Good day, everyone. Welcome to the CAE First Quarter Financial Results for Fiscal Year 2026 Conference Call. The conference is being recorded. I would now like to turn the conference over to Mr. Andrew Arnovitz. Please go ahead, Mr. Arnovitz.

Good morning, everyone, and thank you for joining us today. Before we begin, I'd like to remind you that today's remarks, including management's outlook and answers to questions, contain forward-looking statements. These forward-looking statements represent our expectations as of today, August 13, 2025, and accordingly, are subject to change. Such statements are based on assumptions that may not materialize and are subject to risks and uncertainties. Actual results may differ materially, and listeners are cautioned not 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 and MD&A for the 3 months ended June 30, 2025, available on our corporate website and in our filings with the Canadian Securities Administrators on SEDAR+ and at the U.S. Securities and Exchange Commission on EDGAR. On the call with me this morning from CAE are Calin Rovinescu, the company's Chairman; Marc Parent, President and Chief Executive Officer; Matthew Bromberg, Incoming President and Chief Executive Officer; and Constantino Malatesta, our Interim Chief Financial Officer. Nick Leontidis, Chief Operating Officer, is on hand for the question period. After formal remarks, we'll open the call to questions from financial analysts. Let me now turn the call over to Calin.

Thank you, Andrew, and good morning, everyone. Since being appointed Chairman of CAE earlier this year, I've had the chance to connect with a number of our long-term investors, many of whom I've known through my years at Air Canada. While this is my first time addressing the broader investment community in this role, I want to share why I was compelled to accept the Chairman position and more recently take on expanded responsibilities as Executive Chairman. My relationship with CAE goes back many years. As President and CEO of Air Canada, I saw firsthand the value CAE brought as a trusted partner in building and sustaining a world-class training organization, particularly through our co-located training centers in Toronto and Vancouver. Earlier in my career, during my time in law and as a managing partner at Stikeman Elliott, I also had a connection to CAE through one of its original investors and longtime Chairman, Fraser Elliott, Co-Founder of that firm that bore his name. And as an investor, I've been a long-time supporter of the company's mission and potential. So it's both an honor and a privilege to now take on an active role as Executive Chairman. I've reoriented my professional commitments to dedicate the time required to support Matt and help guide CAE's long-term direction. In addition to Board duties, I'll work closely with him on strategy, operational excellence and capital allocation with a clear focus on enhancing the customer experience, improving free cash flow conversion and driving stronger returns on invested capital. A key priority will be deleveraging the balance sheet, not merely as a financial objective but as a means to enhance shareholder value and strengthen CAE's long-term resilience. The company made solid progress last fiscal year, and we're targeting a net debt to adjusted EBITDA ratio of approximately 2.5x by fiscal year-end. I see that as a way point, not the final destination, as I believe we can go further in reinforcing our financial position. At the same time, we continue to give thoughtful consideration to the potential timing and form of shareholder returns, including dividends and share repurchases. We have a buyback program in place to be used opportunistically, and at the appropriate time, we may also consider reinstating a dividend. As Executive Chairman, I'll also engage regularly with key stakeholders, including investors and government leaders. With defense spending accelerating across NATO towards 5% of GDP, along with initiatives like the EU's ReARM strategy and renewed momentum in Canada, I intend to play an active role in positioning CAE as a strategic partner. This includes sustained engagement with federal and provincial governments, particularly in Quebec, where CAE is a long-standing anchor company. Our goal is to ensure CAE is recognized not only for its critical training and simulation capabilities but also for the broader economic value we deliver through high-quality jobs, exportable IP and technology leadership. As defense procurement and policy frameworks continue to evolve, we remain committed to close alignment and active participation. As you all know, today marks an important milestone for CAE as Matt Bromberg formally succeeds Marc Parent and steps into the role of Chief Executive Officer following our AGM. I want to acknowledge Marc for his outstanding leadership and enduring contribution to CAE. Over his 21 years with the company, including 16 as CEO, Marc guided CAE through a period of tremendous transformation and growth. Under his stewardship, CAE became the global leader in civil aviation and defense training and simulation that it is today. Perhaps most importantly, Marc is widely credited with instilling a deeply customer-centric culture across the organization that continues to define the way CAE's more than 13,000 employees around the world serve our partners and stakeholders each day. Marc has earned a deep respect within the global aerospace industry, and his impact extends far beyond CAE. His vision, passion and unwavering commitment to excellence have helped shape the future of aviation training globally. On behalf of the Board and the