CAE Inc (CAE) 2024 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the CAE fourth quarter and full year financial results for fiscal year 2024 conference call. (Operator Instructions) The conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Mr. Andrew Arnovitz. Please go ahead, Mr. Arnovitz.

Good morning, everyone, and thanks for joining us. Before we begin, I'd like to remind you that today's remarks, including management's outlook for fiscal '25. Answers to questions contain forward-looking statements. These forward-looking statements represent our expectations as of today, May 28, 2024 and accordingly are subject to change.

Such statements are based on assumptions that may not materialize and are subject to risks and uncertainties. Actual results may differ materially and listeners are cautioned not to place undue reliance on these forward-looking statements. A description of the risks, factors and assumptions that may affect future results is contained in CAE's annual MD&A available on our corporate website and on our filings with the Canadian Securities Administrators on SEDAR Plus and the US Securities and Exchange Commission on EDGAR.

With the divestiture of CAE's health care business. all comparative figures discussed here and in our financial results have been reclassified to reflect discontinued operations. On the call with me this morning are Marc Parent, CAE's President and Chief Executive Officer; and Sonya Branco, our Chief Financial Officer; Nick Leontidis, CAE's newly appointed Chief Operating Officer, is also on hand for the question period. After remarks from Marc and Sonya, we'll open the call for questions from financial analysts. And at the conclusion of that segment, we'll open the lines to members of the media.

With that, let me now turn the call over to Marc.

Thank you, Andrew, and good morning to everyone joining us on the call. As you'll have seen from our earnings release, fourth quarter results are unchanged from last week's preannouncement, which was mainly intended to communicate the re-baselining of our defense business for the appointment of Nick Leontidis, a proven CAE veteran, as our Chief Operating Officer.

To provide additional context last week, we also offered our earnings for you in our preliminary fiscal 2025 outlook. This morning, Sonya and I will provide a bit more color on our performance and our very strong financial position.

Last week, we took decisive action to establish a clear path for margin improvement in our defense business. I certainly recognize that our defense performance has significantly fallen short of our expectations and understand and share investors' frustration. The impairments and accelerated risk recognition on the legacy contracts that we announced last week are disappointing, but necessary steps towards putting the overhang of these past issues behind us.

These actions were made possible by renegotiating agreements with our customers or suppliers, adjusting the scope and the timing of these contracts for our mutual benefit. Ultimately, this enables us to address the programmatic risks that have been affecting our business. Alongside a re-baseline of the defense business was the acceleration of risk recognition on legacy contracts and execution of a leadership or reorganization and implementation of targeted operational enhancements at both the segment and corporate levels.

These initiatives are designed to fortify our execution capabilities and foster greater synergies between our defense and our civil businesses. I fully expect these changes to enable greater focus to a simplification of our operating structure with our COO, overseeing the five P&Ls that encompass CAE's entire business scope.

This new structure and recent upskilling of talent in defense will further enhance the execution and oversight of major defense programs and facility the exploration and realization of synergies between our civil and defense operations. Also, in the vein of further bolstering CAE's future, our fourth quarter and full year results reflect continued strong growth in our core markets, robust order flow and consistent cash generation.

For CAE overall, we grew adjusted backlog by approximately 13% year-over-year with $1.6 billion in orders in the quarter or 1.38 book-to-sales ratio. For the year, we booked over $4.9 billion in orders for a 1.15 times book-to-sales ratio.

As of the end of March, we had a record backlog of $12.2 billion. We also further strengthened our financial position, having generated $418 million of free cash flow during the fiscal year. And together with proceeds from the sale of health care, we reduced leverage to below 3 times net debt to adjusted EBITDA excluding legacy contracts.

In civil, we booked orders in the fourth quarter fiscal quarter are $832 million, including contracts for seven full-flight simulators. This brings the total civil order intake to a record $3 billion for the year, including 64 full-flight simulator sales, demonstrating the sustained high demand for pilot training solutions and our flight solutions software platform.

Civil concluded the year with a record adjusted backlog of $6.4 billion. Notable contracts in the quarter included a multiyear commercial aviation training agreement with ITA Airways and a first of its kind partnership in Canada where CAE instructors will deliver initial training for NAV Canada flight service specialists and air traffic controllers.

And testament to our progress in flight solutions, we announced yesterday the signing of European ultra low-cost carrier Wizz Air, as a new partner under a multi-year supply agreement. We'll be supplying Wizz Air with CAE's Operational Control and Crew Management software and CAE's Recovery Manager solutions for operational and crew disruptions.

