Cae Inc Q1 FY2022 Earnings Call

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

Good afternoon, everyone, and thank you for joining us today. Before we begin, I'd like to remind you that today's remarks, including management's outlook for fiscal year '22 and answers to questions contain forward-looking statements. These forward-looking statements represent our expectations as of today, August 11, 2021, 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 and the U.S. Securities and Exchange Commission on EDGAR. On the call with me this afternoon are Marc Parent, CAE's President and Chief Executive Officer; and Sonya Branco, our Chief Financial Officer. After the remarks from Marc and Sonya, we'll take questions from financial analysts and institutional investors. And following the conclusion of that Q&A period, we'll open the call to questions from members of the media. Let me now turn the call over to Marc.

Thank you, Andrew, and good afternoon to everyone joining us on the call. Our positive momentum continued into the new fiscal year, and I am pleased with our strong first quarter performance. Even amid the pandemic, we have driven results by being adaptive and agile through rapidly changing circumstances. In this quarter, we reported growth in both revenue and earnings across all three business units. We achieved 37% year-over-year growth and $0.19 of adjusted earnings per share. In the Civil sector, the average training center utilization for the first quarter was 56%, an increase of 1% from last quarter and significantly higher than the 33% from the same period last year. We also delivered 11 full-plate simulators to customers globally. Regarding orders, we signed training solutions contracts worth $338 million, which included five full-flight simulator sales, new four-year training agreements with Journey Aviation and Gama Aviation, and a three-year agreement with Avcon Jet. Additionally, we have increased our share in the traditionally in-sourced airline training market through two new 10-year exclusive training agreements with Scandinavian Airlines, SAS, and WestJet. We have also been selected as a partner of choice for manufacturers in the growing advanced air mobility market. We are in the lead for designing and developing the John Aircraft Systems Integration Lab for the Company’s new all-electric vertical takeoff and landing aircraft, the journey aircraft. Near the end of the quarter, we announced a strategic partnership with Volocopter to create and implement a training program for eVTOL operations. In our mergers and acquisitions activities, we fortified our position in civil maintenance training by acquiring Global Jet Services, a leader in aviation maintenance training. This acquisition enhances our capabilities and increases our market addressability for maintenance training of business aircraft and helicopters through superior regulatory-approved training programs. By leveraging our pilot training experience, we anticipate accelerated growth in the maintenance training sector. In Defense, we secured $152 million in orders, including new contracts with the United States Army for an upgraded maritime integrated training system, and a contract with the SOSSEC consortium to develop an initial prototype HH-60W virtual reality/mixed reality aircrew trainer for the United States Air Force. Noteworthy contracts also include ongoing upgrades to C-130J training systems for the U.S. Air Force and KEC-130J systems for the U.S. Marine Corps, in addition to providing continuous service support for the Royal Canadian Air Force's CF-18 aircraft and management of Royal Australian Air Force Aerospace simulators. Defense received an order to supply a new part cash trainer and additional training support services for the PC-21 ground-based training system for the French Air Force. I am particularly pleased with how swiftly our team completed the acquisition of L3Harris military training right after the quarter's end, having met all regulatory requirements and closing conditions. We are excited to welcome 1,600 members of the L3Harris military training team and leverage our combined expertise to support our defense and security clients. Our integration efforts are now in full swing, aiming to capitalize on expanded market opportunities. This newfound strength has already led to Defense winning key positions on three major IDIQs and two significant prime contracts, expanding CAE's customer base and market reach. Specifically, we secured the largest IDIQ contracts in CAE's history with a prime position on the U.S. General Services Administration Astro IDIQ for data operations, aircraft development, systems integration support, and training pools. Additionally, we gained access to four small businesses within the national cyber range complex IDIQ. Defense also won a competitive prime contract with an estimated lifecycle value of $90 million over eight years for developing simulators and training for the U.S. Air Force Joint Terminal Attack Controllers. In a first, Defense obtained a three-letter agency prime contract with the GSA, enhancing our penetration into synthetic environments and multi-domain operational support and training. In Healthcare, I am encouraged by the double-digit year-over-year growth we experienced this quarter, driven by our core healthcare simulation and training business. We continue to introduce highly innovative solutions, including the industry's first ultrasound simulator featuring 3D, 4D ultrasonography and multi-cleaner reconstruction for enhanced fidelity and realism. We also launched CAE ICCU, a digital portfolio of learning solutions aimed at critical care clinicians for ultrasound education. I will now pass the call over to Sonya for additional details about our financial performance, and I will return at the end of the call to discuss our outlook.