entire CAE team, I want to thank Marc for his legacy that will continue to inspire us as we build upon his accomplishments. It's also my pleasure to formally mark the beginning of Matt's tenure as Chief Executive Officer as he steps into this important leadership role at CAE. I had the privilege of leading the Board's CEO selection process, and I'll speak briefly to the qualities and experience that led us to the clear conclusion that Matt is the right person to lead CAE into its next era as the company builds on nearly 8 decades of leadership and innovation. His appointment follows a comprehensive and highly competitive international search. Given the distinctiveness of CAE's business, we sought a leader with a strong record of value creation in either aerospace or defense. And in Matt's case, we found both. We also prioritized candidates with experience managing complex, large-scale global operations. And most recently, Matt led global operations at Northrop Grumman, where he drove significant enterprise-wide cost and performance transformations. Prior to that, he served as President of Military Engines at Raytheon and earlier as President of Commercial Aftermarket at Pratt & Whitney. Matt brings a rare combination of strategic insight, operational depth and leadership acumen. He is, as one would expect of an MIT trained engineer with a business degree, intellectually rigorous. But equally important, he brings a high degree of emotional intelligence. His track record of leadership in world-class aerospace and defense organizations, combined with that important balance of IQ and EQ, makes them exceptionally well suited to carry forward CAE's unique culture, which we believe is one of our most important differentiators. Equally important to the Board was Matt's full commitment to CAE's identity as a proudly Quebec headquartered global company. Matt and his family are relocating to Montreal, which we view as essential. He has also begun taking French lessons, a reflection of his respect for our local roots and commitment to leading CAE in a way that is fully aligned with our values and culture. On behalf of the Board and the broader CAE community, I want to formally welcome Matt as he begins this important new phase with us. As Matt, the management team and I begin to assess CAE's forward plans, I'm highly optimistic about the next 3- to 5-year period. We're building on the strong foundation established under Marc's leadership and are now well positioned to unlock the next level of performance and value creation. With a refreshed Board, new CEO and an even sharper focus on financial and operational priorities, we see a clear path to delivering stronger returns. These internal drivers, combined with favorable long-term market dynamics support what we believe is a compelling and durable investment thesis. In Civil, the long-term fundamentals remain particularly strong despite some timing noise around pilot hiring this summer. The two major aircraft OEMs currently hold a record combined backlog of more than 17,500 aircraft, and both forecast that the global in-service fleet will nearly double over the next 20 years. CAE also estimates that approximately 300,000 new pilots will be needed globally over the next decade to support this growth and offset retirements. These structural drivers point to a sustained runway for growth in commercial pilot training and in earnings. In Business Aviation, the long-term outlook remains quite positive as well, supported by strong aircraft OEM backlogs, an expanding population of high net worth individuals and a shift towards fractional ownership models. We are in the early stages of a generational upcycle in Defense driven by rising geopolitical tensions and a surge in spending across NATO, the EU and Canada. This is fueling sustained demand for advanced training and simulation. This is an area where CAE's global reach, technical capabilities and trusted customer relationships position us to lead. The Canadian government's renewed emphasis on aerospace and sovereign industrial capacity further reinforces the durability of this demand. As Allied Nations work to rebuild critical capabilities, CAE's alignment with national priorities from mission readiness to supply chain resilience supports our conviction in the long-term growth opportunity ahead. Importantly, our growing Defense business provides a predictable revenue stream and adds balance to CAE's portfolio, offering meaningful upside in a sustained upcycle and complementing the secular growth we see in civil aviation. Looking ahead, our priorities include disciplined execution, greater operating leverage and translating earnings into robust and sustainable cash generation to support future investment and shareholder returns. With strong market tailwinds, a focused leadership team and a reinforced internal foundation, I believe we're well positioned to deliver meaningful long-term value to our shareholders. Now turning to the first quarter performance. Overall, we had a solid start to the year amid a backdrop of heightened economic uncertainty. We delivered adjusted earnings per share of $0.21 and secured $1.1 billion of adjusted order intake. Defense delivered strong year-over-year growth in adjusted segment operating income and margin expansion, driven by improved execution and disciplined program management. In Civil, performance was mixed with continued strength in business aviation, offset, as I said, by some near-term softness in commercial training and pilot hiring, consistent with the outlook we provided. I'll now turn it over to Marc and Constantino to walk you through the results in more detail.

