CAE Inc. Price & Performance (CAE)

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 02/14/2025. And accordingly are subject to change. Such statements are based on assumptions that may not materialize and are subject to risks and uncertainties. Actual results may differ materially and listeners are cautioned not 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 and A and MD and A for the three months ended 12/31/2024, available on our corporate website and in our filings with CAE Securities Administrators on SEDAR plus and the U. S. Securities and Exchange Commission on EDGAR. On the call with me this morning [indiscernible] C's President and Chief Executive Officer and Constantino Malatesta, our Interim Chief Financial Officer. [indiscernible] Chief Operating Officer is on hand for the question period. After remarks from Mark and Constantino, we'll open the call to questions from financial analysts. Before we begin, I'm sure you've all seen the news release we issued yesterday afternoon along our Q3 results. It announced the appointment of four new directors to CAE.

A. Board with Caelin Robinescu as the new Chair. The other appointees are Peter Lee, Catherine A. Lehman and Louis Teteau. These changes come after consultations with our [indiscernible] focusing on the Board's ongoing review of its composition, and a transition towards renewed Board leadership. The four appointments are being made in conjunction with the retirement of four directors, Alan N. McGivin, who has served as Chair of the Board since 2022 and as a Director since 2015. Margaret S. Billson, Francois Olivier, and David G. Perkins. We extend our gratitude for their exceptional service and valuable contributions during their tenure and we look forward to welcoming our new Board members to CAE. Let me now turn the call over to Mark. Thank you, Andrew, and good morning to everyone joining us on the call. Let me first say that I certainly echo Andrew's comments and in particular want to express my heartfelt gratitude to Dowan for steadfast leadership and commitment to our shared vision for CAE I'm also grateful to the other departing Board members, Francois Peg and David for their continued support and advice through the years. As we embark on the next chapter, I'm looking forward to working with our new Board members in the coming months.

And I'm confident that together, we'll continue to build on our success. Before I move to our quarterly results, I also want to take a moment to share how proud I am that CE has been recognized as one of Canada's top 100 employers for the third consecutive year and has earned a spot on Forbes Canada's Best Employers List for 2025. These honors reflect the collaborative innovative and empowering culture made possible by the dedication of our 13,000 employees. This strong foundation of talent [indiscernible] continues to drive our success as reflected in our outstanding third quarter performance. During this quarter, we generated a record $410,000,000 in free cash flow while further securing CE's future with $2,200,000,000 in new orders. Culminating in a record adjusted backlog of $20,300,000,000 In civil we finalized the purchase of an increased stake in our Symcom joint venture and extended our exclusive long term training agreement with Flexjet and its affiliates. Initiatives that generated more than $500,000,000 in additional order intake and backlog in our highly desirable Business Aviation Training segment. In total for Civil, we booked $1,500,000,000 in orders for a two times books to sales ratio on revenue, that's 21% higher than Q3 of last year.

We ended the quarter with a record $8,800,000,000 total civil adjusted backlog which is up 44% over year. Year over year. In products, we received orders for 15 full flight simulators bringing the total to 42 as of the end of the third quarter. We delivered 20 full flight simulators this quarter notable increase from our first half cadence and from 13 in the same quarter last year. Combined commercial and business aviation training center utilization reached 76% consistent with last year's performance although some softness persisted longer than we expected in commercial aviation training in The Americas. Pilot hiring remained modest in that region and some of our airline customers deferred their training bookings due to ongoing short term aircraft supply chain challenges. Partly offsetting this headwind was the continued positive momentum in business aviation training, driven by higher utilization and profitability as we ramped up of our newly deployed simulators and training centers. We also continue to make excellent progress in a market for our flight services software solutions. We signed orders for more than $60,000,000 with major airlines in The Americas and Asia And we just announced Turkish Airlines as another customer who will be adopting CEE's next generation unified task board and Crew Management Solutions.

Market is responding very positively to the SEE innovation which provides airline operations control centers with enhanced situational awareness and disruption management capabilities. We're also proudly inaugurated our first air traffic services training center in collaboration with CAE Canada located in our main campus in Montreal, this newly opened training center extends C's core mission of making the world As a pilot, I could personally attest to the vital role that clear effective communication between flight crews and air traffic control personnel plays in ensuring the safety of every flight. By leveraging C's expertise, and competency based trend design, [indiscernible] structural delivery and data driven technologies we're helping to prepare the next generation of air traffic professionals for this critical responsibility. In defense, performance tracked ahead of our expectations as we made more progress towards becoming a low double digit margin business. This was driven by strong execution risk reduction significant backlog growth and improving backlog quality. During the quarter, we made excellent strides in advancing growth and expanding margins, including successfully completing another legacy contract from our backlog our second this year. Orders included a contract under the Canadian Future Aircrew Training Program auction awards to extend our support for U. S. Army fixed wing training and the KC-one 35 program United States Air Force.

