Good day, ladies and gentlemen. Welcome to the CAE Fourth Quarter and Full Year Financial Results for Fiscal Year 2024 Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity for analysts to ask questions, followed by a Q&A for members of the media. I would now like to turn the conference over to Mr. Andrew Arnovitz. Please go ahead, Mr. Arnovitz.

Good morning, everyone, and thanks for joining us. Before we begin, I'd like to remind you that today's remarks, including management's outlook for fiscal '25 and answers to questions, contain forward-looking statements. These forward-looking statements represent our expectations as of today, May 28th, 2024, and accordingly, are subject to change. Such statements are based on assumptions that may not materialize and are subject to risks and uncertainties. Actual results may differ materially and listeners are cautioned not to place undue reliance on these forward-looking statements. A description of the risks, factors, and assumptions that may affect future results is contained in CAE's annual MD&A available on our corporate website and on our filings with the Canadian Securities Administrators on SEDAR+ and the US Securities and Exchange Commission on EDGAR. With the divestiture of CAE's Healthcare business, all comparative figures discussed here and in our financial results have been reclassified to reflect discontinued operations. On the call with me this morning are Marc Parent, CAE's President and Chief Executive Officer; and Sonya Branco, our Chief Financial Officer; Nick Leontidis, CAE's newly appointed Chief Operating Officer; is also on hand for the question period. After remarks from Marc and Sonya, we'll open the call to questions from financial analysts and at the conclusion of that segment, we'll open the lines to members of the media. With that, let me now turn the call over to Marc.

Thank you, Andrew, and good morning to everyone joining us on the call. As you'll have seen from our earnings release, fourth quarter results are unchanged from last week's pre-announcement, which was mainly intended to communicate the re-baseline of our defense business and the appointment of Nick Leontidis, a proven CAE veteran, as our Chief Operating Officer. To provide additional context, last week, we also offered an earnings preview in our preliminary fiscal 2025 outlook. This morning, Sonya and I will provide a bit more color on our performance and our very strong financial position. Last week, we took decisive action to establish a clear path for margin improvement in our Defense business. I certainly recognize that our Defense performance has significantly fallen short of our expectations, and I understand and share investors' frustrations. The impairments and accelerated risk recognition on the legacy contracts that we announced last week are disappointing, but necessary steps towards putting the overhang of these past issues behind us. These actions were made possible by renegotiating agreements with our customers and our suppliers, adjusting the scope and the timing of these contracts for our mutual benefit. Ultimately, this enables us to address the programmatic risks that have been affecting our business. Alongside the rebaseline of the Defense business was the acceleration of risk recognition on legacy contracts and execution of the leadership reorganization and implementation of targeted operational enhancements at both the segment and corporate levels. These initiatives are designed to fortify our execution capabilities and foster greater synergies between our Defense and our Civil businesses. I fully expect these changes to enable greater focus through the simplification of our operating structure with our COO overseeing the five P&Ls that encompass CAE's entire business scope. This new