Thank you, Calin, for your very kind words. Let me start with a few highlights from the quarter. In Civil, we delivered solid results, supported by the essential nature of our services and the durability of our recurring training business. As indicated last quarter, we continue to take a measured view of the first half of this year in light of macroeconomic uncertainty and ongoing aircraft supply constraints. In Q1, we saw an extension of the temporary pause in pilot hiring and a more cautious approach from commercial airlines, particularly in the U.S., where we believe hiring reached a trough. We have just 55 pilots hired in June by the 13 largest airlines. Similar dynamics were observed in other regions, and these factors contributed to lower utilization and fewer full-flight simulator orders in the quarter. By contrast, market conditions for business aviation, which accounts for about half of Civil's profit, remain strong throughout the period. Training center utilization came in at 71%, down from 76% in the prior year period, consistent with the short-term softness in commercial training we experienced last year. We also delivered 8 full flight simulators, which is the same number that we delivered last year. And while the early part of the year was shaped by macroeconomic uncertainty, we're beginning to see encouraging signs of stabilization, along with improvements in aircraft supply chains that are bringing greater clarity to airline hiring and fleet planning. The recovery in demand for commercial training solutions is really a matter of when, not if, and we continue to expect a positive inflection in the second half of the fiscal year. On the order front, we secured $511 million of business, including 5 full-flight simulators for a book-to-sales ratio of 0.84x and 1.27x on a trailing 12-month basis. We ended the quarter with $8.4 billion of total Civil adjusted backlog, which is up notably 27% year-over-year. During the quarter, we announced the expansion of our commercial Embraer E2 training offering with the deployment of the first full-flight simulator to support the growing E2 fleet across Europe, the Middle East and Africa. Since quarter end, we also announced that E2 pilot training will be delivered in Montreal, further supporting Porter Airlines' expanding fleet and enhancing the efficiency of their pilot training program. In business aviation, we were pleased to open our first dedicated training center in Central Europe located in Vienna, which welcomed its first customer in April. The state-of-the-art Business Aviation Training Center, an 8,000 square foot facility, offers an elevated training experience and reflects our continued commitment to supporting customers closer to where they operate. Our Gulfstream G550 full-flight simulator is already in service, and a new Pilatus PC-24 full-flight simulator will be added in the second half of 2026. The center will ultimately feature up to 9 full-flight simulators, including Europe's first Bombardier Global 7500, a global vision, Embraer Phenom 300, and a Bombardier Challenger 3500. And in airline operations, we're proud to have rebranded our suite of solutions under a new name, Flightscape powered by CAE. Flightscape is a data-driven platform that delivers real-time insights to help airlines enhance operational performance. It empowers operations control center teams to anticipate disruptions, adapt quickly to changing conditions, and optimize costs even in the most complex time-sensitive scenarios. During the quarter, we signed a long-term agreement with Allegiant, which will leverage Flightscape to transform its operational intelligence and drive improved performance. CAE has a proven track record of leveraging technology to drive innovation and improve the effectiveness of our training solutions. Last fall, we became the first to develop an immersive pilot training app for Apple Vision Pro, enabling pilots to complete key training activities remotely, enhancing efficiency and scalability and training outcomes. Apple selected CAE as a flagship use case for Vision Pro in Aviation. And Apple's CEO, Tim Cook, and the CFO highlighted us on their latest earnings call. They recognize how our adoption of spatial computing will improve pilot readiness and drive more productive simulator training. Turning to Defense, we had a particularly strong quarter driven by solid program execution across the board and improving product mix – program mix, I should say. Adjusted segment operating income and margin grew significantly year-over-year, reflecting better program performance and the successful completion of lower-margin contracts. We recorded a total of $611 million in Defense orders, achieving a book-to-sales ratio of 1.25x, contributing to $11 billion in Defense adjusted backlog, up 7% year-over-year. Over the last 12 months, the Defense book-to-sales ratio stood at 2.08x. The pipeline continues to be robust, with some $6 billion of orders pending customer decisions. In Defense, we continue to win strategically important contracts that really reflect the breadth of our training and mission support capabilities. During the quarter, we secured a continuation of flight training services for the United States Air Force on the KC-135 tanker aircraft as well as an extension of our management role in the simulator common architecture requirements and standards program for the United States Air Force. SCARS is a centralized open systems architecture initiative that supports U.S. Air Force platform simulators and the joint synthetic environment, underscoring CAE's leadership in enterprise training solutions. For the U.S. Army, we signed an agreement with GDIT under the Flight School Training Support Contract, or FTSS, providing simulation capabilities and training support for rotary wing pilot instruction at Fort Novosel, Alabama. In operational support solutions, we announced a collaboration with Sikorsky to deliver CAE's magnetic anomaly detection extended role system for the U.S. Navy and the Royal Australian Navy MH-60R Seahawk helicopters. Built by CAE and integrated by Sikorsky, this compact removable sensor detects magnetic anomalies caused by submarines, providing a powerful new anti-submarine warfare capability for MH-60R operators. In Canada, we signed an additional amendment under the FACT program, bringing the total value of subcontracts awarded to CAE under the Skyline joint venture to approximately $2 billion. This is aligned with our strategy to transition the defense adjusted backlog towards more accretive long-term contracts. Since the end of the quarter, we were also awarded a contract by the Italian Air Force to deliver a Block 5 Predator Mission Trainer Plus or PMT Plus for the MQ-9A Reaper. Developed in partnership with General Atomics, our PMT Plus is the most advanced simulator for the Reaper platform, offering a highly immersive training environment that accelerates readiness and reduces the need for live aircraft time during pilot and sensor operator training. These wins underscore the impact of the improvements we've made across the defense business. Through stronger execution and disciplined program delivery, we are seeing tangible results, both in our operational performance and in growing customer confidence. This progress reflects the focus and hard work of our teams to turn strategy into results and improve profitability. Before I close, I'd like to shift gears. As many of you know, today is my last day as CEO of CAE. And I want to take a moment to reflect on what these 21 years have meant to me. It's really been the honor of my professional life to lead this company for the past 16 years. When I joined in 2005, CAE was a very different business, and we've gone through multiple transformations since then, expanding into new markets. And today, we are the global leader in aviation and defense training. But what I'm most proud of is our culture. From the very beginning, I believed that if we take care of our people and our customers, the results will follow. And that's what we've built together at CAE, a company that leads with purpose and a company where people take pride in the mission, our noble mission, where safety, innovation, and customer partnerships aren't slogans but are part of who we are. They're part of our DNA. And none of this would have been possible without the incredible team at CAE. And I want to thank our instructors, our engineers, our technicians, our support staff and everyone in between for their dedication, their grit, their passion, and their belief in what we do. As I've often remarked, without the employees of CAE, we are merely a collection of buildings without 13,000 people who bring CAE to life. I know much has been asked of you over the past 1.5 decades, all of our employees listen to me, and I'm extremely proud of all that you have accomplished to make CAE the global leader that we are today. I'm equally grateful to our exceptional civil aviation and defense customers around the world. We exist to make the world safer, and it's been a true honor to serve as your trusted partner and to help you prepare for the moments that matter most. I also wanted to thank the Board and our investors for their trust over the years. And of course, I want to thank Calin warmly, and welcome Matt as he officially steps into the CEO role today. I had the opportunity to work closely with Matt over the past couple of months, and I can say without hesitation that he brings the right mix of leadership, operational discipline and vision to take CAE forward, and I am honored that he has been chosen to replace me. I'm confident in the team, confident in the company, and incredibly grateful for the opportunity to have served as CAE's CEO, which has really been the privilege of my life.

