those contracts at the margins at which we bid them, which, again, are accretive to margin expectations that we've communicated.

And if I'm looking at the year, I mean, look, it takes time for these new contracts to work themselves through. So as we've said before, we expect second half performance in Defense to step up both in margin and absolute levels. So I would expect Q2 to look similar to Q1 and all in broad terms. And again, a big to step up in the second quarter. And as we expected, as we've communicated a bigger inflection in margins next fiscal year.

Our next question comes from James McGarragle with RBC Capital Markets.

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

Well, look, without appearing to be Pollyanna here, all I see out there is unmet demand. And I'm not seeing any signs of slowdown in terms of level of trading activity in our forecast either in commercial or business aviation training. So I don't want to really be hypothetic about the future.

Look, just to give you an anecdotal evidence, look, we're ramping up to satisfy demand. As you've seen, we deployed, I think, 23 full-flight simulators last year in both Civil and, well, across Civil. We've opened up new training centers. I'm the CEO and I got anecdotally, this doesn't happen every day, but just to give you an idea, I got 2 text messages today during a Board meeting for people that I know are looking for training slots. And obviously, they're calling me is because they're seen people that have flight departments or whatever, they're calling me to say, "Can you help me out?"

It's really, if we have slots, we're filling them. And so I'm not seeing any signs of basically slow down. And there are a lot of people out there that I talked to that actually would welcome a little bit so they could catch up.

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

Well, look, I would tell you that maybe the question depends on timing. Right now as we said before, our priority has been on deleveraging. And we're well down on the track that we've said to reach our deleveraging target this year. We've made excellent progress. We're very happy to see down the 3.2x this quarter. And so I'm pretty confident no big risk on us achieving our deleverage target of 3x mid-year. So look, that opens up possibilities for us in terms of capital allocation.

Look, I think in terms of M&A, I'll say it again, there's nothing that we need to buy, okay? We have everything we have. However, if there's opportunities out there, we're always looking, obviously. Think about some of the acquisition we've made that would be accretive to the growth that we have consolidated our picture. I mean there's not a lot of people that can bring that amount of synergy that we can bring to an acquisition. I don't -- I wouldn't be looking for anything in the short term.

I mean what we will do is continue to deploy assets in line with the market. You've seen us do that. And again, just highlighting what we just said in the previous call, if you have a -- if you've seen some of the incremental returns that we're making out of both the commercial and business aviation training simulators that we put in the market, I think you would be pleased for us to deliver that capital. And as we said before, we don't deploy that capital unless we have long-term contracts to back them up. So look, I think we'll continue to look for a balanced allocation approach from us.

Our next question comes from Tim James with TD Securities.

Wondering first, Marc, the award, the Boeing authorized training provider agreement, I think it seems to me like quite an interesting kind of position to be taking on with Boeing. And as we look about training into the future, I'm just wondering if you could talk about what that agreement means to CAE and to the future of commercial training and the company's positioning?

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

So again, it's about safety here. There's long-term trading agreement. And we're very proud of it, obviously.

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

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

Okay. That's really helpful. And then just my last question, rather broad question, but -- and I guess I'm thinking more about the Civil side of the business. I mean your competitive position is quite something, is very, very good. Are you seeing any changes in the competitive environment?

I mean, the outlook is very strong. You're generating good results. The momentum is there. Is it attracting any moves on the competitive front that you're noting or are worth calling out?

No. Look, I don't see a difference. I would tell you that before I concentrate on customers and meeting customers' demands across our business, that's what I'm focused on. That's what we're focused on. At CAE, our mantra is not to satisfy customers, it's to delight customers. What we do see is -- and you've seen it -- airlines are much more amenable to outsourcing because we provide them the only real global alternative, globally based alternative, to be able to outsource the training and deliver training that is to the level that an airline would provide leveraging not only a regulatory, mere regulatory requirements, but requirements of the airlines themselves, their standard operating procedures, as an example.

I'll just point to the fact that 6 out of the top 7 U.S. airlines now are now training within our network. And that's versus again zero before the pandemic. You've seen us now do a deal for training Aegean, largest Greek carrier, training with Qantas. I mean these are marquee airlines. So that's the dynamic that we see. So the competitive to me -- I mean, look, I don't see any difference in the competitive environment from that standpoint.

Our next question comes from Cameron Doerksen with National Bank Financial.

Just a question on full-flight simulator orders. 22 in the quarter, obviously very strong. I just wonder if you can talk about the outlook for order activity there for the remainder of the year because it does seem like you would be -- I know it's only 1 quarter, but very much on pace to exceed last year's total, which was also pretty strong.

It's been a long time since we haven't had a question on a number of full-flight simulator deliveries like that. But look, I expect it to be elevated. Look, we got 22 so far. What we are always focused, Cameron, is maintaining our share, leading share. We're not going to take every order if it doesn't make sense. It has to be accretive to our expectations. But by and large, look, with the commanding market share that we have and you will imagine that it's not a commodity game here, we basically compete on the fact that, again, our SIMs are going to be out there for decades and we're going to be supporting because that's what we do.