structure and recent upskilling of talent in Defense will further enhance the execution and oversight of major defense programs and facilitate the exploration and realization of synergies between our Civil and Defense operations. Also, in the vein of further bolstering CAE's future, our fourth quarter and full year results reflect continued strong growth in our core markets, robust order flow, and consistent cash generation. For CAE overall, we grew adjusted backlog by approximately 13% year-over-year with $1.6 billion in orders in the quarter for a 1.38 times book-to-sales ratio. And for the year, we booked over $4.9 billion in orders for a 1.15 times book-to-sales ratio. As of the end of March, we had a record backlog of $12.2 billion. We also further strengthened our financial position having generated $418 million of free cash flow during the fiscal year. And together with proceeds from the sale of Healthcare, we reduced leverage below three times net debt to adjusted EBITDA, excluding legacy contracts. In Civil, we booked orders in the fourth fiscal quarter for $832 million, including contracts for seven full-flight simulators. This brings the total Civil order intake to a record $3 billion for the year, including 64 full-flight simulator sales, demonstrating sustained high demand for pilot training solutions in our Flight Solutions software platform. Civil concluded the year with a record adjusted backlog of $6.4 billion. Notable contracts in the quarter included a multi-year commercial aviation training agreement with ITA Airways and a first-of-its-kind partnership in Canada, where CAE instructors will deliver initial training for NAV CANADA flight service specialists and air traffic controllers. And testament to our progress in flight solutions, we announced yesterday the signing of European ultra-low-cost carrier Wizz Air as a new partner under a multi-year supply agreement. We'll be supplying Wizz Air with CAE's operational control and crew management software and CAE's recovery manager solutions for operational and crew disruptions. Average trading center utilization was strong at 78% for the fourth quarter and 76% for the year, up from 72% the year prior. In products, we delivered 17 Civil full-flight simulators in the quarter and 47 for the year compared to 46 deliveries in the prior year. As this closed last week, this is a bit lower than the approximately 50 that we had expected with timing differences due to customer requests to postpone deliveries because their own facilities weren't ready to receive the full-flight simulators as originally planned. Taking time delays from last year into account, we expect to deliver more than 50 full-flight simulators in fiscal 2025. Turning to Defense, at the same time as we've been taking actions to rebaseline the business, we've continued to make headway with our transformation strategy. We reached $1.9 billion of adjusted order intake on an annual basis involving training and simulation solutions for a 1.04 times book-to-sales ratio. This contributed to a $5.7 billion adjusted defense backlog. In the quarter, we had orders totaling $718 million, including a transformative win involving a contract with General Atomics to support the Remotely Piloted Aircraft System, or RPAS program, for delivering aircrew and maintenance technician training and supporting training devices and courseware to meet Canada's RPAS requirements. This to me is a prime example of a kind of larger and more differentiated program that we're in a position to address that will ultimately drive the defense transformation that we've been expecting. With that, I'll now turn the call over to Sonya, who will provide a detailed look at our financial performance. And I'll return at the end of the call to comment on our outlook.