Thank you, Marc, and good afternoon, everyone. Our results continue to reflect the success of the measures we've taken to strengthen the Company, both externally in terms of expanding our reach and adapting to dynamic market conditions and internally to lower our cost structure. Consolidated revenue of $752.7 million was 37% higher compared to the first quarter last year. Adjusted segment operating income was $98.4 million compared to a loss of $2.1 million last year. Quarterly adjusted net income was $55.6 million or $0.19 per share compared to negative $0.11 in the first quarter last year. Cash used in operating activities this quarter was down 46% to $129.1 million compared to $88.4 million in the first quarter of fiscal 2021. Free cash flow was negative $147.6 million compared to $92.7 million last year. We usually see a higher investment in noncash working capital accounts in the first half of the fiscal year. As in previous years, we expect a portion of the noncash working capital investment to reverse in the second half. We continue to target 100% conversion of net income to free cash flow for the year. Growth and maintenance capital expenditures totaled $73.9 million this quarter, mainly for growth and specifically to add capacity to our global training network to deliver on the long-term exclusive training contracts in our backlog. Our growth CapEx is directly linked to our opportunities to invest incremental capital with attractive returns on free cash flows; with several attractive market-led expansion investment opportunities on the horizon, we are in a good position to deploy more organic capital, and so we are raising our expectations for total capital expenditures to more than $250 million in the fiscal year 2022. Income taxes this quarter were $10.3 million, representing an effective tax rate of 18% compared to 24% for the first quarter last year. Income tax was impacted by restructuring costs this quarter excluding which the rates would have been 19%. On this basis, the decrease in the tax rate was mainly attributable to the beneficial impact of certain tax assets, partially offset by the change in the mix of income from various jurisdictions. Our net debt position at the end of the quarter was $1.6 billion for a net debt to capital ratio of 33.9%. And net debt to adjusted EBITDA was 2.43x at the end of the quarter. All told, between cash and available credit, we have approximately $2.6 billion of available liquidity. On the restructuring front, we continue to make very good progress. The program is enabling us to best serve the market by optimizing our global asset base and footprint and adjusting our business to correspond with the expected level of demand and the structural efficiencies that will be enduring. We continue to expect significant annual recurring cost savings to ramp up to a run rate of approximately $65 million to $70 million by the end of the current fiscal year. We began executing our restructuring program in the second quarter of last year; and as at the end of June 2021, we had incurred a total of $136.2 million of restructuring expenses for the entire program, including $12.2 million this quarter. We expect to incur total restructuring expenses related to this program of approximately $50 million in fiscal 2022. Now turning to our segmented performance. In Civil, first quarter revenue was up 75% over Q1 last year to $432.9 million and adjusted segment operating income was up $85.9 million over the first quarter of last year to $69.7 million or a margin of 16.1%. The Civil book-to-sales ratio for the quarter was 0.78x. And for the rolling 12-month period, it was 0.88x. In Defense, fourth quarter revenue was $288.2 million, which was up 3% over Q1 last year. And adjusted segment operating income was up 37% over last year to $23.7 million for a margin of 8.2%. The Defense book-to-sales ratio for the quarter was 0.53x and 0.87x for the last 12 months. And in Healthcare, fourth quarter revenue was $31.6 million, up 42% from $22.3 million in Q1 last year. Adjusted segment operating income was $5 million in the quarter compared to a loss of $3.2 million in Q1 of last year. With that, I will ask Marc to discuss the way forward.