As well as ongoing modifications and updates or F-sixteen fighter creating devices. These agreements reinforce our commitment to the long term success of our defense customers. For the quarter, We recorded a total $7.00 $7,000,000 in defense orders achieving a book to sales ratio of 1.5 times contributing to a record $11,500,000,000 in defense adjusted backlog. 104% year over year. Over the last twelve months, the defense book to sales ratio stood at an impressive 2.19x. With that, I'll turn the call over to Dino who will provide additional details about our financial performance. Thank you, Mark. Good morning, everyone.

Consolidated revenues of $1,220,000,000 was 12% higher compared to the third quarter last year. While adjusted segment operating income was $190,000,000 up 31% in the last quarter Our quarterly adjusted EPS was $0.29 compared to $0.24 in the third quarter last year. Net finance expense this quarter amounted to $56,600,000 which is up from $52,900,000 in the preceding quarter and $52,400,000 in the quarter last year. The higher level of finance expense is mainly the result of higher lease liabilities in support of our training network expansions additional borrowings to finance the Synchron transaction this quarter. This was partially offset by lower finance expense on long term debt due to a decreased level of borrowings during the period aligned with our ongoing deleveraging objectives. All things considered, we now expect net finance expense for the year to be approximately 10,000,000 higher than last year. Income tax expense this quarter was $34,800,000 or an effective tax rate of 17%. The adjusted effective income tax rate was 29% which is the basis of the adjusted EPS. We continue to expect a run rate effective income tax rate 25%. I'm especially pleased with our strong cash flow performance this quarter. Net cash from operating activities was a record $424,600,000 compared to $220,800,000 in the third quarter of fiscal twenty twenty four.

Free cash flow was a record $409,800,000 compared to $190,000,000 in the third quarter last year. The increase was mainly due to a higher contribution of non cash working capital. [indiscernible] higher net income.

All told, we expect to generate strong free cash flow for the year with a conversion of adjusted net income of over 150%. Which is an increase from our previous conversion target of approximately 100%. [indiscernible] Capital expenditures totaled $97,600,000 this quarter, with approximately 80% invested in growth mainly to add capacity to our global training network, to deliver on long term training contracts in our backlog. We expect total CapEx for fiscal twenty twenty five to be approximately $30,000,000 higher than fiscal twenty twenty four CapEx of $330,000,000 which is lower than our previous expectations. Our net debt position at the end of the quarter was approximately $3,400,000,000 for a net debt to adjusted EBITDA of 3.36 times. Before the impact of the legacy contracts, net debt to adjusted EBITDA was 3.08x. We remain focused on further strengthening our financial position. And we continue to expect to be below 3x net debt to adjusted EBITDA by the end of the fiscal year. Now turning to our segmented performance. In Civil, third quarter revenue grew 21% year over year to $752,600,000 while adjusted segment operating income rose 21% dollars 250,800,000.0 resulting in a 20% margin. This excludes a net remeasurement gain of $72,600,000 on our Syncom transaction.

Which effectively marked up our previously held equity interest in the joint venture to fair value.

As Mark highlighted earlier, with 20 FFS deliveries this quarter, we saw a notable shift in revenue mix. With a higher proportion of products compared to last year. Defense revenue remained stable at $470,800,000 while adjusted segment operating income increased 88% to $39,200,000 delivering an 8.3% margin. Thanks to strong execution from the team, and lower net R and D expenses. Legacy contracts remain on track. Costs and schedules well managed. As planned, we concluded another one of our legacy contracts this quarter. And on our and we are on track to finalize a third one at the end of the fiscal year. This quarter, legacy contracts contributed around seven basis points of margin dilution. About this impact, the adjusted segment's operating income margin for defense would have been 9%. With that, I will ask Mark to discuss the way forward. Thanks, Dino. The investment thesis for CE remains as compelling as ever and our record setting $20,000,000,000 backlog reinforces my confidence in the company's bright future. CAE common driver across both our civil and defense segments is the sustained high demand for pilots and pilot training. To support industry growth, and to replace retiring personnel. We're in an excellent position in strong markets and these structural factors continue to fuel long term demand for returning and operational support teams [indiscernible] Commercial OEM aircraft supply disruption have [indiscernible] Recent optimism surrounding production rate recovery and the return to service of aircraft that have been grounded by engine issues has occurred in Although some airline customers in The Americas deferred initial training reservations this quarter those same airlines are now actively engaging with us to plan the timing and scale of their pilot hiring ramp up and associated training needs.