Thank you, Marc. Good morning, everyone. Consolidated revenue of $1.1 billion was 2% higher compared to the first quarter last year, while adjusted segment operating income was $147.8 million, up 10% compared to $134.2 million in the first quarter last year. Our quarterly adjusted EPS was $0.21, in line with the first quarter last year. Net finance expense this quarter amounted to $54.6 million, up from $49.5 million in the first quarter last year, mainly because of additional lease financing costs related to the recently opened training centers in our global network in support of growth. We also have additional financing costs associated with the consolidation of the SIMCOM joint venture in business aviation, which took place in Q3 last year. The increase was partially offset by lower finance expense on long-term debt on a lower level of borrowings during the period, in line with our ongoing deleveraging undertakings. Income tax expense this quarter was $19 million for an effective tax rate of 24%. The adjusted effective income tax rate was also 24%, which is the basis for the adjusted EPS. We continue to expect a run rate effective income tax rate of 25%, considering the income anticipated from various jurisdictions and the impact from global minimum tax legislative changes. Net cash from operating activities this quarter was negative $15.3 million compared to negative $12.9 million in the first quarter of fiscal 2025. Free cash flow was negative $36.2 million compared to negative $25.3 million in the first quarter last year. The decrease is mainly due to a higher investment in non-cash working capital, partially offset by higher net income adjusted for noncash items and higher dividends received from equity accounted investees. With continued expected reversals in noncash working capital investments and our outlook for operations, we expect to generate strong free cash flow in the year with a conversion of adjusted net income of approximately 150%. Capital expenditures totaled $106.9 million this quarter, with approximately 75% invested in growth. Approximately 40% of the growth capital expenditures this quarter were for simulators deployed to the FSTSS program in support of U.S. Army helicopter training in Alabama. We remain highly focused on capital efficiency. And notwithstanding this contract-specific investment opportunity in Defense, we continue to expect total CapEx in fiscal 2026 to be modestly lower than in fiscal 2025. This will be concentrated mainly on organic growth investments in simulator capacity to be deployed to CAE's global network of aviation training centers, which are backed by multiyear customer contracts. Our net debt position at the end of the quarter was approximately $3.2 billion for a net debt to adjusted EBITDA of 2.75x at the end of the quarter. As Calin indicated, we remain committed to further strengthening our financial position and continue to expect to reach 2.5x net debt to adjusted EBITDA by the end of the fiscal year. Now turning to our segmented performance. In Civil, first quarter revenue grew 3% year-over-year to $607.7 million, while adjusted operating income rose 1% to $107.6 million, resulting in a 17.7% margin. The approximate 40 basis point decrease in the Civil margin reflects lower utilization in commercial training and some differences in product solution mix this quarter. Looking ahead for Civil, we continue to take a measured view of the first half given commercial market dynamics. While I’ll also factor in the usual seasonal impact on our second quarter from busy summer travel period when pilots are flying. We now expect annual adjusted segment operating income to grow in the mid-single-digit percentage range at the lower end of our prior outlook, with annual segment operating income margin remaining stable year-over-year. The expected weighting of Civil's results toward the second half is consistent with prior fiscal years, supported by usual seasonality, improving market dynamics and macroeconomic conditions. Adding to our confidence is a recent increase in activity with our U.S. airline customers. In Defense, revenue remained stable at $490.9 million, while adjusted segment operating income increased 45% to $40.2 million, delivering an 8.2% margin, thanks to higher profitability and activity on our North American programs. Legacy contracts remain on track with costs and schedules well managed, and there is no change to our annual outlook for Defense.