Thank you, Sonya. As we look ahead, I anticipate our positive momentum to continue throughout the fiscal year and beyond. Eighteen months ago, we began facing the most significant challenge the Company had ever encountered. Despite the uncertainties at that time, we were determined not only to recover from the pandemic but to emerge as a stronger company. We remain independent, and despite that, we've grown stronger. I am truly encouraged by the steps we've taken over the past year and a half to reinforce CAE's foundation and aim for long-term sustainable growth. The speed of our recovery to pre-pandemic levels and beyond will rely on how quickly and safely border restrictions can be lifted and normal activities can resume in our target markets and regions where our customers operate. Even with varying global vaccination rates and the ongoing volatility of border restrictions making market visibility difficult, we still anticipate robust growth in our core markets during this fiscal year, particularly in the second half. We are confident in the strategic moves we've made to solidify our leading position, including five acquisitions in the Civil sector to enhance our position and enter growth areas, as well as our largest acquisition to date, L3Harris Military Training and Defense, which doubles our presence in the U.S. Defense market and accelerates our defense and security strategy. While expanding CAE’s reach externally, we are also undertaking enterprise-level projects to significantly reduce our cost structure and achieve higher operational excellence. As Sonya mentioned, we expect to achieve an exit rate of $65 million to $70 million in annual recurring cost savings from those initiatives this fiscal year. In the Civil sector, we are well-positioned to take advantage of a broader market recovery, primarily driven by domestic air travel in regions with relatively high vaccination rates and cargo operations. The rebound in domestic activities reflects strong demand for air travel, indicating the potential for a swift increase when restrictions are lifted. Cross-border and transcontinental operations have lagged as they heavily depend on border restrictions, but we believe there's significant pent-up demand there as well. As the broader market recovery gathers momentum in commercial aviation, we plan to keep growing our market share and securing new customer partnerships from a large group of airline prospects. We are also successfully expanding our Civil addressable market by over $1 billion to more than $6 billion by moving beyond pilot training solutions into rapidly growing areas like digitally enabled crew optimization services and aircraft maintenance training services. In business aviation, demand has rebounded quickly, with current flight activity in the U.S. exceeding 2019 levels and approaching previous levels in Europe. This is promising for pilot hiring and training demand in this vital segment of the civil training market. Much of the current demand is coming from new users of private aviation, and we believe the market has expanded structurally as a result. Civil full flight simulator sales are linked to new aircraft deliveries, which are showing signs of improvement. While the total market for simulator products is still small, we expect to maintain our leading share of full-flight simulator sales and aim to deliver over 30 units in fiscal year 2022, primarily from backlog. We also plan to build on our early successes in the emerging advanced air mobility market, which we view as a new potential driver for pilot training and leverage CAE's expertise in modeling and simulation. With selections from OEMs like John Air Mobility and Volocopter, we envision a key role for CAE in establishing training standards for approximately 60,000 new pilots by 2028 in support of this new type of air transportation. In Defense, the quick completion of the L3Harris Military Training acquisition will provide greater clarity for the remainder of fiscal 2022 and beyond, with our focus on successful integration of this acquisition. International opportunities are slower to develop in the current context, but we see this as a temporary challenge. We have a strong pipeline with around $5.8 million in bids and proposals awaiting customer decisions. With our enhanced presence in the Defense sector, particularly in the U.S., we expect Defense to benefit from increased government budget stability. CAE’s Defense business is now the leading global platform-agnostic training and simulation provider, and we’re excited about the greater potential this offers to capture business worldwide, especially with our expanded capabilities and customer base. Our new client positions on major IDIQ contracts and our work to develop training simulators for U.S. Air Force Joint Terminal Attack Controllers highlight the synergies and how L3Harris Military Training broadens our core offerings across multi-domain operations. Our Defense priorities are centered on long-term investments in our role as a training and mission support partner, with advanced capabilities in digital immersion. We are also strengthening our position by laying the groundwork for strategic partnerships with major OEMs on next-generation platforms. With our expertise in live, virtual, and constructive training, alongside our newly expanded capabilities in mission and operations support, we expect significant advancements in the broader defense market in the coming years. Lastly, in Healthcare, I believe we have the right team in place, including a revitalized front end to fully leverage the greater market recognition of the benefits of Healthcare simulation and training to enhance safety and save lives. We are intentionally working to increase our addressable market and access larger value pools in Healthcare training, such as nursing and military. We expect positive momentum here as well, and I look forward to achieving sustainable scale with our innovative solutions to improve safety in Healthcare. In conclusion, CAE is well-positioned to benefit from the changes in a post-COVID-19 world, and we have adapted our growth strategy to capitalize on these new realities. Over the past year and a half, we have taken significant steps to expand and enhance our position. The investment rationale for CAE has never been more compelling. We anticipate strong growth in the upcoming year, along with sustainable growth and strong free cash flow in the long run. Thank you for your attention, and we are now ready to answer your questions.

Operator, we'll now be pleased to take questions from analysts and institutional investors.

Our first question comes from Konark Gupta with Scotiabank. Please proceed.