This isn't a question of if or when. Looking ahead, the demand for air travel, ongoing pilot requirements and the delivery of nearly 15,000 aircraft on Boeing and Airbus's combined backlog over the next decade position us as a key player in a long term secular growth story. Similarly, the outlook for business aviation training remains highly positive especially as we continue strengthening our presence in this critical segment. Building on our increased investment in Simcom, Flexjet one of the world's largest fractional jet operators, announced last week a $7,000,000,000 aircraft order and projected fleet expansion to approximately 600 aircraft by 02/1931.

This move underscores the accelerating shift towards fractional jet ownership which has been growing much faster than the overall market. As Flexjet's exclusive training partner, CE is well positioned to benefit from this industry growth. [indiscernible] [indiscernible] demand for our training solutions remains robust driven by a global shortage of uniformed personnel Prompting militaries to turn to see [indiscernible] We're very well positioned in a strengthening market as the sector enters a prolonged growth cycle with rising budgets across NATO and allied nations, geopolitical tensions and evolving security threats are driving defense modernization efforts increasing the need for the training and simulation solutions that we provide. These factors are creating substantial growth opportunities for Sea as governments and defense forces see innovative solutions to enhance patient readiness, and operational effectiveness. A prime example is a strategic partnership we announced yesterday between CAE and the Government of Canada Through this partnership, CAE will leverage its CAE's expertise to work alongside the Royal Canadian Airports in designing and co developing the future fighter leading training program work, but This initiative will play a critical role in preparing pilots for the transition to Canada's next generation fighter jets ensuring the long term success of the CF-35A program.

By integrating cutting edge technology and advanced training methods, Future FLIT will equip fighter pilot candidates with the skills required to operate CAE sophisticated CF-35A in increasingly complex operational landscape. Looking ahead to the remainder of this fiscal year, and civil, the ramp up of commercial aircraft deliveries is taking longer than expected and this is a key driver. Driver of initial training demand for newly hired pilots. With the short term impact that this is having on incremental training demand in The Americas, we now expect annual Civil Adjusted segment operating income growth to be modestly below our previous outlook approximately 10% Also Since product deliveries are expected to account for a higher proportion of civil revenue than initially planned, we expect the annual civil segment operating income margin to be modestly below our previous previously expected range of 22% to 23%. Looking beyond this period, we continue to foresee ample room for margin expansion in future years On volume, efficiencies [indiscernible] In defense, with the benefit of our CAE baselining last fiscal year and the higher cadence quality of execution, now expect to achieve high single digit percentage revenue growth for the year which is up from our previous expectations in the low to mid single digit percentage range.

We're also expecting the annual defense adjusted segment operating income margin to be modestly above the previously indicated range of 67% This puts us solidly on the path to becoming a low double digit margin business. Taking our civil and defense outlook together, we remain on track to meet our previously stated three year EPS target while achieving strong order intake backlog and free cash flow. With that, I thank you for your attention and we're now ready to answer your questions. [indiscernible] please open the line to questions from financial analysts.

We'll now begin the question and answer session. Our first question is from Connor Gupta from Scotiabank. Please go ahead. Hi, this is Eddie filling in for Konark. Good morning, everyone.

My first question is on the CapEx.

Yes, my first question is on the CapEx targets reduction.

Was it more a function of delays in demand in certain areas or just more prudent? I think it's prudent and we always align basically capacity with demand. So we always say a lockstep and that's what you see reflected here.

And if I can add to that, I think we I just wanted to add effectively that this is lower than previous market expectations. So again, a continued example of disciplined approach to capital allocation and cash management in this along with the $410,000,000 of free cash flow, I think is is an evidence of our disciplined approach to capital CAE. And our focus on driving free cash flow CAE. Thank you. That's helpful. And maybe just one more question. How is your training utilization trending in The Americas versus Europe and Asia?

Well, look, I think look, let me start with you, maybe the flight activity which leads to that. Let me look at year over year figures. I think what drives everything is the commercial flight activity, right? So airline pass through traffic. So in The Americas, what we've seen is about 7% growth year over year and that's driving Actually, perversely, what you see in The Americas is, as we've talked about, we're seeing a utilization in our training centers was down slightly. And that's driven by the lower pilot hiring in The United States If I look at in Europe, Middle East, passenger traffic is up 5%. And in that case, We're seeing corresponding utilization increase and in India, we're up about 7%. Anything you'd add to that in the comments? No, I think The U. S. Utilization is down year over year.

And it's really just a function of the hiring demand that is supposed to be happening right now. CAE. Thanks guys. Appreciate the time. That's all my questions. The next question is from James McGurigal from RBC Capital Markets.

Please go ahead.

Hey, good morning. Scott on a good quarter and thanks for having me on. Thank you.