Average training center utilization was strong at 78% for the fourth quarter and 76% for the year, up from 72% the year prior. In products, we delivered 17 Civil full-flight simulators in the quarter and 47 for the year compared to 46 deliveries in the prior year. As disclosed last week, this is a bit lower than the approximately 50 that we had expected with timing difference due to customer requests to postpone deliveries because their own facilities weren't ready to receive the full flight simulators as originally planned.

Taking time delays from last year to account, we expect to deliver more than 50 full-flight simulators in fiscal 2025. Turning to defense, at the same time, as we've been taking actions to re-baseline the business, we've continued to make headway with our transformation strategy. We reached $1.9 billion of adjusted order intake on an annual basis involving training and simulation solutions for 1.04 times book-to-sales ratio. This contributed to a $5.7 billion of adjusted defense backlog.

In the quarter, we had orders totaling $718 million, including a transformative win involving a contract with General Atomics to support Remotely Piloted Aircraft System or RPAS program for delivering air crew and maintenance technician training, supporting training devices, of and courseware to meet Canada's RPAS requirements.

This is a prime example of a kind of larger and more differentiated program that we're in a position to address that will ultimately drive the defense transformation that we've been expecting. With that I'll now turn the call over to Sonya to provide a 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. Looking at our fourth quarter results on a consolidated basis, revenue of $1.1 billion was down 6% compared to the fourth quarter last year. Adjusted segment operating income was $125.7 million or $216 million, excluding the impact of the legacy contracts compared to $193 million last year.

Quarterly adjusted EPS was $0.12 per share or $0.37 excluding the legacy contracts, compared to $0.33 in the fourth quarter last year. We incurred restructuring integration and acquisition costs of $55 million during the quarter in connection with the previously announced restructuring program related to portfolio-shaping actions, including the sale of healthcare and to the continued integration of our center. AirCentre integration is progressing as planned and is expected to wind down by the end of June.

The restructuring program is related to portfolio-shaping actions of the streamlined CAE's operating model and portfolio, optimize our cost structure and create efficiency. Total restructuring costs incurred since the start of this restructuring program this quarter amounted to $39.3 million, and we expect to record approximately $10 million of additional restructuring expenses over the next two quarters.

In light of the organizational and operational changes announced last week to re-baseline the defense business, further strengthen our execution capabilities and drive additional synergies between CAE's defense and civil aviation businesses. For the year, consolidated revenue was up 7% at $4.3 billion. Adjusted segment operating income was up 2% to $549.7 million and annual adjusted net income was $276.8 million or $0.87 per share, which is stable compared to $0.87 last year.

Excluding Legacy Contracts, adjusted segment operating income was up 19% to $640 million and annual adjusted net income was $355.3 million or $1.12 per share, which is up 29% compared to last year. Net finance expense this quarter amounted to $52.4 million, which is stable from the preceding quarter and up from $50.4 million in the fourth quarter last year.

I expect our annual finance expense in fiscal 2025 to be similar to fiscal 2024 on lower interest expense on debt, offset by higher lease expense related to recently deployed training centers in our global training network in support of growth.

Income tax recovery this quarter was $80.6 million, representing an effective tax rate of 14% compared to an effective tax rate of 24% in the fourth quarter last year. The adjusted effective tax rate, which is the income tax rate used to determine adjusted net income and adjusted EPS was 47% this quarter compared to '23 in the fourth quarter last year.

The increase in the adjusted effective tax rate was mainly due to the derecognition of tax assets in Europe, partially offset by the change in mix of income from various jurisdictions. On the same basis, the adjusted effective income tax rate for the year was 17%. The annual effective income tax rate in fiscal 2025 is expected to be approximately 25%, considering the income expected from the various jurisdictions and the implementation of global minimum tax policy.

With the closing of the sale of our healthcare business, net income from discontinued operations was $20.5 million this quarter compared to $4.8 million in the fourth quarter last year. The increase compared to the fourth quarter was mainly attributable to the after-tax gain on the disposal of discontinued ops of $16.5 million in relation to the sale of the healthcare business.

Net cash provided by operating activities was $215.2 million for the quarter compared to $180.6 million in the fourth quarter last year.

And for the year, we generated $566.9 million from operating activities compared to $408.4 million last year. We had free cash flow in the quarter of $191.1 million and $418.2 million for the year for an annual cash conversion of 151%. We continue to target an average 100% conversion rate going forward.

Uses of cash involved funding capital expenditures for $91.7 million in the fourth quarter and $329.8 million for the year, driven mainly by the expansion of our civil aviation training network in lockstep with secured customer demand.