Thank you, Marc, and good morning, everyone. Looking at our fourth quarter results. On a consolidated basis, revenue of $1.1 billion was down 6% compared to the fourth quarter last year. Adjusted segment operating income was $125.7 million, or $216 million, excluding the impact of the legacy contracts compared to $193 million last year. Quarterly adjusted EPS was $0.12 per share, or $0.37, excluding the legacy contracts, compared to $0.33 in the fourth quarter last year. We incurred restructuring, integration and acquisition costs of $55 million during the quarter in connection with a previously announced restructuring program related to portfolio shaping actions, including the sale of Healthcare, and to the continued integration of AirCentre. The AirCentre integration is progressing as planned and is expected to wind down by the end of June. The restructuring program is related to portfolio shaping actions and to streamline CAE's operating model and portfolio, optimize our cost structure and create efficiencies. Total restructuring costs incurred since the start of this restructuring program this quarter amounted to $39.3 million, and we expect to record approximately $10 million of additional restructuring expenses over the next two quarters. In light of the organizational and operational changes announced last week to rebaseline the Defense business, further strengthen our execution capabilities and drive additional synergies between CAE's Defense and Civil Aviation businesses. For the year, consolidated revenue was up 7% at $4.3 billion. Adjusted segment operating income was up 2% to $549.7 million and annual adjusted net income was $276.8 million, or $0.87 per share, which is stable compared to $0.87 last year. Excluding legacy contracts, adjusted segment operating income was up 19% to $640 million and annual adjusted net income was $355.3 million or $1.12 per share, which is up 29% compared to last year. Net finance expense this quarter amounted to $52.4 million, which is stable from the preceding quarter and up from $50.4 million in the fourth quarter last year. I expect our annual finance expense in fiscal 2025 to be similar to fiscal 2024 on lower interest expense on debt, offset by higher lease expense related to recently deployed training centers in our global training network in support of growth. Income tax recovery this quarter was $80.6 million, representing an effective tax rate of 14% compared to an effective tax rate of 24% in the fourth quarter last year. The adjusted effective tax rate, which is the income tax rate used to determine adjusted net income and adjusted EPS, was 47% this quarter compared to 23% in the fourth quarter last year. The increase in the adjusted effective tax rate was mainly due to the derecognition of tax assets in Europe, partially offset by the change in the mix of income from various jurisdictions. On the same basis, the adjusted effective income tax rate for the year was 17%. The annual effective income tax rate in fiscal 2025 is expected to be approximately 25% considering the income expected from various jurisdictions and the implementation of global minimum tax policies. With the closing of the sale of our Healthcare business, net income from discontinued operations was $20.5 million this quarter compared to $4.8 million in the fourth quarter last year. The increase compared to the fourth quarter was mainly attributable to the after-tax gain on the disposal of discontinued operations of $16.5 million in relation to the sale of the Healthcare business. Net cash provided by operating activities was $215.2 million for the quarter compared to $180.6 million in the fourth quarter last year, and for the year, we generated $566.9 million from operating activities compared to $408.4 million last year. We had free cash flow in the quarter of $191.1 million and $418.2 million for the year for an annual cash conversion of 151%. We continue to target an average 100% conversion rate going forward. Uses of cash involved funding capital expenditures were $91.7 million in the fourth quarter and $329.8 million for the year, driven mainly by the expansion of our civil aviation training network in lockstep with secured customer demand. These opportunities translate to some of our best returns as our simulators asset ramp-up within the first few years of their deployment. Commensurate with our ongoing success to capture market opportunities and training, I expect total CapEx in fiscal 2025 to be $50 million to $100 million higher than fiscal 2024. Approximately three-quarters of this relates to organic growth investments in simulated capacity to be deployed to our global network of primarily Civil Aviation training centers and backed by multi-year customer contracts. Our net debt position at the end of the quarter was $2.9 billion for net debt to adjusted EBITDA of 3.17 times, excluding legacy contract leverage was at 2.89 times at the end of the same period. We're prioritizing a balanced approach to capital allocation, including funding accretive growth, continuing to strengthen our financial position, commensurate with our investment-grade profile, and returning capital to shareholders. Given our progress in strengthening CAE's financial position as we announced last week, we are reestablishing a normal course issuer bid as part of our capital allocation strategy. The NCIB is currently intended to be used opportunistically over time with excess free cash flow. Given our outlook and the cash-generative nature of our highly recurring business, CAE's Board of Directors will also continue to evaluate the possibility of reintroducing a shareholder dividend. At the same time, I expect that we'll maintain a very solid financial position, bolstering our balance sheet through ongoing deleveraging, consistent with our investment-grade profile. Now to briefly recap our segmented performance. In Civil, fourth quarter revenue was up 6% year-over-year to $700.8 million and adjusted segment operating income was up 17% year-over-year to $191.4 million for a record margin of 27.3%. For the year, Civil revenue was up 12% to $2.4 billion and adjusted segment operating income was up 13% to $548.9 million for an annual margin of 22.5%. In Defense, as we disclosed last week, we accelerated the recognition of risks associated with our legacy contracts in the fourth quarter, following revised agreements on scope and timing with customers, suppliers, and other stakeholders. These actions resulted in profit adjustments associated with a reassessment of our estimated costs. Fourth quarter Defense revenue of $425.5 million was down 21% over Q4 last year. This includes a $54.3 million impact from the accelerated risk recognition on legacy contracts and the conclusion of certain service contracts we decided to no longer pursue. Adjusted segment operating loss was $65.7 million and adjusted segment operating income, excluding legacy contracts, was $24.6 million compared to an adjusted segment operating income of $30.5 million in the fourth quarter last year. For the year, Defense revenue was stable at $1.8 billion and adjusted segment operating income was down 98% to adjusted to $0.8 million. Adjusted segment operating income, excluding the legacy contracts, was up 72% to $91.1 million. With that, I'll ask Marc to discuss the way forward.

