Earnings Call Transcript - CAE Q2 2026

Operator, Operator

Good day, ladies and gentlemen. Welcome to the CAE Second 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.

Andrew Arnovitz, VP of Investor Relations

Good morning, everyone, and thank you for joining us today. Remarks, including management's outlook and answers to questions, contain forward-looking statements, which represent our expectations as of today, November 12, 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 September 30, 2025, available on our corporate website and in our filings with the Canadian Securities Administrators on SEDAR+ and the U.S. Securities and Exchange Commission on EDGAR. On the call with me this morning from CAE are Calin Rovinescu, the company's Executive Chairman; Matthew Bromberg, President and Chief Executive Officer; and Constantino Malatesta, our Interim Chief Financial Officer. Nick Leontidis, Chief Operating Officer, is also 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.

Calin Rovinescu, Executive Chairman

Thank you, Andrew, and good morning, everyone. Q2 was a solid quarter, all things considered, and Matt and Constantino will comment on it shortly. More importantly, since Matt's appointment, we have started to build out the transformation plan for the next chapter of CAE's evolution with a focus on: one, sharpening our portfolio; two, disciplined capital management and capital allocation; and three, improved performance through operational excellence and cost transformation. We expect this plan to lead to sustained value creation and long-term shareholder returns. The first order of business for Matt as he took the reins as CEO was to undertake a comprehensive review of CAE's business and operations, and my focus has been on ensuring continuity, providing counsel and engaging with stakeholders as we chart the transformation plan that Matt will set out in a few minutes. Matt and I have also met with many investors and prospective investors and equity analysts both to take their feedback as well as to discuss the huge opportunities in front of us, especially regarding the Defense business, which will remain a key component of CAE going forward. In fact, I recently participated in a Bloomberg conference panel in New York, focused on Canada's generational defense investment push, a discussion that underscored the market's confidence in the opportunity ahead for CAE. Canada's creation of the new Defense Investment Agency is an important step toward renewed emphasis on capability, modernization, and industrial sovereignty, priorities that align closely with CAE's global position and core strengths. Last week's federal budget reinforces that direction with a total of $81.8 billion in new defense spending projected over the next 5 years and substantial incremental amounts over the next 20 years. As you'll hear from Matt, we're making meaningful progress on the first stages of the transformation plan, which has already resulted in some important organizational changes. Having led several successful programs to unlock shareholder value in the past, I'm confident we're on the right track, challenging the status quo while protecting what is core to CAE. We selected Matt as our CEO because he has the operational depth and proven record of building and leading high-performance teams that drive value in some of the world's leading aerospace and defense companies, and he has the full support of the Board as we embark on this next phase of CAE's journey. CAE's culture has centered primarily on growth over the last 2 decades, and it is time now to harvest that growth and extract even greater bottom line profitability. And that is what our transformation plan will seek to do. With that, I'll turn the call over to Constantino to provide some financial highlights, and then to Matt to share his perspective from his first 90 days, outline the high-level approach to the transformation plan and discuss the organizational changes that we announced today. Constantino, over to you.

Constantino Malatesta, Interim Chief Financial Officer

Thank you, Calin, and good morning. Consolidated revenue of $1.24 billion was 9% higher than the second quarter last year, while adjusted segment operating income was $155.3 million, up 4% from $149 million in the second quarter last year. Our quarterly adjusted EPS was $0.23 compared to $0.24 in the second quarter last year. Net finance expense this quarter was $56.9 million, up from $52.9 million in the second quarter last year, mainly due to additional financing costs from acquiring the rest of SIMCOM in Business Aviation, which occurred in Q3 last year, and increased lease expenses for training center expansions in our global network. The rise was partly offset by lower finance expenses on long-term debt because of reduced borrowings during the period, aligning with our ongoing deleveraging efforts. Income tax expense for this quarter was $22.3 million, leading to an effective tax rate of 23% on both statutory and adjusted bases, compared to an adjusted effective tax rate of 18% in the second quarter of fiscal 2025. We expect a run rate effective income tax rate of about 25%, reflecting our anticipated geographic mix of earnings and ongoing tax legislation reforms from various regions. Net cash from operating activities rose to $214 million this quarter from $162.1 million in the second quarter of fiscal 2025. Additionally, our free cash flow increased by 44% to $201 million compared to $140 million in the second quarter last year, primarily due to higher net income adjusted for noncash items and increased dividends from equity accounted investees. With expected reversals in noncash working capital investments and our operational outlook, we anticipate generating strong free cash flow for the year, with an adjusted net income conversion of around 150%. Capital expenditures were $87.6 million this quarter, with about 85% allocated for growth. Approximately 40% of growth capital expenditures this quarter were for simulators used in the FS TSS program to support U.S. Army helicopter training in Alabama. We anticipate total capital expenditures in fiscal 2026 to be lower than last year, even below our previous guidance, with a roughly 10% year-over-year decrease in CapEx, highlighting a 25% reduction in Civil spending while focusing remaining investments on market-driven growth backed by multiyear customer contracts and simulator deployments across CAE's global training network. Our net debt at the end of the quarter was around $3.2 billion, resulting in a net debt to adjusted EBITDA ratio of 2.66x. We still aim to achieve a 2.5x net debt to adjusted EBITDA by the end of the fiscal year. In Civil, second quarter revenue increased 5% year-over-year to $670 million, while adjusted segment operating income fell 6% to $108.7 million, yielding a margin of 16.2%. Training center utilization was at 64%, down from 70% last year. We delivered 12 full-flight simulators compared to 18 the previous year. This decline reflects the typical seasonal slowdown in training activity, along with lower commercial training utilization than the same period last year. In Defense, revenue rose 14% year-over-year to $566.6 million, while adjusted segment operating income increased 41% to $46.6 million, achieving an 8.2% margin due to heightened activity on newer high-margin program awards and the ramp-up of recently awarded contracts in the U.S. and Canada. Now, I will turn the call over to Matt.