These opportunities translate to some of our best returns as our simulators assets ramp up within the first few years of their deployments. Commensurate with our ongoing success to capture market opportunities and training. I expect total CapEx of fiscal 2025 to be $50 million to $100 million higher than fiscal 2024. Approximately three-quarters of this relates to organic growth investments in simulated capacity to be deployed to our global network of primarily civil aviation training centers and backed by multiyear customer contracts.

Our net debt position at the end of the quarter was $2.9 billion for a net debt to adjusted EBITDA of 3.17 times excluding legacy contract leverage was at 2.89 times at the end of the same period. We're prioritizing a balanced approach to capital allocation, including funding accretive growth, continuing to strengthen our financial position, commensurate with our investment grade profile and returning capital to shareholders.

Given our progress in strengthening CAE's financial position as we announced last week. We are reestablishing a normal course issuer bid as part of our capital allocation strategy. The NCIB is currently intended to be used opportunistically over time with an excess free cash flow. Given our outlook and the cash generative nature of our highly recurring business, CAE's Board of Directors will also continue to evaluate the possibility of reintroducing a shareholder dividend.

At the same time, I expect that we'll maintain a very solid financial position, bolstering our balance sheet through ongoing deleveraging, consistent with our investment grade profile. Now to briefly recap our segmented performance. In civil fourth quarter revenue was up 6% year-over-year to $700.8 million and adjusted segment operating income was up 17% year-over-year to $191.4 million for a record margin of 27.3%. For the year, civil revenue was up 12% to $2.4 billion and adjusted segment operating income was up 13% to $548.9 million for an annual margin of 22.5%.

In defence, as we disclosed last week, we accelerated the recognition of risks associated with our legacy contracts in the fourth quarter following revised agreements on scope and timing with customers suppliers and other stakeholders. These actions resulted in profit adjustments associated with the reassessment of our estimated costs.

Fourth quarter defense revenue of $425.5 million was down 21% over Q4 last year. This includes a $54.3 million impact from the accelerated risk recognition on legacy contracts and the conclusion of certain service contracts, we decided to no longer pursue.

Adjusted segment operating loss was $65.7 million and adjusted segment operating income, excluding logistic contracts, was $24.6 million compared to an adjusted segment operating income of $30.5 million in the fourth quarter last year. For the year, defence revenue was stable at $1.8 billion and adjusted segment operating income was down 98% to $0.8 million. Adjusted segment operating income, excluding the legacy contracts, was up 72% to $91.1 million.

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

Thanks, Sonya. I'm going to separately address the outlook for our two segments. But before I offer any numbers, I'd like to mention that our combination of our civil and defense businesses have significant strategic advantage. Now let me reiterate that and be very clear that our defense performance in terms of product profitability certainly hasn't met my expectations so far, but our strategy remains solid.

Over the past two years, we've achieved some 20% growth in adjusted backlog and expanded our pipeline with bid opportunities that align very well with our core strengths and training simulation offering attractive risk return profiles. Our simulators in our training products are very complementary for both civil and defense purposes.

The synergies are strong in terms of technology, manufacturing as well as go-to-market approach. There's hardware and software commonality in the products and increasingly, there's operational synergy in how we optimize training across the two businesses. I'm very confident that Nick Leontidis will strengthen our execution capabilities and drive additional focus and synergies between both of our business segments.

For civil, this secular demand picture for aviation train solutions remain very compelling, underpinned by growth in air travel, demand for pilots, and the need for them to stay current with always advancing aviation technology and regulation.

Our business is driven primarily by the regulated training required to maintain the pilots and crews who operate the global in-service fleet of commercial and business aircraft. And as additional secular driver, we expect to sustain high level of pilot movements from the growth and replacement of the active pilot population.

According to our estimates over half the commercial and business jet pilots will be active in a decade from now have yet to even begin their training. With that background, I expect low double digit percentage civil annual adjusted segment operating income growth in fiscal 2025 and continued margin strengthening with an annual segment operating income margin of approximately 23%.

The expected increase in civil margins reflects the ongoing ramp-up of newer training centers and recently deployed full-flight simulators, partially offset by SaaS conversion that's currently underway in our freight operations solutions software business. As in previous years, I expect annual civil performance to be more heavily weighted to the second half.

In defense, We're also in a secular growth market as the sector enters an extended upcycle marked by rising budget across NATO and allied nations. Key trends include heightened focus on near-peer threats, greater government commitments to defense, modernization, and readiness amid geopolitical tensions and a growing demand for the training and simulation solutions that we provide.