So look, I would expect it to remain elevated. As I said, we'll deliver probably over 50 full-flight simulators for the year. I'm not going to get ahead of myself on the demand, but I can tell you that the demand is still pretty -- the demand out there in terms of what we see the market is still high.

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

Well, I think short answer is yes, okay? It is going to last for quite a long time. It's really -- we're really talking about a generational contract here. No exaggeration. I'm pretty darn sure. I could tell you I was in [Los Janus] last Friday with our team. And that's going to be a contract that we're going to hire people that spend their whole careers on this contract. No generation. I'm very proud of that, the fact that we're creating such an opportunity.

So look, I can't go in -- I think you would understand, I'm not going to into specific of this contract because now we've got to move from being selected to negotiate terms and get the contract signed. So I can't go into detail. But look, what I would tell you is that it's a meaningful expansion of the work that we do today. It will start to deliver fairly early because there's a lot of work to be done to prepare. New buildings, new aircraft, a lot of new things, new simulators, but I won't get into absolute details right now.

Our next question comes from Kristine Liwag with Morgan Stanley.

Great. Marc, the pilot shortage issue in the industry has been long-standing for the past few years now. And here we are, it seems like there's still tightness in the industry and this could get worse. So maybe a 3-part question and I apologize in advance. So first, how far along is the industry in addressing -- are we in the second inning, the seventh inning? Or are we in spring training?

Second, when you talk to airline customers about their needs, what's the level of urgency that they have in trying to attract new pilots to the industry versus where they should be if they want to address the problem? And the third portion of this question would be, if the industry were to act with appropriate urgency and actions to fully address this issue, what does that look like for CAE?

Okay. A lot of questions here, but yes, look, for your question on the baseball analogy, I think we're still in the early innings with customer market. That's the way I would characterize it. There's lots of room -- lots of time to play this out. And of course, people are focused on the United States, but it's a global situation with different dynamics depending on where you are.

There's -- I could tell you, there's lots of urgency amongst our customers out there, whether business aircraft, commercial airline customers for sure. There's lots of urgency out there. And for us, airlines are doing a lot to attract and retain pilots. You see it -- you see it everywhere. And for us, look, we're not putting a final point on it, we just put out, as I was saying, our aviation professionals forecast at Paris Air Show and there's going to be a lot of pilots, a lot of aircrews, a lot of maintenance technicians going to have to be trained over the next 10 years. And that's our business. That's what we do. And we're #1 in the world at it. So I'm bullish almost any scenario.

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

Well, we are doing it. I mean you saw us -- I think we launched 23 new simulators last year. I think we've either launched or open roll ground on 8 new centers in the past few months. So we're moving, and we'll continue to move in lockstep with demand. That's what we've always done and that's what we'll continue to do.

But again, I'll emphasize that if we're going to deploy that capacity, we're going to do it with -- it's not a question that we're going to like build it and they will come. It will be -- we could see that demand for years to come and the contracts will be based on us being able to support that capacity profitably in line with the expectations that we have for those segments.

Our next question comes from Ron Epstein with Bank of America.

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

Well, when we talk about unfunded backlog, really, what you're talking about is -- and I'm sure you know, but it's really if you win, let's say, you win a 7-year contract in the United States, well, we'll only take the first year because that's the funded part of the U.S. Government. So we fully expect the full contract to be realized and I don't think I've ever seen a contract, certainly the U.S. on that definition has gone anywhere but that way.

So I'll give you an example. We're selected on the FSTSS contract. That's a huge contract where we'll be deploying new simulators for the U.S. Army training in Fort Rucker, now Fort Novosel, which would be for us like $455 million of contract. That will deploy over 12 years. So right now our order intake is not $455 million. It's very small. Actually, a very small part of that is in our order intake. But, of course, it'll be reflected in unfunded backlog.

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

Well, I think the first thing I would say is that we wouldn't bid them if we didn't think that we have a pretty good shot at winning them because if I think in Defense proposals, they're very costly and timely to bid and they require a lot of manpower expertise. So you want to make sure that your expertise, your resources are deployed on the ones that you think you can win.

So look, I think that being -- so we expect to win them. We have a pretty darn good shot. So for us beyond that, what our advantage, well, scale for sure, the technology, the market leadership that we have. And the fact that you look at CAE in the market, we're really the only pure-play platform independent, which is important because that makes us an objective defense simulation training company. So that's very attractive in the market out there.

Our next question comes from Michael Kypreos with Desjardins Capital Markets.

Maybe on the IndiGo order for 500 A320. I know CAE currently has some exposure to the IndiGo Cadet Pilot Programme. Maybe just when should we expect any Civil top line or simulator deliveries to be potentially impacted by this order? And is it possible that IndiGo, the airline, kind of front run this training to be ready for when the fleet capacity actually starts to be delivered?

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

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

Well, we have a number of training centers in India right now in Bangalore and the 2 centers in Delhi. Right off the bat, we have ab initio operations there as well. So we're well exposed on the ground in India right now.

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

No, it's in line with our expectations, what we said there. It's certainly not a drop or thing. No, it's basically what I thought it would be as we basically talked about what the margin profile should be this year.

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

(Operator Instructions)

Operator, are there no questions from the media?

There seems to be no questions at this time.

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

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