On the impact from potential tariffs, can you just discuss a little bit how you're positioned to react in the event we have tariffs that are sustained? And have you seen any shifts in your customers' decision making from tariffs, delaying orders, looking for other options? I understand it's only been a few weeks Any color you can provide would be very helpful. Thanks.

Sure. Thanks for the question. Look, it's obviously a situation that we like everybody else hope reaches constructive and bilateral conclusion through negotiation. But look, I think as we said in the past, don't we certainly don't expect a CAE material impact in the short term certainly, so next few months to CAE year. From this on our business as a whole. But it's definitely something that we're monitoring closely. If any kind of tariffs become more lasting beyond that, beyond getting into more than a year or two, Obviously, we would adapt and then we have the capacity to adapt them in I mean, bear in mind, if you look if you think about our business, it's a business that's changed a lot over the last twenty years, and more than two thirds of our revenue is generated from services And we deliver that in country. So that's not an issue. [indiscernible] so the main product that we sell into United States is the full flight simulator. There's a lot of there's already a big proportion of that which is U. S. Or EU origin.

That's one factor. But again, I think there's a lot of ways for us to mitigate things in if things again should last beyond, should I say, next few months to a year. And again, if I look at, I think conversely, what we're seeing this year we're particularly not affected because with the lower pilot activity, hiring activity that we've seen this year, on the back of OEM delays we've actually had relatively few sales to our U. S. Customers.

So we've only got a few deliveries going there this year. Although Chevrolet sales themselves remain strong, they're just coming from other parts of the world.

Okay. Thanks for the color. And then on the defense results, the margins obviously came in really strong in the quarter. Guidance maybe implies a little bit of a step down next quarter. So anything to call out there in terms of one time items in Q3 Was there seasonality that might have helped your results in the quarter? Just trying to get it see how things might evolve a little bit longer term. And then Nick, you've been looking at this business for a few quarters now. The team highlighted in the release margins are expected to continue to expand. So CAE you just talk about your level of confidence in that? And anything in particular that you see as an opportunity into fiscal twenty twenty six? And after that, I can turn the line over [indiscernible] I'll take it off, turn it over to Dino and then finish off with Nick. Look, I think what you reflect here is we're feeling very good about the direct of the business. And certainly the team in place of which Nick is leading with very good jobs And the momentum at the front end, you just look at the order CAE, I think it's nothing short of outstanding and the geopolitical environment, for unfortunate reasons [indiscernible] [indiscernible] So the team is executing extremely well.

This nothing really extraordinary. I'm sure that's what Dino is going to say. It really comes down here to strong performance all around by the team. At the same time, there's risk reduction. Risk reduction is rampants, taking a very, very disciplined approach. And when we look at the fourth quarter, I think you always got to remember that defense is always, shall we say, a lumpy business quarter to quarter and has a potential to be as we execute [indiscernible] in any given time you could generate plus or more revenue in a single quarter. So as we talk about we are raising the outlook and think we're still being prudent about defense business as a whole. But we remain very confident. So, Ben, just turn to where you Ian. Yes. Thank you, Mark. And I would echo that. Really, really pleased with the 8% to 3%. That's why margin performance this quarter. An increase year over year quarter over quarter. Again, you're right. I think you see a lot of this being a direct result from the process changes and teams that we've changed the way we've team showing through in the performance and execution. We also closed off another legacy contract expect another legacy contract to fall off by the end of next year.

So feel good about that as well.

There was a little bit of help higher than usual R and D tax credits in the quarter, nothing overly significant contributed maybe 0.5 percentage points to the margin. And that's just usual timing that we see sometimes in the quarter. Q3 but overall really strong performance emerging and really good work done by the team. Yes. Just to echo the comments already. In terms of performance, I think CAE team's been certainly we have a different attitude towards executing on the programs for the plan. I think also the mix the mix is better. So So legacy contracts, low margin contracts, I mean, mean, there's always some of that But [indiscernible] pipeline also because you would have seen order intake and the performance on new orders year for defense has been quite strong. So that's also going to help us as we look out in the future. So So I think [indiscernible] pretty confident that we can maintain and or exceed this level of performance.

Thank you very much. The next question is from Fady Shimon from BMO Capital Markets.

Yes. Good morning.

Mark, I was wondering if you can kind of offer some perspective on the board changes that were announced. Are there any specific kind of governance variable items that the Board is focused on.

On to the extent that you can share with us even from a high level kind of what [indiscernible] What does this change going to mean for And my second question I apologize, I must have the beginning of the call a little bit. We had another call going on, but the puts and takes in terms of the organic growth in the civil aviation market going forward I'm guessing The U. S. Market is bit of a drag right now, but How should we think about the relationship in that market recovering to the deliveries of Boeing starting to ramp up Is there a lag effect between the two that we should [indiscernible] And And then if you can offer kind of some maybe even high level perspective of what does the rate of organic growth look like when you put all things together between Business Aviation and what you're seeing on the commercial aviation side?