Our expertise in both civil aviation and defense positions us well to meet those needs. Specific to CAE, we're seeing a consistent demand driver across regions for our training solutions, a shortage of uniformed personnel for defense, which has led militaries to rely on industry partners like CAE for train solutions to ensure readiness.

This aligns perfectly with our core strengths in our defense transformation strategy over the past few years has focused on expanding our leadership position on integrated training and simulation solutions. This strategic focus has allowed us to streamline our project selection to ensure a better risk return balance. Moreover, we've renegotiated favorable terms such as cost-plus contracts for development work and tighter pricing bands on service contracts, while leveraging civil life business models in defense.

These improved terms will positively impact our risk-adjusted returns as new contracts ramp up. This approach has already resulted in significant backlog growth with larger, more profitable programs, and we anticipate even greater growth in fiscal 2025.

Our expectations for fiscal 2025 reflect the re-baselining of the business, any enhanced visibility that this obviously gives us. We're extremely focused on acting on what we can control. It will prove it through execution in the coming quarters, we expect annual revenue growth in the low to mid single digit percentage range and annual defense and SOI margin to increase to the 6% to 7% range.

And like civil to be more heavily weighted to the second half. We have large multiyear programs currently in negotiation that should add significantly to our backlog soon. Beyond our selection on transformational defense contracts in Canada. We're well positioned over the next year on several strategic programs across the Indo Pacific region, Europe, and in the United States.

In particular, demand for aircrew training programs similar to Canada's FAcT and RPAS across the Five Eyes and NATO partners as well as the allies continues to increase. These programs require the types of technologies and proficiency that are CAE's strength. We intend to leverage our position on these generational programs in Canada to enable multi-domain train in secure synthetic environments across our global network.

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

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

Great. We will begin the analyst question-and-answer session. (Operator Instructions)

Kevin Chiang, CIBC.

Thanks for taking my question and good morning, everyone. We'd actually just start with a simple question. Just the slippage of some of the full-flight simulators . It sounds like the client wasn't that position it take those those products.

But I'm wondering, have you started to see any impact of pilot training demand, just with some of the aircraft delivery issues at the large OEMs, is that impacting what you're seeing from the airlines in terms of the demand for training maybe relative to what you would have been forecasted or expected, let's say, six to nine months ago. Just wondering if you could just anything material there.

Okay. Let me take it, Kevin, look at these first and foremost, you're right. I mean, the changes that we saw just relative to your outlook on delivery simulators and therefore the adjusted operating income growth was purely because of those training centers that were ready, our customer service centers were ready and basically, those familiar will deliver this year.

So that's really what happened there. It's not a reflection of any type of demand going to change in the market. If I could ask maybe a little more color if required. But look, I mean we've been living in the kind of environment lower than potentially anticipated deliveries of 737 MAX aircraft. As we finalize, less activity because of the engine issue that's affecting mainly Airbus airplanes. As you know, we'll have literally hundreds of airplanes grounded around the world.

So we've been living in that environment for quite a while. So that really that isn't really changing. So I would say there's pockets that you see that airlines are affected by the slowdowns are not able to get the airplanes that they want to secure the demand. The demand itself is very strong, which I see as airplanes a year late pulling your airplanes out of mothballs, you're basically taking airplanes that are out of that coming off season, maintaining on lease.

But we're not really seeing a change in the demand environment at this time, we're watching it and the guidance that we put for civil for next year -- for this coming year, it reflects your our cautious outlook in that regard.

That's helpful. And then just my second question. I appreciate all the color you provided in terms of the rebasing of defense. It also feels like a segment that feels like it's been in some sort of perpetual restructuring for quite some time now or at least for some sort of strategic repositioning with the acquisition of L3Harris Military Training division.

Maybe if I could ask, but when you look out two years from now or whatever the timeframe is, what does it --what should the trends look like the revenue need to be bigger in order to get the margins you want and maybe give us the backlog in terms of there's always risks on execution. Is it is it being more focused on the addressable market you're trying to go after.

And I'm just trying to get a sense of if all goes well here in defense, you fast forward two years and what exactly does defense look like if it's a bigger business with better margins? And is it a smaller business with better margins? Any color there would be helpful.

Well, look, I think I would start by all of those. Kevin, look, clearly, as I said the numbers that we're printing now surely don't meet my expectation and neither are investors cleared. But I think what we've done here is re-baseline the business we've been talking about, the issues are affecting us in defense. We have applied for at least a couple of quarters here, at least in the detail last quarter. We gave you precision on -- there were eight contracts, what we call the legacy contracts that were really undermining the profitability of our business.