Thank you, Dino, and good morning, everyone. I also want to thank Marc and Calin for the kind words, and the entire CAE team for a warm welcome. Let me start by saying what an honor it is to be joining CAE and to be stepping into the role of CEO later today. It is a privilege to follow Marc, whose leadership over the past 2 decades has shaped the CAE we know today. I'm also grateful to have had the opportunity to work closely with him in the recent weeks, which has helped ensure both continuity and a smooth handoff. Although my appointment becomes official following today's Annual General Meeting, I've already had a valuable introduction to CAE through time spent with our people and our customers and other key stakeholders. One of my first experiences was attending the Paris Air Show last month, along with the team. It was an intensive and energizing start. And I can say without hesitation, after attending air shows for more than 25 years, I have never seen a company so consistently respected. Every conversation spoke to CAE's professionalism, technical leadership, safety mindset and culture, and a deep, deep commitment to customer success. In these early weeks, I've been extremely impressed by the caliber of CAE's people, the strength of our technology and the depth of our customer relationships. This is a fantastic organization with tremendous potential to build upon past successes. It is clear to me that we have a world-class team, which is an excellent place to start. Over the next 90 days, I will take a pragmatic approach to evaluating the business, both operationally and strategically. My focus will be on understanding where we can further improve efficiency, sharpen execution and unlock synergies across our balanced portfolio. I value what makes CAE distinctive, especially a strong culture. And as I look to the future, I intend to protect what's core while building on our strengths. While it will take time to fully assess and quantify the scale of the opportunities ahead, my initial impressions are that there is real potential to strengthen free cash flow and improve returns on invested capital. This can be achieved not only through enhanced operational excellence, but also through disciplined, data-driven capital allocation. This work will be thoughtful, collaborative and grounded in a clear objective, creating long-term value for our shareholders. While CAE is best known for its leadership in civil aviation, our defense technologies are increasingly seen as mission-critical. We help military forces train more safely, more effectively and with a level of realism that is essential in today's environment. Having spent a fair part of my career in and around defense, including service as a U.S. Navy Submarine Officer, I understand how vital it is to be fully prepared before any mission ever begins. That's exactly what CAE enables, and it is why I believe we are uniquely positioned to grow our impact as a strategic partner of choice in defense. I see real potential to leverage our advanced defense technologies more broadly across CAE's portfolio, including in commercial aviation. At the same time, we can drive greater efficiency by applying commercial practices within our Defense business. This cross-pollination of innovation and efficiency can unlock new value, enhance customer outcomes and support higher returns. As we focus on efficiency, we will relentlessly maintain our commitment to our customers to quality and to safety. Before I turn the call back to Andrew, I want to take a moment to speak directly to our investors and analysts. I know many of you have long-standing relationships with Calin and Andrew, and I've benefited from their insights about what matters to you. I look forward to building those relationships over time, and once I'm fully up to speed, I'll welcome the opportunity to engage with you directly. In the meantime, thank you again for the warm welcome. I'm excited to be here, focused on the work ahead and confident that we can achieve good growth and a great future together.