Thanks, Sonya. I'm going to separately address the outlook for two segments. But before I offer any numbers, I'd like to mention that our combination of our Civil and Defense businesses has significant strategic advantage. Now let me reiterate that and be very clear that our Defense performance in terms of profitability hasn’t met my expectations so far, but our strategy remains solid. Over the past two years, we've achieved some 20% growth in adjusted backlog and expanded our pipeline with bid opportunities that align very well with our core strengths in training and simulation, offering attractive risk-return profiles. Our simulators and our training products are very complementary for both Civil and Defense purposes. The synergies are strong in terms of technology, manufacturing, as well as go-to-market approach. There's hardware and software commonality in the products and increasingly there's operational synergy in how we optimize training across the two businesses. I'm very confident that Nick Leontidis will strengthen our execution capabilities and drive additional focus and synergies between both of our business segments. For Civil, the secular demand picture for aviation training solutions remain very compelling, underpinned by growth in air travel, demand for pilots, and the need for them to stay current with always advancing aviation technology and regulation. Our business is driven primarily by the regulated training required to maintain the pilots and crews who operate the global in-service fleet of commercial and business aircraft. And as an additional secular driver, we expect to sustain a high level of pilot movements from the growth and replacement of the active pilot population. According to our estimates, over half the commercial and business jet pilots who will be active in a decade from now have yet to even begin their training. With that background, I expect low-double-digit percentage Civil annual adjusted segment operating income growth in fiscal 2025 and continued margin strengthening with an annual segment operating income margin of approximately 23%. The expected increase in Civil margins reflects the ongoing ramp-up of newer training centers and recently deployed full-flight simulators, partially offset by the SaaS conversion that's currently underway in our flight operations solutions software business. As in previous years, I expect annual civil performance to be more heavily weighted to the second half. In Defense, we're also in a secular growth market, as the sector enters an extended upcycle marked by rising budgets across NATO and allied nations. Key trends include heightened focus on near-peer threats, greater government commitments to defense modernization and readiness amid geopolitical tensions, and a growing demand for the training and simulation solutions that we provide. Our expertise in both Civil Aviation and Defense positions us well to meet those needs. And specific to CAE, we're seeing a consistent demand driver across regions for our training solutions, a shortage of uniformed personnel for Defense, which has led militaries to rely on industry partners like CAE for training solutions to ensure readiness. This aligns perfectly with our core strength in our Defense transformation strategy over the past few years that has focused on expanding our leadership position on integrated training and simulation solutions. This strategic focus has allowed us to streamline our project selection to ensure a better risk-return balance. Moreover, we've renegotiated favorable terms such as cost-plus contracts for development work and tighter pricing bands on service contracts, while leveraging Civil-like business models in Defense. These improved terms will positively impact our risk-adjusted returns as newer contracts ramp up. This approach has already resulted in significant backlog growth with larger, more profitable programs, and we anticipate even greater growth in fiscal 2025. Our expectations for fiscal 2025 reflect a rebaseline of the business and the enhanced visibility that this obviously gives us. We're extremely focused on acting on what we can control and we'll prove it through execution in the coming quarters. We expect annual revenue growth in the low to mid-single-digit percentage range and annual defense and SOI margin to increase to the 6% to 7% range. And, like Civil, to be more heavily weighted to the second half. We have large multi-year programs currently in negotiation that should add significantly to our backlog soon. Beyond our selection on transformational defense contracts in Canada, we're well-positioned over the next year on several strategic programs across the Indo-Pacific Regions, Europe, and in the United States. In particular, the demand for aircrew training programs similar to Canada's FAcT and RPAS across the Five Eyes and NATO partners, as well as the allies continues to increase. These programs require the type of technologies and proficiency that our CAE strengths. We intend to leverage our position on these generational programs in Canada to enable multi-domain training in secured synthetic environments across our global network. With that, I thank you for your attention and we're now ready to answer your questions.