I mean, those contracts all have the same kind of [MoD], no signs prior to COVID. It fixed firm price contracts, and they were very very much adversely affected by supply chain issues, manpower issues, runaway inflation of which we're not immune to a lot of our defense plans and assisted companies across the defense environment, particularly in well, actually, I should say only nicely across the world actually.

I mean, we those affected us. We (technical difficulty) at this quarter. What we've done here is basically worked extremely hard to renegotiate with our customers in this regard. Just figure out exactly what the remaining scope on those programs is. The time it's going to take us to those contracts, the cost of kind of take the services with those contracts.

And the difference between that and a cost that we anticipate in the past is $90 million. And that's to some extent, maybe shouldn't be much of a surprise because -- remember, in the third quarter, what we had said is that those eight contracts were really going to drag for next year by [3 basis points] to 300 basis points for next six to eight quarters, while we exited those contracts, the what we've done here is through the actions that we've taken.

So the agreements we've made for our customers were able basically to take that risk off the table or are we pretty much because we're taking it now. So that gives us a clear view of the future and the program at the programmatic risk now going forward, not only in those eight programs, but overall across all the program and the best is done. So that's one major component.

The other component is I'll go back to the success of the strategy on the front end or reiterate the fact that our Board we look at the book of business, we are winning business. We are winning a larger business in the areas where we have core capabilities, training centers, training products, meeting full flight simulators where this is core to us.

We know how to do that. We know how to do it well, we've signed them at margins that are accretive to the outlook that we have in defense, which is 10% or more in terms of profitability. Those programs are going to materialize in our backlog, and I expect about 15% of that of those to materialize in our revenue this year. That's all going to contribute to the answer to your question is stable revenue growth, higher margins on the way to the low-teens or can north of 10% margins.

I want this and generating stable cash flows, which should you should expect out of the defense business because we're basically selling to customers with sovereign guaranteed. So that's what I expect out of the defensive.

That's that's very helpful color. Thank you for taking my questions.

James McGarrigle, RBC Capital Markets.

Morning and thanks for having me on (multiple speakers) On the defense margin guidance applies. I'll pickup in the back half. So can you just talk to the visibility that you have into that higher margin in the back half? And is there any seasonality in the defense side going forward or should we expect that back half margin to kind of be the exit rate for margin to the upcoming fiscal year?

So, I think that if you look at our performance in the past few years, you always see a back half loaded and there is reasons for that. There's budgets in the specific countries, there's programs that are ramping up. This year, I mean we have high visibility of this year, the majority of the revenue and air go profit that we need to execute this year plan and meet the guidance of [6%, 7%] that we put out there.

We've already won those contracts there and the backlog is first to execute. We also obviously have very high visibility on some legacy contracts that we've talked about having a re-baseline the programmatic risk there. So what I'd say is basically we're going in terms again, in terms of variability in the year, it's basically just just the same way we've seen in previous years.

I think maybe to provide a little bit more color on it. I'd say that when we look at the year of the average, the average margin we talked about for 6% to 7%. I would expect that it will start to the year where we ended in terms of profitability. So call it in the five north of 5% range with stronger second half. That's what I would say.

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

Well, look, I think that I fully expect that the demand environment is civil business it must be solved for years to come. I think maybe just a little bit provide a little bit more color on civil. I think if you think about the whole civil business, you saw the change that we've made there and under under Nick Leontidis, our COO; giving more visibility on the leaders of that business. The three layers that we have.

We've got all Alex Prevost of running the Business Aircraft Training. Michelle has already moved up running a commercial aviation training in simulators of world-class talent ready running the software business will be able to provide you, I think, more and more of a broader view of those specific individual businesses with civil.

But let me just have a shot at that maybe also to your answer here. If you break down the revenue in our civil business, about a third of it comes from selling simulators to world's airlines. About one-third of it comes training for the world's airlines who are training centers for airlines around the world. And a third of it comes from business Aviation training and the final really 10% comes from our software business each each of these business has its own dynamics that drives margin.

There's we talk a lot about you utilization, which is a strong metric, but it's not the only metric that is affected by seasonality, especially when you get into the second half where you have lower utilization in our training centers because airlines certainly in the Western Hemisphere, they're flying. So they're not training in a large part.