So maybe the first question on the order activity. The book-to-sales ratio was a bit low in the first quarter for both Civil and Defense segments. Did you see any delays and/or any cancellations that may have impacted the orders?

No, we definitely did not experience any cancellations, Konark. We are still facing challenges regarding the timing of international orders in Defense, which I mentioned earlier. There continue to be some cold bid impacts. The situation is not yet back to normal, not only in the Civil sector but also in Defense overall due to ongoing travel restrictions and the general state of affairs. This is influencing our international operations. However, in Defense specifically, I have previously expressed my reluctance to evaluate orders on a quarterly basis. I recommend focusing on our 12-month run rate, and even from that perspective, the outlook remains positive. I would highlight the recent orders we have secured and the highly encouraging awards related to not just orders but also IDIQs since the quarter, particularly following our acquisition of L3Harris Military Training. While these awards do not convert immediately into order intake, they represent significant opportunities, granting us access to billions of dollars in the coming years. Therefore, I am quite optimistic about that aspect. I'm not overly worried about sustained performance. On the Civil side, we have openly acknowledged that simulator orders would be slow this quarter, and as a result, we did not anticipate achieving a book-to-bill ratio close to one in terms of product orders. However, when assessing training specifically within Civil, our book-to-bill ratio is above one. It's important to note that for our Business Jet division, which operates primarily on a transactional basis, the book-to-bill ratio tends to hover around one. So if we are seeing substantial figures above one, it indicates a significant upside in the commercial aviation training sector. That is how I would characterize the situation and provide additional clarity.

That's very helpful, Marc. And you mentioned the three IDIQ contracts, so congrats on that and the two prime contracts as well. Just to clarify, do these five contracts belong to the acquired L3Harris business? Or is it for the existing business in Defense?

Well, they do belong to us because we own the L3Harris training business. And it was bid by L3Harris Link. And Link is now owned by us. So they are our contracts. They are our IDIQs.

No. I'm sorry, just to be clear, I wanted to understand, is it related to the L3Harris asset that you acquired? Or is it outside of the L3Harris?

Okay. Part of it involves the IDIQs. There are different pools, one of which is training. There were five pools, though I won't detail all of them. L3Harris Link submitted bids for several of those pools and was selected as the prime contractor for five out of the ten pools they were involved with. Additionally, we were chosen as the prime contractor in the training pool, which relates to our legacy. As a result of the acquisition, we have secured a prime position in those other pools. Another order worth $90 million for the training system for the U.S. Airport JPAC also stems from the Link acquisition.

That's great color. And the last one for me before I turn it over, maybe for Sonya. So you raised the CapEx guidance slightly, and you are still expecting 100% free cash flow conversion. Should we interpret that as you're expecting higher net income versus your prior expectations this year? Or is it the better working capital performance that you're expecting?

Free cash flow is connected to net income for the quarter and primarily driven by noncash working capital. We observe the typical seasonality, with a higher amount of annual payments in the first quarter and possibly some volume shifts from Q4 to Q1. We anticipate that this will partially reverse in the second half, as we've experienced previously, due to our ongoing focus on working capital metrics and optimization, and we are still aiming for a 100% conversion of net income to free cash flow. It's important to note that the way we've defined free cash flow excludes growth CapEx. The increase in CapEx to over $250 million is not part of that free cash flow figure. One reason we've raised our CapEx outlook is due to positive developments, particularly in training and commercial orders, as airlines are requesting additional capacity. We are observing behavioral changes with some airlines entering into long-term training agreements instead of simply purchasing a simulator, which contributes to our increased CapEx forecast. I want to emphasize that organic CapEx is our most accretive capital, representing growth investments that yield incremental returns of 20% to 30% within the first two to three years, showcasing our best example of growth compounding.

If I can clarify, Sonya. Why would you need to invest in incremental capacity even when your utilization levels are still below 60%, let's say? I mean, should you not have excess capacity in your training centers already? And like where is the demand coming from?

I'll address that, Konark. It relates directly to the varying behaviors being shown by airlines, which we wanted to highlight. Airlines are shifting from a traditional in-house model to an outsourced approach. We're having more discussions about this, and in fact, we announced two outsourcing agreements this quarter, securing two 10-year contracts with different airlines for these types of arrangements. Airlines are primarily investing in new capacity for new aircraft, and instead of investing in simulators, they are opting to enter long-term contracts with us. This is reflected in the incremental capital expenditures that align with this trend. As we’ve mentioned before, we believe that investing in this kind of capital expenditure represents the best example of growth compounding, as we only proceed with investments when we see significant return potential, which we've communicated to the market. Thank you. So, in response to your question, we are still operating at about 56% capacity. Once the market normalizes, we fully expect to return to the same level of capacity. The capital expenditures and investments we are discussing are additional to that.