Well, maybe let me just start with the last question, not to deflect the first one, but just because we got my head around that one. Look, I think notwithstanding the softness that we've seen in the quarter again of in The U. S. As you said, and it's quite right, I mean, the Civil had excellent results this quarter. It reflects the diversification in our civil business in itself. And you highlighted a lot of the a lot of the components there. Look, in this quarter, it what we saw is basically the continuation of what we saw in previous quarters and this and this year in pilot hiring in The U. S. Is that basically a fraction of what it was just last year and actually third quarter was our worst quarter in that regard. And that just basically because we saw continuation in perhaps more than well, certainly more than we anticipated. I think we're not alone in that. In the amount of airplanes that were delivered by OEMs and the amount of disruption caused by groundings of aircraft across the world really either reflect that affected customers of Airbus, aircraft primarily. For us, in the where how that reflects itself in United States is that you don't have strong pilot hiring You don't have a lot of new aircraft being delivered to airlines You see the airlines basically essentially they increased pilot hiring substantially over the last couple of years.

And now basically they have, if you like, for a short amount of time, too many people, too many pilots hired for the needs that they have on the aircraft that they're flying. So Typically, is that the CAE effect of the large carriers are taking pilots when they hire to take them from the regionals and the regionals themselves they're basing hiring new plants and that creates a disproportionate amount of training in our training centers for regional aircraft in The United States. So centers like for example, we have a strong center for regional pilot training in Minneapolis, for example.

And although that's not a very big impact in terms of revenue itself, it kind of has a disproportion In fact, barges because the training we do on the type of aircraft [indiscernible] [indiscernible] aircraft like CRJs, like dash hights, which those airplanes have been around for a long time and so have our simulators So they tend to be far down the depreciation curve and therefore we make a larger amount of profit on it. So that's what you see happening here. And then it's the same factor we had before. What's changed in this particular quarter is that because of CAE sustained situation around OEMs, we've seen actually airlines actually canceling or deferring their training slots in the quarter. Now as I said in my remarks, you see those same airlines With the positive news that we're seeing now, you saw Boeing just recently announced that they had delivered 40 airplanes in the quarter So that's resulting obviously in the people saying, CAE, well, there's renewed optimism happening here. So look, again, as I said, watch the deliveries and as they recover, I mean, the utilization in our U. S. Train center should follow and they should follow relatively quickly behind.

Of course, that's not the only story. We're talking about commercial aircraft. Sales of simulators are still very strong. And you see just testimony of the strong order intake you see that certainly that do and the airlines enthusiasm for the future certainly does dampen. That's testimony by the book to bill that we have.

As well, of course, business aircraft, well, business aircraft is doing extremely well. We continue to ramp up more recently deployed training centers, for example, like our new training center with Simcom that [indiscernible] In Orlando, our train center in Las Vegas and we're seeing higher utilization in all of those cases and and you just look at the order intake, we just added $500,000,000 to the order intake In Business Aircraft as a result, of Simcom acquisition and associated Flexjet. Orders that are delivery is going to come out of that in terms of the training slot. So look, I think as I said in my remarks, it's not a question of if there's a question of when and we're going to see strong demand. [indiscernible] Go back to your previous question. Look, I think what you're seeing here I'm not going to answer for the Board, but what you're seeing is a function of ongoing Board renewals. You have my succession and at the same time you have a new Chairman coming in and Alan has done an outstanding job leading his company over the last few years. We've worked very well together. And I think there's a very I think smart timing in terms of transition my transition with bringing on a very, very strong attribute of very strong new term in Kalynorovadescu. [indiscernible] Chairman of IATA in the past, to be able to be someone that's going to be able to play a very, very strong role in terms of certainly hiring my successor and having a very effective transition [indiscernible] the board into the future.

So I think we're all encouraged by it.

Appreciate it. Thank you, Mark. The next question is from Kevin Chang from CIBC.

Please go ahead.

Good morning. Thanks for taking my question. I apologize if you went through some of this in your prepared remarks. I was also on a call earlier But just on the I guess on the announced Flexjet order with Embraer, obviously a pretty large order for them. Just wondering How do you see that opportunity for CAE Post its SIMCOM deal and I know it's probably early days, but are there any investments you think you'll be required to make to support trading related to that large large fleet order on the [indiscernible] I'll start it off and maybe hand it over to Nick. It's extremely positive for us. Because again, we're exclusive to flight jet. We know that very, very well. Because we've been training them for years, What's positive is not only the amount of aircraft that they're buying, but they're buying the mix of aircraft which really basically grows the accessibility that we have of training on the whole fleet of Flexjet aircraft So again, I couldn't be more happy with that order, but maybe if Nick want to add?