Thank you, Marc.

Thank you. Andrew Arnovitz: Operator, we'll take our first questions from the members of the financial community. Great. So we'll begin the analyst question-and-answer session. (Operator Instructions) The first question is from Kevin Chiang from CIBC. Please go ahead.

Thanks for taking my question and good morning, everyone. Maybe, I should start with a simple question. Just the slippage of some of the full-flight simulators, it sounds like the client wasn't in a position to take those products, but I'm wondering if you're starting to see any impact on pilot training demand just with some of the aircraft delivery issues at the large OEMs. Is that impacting what you're seeing from the airlines in terms of the demand for training, maybe relative to what you would have been forecasting or expecting, let's say, six to nine months ago? Just wondering if you're seeing anything material there.

Sure. First of all, you're correct. The changes in our outlook regarding delivery simulators and the adjusted operating income growth were solely due to our customers' training centers not being ready. Those simulators will indeed be delivered this year. This situation does not indicate any shift in market demand. We have been facing a consistent environment characterized by lower than expected deliveries of 737 MAX aircraft, along with reduced activity stemming from engine issues primarily affecting Airbus planes, which have numerous aircraft grounded globally. This condition has persisted for quite some time, and it remains unchanged. There are specific areas where airlines are experiencing slowdowns and are unable to acquire the airplanes needed to meet demand. However, the demand itself remains robust. Airlines are beginning to revive planes that were previously inactive and are managing their leasing arrangements. At this point, we are not witnessing any significant changes in demand. We are monitoring the situation closely, and the guidance we've provided for the upcoming year reflects our cautious perspective on this matter.

That's helpful. I have a second question. Thank you for the insights regarding the rebasing of Defense. It seems like this segment has been undergoing some sort of ongoing restructuring for quite a while, particularly with the acquisition of L3Harris' Military Training Division. Looking ahead two years or whatever the timeframe is, what should we expect from Defense? Does revenue need to increase to achieve the desired margins and mitigate risks associated with execution? Should there be a greater focus on the addressable markets you're targeting? I'm trying to understand what Defense could look like in two years if everything goes well. Will it be a larger business with improved margins, or a smaller business with better margins? Any insights would be appreciated.

I believe it's important to address that the current numbers we're seeing do not meet my expectations or those of our investors. However, we have taken steps to recalibrate the business. We've been discussing the challenges impacting our Defense sector for the past couple of quarters. Last quarter, we provided details on eight contracts, referred to as legacy contracts, which have significantly affected our profitability. These contracts, signed prior to COVID, were fixed price and have been heavily impacted by supply chain disruptions, labor shortages, and inflation, challenges that are affecting many in the Defense sector globally. We've isolated these issues and worked diligently to renegotiate with our customers to clarify the remaining scope, execution timelines, and costs associated with these contracts. The difference in expected costs is now $90 million, which aligns with what we indicated last quarter regarding the drag from these contracts for the next six to eight quarters. Through our negotiations and actions, we have managed to mitigate this risk, providing us with clearer visibility for the future, not just for these specific contracts but across all our programs. Additionally, I want to emphasize that we're successfully pursuing new business opportunities where we excel, particularly in our core areas like training centers and flight simulators. We're securing contracts with margins that contribute positively to our Defense outlook, which aims for 10% or more in profitability. I anticipate that around 15% of these new contracts will reflect in our revenue this year, supporting stable revenue growth and higher margins, moving towards low teens or nearly 10% margins. We also expect consistent cash flows from our Defense operations due to the nature of our customers, which typically have sovereign guarantees. This is the trajectory I foresee for the Defense business.

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

The next question is from James McGarragle from RBC Capital Markets. Please go ahead.

Good morning, and thank you for having me. Regarding the Defense margin guidance, can you share your insights on the visibility into the higher margin in the second half of the year? Is there any expected seasonality in the Defense side going forward, or should we anticipate that the second half margin will be the same as the margin rate leading into the next fiscal year?

I think that when you examine our performance over the past few years, you'll notice that the latter half of the year tends to be more loaded. This is due to various factors such as budgets in specific countries and ramping up of programs. This year, we have a clear visibility of our revenue and profit expectations, which align with our guidance of 6% to 7%. We've already secured those contracts, and they are part of our backlog, so now it is our responsibility to execute. We also have good visibility on the legacy contracts we previously discussed regarding a rebaseline and associated programmatic risks. Essentially, the variability we anticipate this year aligns with what we have experienced in prior years. To provide more details, our average profit margin is expected to be around 6% to 7%. I anticipate that we'll begin this year similar to where we finished the last one, which is in the range of over 5%, and we expect to see stronger performance in the second half.