Within our product segment, which is selling simulators for the as the margins and the actually the revenue can be affected quite significantly by the customer, the product mix for simulator whether the equipment is supplied by buyer in terms of the cost of equipment, for example. There's an impact from joint ventures as well as we do a lot of joint ventures.

And in those cases you don't see the revenue, but you'll see the city income pickup. And finally, the software, that's really affected by the timing of, yes, the contracts, whether or not they're SaaS contracts, which we are prioritizing, and that's has a lower margin addition, while we bought through that Saas conversion.

And so and that's the reason I'm explaining all that. That's why we tend to drive the guide on an annual basis civil. So look, I mean going forward, the trend is going to be higher in civil in all of those segments with the provider, as I talked about, the SaaS conversion, which is probably two to three year basically will ramp up as we go through SaaS conversion.

Appreciate the color, all. I'll turn the line over. Thank you.

Welcome.

Benoit Poirier, Desjardins Capital Markets.

Thanks. Good morning, Marc. Good morning, Sonya. Just to come back on the assumption behind the 6%, 7% EBIT margin target for defense and fiscal year '25. I think I heard that about [50%] of the total revenue is expected to come from those transformative deals that are already in the backlog. So could you maybe provide some color about what was the contribution in Q4 and what makes you confident or the visibility you have with respect to the ramp up in the the second part of the year.

I may not be as clear or maybe I want to answer that question. It's not 50% is 15% of the revenue that's that we're going to get this year comes from those transformation programs, Benoit, and that's relative to 3% last year. So we had last year, we had like 20% of our backlog in defense was these new transformational of programs, and that was that translate in 3% of revenue again this year that will be 15% this year and obviously growing in the years to come as they ramp up.

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

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

Okay. And with which respect to the appointment of Nick Leontidis, COO, obviously been CAE for over 35 years. Could you talk maybe Marc about the strategy here or the action that Nick is going to undertake? And maybe more color about the expected synergies there you would like to extract between civil and defense.

You're going to have to ask me to put Nick on the spot, but before I do. Let me talk about how I viewing. Nick, as you said -- Nick is a veteran of this company. And it's interesting that you may or may not know, actually, Nick started his career defense. So having led starting as an engineer, but like I was -- but having led some major defense contract, including the most complicated, the more extensive than we have ever had.

Probably before fact, which was putting together the first PFI contract in UK in defense, which was standing up here, our Benson training center, where we train all medium helicopters -- or airport, I think you may have visited at one point that training center that we have in Royal Air Force, which still one of the most prestigious technology advanced in the world.

So Nick put that together. So just suffice to say, having known Nick, and Nick has worked for me directly ever since I've been at CAE in various roles. As Nick understands the business. Nick has a very strong operational mindset and a focus on execution as well as strategy. And that's basically the reason I put him in charge expense over 10 years ago.

And I think he's done a pretty good job as tripling the operating in civil in that period and building us the franchise that we have in defense, he is going to put those strengths to focus in defense. Beyond that there's a lot of simplification here that we had through greater focus. It's very clear to me that one of the reasons certainly deal and one of the key reasons that we've been successful in civil is to focus.

I talked about the three P&L leaders that are fully accountable and have all the tools to be able to execute in their business. We're providing through the changes we're making here. We're enhancing the focus here to very specific P&L leaders in the United States. The largest business is the largest military market in the world.

By far very specific focus with Jason Goodfriend as he'll present Interim President there, working for working us through to the US for Nick. And we've marketed visibly running all our international programs, including Canada, where we have some very large contracts that I announced today. So number one is greater focus.

That's very important and that meant beyond that synergy capture is clear to me that there's a lot of synergy left to be had by leveraging our scale and technologies across the entire enterprise and that's going to be key to next responsibly. Beyond that, Nick, maybe a couple of words from your side.

Yes. I was just going to reinforce, I mean, the simplification and accountability. I think we went a little bit astray trying to do all of that under the guise of the two business units. I think the we have go to market business units in business aircraft and commercial and DNS US, DNS International, and then we'll drive synergies across that.

Of course, there's going to be some some restructuring. I will use the word restructuring, of course, because we have some duplication which were necessary at the time. But I think we know it's one of those things when you look at it and you say. Okay, well, we need to make it. And by the way, that's my right now, I'm just asking questions and I'll ask questions about everything. Why is this like this? Why is this like that? And it's amazing the answers that you get.

So I think a lot of times, it's a we get the people working on this. The people know what to do. I'm just going to enable them to do it. And as I tell, we're playing as a team and we're going to have to do this together as a team and people know where the inefficiencies are and they know what they need to stop doing.