Yes. I mean, the Flexjet placed an order for 180 plus craters and phenoms, those are aircraft that We currently serve in the training center. I mean, we don't have enough capacity to deal with 183 aircraft with what we've got right So yes, there will be investment in more greater capacity and more phenome capacity. So but there's no need for anything beyond that, like Nona can take those that capacity in terms of space and the deliver the training. And this is part of the part of the reason why you saw the order intake and you also see The order intake CAE of function because one of the things we did was so this contract when we originally consummated the JV was a fifteen year agreement. We were five the agreement was reset to fifteen years and so this this justifies the investments for the next batch of aircraft.

No, definitely makes sense. It seems like a pretty nice tailwind for you. Especially post the Syncom transaction. [indiscernible] I generally think of CAE as broadly immunized from kind of the marginal change in U. S. Fed spending or broader U. S. Budgets, just given type of stuff you do. Just wondering if the if that's changed as a new administration. They're obviously looking at cost cutting maybe in a different way than previous administration. Just wondering if you see anything at risk or anything that that might have been impacted within your backlog Given the change in administration?

The first thing I'll say to that one is, as I've always said, is the day that Sea Sports will be a proxy to The U. S. Defense budget, I will be very happy happy, but that's not the case. I think the reality is what you see is a focus in The United States and all of its allies, Canada and NATO, NORAD is a strike to increase readiness of forces. And that readiness meets training. When you think about what a military does in conflict they train. That is all that they do. And with increasing readiness, what that means [indiscernible] more demand for the kinds of services and products that we do and you see that as we're reflected in very strong order backlog that we've already won and The opportunities that we have out there in terms of the business that we have there for basically selection by customers. So I am not I mean, what you could see, I mean, short term variations like if we see some, for example, like a shutdown of the U. S. Government, well, [indiscernible] crystal ball. So that or if you have continuous resolutions that that has been somehow the norm in the past year.

That can cause short term disruptions if we're basically let's say we're on a we've won a new contract which we have won a lot. [indiscernible] I did get into a situation for example, continuous resolution or in that particular CAE, what happens is the government is precluded to be able start activity on that new contract But those are short term issues. They're not reflective of long term [indiscernible] [indiscernible] And finally, I think the big thing about this in defense, as in civil, we enjoy the benefit of having very long term contracts So the backlog that you see right now is out many, many years. [indiscernible] That's great color. Thank you very much and have a great weekend. The next question is from Sheila Kahyaoglu from Good morning and thank you.

Maybe I could Maybe if I could ask a two part question in terms of simulator deliveries, how you're thinking about 20 about this year with 50 as your previous guidance being weighted for Q4, but obviously there was a pull forward into Q3. And how we think about the exit margin rate for fiscal Q4 given potentially less simulator deliveries that are implied and what it means for fiscal twenty twenty Sure. I mean, on the simulator deliveries, I mean, obviously, we're not we're not changing any of our guidance. We have the same it's going to be, I think as we said, more than $0.5 and obviously, you'll see the actual number. Some of this just depends when we're on the edge of March 31. Some may be delivered in next fiscal year. But I don't see an issue with the the guidance that we've given today, In terms of Q3, maybe I'll let Constantino Q4, excuse me. Yes. No. So what I think we'll see is again products being a higher proportion of the revenue mix going forward. And that's why we've also adjusted the guidance to say that we will be modestly below the 22% to 23% of the adjusted SOI margin range for the year.

Okay. And That makes sense. And then maybe just Another question on, again, we're seeing a growing divide among operators outlining expectations for GTF AOGs over the coming years.

Some suggest AOG should be unwinding from peak levels steadily in line with RTX's own commentary. Others like Wiz are talking about beyond 2026. So just maybe if you could touch on the at GTF and what you're seeing for 2026 how we should be thinking about framing that?

Maybe I think yes, I think we can talk about it because it's typically some of our large customers like Indigo Airlines CAE that issue.

Yes. I mean, the overall, I mean, we do track the aircraft grounded.

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

Great. Thank you. Thanks, Sheila.

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

Thanks for taking my question.

Noticed in the quarter you didn't really touch the NCIB and I joined this call late, but just given the focus on deleveraging and maybe opportunity for tuck ins as well as in the CapEx you mentioned, How much of a priority is buying back shares at this juncture?

I think we'll be able to kick it off. I mean, we've always had the same priorities that we've had, was it that we prioritize accretive growth, but delever is close behind. So, and let's pick up on that one. I mean, in the end of the day, I think with we've said that NCIB, we will use it and we did. But I think today, I think we reflect that the stock is at that we thought we had better opportunities to use our cash flow a bit [indiscernible] Thanks, Mark and good morning, Matthew. So So we do, we continue to talk to take a real balanced capital allocation approach. Organic investments, where it makes sense and then older the bolstering financial position through deleveraging. So we look at NCIB effectively, like Mark said, opportunistically over time excess free cash flow You saw in Q3, we did not purchase any additional shares. Because our focus is deleveraging.