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

I fully expect that the demand in the Civil business will remain strong for years to come. To provide more context on Civil, we made changes under Nick, our COO, to enhance visibility among the business leaders. We have three key leaders: Alex Prevost oversees Business Aircraft Training, Michel Azar-Hmouda is in charge of Commercial Aviation Training and simulators, and Pascal Grenier runs the software business. We will be able to offer a broader view of these specific individual businesses within Civil. If we break down the revenue in our Civil sector, roughly one-third comes from selling simulators to airlines, another third from training services for airlines through our training centers worldwide, and the final third from Business Aviation Training. The remaining 10% is generated from our software business. Each of these sectors has unique dynamics that influence margins. While utilization is an important metric, it is not the only one and can be impacted by seasonality, especially in the latter half of the year when training center utilization decreases as airlines are operating more flights. In our Products segment, which focuses on selling simulators, margins and revenue can vary significantly based on the customer, the simulator's product mix, and whether equipment costs are covered by the buyer. Joint ventures also play a role, as they may not reflect immediate revenue but can increase income. Additionally, our software revenue is influenced by contract timing, particularly for SaaS contracts, which we are prioritizing, but these have lower margins during the SaaS conversion period. This explains why we provide annual guidance for Civil. Looking ahead, I anticipate growth across all segments of Civil. Regarding the SaaS conversion, we expect a ramp-up period of roughly two to three years as we transition through it.

I appreciate the color. And I'll turn the line over. Thank you.

Welcome.

The next question is from Benoit Poirier from Desjardins Capital Markets. Please go ahead.

Yeah, thanks. Good morning, Marc. Good morning, Sonya. Yeah, just to come back on the assumption behind the 6%, 7% EBIT margin target for Defense in fiscal year '25, I think I heard that about 15%. The total revenue is expected to come from those transformative deals that are already in the backlog. So could you maybe provide some color about what was the contribution in Q4, and what makes you confident or the visibility you have with respect to the ramp-up in the second part of the year?

I might not have been clear, but when I answer that question, it's not 50%; it's about 15% of the revenue we expect this year will come from those transformational programs. This is up from 3% last year. Last year, around 20% of our Defense backlog consisted of these new transformational programs, which accounted for 3% of our revenue. This year, we anticipate that will increase to 15% and will continue to grow in the coming years as they ramp up.

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

The 10% margin is definitely still achievable, and the actions we've implemented will help make that happen. We have provided guidance for next year. Although we haven't been specific, it will occur within the planned timeframe, so within the next few years, but we are not projecting beyond this year.

Okay. And with respect to the appointment of Nick as a COO, obviously, he's been at CAE for over 35 years. Could you talk maybe, Marc, about the strategy here, the action that Nick is going to undertake? And maybe more color about the expected synergies that you would like to extract between Civil and Defense?

You're going to have to ask me to put Nick on the spot. But before I do, let me discuss how I approach things. Nick is a veteran of this company and interestingly, he started his career in Defense. He began as an engineer and led some major defense contracts, including one of the most complex projects we've ever undertaken before FAcT, which involved establishing the first PFI contract in the UK for Defense, setting up our Benson Training Center where we train all medium helicopters for the Royal Air Force. You may have visited that training center, which is still one of the most prestigious and technologically advanced in the world. Nick was behind that effort. Having known Nick and working with him directly since I joined CAE in various roles, I can say he understands the business well. He has a strong operational mindset, focused on both execution and strategy, which is why I appointed him to lead Defense over 10 years ago. He has successfully tripled the operating income in Civil during that time and built a strong franchise in Defense. He will leverage those strengths in his role. There is a lot of potential for simplification through greater focus. One key reason we've been successful in Civil is our focus. I've emphasized having three P&L leaders who are fully accountable and equipped to execute within their businesses. The changes we're implementing will enhance focus on specific P&L leaders in the United States, which is by far the largest military market in the world. Jason Goodfriend is serving as Interim President, working closely with Nick and overseeing our international programs, including Canada, where we announced some large contracts today. So, the emphasis on greater focus is very important. Beyond that, there is significant opportunity for synergy capture. It's evident that we can leverage our scale and technology across the enterprise, which will be a key aspect of Nick's responsibilities. Nick, would you like to share a few words?

I wanted to emphasize that we may have deviated a bit by trying to manage everything through the two business units. We have distinct go-to-market units in business aircraft, commercial, and both D&S US and D&S International, which will help us create synergies. Naturally, we will face some restructuring due to overlaps that were previously necessary. It's a situation where we recognize the need for change. Right now, I'm in a position of asking questions about everything, and the responses I receive have been quite enlightening. Often, the team is aware of what needs to be done; my role is to support them in executing it. As I mentioned, we will work collaboratively, and the team is already identifying inefficiencies and determining what needs to be eliminated.