Yes. And I'd just add that the demand is linked to either new platforms or platforms where we don't have excess capacity. Of course, if we have simulators that are underutilized, that's part of the restructuring program; we move it around to match up with demand. And so these contracts are for a platform that are under or already all utilized or in use.

Our next question comes from Kevin Chiang with CIBC. Please proceed.

Maybe just two for me. It does seem like in this pandemic, you've invested in some of these adjacent services. You talked about the maintenance training acquisition, you've been growing the crew management. Just wondering how you think about the adjacent service opportunities you can bolt on into Civil, I guess over the medium to longer term, are there areas you still want to focus on that you don't offer now. And then are you seeing benefits from cross-selling? I presume that's the end goal here where someone comes to for pilot training, maybe maintenance training and to manage their crews as well. Is that kind of the best-case scenario as you bring this all together?

Absolutely. That's definitely a significant aspect, Kevin. It's about expanding our traditional share of wallet in all our transactions with customers. Our goal has always been to become more relevant and essential to our partners, positioning ourselves as their preferred training partner. We're evolving towards what we refer to as mission operations in defense, and in the Civil sector, we aim to meet more of their needs related to pilots, technicians, and overall operations. Maintenance training aligns perfectly with this strategy. We've successfully established a solid presence in business aircraft training and recently made strides in commercial aircraft through our acquisition of Telesis. We're further building on this with our current acquisition in the United States, and I am optimistic about the growth in that market. The technician segment, like the pilot sector, is set to grow due to a seasoned workforce and stringent regulations, especially in Europe, where certified technicians are necessary. Furthermore, we're transitioning to more software-enabled solutions, as demonstrated by our work with Marlow, Roster Buster, and RB Group. This approach is making us more vital to our customers, who are either already outsourcing these solutions or are receptive to doing so, as we can address their critical needs that are outside their core operations.

And maybe just a couple. Have you been able to cross-sell some of these newly acquired services within your core customer base? And when you think about the addressable market now, I think earlier this year, you talked about Civil being a $6.1 billion addressable market. Now with the maintenance training capabilities give a sense of how big that pie is today?

Well, at the moment, when I talk about $6 billion, I am talking about the market that we see, including those adjacencies.

Okay. Okay. And maybe just a second one for me. Just turning to Healthcare. In your outlook in your press release, you highlighted the growing shortage in your outlook as I think is a long-term tailwind for Healthcare and the services you provide. I'm just wondering, when you talk to healthcare customers, are you seeing, I guess, a similar realization like you see in Civil and Defense whereby they recognize that simulated training could help free up labor? Or is this something that to educate these customers on, and so that might extend out this labor shortage issue in terms of a revenue recognition opportunity for you over CAE?

At a macro level, we are definitely observing the nursing shortage, which is expected to grow, acting as a catalyst for our business. This situation necessitates an increase in nurses and more slots in nursing schools, where we sell our products and solutions. Additionally, through simulation-based training, we can enhance the effectiveness of these schools, adding value and making them more relevant. In many cases, particularly in the United States, there are more for-profit institutions. If they can implement a nursing program that incorporates modern technology, such as medical manikins and digital solutions, it becomes more attractive to students pursuing degrees in this field. This factor significantly influences our perspective on the healthcare market. However, it's just one aspect among many. As we emerge from the pandemic, healthcare has never been at the forefront of everyone's concerns. We are revitalizing the organization and focusing on our core business, particularly in nursing, while also identifying significant opportunities in the military and government sectors, including paramedical organizations like FEMA. We are introducing simulator-based training solutions into these areas and are increasing our activity in healthcare, which gives me confidence in a strong growth trajectory for our business.

Our next question comes from Tim James with TD Securities. Please proceed.

Marc, I'm just wondering if you could talk for a minute about type certification versus recurrent training activity that you're seeing throughout the network. And maybe just commenting on how each is faring relative to if we use, say, fiscal 2020 as kind of a baseline. I'm just trying to understand how the relative strength of their rebounds have been?