Do you guys have a target for the year in terms of NCIB usage or something we can point to in that regard or is it just more opportunistic? Absolutely more opportunistic. We focus on capital allocation, looking at all opportunities depending on excess free cash flow. But more of an opportunistic approach.

The next question is from Cameron Doerksen from National Bank Financial. Please go ahead. [indiscernible] CAE quick question on working capital, obviously, significant positive working capital reversal in Q3.

Just wondering if there's anything, I guess, That you are doing differently to manage your working capital flows to, I guess, improve over time, just something you can point to specifically that is a change from past practices to improve cash flow from working capital. Cameron, thank you for answering the question. I'm particularly pleased with our record free cash flow generation. $4,000,000 to $10,000,000 this quarter I think what you're seeing here really is the direct benefit of strong execution That's especially in defense, this is allowing us to hit our building milestones, right? Then we use our levers that we have at our disposal to unlock and reduce non CAE working capital to generate CAE. Alongside continued strict inventory management, disciplined organic investments, obviously locks up with the market. This is a disciplined approach to managing our cash and it's giving us continued confidence that we will CAE our deleveraging commitments. So I think you saw in the guidance, we expect to deliver CAE cash conversion rate exceeding 150% in FY 2025 compared to our previous stated conversion rate target of about 100%. So this really is because of our focus on cash generation.

No, that's helpful. And maybe just as a a follow-up, I mean, on the defense side and maybe this question for Mark, just on the future lead in fighter program in Canada. Obviously, CA selected to I guess to manage that program and run Cement's [indiscernible] for that future program. Can you just talk a little bit about what what exactly your role is here on this program? And what the timeline might be for this to start actually contributing financially?

Yes. Thanks for the question, Cameron. I'm particularly very pleased of that particular announcement. I mean, this is just another really great example of just how WellC is positioned in a growth market. So what you see here and I CAE tell you and this I've been having personally these in-depth discussions with the government and then it's been some layers subsidiary in defense. Canada is looking stepping up government is stepping up significantly its expenditures in defense to maintain the preparedness and readiness of Canadian troops.

And basically, again, that's Canada joining the course of nations, they're doing just that. So What you see here is definitely a shift in previous practice. This is government putting a new mechanism in place to accelerate that the procurement of military programs. And I CAE tell you I've had a very personal role in working with government to make that happen. And I think this is this is a I would tell you, I mean, very excited about this. It's good for Canada, good for gaining the industry. In a very, very big way. And what you see here is we are becoming a key strategic partner and what we want to be doing here is being recognized as a strategic partner on this program [indiscernible] to essentially design and assist their project team in finalizing the procurement requirements, accelerating the procurement process beyond anything that's done and that's been done in the past on the future fighter leading program which of course, as I said, is going to prepare and train pods for the transitions to the CF-35A. So we had the announcement this this week with the Minister DuPont, who's the Minister of Public Works. Responsible for the acquisition.

So I mean, just follow what they said, they've got budgeted $5,000,000,000 program and that covers the acquisition of aircraft, training, courseware, procurement, instructors and on-site support for daily [indiscernible] Asset management, base support, [indiscernible] By the way, all of the kind of stuff that we do, not only in Canada, around the world, mean, if you look at a huge contract that we signed just recently, CAE FACT contract in Canada we're doing exactly that for if you like the phases of training that are before Pluto Flip. To basically get very precise with regards to the timelines here, except that we're obviously starting like immediately. On this program and the whole idea is to accelerate procurement of this program show that the basically CAE will be there on the CF-thirty five inter service.

CAE, that's great detail. Appreciate it. Thanks very much. Thank you. The next question is from Noah Poponak from Goldman Sachs.

Please go ahead.

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

I'll turn it over to Nick. CAE last question, I'll definitely say accretive. Go ahead, Nick.

Nick. So in your first question, so yes, we do have We do have couple of training centers that are ramping up. At the moment, namely Las Vegas and Savannah. We are as you saw from the announcement, but the training center in Lake Nona is also in I would say almost at capacity. So I think There is definitely some drag that is coming from the from the ramp up of those two training centers.

And come next year, come in April, we will be also opening Vienna. So there will be some there as well, although Vienna will be ramped up quickly because we're [indiscernible] a lot of the assets that are going into Vienna initially are going to be assets that we already own and just moving around. So it shouldn't be too disruptive to the numbers themselves.