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

Yeah. I think for the question, so that the CapEx is really a direct reflection of the success that we've had with all of the orders we secured to output more training. So three-quarters of this CapEx is simulators to our network. So whether it's Qantas agent, we've got plenty [Las Vegas] plenty of examples through that record order intake that we've got in the year.

So we don't deploy simulators to our network on a speculative basis every single one of them are backstopped by signed long-term recurring revenue customer contracts. So what we see that this year's CapEx is really a reflection of the secured order intake that we have and this is to deliver to growth at our customers.

And frankly, we have a proven track record of delivering really accretive returns on this organic CapEx of 20% to 30% range of incremental return on capital on our organic growth. So I wouldn't necessarily going to guide beyond that year, but it will be a function of the level of orders and market capture that will succeed.

Thank you very much for the time.

Konark Gupta, Scotiabank.

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

I think it reinforces the because I think what's important here is that -- ti me, this is a very successful renegotiation that we've done. The teams have been on this for quite a while. Obviously, we have tiger teams on every one of those programs for obvious reasons, but focus on execution of those contracts. But what I talked about in the previous quarter, one, what I said that we're going to take every effort to be able to accelerate the recognition of risks on those programs.

So really scope out the remaining worker. I mean, and I had talked about the time that look, we're going to have to have tough negotiations here and it could lead to, in some cases, basically having to accept penalties for example -- because you were late on contracts as just one example. But the reality is we haven't to do that in a way.

We haven't had to do that in any one of these cases. So we are going to do with CAE always steps. We are going to execute on those contracts and that customers every one of them on these eight contracts are very happy with the outlook that we now have a flawless as we will deliver what we committed on those contracts.

And at the end, the time line and the scope of what we'll do is in line with the expectations kind of have a way. So our reputation that he has of always delivering is intact. And in some cases, actually in somebody's programs. That's really why I talk about it as particularly successful. In some cases, we negotiate additional scope on those contracts. So follow-on contracts as a result of negotiations. Long answer, but this is say, if anything, it enhances our reputation.

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

Well, I think I can give you a lot of examples. But I wouldn't want to turn now to right now. But I can say that (technical difficulty) for example, the leagcy CAE business. There's a lot of overlapping technologies. Best example I can give you is the contract we won called our past. Both teams have products.

So these things have to be rationalized, so they don't have to be done. I mean, we're supporting customers, we're supporting, but we need to build up the synergies and develop a strategy where the whole company has one product in some of these areas, same on the civil side, there are opportunities for the defense guys to offer solutions like Gulfstream's and globals because as you know, these aircraft are used for missions, for missionized missions, if I can use this word.

So right now, we know it's very much not -- they don't know what the simple guys do, and we don't know what these defense requirements are. But for sure the customer is interested in having the solutions. And as we know, especially on some of these programs like the globals and the gulfstream. These are these are very good programs for us. I mean, basically, we lift and shift our training program.

We lift and shift a simulator and instructor training and we have a program, you can have a custom program anywhere you want. So I think that's the kind of stuff that I think we're going to pursue more because obviously we will always have these program that are a little bit more complicated and yes, we'll protect for all the all the obvious stuff, but we need a base of business, which is a little bit less volatile. And I think these are a couple of examples of things that I think we can do to make ourselves more success.

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

Thank you.

Cameron Doerksen, National Bank Financial.

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

Absolutely, thanks Cameron. Some part of our continued balanced capital allocation. We're going to continue to focus on deleveraging. We had always said that the 3 times was really just a waypoint on the way to a lower leverage. So that's a continued focus. We don't we haven't necessarily set a target. It's going to be a balance, but something in line in with our investment grade.

So I say 2 times and 2.5 times as a usual for an investment grade, it gives us flexibility and it gives us flexibility to bring back current returns and support our organic investments in CapEx a lot longer term, that's what I'd be targeting. But ultimately over the next year, it's really continuing on the deleveraging profile while we continue to invest in accretive organic investments and bringing back some shareholder returns.

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

I'm really pleased with the progress on the non-cash income for the year. So it's really the result of continued focus on efficiency of our key metrics, whether it's TSO inventory management deposits and unbilled sales. So it resulted in a strong reversal and an overall reduction in non-cash working cap on balance sheet. So focus is continuing.

For the year, I'd expect the historical trends to continue both on a seasonality, H1, H2 that trend continues, although no more abated. And for the year, training is still the bulk of our business, and that's generally billed after expectations. So as it grows, it slightly non-cash working cap investment, but we continue to focus on the metrics on the efficiency of those metrics. And overall, we target 100% conversion of net income to free cash flow.