Matthew Bromberg, President and Chief Executive Officer

Thanks, Dino, and good morning, everyone. Before I get started, I want to acknowledge yesterday, November 11, Veterans Day and Remembrance Day. It's something that's very important to me and the over 10% of our employees that are veterans, and given that almost 45% of what we do is to serve the warfighter, it's an important time to take a moment and reflect. Since stepping into the CEO role in mid-August, I have spent time with our customers, our partners, our shareholders, and our employees across the company. These first few months have confirmed what those of you who follow the company already know. CAE is a strong business with strategic advantages and compelling industry fundamentals that support growth. We have world-class technology and a leading share of the markets in which we participate. CAE has very strong customer relevancy with airlines, OEMs, governments, and defense services, and the CAE brand commands respect, not only for our capabilities, but for what we stand for: safety, quality, and mission readiness across both civil aviation and defense. Looking forward, the task is now to leverage our team, our technology, our customer relationships, and our strategic assets to not only grow the top line but also improve cash flow and our return on assets. We will build on our strategic advantages to further unlock value in our markets. And that's what our transformation will seek to do. We are a world leader in flight simulation and training. I have discovered firsthand that we have an entrepreneurial culture and a highly passionate employee base, who all recognize the importance of what they do. It shows in our engagement surveys and in our customer satisfaction surveys. The key now is to harness that drive and align it behind a coherent strategy supported by disciplined capital management and tighter operational controls. That same drive is reflected in the technology that powers our business. We have industry-leading capabilities embedded in our products and in our services. What is unique about CAE is that innovation here is built into how we think, how we design, and how we execute. Our ability to simulate complex environments and scenarios is unmatched, and our model-based systems engineering capability is world-class. Our expertise in hardware and software integration is a key differentiator, and our unique database or knowledge base of aircraft, airports, pilot performance, environmental effects, and sensor responses is a strategic asset. That innovative edge runs through everything we do. For example, the new CAE Prodigy Image Generator is the world's first third-generation Level D certified image generator. Prodigy is redefining realism and efficiency by narrowing the gap between virtual and real worlds with ultra-realistic visuals and high-fidelity motion and flight dynamics. And for the first time, we are applying the same image generator technology across both commercial and military training systems. It has been certified for commercial aircraft use and is already operational in multiple Eurofighter and CH-53 styling and simulators with dozens more in the pipeline. To me, it's a clear expression of CAE's technology differentiation. Through disciplined capital allocation and a deep engineering culture, we can deliver dual-use technologies with lasting strategic and financial impact. Another example is the NH90 C line program in Defense, which demonstrates our ability to deliver a highly integrated mission-level simulation environment at scale. It is a fully immersive multi-role training ecosystem that mirrors the operational complexity of naval helicopter missions and is powered by more than 3,000 CPUs, 50 GPUs, and over 100 terabytes of data. The system rivals the computational scale of enterprise-grade defense networks. It is able to link multiple training devices together from full mission simulators to tactical and procedural trainers. This provides the flexibility for our users, the warfighter, to operate independently or together in coordinated scenarios. What also sets it apart is the depth of its domain modeling, from advanced sonar acoustics to ship deck wind and wave dynamics, capturing the full realism of naval aviation operations. These are just 2 of many examples of how CAE's technology leadership translates directly into customer value, competitive advantage, and long-term growth. The technology advantage spans both Civil and Defense. The majority of what we do in each business is training and simulation, and I believe there is real potential to create greater synergy and shared innovation between them. So looking forward, the task at hand, the opportunity is to protect and leverage the great technology, people, and customer relevancy that has propelled CAE over the past decade, while at the same time, to sharpen how we operate with a focused portfolio, a simplified organizational structure, and a higher bar for performance and returns. We are, therefore, embarking on a transformation plan, a transformation plan that will include several key drivers. To start, we have begun to align our organization and leadership for greater clarity of responsibilities and sharper execution. Nick Leontidis will retire at the end of the calendar year and transition to the role of Special Adviser to the CEO. Nick's 37-year contribution to CAE has been extraordinary, building civil into a global leader, stabilizing our defense operations, and helping set the foundation for our next phase. And Nick is sitting here with me today, and having gone through many transitions, I want to tell you, Nick, thank you personally as a mentor and as a friend over the past 90 days. It has been a pleasure to spend time with you and get to know you, and I look forward to working with you until the end of your retirement. With his retirement, we are reducing a management layer by limiting the Chief Operating