Maybe just adding to just basically look at the market itself, the global business yet fleet itself is expanding. It's not the order for Flexjet, but deliveries of aircraft out of the this Jet OEM expect to be 12% higher year over year 2025 And consistent with basically previous forecast, the proportion of that, that's large jets. And I say large jets, because that's what we're disproportionately that's what disproportionately the amount of training we lose on large techs like [indiscernible] they're expected to account about two thirds of all expenditures of new business jets over the next five years.

So if you look at the market, I mean, that's you see about a four I mean, I think I'm just reading for me just the forecast here 4.7% higher of large cabin businesses forecasted between the next five years versus about 2.9% CAGR for medium cabin And I think even another factor that's particularly important for us and in concert of the SIM CAE acquisition is the fractional and charter operators fractionals such as Flexjet of course continue to show extremely strong performance on a year over year basis going much faster than the market itself. I mean just look fractional ownership to give you an example, is up 65% from 2019 levels, obviously, prior to COVID.

So and year over year, just I mean, it should take closer to now, I mean, year over year, [indiscernible] The amount of expenditure we've made expanding our business centers like the ones that you mentioned that Nate mentioned Las Vegas, of course, the acquisition of Simcom.

So I guess Without putting a specific year on it, but if we just think about the period of time in the future when you have the full utilization of the business jet ex expansion you've done and then you do not face Boeing and Airbus are delivering somewhere near demand. You don't have engines grounding airplanes. So that market's normal. Again, not putting a year on it, but just in the period of time in the future when all of your inputs are relatively normalized, what do the civil margins look like? [indiscernible] No, look, I mean, we're not going to get into the outlook today. But I think I said in my notes, I think I used the words and I'll repeat them. I think we have ample rooms [indiscernible] of course more absorption of overhead [indiscernible] I think all things being equal, I think the factors you mentioned will inevitably and quite deliberately make margins go higher.

Okay.

And then I just also wanted to ask a little bit more about the defense margin. Did I hear correctly you say that there's only one more legacy challenged contract that rolls off in your fiscal twenty six? In fiscal twenty twenty five, by the end of fiscal twenty twenty five, there's one more that we expect to roll off.

Okay.

No, that will be leave five contracts going into next fiscal year. We started with eight Yes, yes, go ahead.

No, no, I just got to ask maybe Nick, you want to add color on how you feel about those five programs? Yes. I mean, I think I don't see, at least for now, I mean, we're on track with the remainder. Some of them are out next next year or the year after. But I mean they roll off as planned and we feel pretty good about all the positions that we've taken to manage the remaining work and to manage the risk with the customer. So So it's It's good that we have three out of the way, but we still have five and we still need to pay close attention to ex I see any issues.

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

Sounds good. Our last question is from Benoit Poirier from Desjardins Capital markets.

Yes. Good morning, everyone. Just obviously on the free cash flow side, better than expected. Do you know you provide great color around the working cap for Q3. But when we look in terms of capital deployment you intend to be below 3x by year end. It's going to be a great achievement. Could you remind us your targeted level in terms of leverage longer term And given the nice inflection on free cash flow, discipline around CAE. I'm just wondering how you see capital deployment once you're at the targeted level?

Benoit, thanks thanks for the question. So effectively, like I said, we're really proud of the free cash flow conversion this year. This quarter, it's more than $10,000,000 So when we look at CapEx again, it's a matter of working and talking to deploying FFFs on the market based on what we see and from our situation we see with our customers. We don't want to be ahead of our customers. That's the approach We don't deploy FFS as in our marketing on spec. We invest organically to keep pace with the growth. Of our existing customer base So that's why we constantly monitor the market situation. We are taking a focused approach Pro form a leverage, we want to make sure we continue to focus on the investor grade performance, and we're looking to be below the 2.5 times net debt adjusted EBITDA range. Within in the next fiscal year? So continued focus on generating free cash flow disciplined approach to CAE, working lockstep with the market going forward.

Okay.

CAE. Sorry again, really quick.

Yes, really quick. Just in terms of defense margin, obviously, when we look at fiscal year twenty twenty six, you've gone to run down further legacy contract, but also at the same time, you'll be ramping up new business that I would assume will be accretive to margin. So CAE you point out to some direction we might see on defense for margins for fiscal year twenty six That's a [indiscernible] obviously than what I mean for the factors that we talked before, I mean as you CAE, we're the fact that we're winning a lot of backlog here and we'll replace the new backlog. Is there accretive to the margin target that we have below double digits. And I've always said that 10% is a way point out of destination. But we're not going to get into your book today. You saw the strong execution. We're being very prudent. Of how we execute business for obvious reasons.

So look, I think that we'll give you a few words how booked as we get into next quarters.

Thank you for the time.

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

That brings a close to today's conference call. You may disconnect your lines.