I would say that type rating in our commercial aviation training is closely aligned with flying activity, which I mentioned earlier as a key factor. When considering the utilization in our training centers, the business center is performing well due to high activity levels. In the U.S., we are doing very well, with our training centers operating at high levels. However, the rest of the world in commercial aviation is not performing as well, largely due to ongoing border restrictions and uneven vaccination rates. For instance, Europe is averaging around 56%, which is significantly lower than that. Asia is lagging quite a bit because of low vaccination levels. Recently, we've had to close training centers in Vietnam, Kuala Lumpur, and Australia. However, I see this situation as somewhat positive because we are achieving a good return at 56% utilization despite these challenges. I feel optimistic that as the rest of the world recovers like the U.S., which is inevitable, we will see improvements. Having traveled internationally myself recently, I can attest to the numerous hurdles one must navigate to fly internationally, which makes it clear that once those barriers ease, there will be significant pent-up demand. In terms of ab initio activity, it remains strong, and we haven’t reduced flying activity significantly. We did have to lower activity in Australia due to strict lockdowns and school closures, but now that those closures are lifting, we are seeing airlines anticipating a renewed pilot shortage and increasing their orders. This is definitely a positive trend. Historically, during any crisis, there is a delay before airlines start purchasing simulators consistently, even though simulator deliveries are closely tied to aircraft deliveries. This shock has created a lag, and we don’t expect to return to pre-pandemic order levels for some time. However, we are starting to see signs of recovery, with five orders in the recent quarter. While I wouldn't call that a consistent rate, I am encouraged by it and by the overall activity. Airlines are noticing a recovery as well; for example, Airbus is planning to increase deliveries next year. The major U.S. airlines are recalling thousands of pilots and flight attendants, and United Airlines has placed significant orders for new aircraft. Additionally, TSA passenger throughput in the U.S. is reaching high levels again, hitting 80% of pre-COVID numbers. Overall, these are all positive indicators, though I hope this provides you with a satisfactory answer, Tim.

No, that's very helpful, Marc. Just regarding the 737-MAX, I know when the issues were being addressed, we have to look back more than a year ago. CAE was building some MAX simulators in anticipation of demand, possibly not based on existing contracts. How are those simulators, and if you still have them, have they all been accounted for? Are we returning to a normal trend in terms of MAX simulators being produced in CAE facilities?

Yes, we currently do not have any backlog with the 737 MAX as all units have been delivered, and I expect strong demand for 737 MAXs.

Okay. Great. And then my last question, there's excellent insight into where defense orders are coming from. I'm curious about the significant increase you mentioned in the bid pipeline, which is over $1 billion compared to the end of fiscal '21, specifically on the defense side. Are there any particular platforms, trends, or areas contributing to this substantial rise in the bid pipeline? Are there specific types of warfare or markets you could highlight, or is this growth seen across the board?

Well, it's across the board, but obviously, the U.S. is the largest expense market in the world. So you expect that's a high level. But having said that, the contracts that we go after internationally are large contracts that basically established turnkey training centers for fighters, that kind of thing, we have a number of countries that we're looking to do that specifically, some of those talks are going slow because of pandemic, but that's where we are seeing some of that order activity bit protracted. But if your question is, I mean is that order pipeline, if you like, is it sensitive to one or two major bids, I would tell you, no. That's across the board.

Our next question comes from Fadi Chamoun with BMO. Please proceed.

I was on mute. Apologies. So I was wondering on the SAS and WestJet, were there asset commitments on your part toward these outsourcing deals? Or is it purely kind of service side?

It's about asset commitments, specifically the assets we have invested in. This is part of the increased capital expenditures we are discussing for both airlines. Essentially, they are not investing in a simulator, but in these two situations, we secured 10-year exclusive contracts for training on those platforms for those airlines. That's the main point.

Okay. My second question is kind of as you look at this year, can you give us kind of an idea about kind of what is the contribution that you're expecting in terms of maybe revenues or operating income from the acquisitions that you've made? And also if you can give us an idea about how much contribution you expect to realize on a full-year basis from that $65 million to $70 million restructuring program.

I'll let Sonya provide more specific details. The most significant development is L3Harris, and we are very pleased to have completed this acquisition after a wait of about three to four quarters. Previously, we indicated that this acquisition could be a $500 billion business, and since we have nine months of it, we can estimate the expected revenue. However, closing the deal early introduces various complexities, and we are currently focused on integrating both teams and financials. There is substantial work involved before we can provide clear details, but this is clearly our major focus. Sonya, perhaps you can discuss the other aspects.