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

Yes, Benoit, thanks for the question. So the CapEx is really, the spend is really a direct reflection of the success that we've had with all of the orders we secured to outsource more training. So three quarters of this CapEx is simulators to our network. So whether it's Qantas, AGN, we've got plenty, Las Vegas, Savannah, plenty of examples through that record order intake that we've got in the years. So we don't deploy simulators to our network on a speculative basis. Every single one of them is backstopped by signed long-term recurring revenue customer contracts. So, you know, what we see this year's CapEx is really a reflection of the secured order intake that we have, and this is to deliver to growth and our customers. And frankly, we have a proven track record of delivering really accretive returns on this organic CapEx. 20% to 30% range of incremental return on capital on our organic growth. So while we're not necessarily going to guide beyond that year, but it will be a function of the level of orders and market capture that will succeed.

Thank you very much for the time.

The next question is from Konark Gupta from Scotiabank. Please go ahead.

Thanks for taking my question. Just on the Defense, I'm wondering, Marc, how does the rebaselining of legacy contracts affect your market position and your ability to structure future bids appropriately?

I believe this reinforces our position because this successful renegotiation demonstrates the hard work of our teams over an extended period. We've employed teams for each of those programs to ensure we focus on executing the contracts effectively. As I mentioned in the previous quarter, we are committed to recognizing risks associated with these programs and defining the remaining work. While I acknowledged the potential for challenging negotiations that could result in penalties for delays on contracts, I am pleased to report that we have not had to face such situations in any case. We will continue to fulfill our commitments under the contracts, and our customers are satisfied with the outlook for these eight contracts. The timelines and scopes we have set align with client expectations, preserving CAE's reputation for reliability. In fact, in some programs, we have negotiated additional scope, leading to follow-on contracts. While this is a lengthy explanation, it ultimately underscores the enhancement of our reputation.

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

I could provide numerous examples, but I'd prefer not to at this moment. However, I can mention that in the L3 acquisition and the Legacy CAE business, there is significant overlap in technologies. A prime example is the RPAS contributor, where both teams have products. These areas need to be streamlined, although it's not an immediate necessity. We are currently supporting customers, but we also need to enhance synergies and establish a strategy for the company to unify its offerings in these domains. The same applies to the Civil side; there are opportunities for the Defense sector to deliver solutions similar to Gulfstream's and Global's, as these aircraft are utilized for specialized missions. At present, there is a lack of awareness about each other's work, both on the Civil and Defense sides, although customers are definitely interested in these solutions. Specifically, programs like Global's and Gulfstream's are quite beneficial for us. Essentially, we can adjust training programs by relocating simulators and instructor training, making it possible to implement a Gulfstream program anywhere. This is the type of initiative we aim to pursue further, while also continuing with more complex programs. Absolutely, we will remain vigilant against obvious challenges, but we require a stable business foundation that is less volatile. I believe these are a couple of ways we can enhance our success.

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

Thank you.

The next question is from Cameron Doerksen from National Bank Financial. Please go ahead.

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

I believe, Cameron, that as part of our ongoing balanced capital allocation, we will continue prioritizing debt reduction. We've always mentioned that reaching three times leverage was just a step towards achieving lower leverage overall. This will remain a focus for us. While we haven't set a specific target, we aim for a balance that reflects our investment-grade status. Generally, a ratio of two to 2.5 times is typical for investment-grade companies, as it provides us with the flexibility to enhance current returns and support our organic capital expenditures. So, that's my long-term target, but in the coming year, we will continue focusing on reducing debt while also making prudent organic investments and reinstating some shareholder returns.

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

Sure. I'm really pleased with the progress on the non-cash working capital for the year. So it's really the result of continued focus on efficiency of our key metrics whether it's DSO, inventory management, deposits, and unbilled sales. So it resulted in a strong reversal and an overall reduction in non-cash working cap on the balance sheet. So the focus is continuous. For the year, I'd expect the historical trends to continue, both on a seasonality, H1, H2, that trend continues, although, more abated. And for the year, training is still the bulk of our business and that's generally billed after execution. So as it grows, it's slightly a non-cash working cap investment. But we continue to focus on the metrics, on the efficiency of those metrics. And overall, we target 100% conversion of net income to free cash flow.