Okay. That's helpful. Thanks very much.

Tim James, TD Securities.

Thanks very much. Just one question here. You saw you mentioned that expansion of the train network will be in lockstep with with customer demand. And then you mentioned you look to sign long-term contracts for recurring revenue at customers. Is it possible to outline the hurdle rates that accompany that approach.

And what I'm trying to get at is just at a sense or a comfort level for -- we know an outcome where customers maybe their own demands change from what they contract with CAE and how do you manage that? And how are you ensured against changes in their own activity levels that they want to put through some specific full-flight simulator in the future.

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

I should say a lot of our contracts, in particular, our good clients from people like LATAM. I mean, these are secured capacity. So the so the the exchange there is okay, you secure me X number of simulators and capacity because I need that just to be able to keep all the pilots current in their in their aircraft or training another other or whatever. And then in exchange for that, I will pay you a certain amount of money to keep that capacity.

Now, of course, we like to cover is a good example where we had COVID customers came back and said, hey, we need some relief, whatever, okay? But contractually, we have the hammer I hate to use that word, but we have the hammer and then the question becomes. If an airline wants to change your capacity now you got to remember these are a lot of ways they're like.

I don't want to use the word mathematical, but you have so many pilots, we need so many hours of training you're going to have so much churn going up so much with. I mean, it's not the airlines can be we are very good at predicting their demand. So we contract on that basis. So there your fluctuations tend to be a little bit less so pronounced, especially on the commercial side.

Okay. That's helpful, Nick. Thank you. Sonya, if I could just return to you mentioned the 20% to 30% return on capital target within -- correct me if I'm wrong, but you said two to three years. Can you just remind us on the -- is that return on capital calculation mimic what you can publish as a consolidated target. Is that how we should think about the kind of the numerator and the denominator in that metric when we're thinking about an individual $1 invested in a full-flight simulator?

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

Super, thank you.

Jordan Lyonnais, Bank of America.

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

Did you just said, Vegas or something?

So yes.

Maybe I'll turn it over to him for him.

Well, the biggest facility is ramping up this year will have a we'll have a pretty close to a steady state here. We've been more the Trenton has been open now for a couple of years. So I just did a review with the team and the and they've got to we've got a good plan to bring it up to what we would call steady state.

And in more generally, of course, Q2 will always be a little bit quieter, especially in places like Europe because we have some big customers like easyJet were basically for bidding anybody to train machine or they just want everybody flying for for the summer season. So we'll see some slowdown there in the US, maybe less because there's still a lot of hiring going on. So that's not as affected by seasonality, but in Europe, definitely we see a lot of seasonality.

Got it. Thank you.

(Operator Instructions)

Noah Poponak, Goldman Sachs.

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

It's really that as I was mentioning that Noah. Each one of these eight contracts and there have been substantial and extensive renegotiated on every part of those contracts.

Okay. And that's really to define the remaining work that we have to do on those contracts the time it's going to take us and a very specific costs. It's going to take us. I would tell you on still on top of that, as you would expect on every one of those contracts on top of those that has please put the usual and contingencies that are associated with any remaining what I would call normal risk on those programs because you can never fully eliminate risks.

There's always some risk, but we have contingencies against those. And we have on top of that management reserve on top of those individual programs and through our whole field defense backlog as a whole. So if anything, when I look at those contracts. I would feel good that we should be in a position that we're in a situation that we haven't been in quite a while. You're on sort of on those forecasts where basically you don't have to use any sizable part of those as we want to outperform models program very clearly.

That's really what we mean by re-baselining here. It is put this overhang behind us. We're not going to we still have to execute on those contracts were not walk away walking away from anything that we're still largely going to be executing on those contracts to bring them to a close over the next six to eight quarters.

A couple of them probably will go into the next year just because of the time line. But again, you're always predicted what the cost is going to be on those programs. So feel very good about the execution and the visibility I have on those programs.

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

(technical difficulty) maybe I was mentioning some of those contracts that we've actually been successful in getting follow-on work. What I mean by those, you see these engineering change proposals on a couple of them and on one particular year, we actually got a follow-on contract, which it is definitely a better pricing in [turks].

Okay. And how many of the eight are unprofitable and there?

I mean, going forward, all of them are being but not all at the most numerous at zero margin because we're sitting in there because we've taken the charges on the -- methere's three of them that are operating a very slight profit going forward. So that's kind of situational.

Okay, thank you.

Welcome.

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