Officer role and moving to a more streamlined business-led production model organized around driving excellence and quality across product and service delivery. To that end, we have consolidated leadership of the Civil business with the appointment of Alexandre Prevost as its President. By doing so, we are combining commercial and business aviation to accelerate the transformation and to optimize utilization and efficiency on a global scale. This move also establishes a single integrated service excellence organization designed to best serve the needs of our civil aviation customers. As many of you know, Alex most recently led our business aviation training division after heading commercial aviation training in Asia Pacific. He has an excellent customer relationship portfolio and brings a strong operational track record and financial acumen, having started his CAE career in structured finance and M&A. In Defense, we've consolidated from 3 P&Ls into 2. Merrill Stoddard will continue to lead our U.S. defense business, while France Hebert will have the responsibility for Canada and International. In doing so, we will sharpen focus and improve coordination across our global defense organization. Together, these changes create 2 comparable segments with the technology, scale, and reach to capitalize on growing defense market opportunities. I want to thank Marc-Olivier Sabourin, who will be leaving CAE in December for his decades of dedication to the company and for his instrumental role in developing our international defense presence. We are deeply grateful for his many contributions and wish him continued success in his future endeavors. We are also welcoming Juan Araujo. Juan will join CAE in January as our new Senior Vice President, Operations. Juan brings over 25 years of global aerospace and industrial experience, with companies including Raytheon, Pratt & Whitney, and Hamilton Sunstrand, and has a proven record of driving operational excellence. Juan will focus on productivity, quality, cost, and continuous improvement across our product organization. In a typical year, CAE designs, manufactures, and services over 300 training devices for the civil and defense markets, making this a prime opportunity to unlock further efficiencies and value. Juan's mandate is to unite several previously dispersed functional areas into a single end-to-end products team. In doing so, we will strengthen execution and product quality while lowering product costs and driving greater supply chain efficiency for both Civil and Defense segments. Today's leadership announcements are only the first step in creating a leaner, more focused organization, one that has fewer layers, eliminates redundancies, and is aligned to deliver sustainable value creation. In addition to the leadership changes, the transformation will focus on 3 priorities: our portfolio, our capital discipline, and our performance. First, let me comment on our portfolio. We have a strong balanced portfolio across Civil and Defense, 2 businesses powered by long-term secular tailwinds. Our Defense segment provides durable, predictable growth, largely insulated from the broader economy with sovereign-backed contracts that generate steady cash flow. That cash gives us the flexibility to fund the highest return opportunities across the company. And as I discussed a few moments ago, there is real technology and capability overlap between Civil and Defense that strengthens both sides of the portfolio. In addition, our operations team focuses on unlocking value across both segments. However, we are taking a bottom-up look at every business, every investment in every partnership within our 2 segments to ensure that our capital and management attention are concentrated where CAE has the greatest advantage and the greatest potential return. Our portfolio assessment is in its early stages, but I fully expect decisions and actions to be made over the next few quarters. Second, our capital discipline. One of my first actions as CEO was to review our capital approval and operating policies. While our previous practices were successful at supporting growth, we need to also reflect return on capital and free cash flow. We have already tightened policies around capital and operational expenditures, introducing sharper filters for returns, strategic fit, and execution certainty. All material capital projects, again, all material capital projects and commercial proposals are reviewed by me to ensure that they meet the heightened return thresholds. We're also standardizing how we bid, track, and evaluate projects, shifting from discrete investment reviews to a more holistic, rigorous portfolio approach that looks ahead and links directly to our strategy, to our risk appetite, and to our expected returns and cash flows. Through these enhancements, we expect to identify certain businesses and contracts that no longer align with our long-term objectives, a healthy outcome of this review. We also invest significantly in research and development. Here too, we are taking a pragmatic data-driven approach, evaluating initiatives not only against their budgets but also their original business case. Where the assumptions or market dynamics have shifted, we have already identified projects for wind down, and as a result, we expect R&D spending to moderate later in the year. Ultimately, our goal is to be more selective, not less ambitious, just more selective. The opportunity set in our end markets is large and growing, and that allows us to drive profitable growth while raising our standards for return on capital. In short, we'll be more disciplined, more selective, and more demanding in all our commercial bids, in all our capital projects, and all our research and development programs. Likewise, any acquisition will be considered only within our core markets. And finally, our performance. We are already taking actions to simplify our structure, consolidating