Okay. That's helpful. Thanks very much.

Thanks.

The next question is from Tim James from TD Securities. Please go ahead.

Thanks very much. Just one question here. Sonya, you mentioned that expansion of the training network will be in lockstep with customer demand and then you mentioned, you know, you look to, you sign long-term contracts for recurring revenue with customers. Is it possible to outline hurdle rates that accompany that approach? And what I'm trying to get at is just sense or a comfort level for an outcome where customers, maybe their own demands change from what they contract with CAE. And how do you manage that? And how are you insured against changes in their own activity levels that they want to put through a specific full-flight simulator in the future?

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

I wanted to mention that many of our contracts, especially with large clients like LATAM, involve secured capacity. The agreement is that clients secure a specific number of simulators or capacity they require to ensure all their pilots are current in their aircraft or training on different ones. In return for this, they commit to pay a certain amount to maintain that capacity. For instance, during COVID, customers asked for some relief, but we legally have the upper hand. The challenge arises when an airline wants to adjust its capacity. It's important to note that airlines are quite skilled at forecasting their needs based on the number of pilots and training hours required. As a result, fluctuations in demand are typically less severe, particularly in the commercial sector.

Okay, that's helpful, Nick. Thank you. Sonya, if I could just return to your earlier point. You mentioned the target return on capital of 20% to 30% over the next two to three years. Can you remind us if that calculation for return on capital aligns with what you publish as a consolidated target? Should we consider that when evaluating each individual dollar invested in a full-flight simulator?

So that incorporates all of that calculation. So ultimately, we look at it simulator by simulator, and this is the aggregate of all the simulators we've deployed, and ultimately track the contribution of that simulator over its capital cost. And so, you know, that we're measuring the incremental, accretive benefit of that growth investment.

Super. Thank you.

The next question is from Jordan Lyonnais from Bank of America. Please go ahead.

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

Did you say the Vegas facility?

Yeah.

Yeah. Well, maybe I'll turn over to you, Nick. Go ahead.

The Vegas facility is ramping up this year, and we’re approaching a steady state. This training center has been operational for a couple of years, and there's a solid plan in place to reach that steady state. In general, Q2 tends to be a bit quieter, particularly in Europe, as major customers like easyJet have restricted training to prioritize flying for the summer season. We expect a slowdown in that region. In the US, the situation is different because there is ongoing hiring, which is not as influenced by seasonality. However, Europe definitely shows significant seasonal effects.

Got it. Thank you.

The next question is from Noah Poponak from Goldman Sachs. Please go ahead.

Hi, good morning.

Good morning.

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

It's really back, as I mentioned, in each of these eight contracts, there have been significant and extensive renegotiations on every aspect of those contracts. This is to clearly define the remaining work we have to do, the time it will take, and the specific costs involved. Additionally, as expected with each of these contracts, we included standard contingencies to account for any normal risks associated with these programs because it's impossible to completely eliminate risk. We have contingencies in place for those, along with management reserves across our entire defense backlog. When I look at these contracts, I feel confident that we are in a unique position we haven't experienced for a while, particularly with these programs where we don't need to utilize a significant portion of those reserves to complete them. Our goal is to exceed expectations on these programs. By rebaselining, we aim to put this backlog issue behind us. We still need to execute these contracts; we're not stepping away from any of them. We plan to continue working on them to bring them to completion over the next six to eight quarters, with a couple possibly extending into the next year due to their timelines. However, we've accurately predicted the costs associated with these programs, so I feel very confident about our execution and the clarity I have regarding these programs.

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

I was mentioning that we have been successful in securing follow-on work for several contracts. Specifically, this includes Engineering Change Proposals for a couple of them, and on one particular contract in Europe, we obtained a follow-on agreement with improved pricing.

Okay. And how many of the eight are unprofitable?

Going forward, most of the contracts are being executed at zero margin because we've already accounted for the charges associated with them. There are three contracts that are operating at a very slight profit moving forward. That's the current situation.

Okay. Thank you.

Welcome.

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