Yes. As Marc mentioned, we are fully focused on the integration. We stated that it would be immediately accretive to EBITDA and would significantly contribute to EPS in the first full year of operations, which is fiscal year 2023. We expect to achieve a run rate of synergies between $35 million and $45 million, also translating to EPS growth in that initial full year after closing. For the restructuring program, we have provided guidance of $65 million to $70 million in recurring structural savings for the full year, and we are progressing towards that run rate throughout this year. In this quarter, we have already achieved about 15% of that annual target, which is a good start, and we will continue to make progress as we optimize locations and relocate simulators. We anticipate a ramp-up throughout the year, particularly in the second half.

Okay. And maybe a follow-up on this question, specifically on the aviation side. Now that you've kind of overlapped the hardest quarter last year, your run rate EBIT in that business is about $250 million for the last four quarters. Based on what you're seeing in both delivery of full-flight simulators and opportunities on the services side. Like would you kind of maybe give us maybe an overall range of where do you think organic growth will look like as we go into the next nine months and year?

We did not provide specific financial guidance due to the uncertainty surrounding border and travel restrictions, which are significant factors influencing recovery. However, we anticipate strong year-over-year growth. In the last quarter, we achieved approximately $70 million of SOI at a 16% margin, with a utilization rate of 56% in our buildings. As the recovery progresses and we realize further cost savings, we expect SOI and margins to increase as well.

Yes. To break it down, if we look at Civil, considering revenue and earnings from simulators as well, we expect to deliver about 30 from backlog. This gives us a clearer picture. Regarding our flight training and STOs, that area is breakeven since revenue is recognized as flights occur, resulting in minimal fluctuations. However, I can tell you that there’s an upward trend. Business aviation and training are performing very well, particularly as business aircraft training is strong. We are currently in Q2, which is typically a low period, so we anticipate growth in Q3 and Q4. Commercial is unpredictable because it’s affected by vaccination rates and border restrictions, which creates more uncertainty. The U.S. market is doing exceptionally well, while Europe remains low but shows signs of improvement. Asia's performance appears to be linked to vaccination rates. That’s my best forecast for now.

Okay. Great. The SAS and WestJet go into effect now, basically?

Well, no, we have to...

Well, the agreements are signed. And we're going to build the simulators to deploy.

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

Just one question for me. I'm just wondering if you can expand a little bit more on the latest R&D program that you've announced. I know you've kind of highlighted the advanced air mobility and AI and some other things in there. But just wondering if you can provide any more specifics. And I'm just wondering what kind of new capabilities are you looking to develop at CAE that maybe you didn't have before or maybe that you were underrepresented in before?

A lot of it involves enhancing our core competencies. Some of it is related to new areas, particularly the development of capabilities in urban air vehicles, which includes electric hybrid aircraft and green technologies. We're also focused on leveraging data from our business to create technologies that improve our customer effectiveness and generate data-driven revenue streams. Additionally, we are advancing our expertise in creating synthetic environments crucial for modern warfare. One significant outcome from our acquisition of L3Harris is our strong capabilities across all five domains, especially as the military prepares for what is known as near-peer conflict, which can only be effectively trained for in a virtual setting. This requires the development of synthetic environments for military exercises, and we excel in that area. However, we recognize that progress is continuous, which is why we are committed to investing in research and development to refine the skills that keep us as a leader in this field and relevant to our customers. Those are some of the aspects we've been discussing.

Our next question comes from Benoit Poirier with Desjardins Capital Markets. Please proceed.

Yes. During the quarter, we've seen some big aircraft orders. Could those initial steps could they lead to some sizable training opportunities?

Well, for sure, for sure, Benoit. As we said before, to the extent that they're going to translate into incremental deliveries and that you see, as I was mentioning, Airbus increasing your production rates then that's going to inevitably result in more simulators needed in the market. And we fully expect to maintain our market lead, specifically, we've gone even more lead in that market where the acquisitions are true. So I think that will be good for us as well as the training market as well. They're going to need incremental capacity, whether that gets deployed in terms of simulators or basically outsourced training.