Thanks, Matt. Operator, we'll now open the lines to questions from financial analysts.

And your first question comes from the line of Fadi Chamoun from BMO Capital Markets.

Okay. First, I want to say congratulations to Marc on his retirement and outstanding career. My question is directed towards Calin and Matt. You both mentioned in the press release the importance of operational excellence and focusing on operational efficiency. Given the significant growth we've seen over the last decade, it seems logical that there is a path for optimization. I would like to know if you have any high-level insights on where you see opportunities for improving margins and enhancing cash flow conversion that you discussed.

Right. Calin here, and it's good to hear your voice again. Two things. One, as has been referenced in these remarks, CAE has invested significantly over the last period of time in building up capability. That investment is starting to pay dividends based on the earnings that we're seeing. But we think there's much more potential there. So that obviously requires an opportunity to leverage those investments, and that may result in some additional focus on cost, how it is we can best optimize. And from my vantage point, as you know, and I referenced as well this in my remarks, that's actually within Matt's wheelhouse in terms of operational excellence. And so it's a simple formula of saying when you look at the commercial side of the business, in particular, and frankly, the entire Civil side of the business, a lot of investment has been made; now is the time to optimize it, and we think that there are some great opportunities ahead. We're still early on, I'd say, in the early innings of that cycle. So there's a lot more room to go. And so that's quite an exciting time to see earnings growth there. On the Defense side, you've seen the positive results this quarter. And we'll continue to build sort of sustainable, profitable long-term contracts and execute well on these various programs. But I think that's as simple as that. I don't know, Matt, if you want to comment further?

Look, thanks, Calin, and thanks for the question. Recognizing that I'm on the doorstep of the role later today, I have spent my entire career looking at complex global organizations and understanding how to drive efficiency, improve operations, maintain quality and maintain safety. And from what I've seen, we have that opportunity to continue to do that at CAE. And as I get into the next 90 days and find out and discover where that is, we'll come back and share that with you.

And your next question comes from the line of Kevin Chiang from CIBC.

I echo Fadi's comment there. Marc, congratulations on your upcoming retirement, and welcome, Matt, to CAE. Maybe as I look at the outlook you provided for fiscal 2026, it seems like you're facing some transit headwinds in Civil. Just wondering as you think about utilization, maybe being a little bit weaker than you anticipated. Does that change near-term CapEx spending opportunities? Like could you see upside to your CapEx guidance this year in the sense that maybe there's an opportunity to push some of that spend further out just as you look to better match near-term demand with supply just given some of the transient headwinds you noted in the prepared remarks?

Yes, Kevin, Calin here, and again, good to hear your voice as well. Listen, there's some timing noise for sure around pilot hiring this summer, but the big picture is that the earning potential can be a lot higher over time. And as I said, we're just at the beginning of that journey. But in terms of getting a bit more granular on capital, I'll ask Constantino to comment briefly.

We continue to anticipate that capital expenditures will be slightly lower year-over-year in fiscal year '26. This aligns with our disciplined approach to capital deployment, which is essential. In the first quarter, civil capital expenditures have already decreased by about $10 million compared to last year. I noted that 40% of the growth capital expenditures this quarter were allocated to a specific program in Defense & Security. We are maintaining discipline, ensuring that we do not exceed market conditions, and we are carefully assessing opportunities to identify savings and potentially defer capital expenditures if needed.

That's helpful. Just on the working capital, you mentioned that typically in Q1 there is a bigger working capital drag, and it sounds like we'll reverse that. But in fiscal '24 and '25, working capital was a tailwind on an absolute basis for the full year. Can we expect the same for fiscal 2026, or will it be a more neutral working capital year for CAE?

Yes. So definitely, it is typical to see higher investment in noncash working capital in the first half. It's not inconsistent with the seasonal profile of our business. So we do expect a stronger cash generation profile in the second half and remain on track to deliver strong free cash flow for the year, targeting our conversion and adjusted net income of 150%. With that, that comes with a disciplined approach to noncash working capital. And yes, we are aiming to have a more neutral approach to noncash working capital this year.

And your next question comes from the line of Cameron Doerksen from National Bank Financial.

Congratulations, Marc, on the retirement, and welcome, Matt. I wanted to ask a question about, I guess, the Civil outlook. Obviously, some incremental softness that you've seen here. But it does sound like you're fairly confident that we'll see a better second half of the fiscal year for you. I guess what indicators do you have that provide that visibility in the second half rebound and, I guess, especially the airline pilot training part of the business? So is there anything that you're seeing specifically that I could point to that?