Absolutely. As we discuss, there are many market-led contract opportunities that allow for a quicker ramp-up. While there are some commercial aspects related to the contracts we've signed, there is also a significant investment in the Business Jet sector and the deployment of our network to meet strong demand in that recovering market. Organic growth capital expenditures represent our most valuable investments, and historically, we have seen a high incremental return on capital, typically in the 20% to 30% range within the first couple of years. This aligns well with our expectations.

There are no further questions at this time.

Operator, if there are any further questions, what do people need to press?

We do have a question from Noah Poponak with Goldman Sachs.

I had understood your prior comments to suggest that with the quarter under your belt here, Civil, a little firmer, biz jet, a lot firmer, the L3 deal closed that you would maybe be providing more formal guidance and outlook commentary this quarter. And I'm just curious, did I interpret that incorrectly? Or did the Delta variant or the end market keep you from doing that? And when do you think you might have enough visibility to provide a more formal outlook?

No, I think you're right. That's what we said. When we were there last quarter, I fully expect to provide more specifics on that. To be honest, I anticipate offering more details than I do now, but I don't know how much more. The reality is that we're not alone in this situation. We still don't have enough visibility regarding the recovery in vaccinations, which will affect the reduction in travel restrictions in that market, and even predicting Europe is a bit challenging right now. However, I know enough to predict that we will see strong growth, especially in the second half of the year. Currently, we are in a seasonally low quarter for flying activity. This year is no different than any other year, with some effects from COVID. We observe the traditional patterns where airlines in the summer are active in the Western Hemisphere and not in training. We see some of that. Nevertheless, things will recover in the third and fourth quarters. To provide any guidance that I can truly rely on will require more specifics. We tend to be a bit conservative when it comes to offering any outlook based on that.

Has the actual business not evolved quite how you thought it would in terms of utilization rate or order flow or customer activity? Or is this really that COVID has progressed in a way that just hasn't become as incrementally visible as you thought it might?

I think the situation is as expected. The business is progressing as I anticipated, and in fact, business aircraft are performing better, particularly in the United States.

Right. Okay. Okay. That's a good clarification. And Marc, you've mentioned a few times how you're in the seasonally light quarter for Civil, and we can see that in the model going back over time, that's usually the case. It's not always the case, but it's usually the case. Are you expecting that to be the case this year because you have the normal seasonality, but then you just have the working off the very low base that COVID has created? So are you expecting that to be the case?

No, we expect that to happen. We currently see this in business aircraft, even though we have a lot of training happening. However, the training is not as extensive as it could be because flying activity levels are higher than they were before COVID. When pilots are flying, they aren't training. As a business aircraft pilot myself, I know that it requires planning to manage your schedule and set aside a week for training, which is necessary. We recognize these dynamics and anticipate they will continue this year. While COVID has skewed some factors, the seasonal pattern remains. This is part of the reason we are projecting more growth in the latter half of the year. We also expect to see seasonal variability in our deliveries, similar to every year, as we have shutdown periods in our factory. This year, we had an extended shutdown due to COVID-related issues, which means fewer simulators are being built. We plan for 30 simulators this year, but more will come in the latter half, even though they will be drawn from backlog.

I find it a bit surprising how the change in Civil EBIT dollars compares to revenue dollars sequentially, especially since BizJet is performing better and has higher margins. Typically, with the utilization rate being relatively stable, I would expect the joint ventures to affect EBIT differently than revenue. Can you help clarify the discrepancy there?

Maybe Sonya, you want to...

Yes. Well, on the margin front, it's really a question of mix. Q4 has very strong on back contribution or proportion. And so that was the highest margin kind of creates some volatility in the margins and as we've discussed with the JVs. In terms of the top and the bottom line, so both top and bottom line growth on both sides and several variables here. You saw growth on utilization, and also on the cost side, you saw a growth or profitability growth coming from the cost savings, right? So a lot of the restructuring program, it's across the board on the Company, but a large proportion goes to the civil side. But you also saw that the deliveries were lower quarter-over-quarter, right? So where you had some progress on those fronts, you had a bit of lower deliveries in Q1 versus Q4.

Great. Operator, I want to thank everyone from the financial community for participating and for their questions. And with the time remaining, we'll open the lines to members of the media should there be any members of the media already taken.

I want to thank everyone from the financial community for participating and for their questions. With the time remaining, we'll open the lines to members of the media if there are any present.

Okay. Well, if there are no questions remaining, we'll conclude the call and again, thank everyone for joining us today. A transcript of today's call can be found later this afternoon on CAE's website. Thank you.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.