Yes, Cameron, it's good to hear from you. As I mentioned, it seems we've reached a low point in pilot hiring. When hiring pilots, there is typically a delay before training programs commence, which is expected. Not only do we believe this is a low point, but we are also starting to see increased activity that looks promising for the remainder of the year. However, we have also noticed that some airlines have been more cautious in their announcements. We're analyzing the available data, and I would like Nick to share what we're observing regarding commercial hiring, particularly in the United States, as we remain cautiously optimistic about the rest of the year. Nick?

Thank you, Calin. As we move from August into September, we anticipate that our customers will resume hiring based on discussions about access to capacity. Hiring is expected to increase in the second half of the year. Additionally, Boeing and Airbus are now delivering planes at more normal levels, which has been consistent for the past couple of months. While we won't declare victory just yet, these delivery levels are likely to drive greater demand for capacity moving forward. Airbus has reaffirmed our guidance, and Boeing is delivering 35 to 40 airplanes a month. These figures will contribute to rising demand as many of our customers take delivery of new aircraft. Overall, with the increase in airplane deliveries and our customers expressing capacity needs, we are confident that there will be an uptick in the utilization of our training operations.

And your next question comes from the line of Konark Gupta from Scotiabank.

Congrats to Marc for an outstanding career. As well as congrats to Matt and Calin. Calin, nice to hear your voice too on the earnings calls now. My first question, I guess, goes to some of the remarks that Calin, you, and Matt made about how you want to tackle the operational efficiency, enhance free cash profile, return on capital, etc. How do you see the executive compensation alignment should evolve over time as you execute on those priorities? I mean, return on capital is obviously one of the metrics that you've been kind of factoring in. Free cash and other metrics. Did you see any room for some innovation there on the executive compensation side?

Thank you very much, Konark, it’s great to hear from you. We are examining various metrics and comparing the different drivers that other organizations have analyzed. We have conducted a thorough evaluation of the aerospace and defense sectors. There is an ongoing conversation about whether return on capital employed (ROCE) is the appropriate measure to use, and we will continue to evaluate that. I have my reservations about it. Moreover, this is just the beginning for Matt, and we need him to get up to speed in order to identify the correct drivers. Capital allocation is one of the key goals of this new initiative. As we compare ourselves with top performers in the aerospace and defense industry, it is essential to recognize that the two segments have distinct capital allocation frameworks and targets. We believe there is significant potential for gradual enhancement. This is not a scenario where we will see immediate, dramatic changes. There is a clear opportunity for steady progress, and we remain highly committed to both segments of our business. Overall, this entails that we will be exploring different capital allocation measures and evaluating ourselves against industry leaders.

Okay. That's a fair comment, Calin. If I can quickly follow up on Defense. The margin in Defense for the first quarter was pretty solid, I would say, like 8% plus. Usually, you have high-pronounced seasonality and lock-ins in Defense orders. I think, Marc, you mentioned about some of the weaker margin, also lower margin contracts rolling over and the mix, etc. Can you speak to the mix shifts between the legacy contracts and the non-legacy contracts and like what kind of contributed this margin? And I mean, does it give you even more confidence in the top end of the range that we have for the full year?

Yes. We're executing as planned and are actually slightly ahead of schedule, which makes me very happy. The strategy we implemented a few quarters ago regarding legacy contracts is on track, and I foresee no issues in executing the remaining programs. We're focused on replacing programs that negatively impact our margins with those that positively contribute to our gross margins, which are in the low double digits for Defense. This is more of a step towards our ultimate goal. The order intake and backlog growth are also encouraging. Overall, our program execution is steady and disciplined. While we may see variability in revenue from quarter to quarter due to the nature of the programs, we are confident and not changing our guidance.

And your next question comes from the line of Benoit Poirier from Desjardins.

Yes. Congrats, Marc for those 21 years, and welcome, Calin and Matt, to the CAE team. I know, Matt, it's early on in the role, but you know obviously quite well the U.S. defense market. I would be curious to have your view about how this market is different from other regions. And what's your first impression of CAE's positioning and potential for margin improvement, especially for the U.S. specifically.

Yes. Thanks, Benoit. I appreciate the question and look forward to getting to know you. I think we're in a very unique period in defense. First, CAE's role in mission safety and mission reversal transcends borders. But we also have tremendous once-in-a-generation growth in defense, not only in the U.S. but in other parts of the world. And I think CAE is well positioned to do several things. One, capitalize on those opportunities; two, leverage the defense business across our commercial enterprise, as I mentioned earlier, from technology; and three, create scalable international solutions among our defense partners. So I see a huge opportunity, and I'm excited to have work to unlock that over the next few months.

Benoit, it's Calin here. And likewise, good to reconnect. Canada is a huge opportunity, of course, because Prime Minister Carney's announcements on increasing spend is, frankly, exponential. We’ve never seen that before in this country. So they are in many, many areas. But one of the things that we believe, and certainly as the country takes on more responsibility in protecting its own sovereignty, it's where the data is maintained, where the training is maintained. If it buys fighter aircraft, who is it that is doing the training on those fighter aircraft, expected to be CAE. As we look forward to programs in other countries, if Canada buys equipment from other countries, we would want to accompany the government on those initiatives. And I think that this is something that we look to leverage the opportunities for CAE not only directly in connection with the government of Canada, not only in relation to government of Canada programs, but quite frankly, international programs throughout. And so this is an extremely unique opportunity for us. And this is not something that is going to happen overnight because, obviously, defense programs take time to be approved. We've also raised the question of some urgency with the government that there are opportunities to exercise the prerogatives that they have as a government to expedite programs and not go through normal procurement processes that can bog down. But we see this as being a fairly exciting long-term growth opportunity as we get to this 5% of GDP spending over time.

And your next question comes from the line of James McGarragle from RBC Capital Markets.

Congrats, Marc, on a great career, and Matt, on the new role. I'm sure it's an exciting time for you. But I just have one on the Defense results here. The margin guidance implies kind of mostly stable margins for the rest of the year, whereas last year, margins kind of stepped up as the year progressed. So anything to call out in Q1 that might have helped out margins here? Or should we kind of expect similar sequential trends in margin improvement that we saw in the prior fiscal year?

James, thanks for the question. So we guide on an annual basis because effectively, there's always potential for volatility in the margins. We did have a step-up in the margins. It really is, as we remarked, some lower margin contracts falling off and some higher-margin contracts being ramped up. So it will be depending on the ramp-up of other contracts, and we can see that change throughout the year. But that's why we guide on an annual basis, because we're confident we're going to meet that, and guidance is unchanged.

Yes. And then on the Civil margin outlook and some of the utilization drop we saw in Q1, can you just walk me through the puts and takes on the margin outlook for the rest of the year? I guess, given the drop in utilization, the stable margins kind of implies you're working on some things operationally to drive an improvement in margins. Can you just kind of talk us through what those things are? And then is to look out into fiscal 2027, as we kind of see utilization to kind of normalize and pick back up, will we be kind of modeling for kind of a step function improvement in margin as we look out longer term as utilization starts to improve back up to where it has trended historically? And after that, I can turn the line over.

Margin improvement in the second half will primarily come from increased utilization, which we expect to enhance for the remainder of the year. Additionally, we are focusing on cost controls, as managing expenses is an integral part of our everyday operations. For the second half, we are operating under certain assumptions regarding cost avoidance to sustain our current numbers. Dino?

I just want to add that we reflected back in May that the first half of this year will be similar to the first half of last year. And so that was a ramp-up, meaning a ramp-up in the second half of this quarter. And again, based on all the things that Nick talked about. So we are expecting, as usual, more deliveries back-ended and some of the efficiencies you're driving through to make sure that we deliver as we committed.

And we have time for one last question, and that comes from the line of Tim James from TD Cowen.

Okay. Best wishes for the future, Marc. It's been a real privilege watching your career and learning from you over the years. Welcome, Matt and Calin. I look forward to your insights and soaking up all I can on CAE's way forward. Just one question here. It was mentioned earlier in the call about the trend towards fleet operators and fractionals and the business aviation side. I know CAE's really well positioned for whatever way the wind blows in business aviation. But is there anything specifically the company can do or needs to do strategically to really take advantage of that trend towards fleet operators and business aviation?

I can begin by saying that one of the key achievements is the acquisition of the remaining part of SIMCOM, which enhances our exclusivity in training for Flexjet, the second largest fractional jet operator. This positions us well within that segment. Additionally, our extensive experience in training airlines globally, both in simulators and at our training centers, allows us to effectively deliver airline-type training. This is particularly relevant for fractional owners, as their pilots resemble airline pilots. They seek training that differs from traditional business aircraft training typically suited for smaller flight departments. Overall, we are in a strong position. Looking at our customer base, including notable clients like AirSprint in Canada, I am optimistic about our continued success due to our presence in the fractional market and our coverage of larger cabin business jets.

Operator, that's all the time we have for the call this morning. I want to thank all of our participants for joining in, and remind you that a transcript of the call will be on CAE's website later today. Thank you. Have a good day.

This brings to a close today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.