where it makes sense, and aligning the organization around speed, accountability, and execution. Today's leadership changes are the first steps towards driving that next level of operational performance. We are reviewing every aspect of the company, from our real estate footprint to asset utilization, cost transformation, and go-to-market strategies. We are taking a thorough and pragmatic approach to ensure that every part of CAE operates at its full potential. One of our most powerful assets is our global aviation training network, comprised of over 85 locations and 360 full-flight simulators, built over the past 2 decades. We delivered 1.3 million hours of training annually, far more than anyone else. Our global training network spans more than 6 million square feet, and we occupy roughly another 5 million square feet company-wide, which intuitively feels large relative to the scale of our output. We are looking for opportunities to better optimize that footprint so that we have the right simulators in the right locations and the network is sized appropriately to serve customer needs and optimize returns. We will also ensure that we are being more selective in future expansions, matching supply with demand. The team is engaged, and we will look to unlock significant value through this effort. On the product side, we manufacture more full-flight simulators than anyone else by far, and our factory operations will also be an important area of focus. The simulator production environment is a high-mix, low-volume business, and our facilities need to reflect that reality through more modern processes and a stronger integration with product management. But performance is not just about scale and structure; it is also about the whole system working together. My philosophy is that great organizations require collaboration between people, processes, tools, and purpose. Every improvement we make, whether in governance, decision rights, or measurement, we tie it with our focus on capital and performance and measure it with respect to impact on growth, profitability, cash flow, and return on capital. With that in mind, we're also putting in place stronger governance over how performance is measured and managed after every investment is launched, ensuring projects deliver what they promise, not just in inception, but through their entire lifecycle. Furthermore, to align incentives with this philosophy, we are assessing our executive compensation plans with the intent of, by next fiscal year, making capital efficiency and free cash flow metrics more prominent. There are multiple work streams and initiatives underway. This transformation will take time. However, the time and investment will unlock greater value from CAE's powerful platform, enabling us to delight our customers, drive higher returns on invested capital, and generate stronger free cash flow. So let me take a moment to walk you through how we see the transformation developing over the next few quarters. We are focused on implementing the organizational changes announced today as well as conducting a portfolio and project review, establishing baselines, and setting the metrics that will guide us forward. By the end of the fiscal year, we expect to share a clear blueprint of the broader transformation plan with prioritized initiatives and financial and operational targets as well as our approach to monitoring and reporting on our progress. We are driving the work methodically, deliberately, pragmatically, and with a results-focused mindset. So now that we've talked about the transformational plan, let me switch gears and talk briefly about current operations. In Civil, financial performance in the quarter was in line with our expectations, reflecting, as Dino mentioned, typical seasonality and some short-term softness in commercial training. Adjusted order intake was $593 million, and we added 7 new full-flight simulator orders, bringing the total to 12 for the first half of the fiscal year. And that 12 still maintains our market share, although historically a soft number. Order activity was lighter than we anticipated at this stage, consistent with the slow recovery in pilot hiring, particularly in the U.S. As a result, the Civil book-to-sales ratio was 0.88x for the quarter, a temporary dip or remaining above 1 at 1.22x on a trailing 12-month basis. We believe pilot hiring activity has passed the trough and is currently improving as indications from airlines in the U.S. are that pilot hiring has commenced again and will ramp in the second half of the year and into 2027. Notwithstanding the lighter activity, CAE continues to maintain its leading market share and is well-positioned to leverage the inevitable market recovery. We ended the quarter with a Civil adjusted backlog of $8.5 billion, up 27% from last year, providing a strong foundation as market conditions continue to normalize. Building on that base of solid fundamentals, we signed a 15-year training agreement with WestJet, announced but not yet reflected in the Q2 adjusted backlog for the establishment of the Alberta Training Center of Excellence for aviation and aerospace in Calgary, which is scheduled to open in 2028. It is a great example of an infrastructure-like investment that strengthens our recurring revenue and cash flow profile and builds long-term strategic partnerships with airlines as they plan future growth. Also encouraging is that OEM production and deliveries have accelerated, driving renewed pilot demand and simulator sales. As I said, we are seeing indications of recovery and growth across the Civil market. U.S. Airlines, most of whom have recently reported encouraging results, are ramping up pilot hires for the second month in a row. And even in business aviation, customers at last month's MBAA reported a higher pilot turnover as commercial carriers resume recruitment. Global business jet activity is at record levels, up 20% in the U.S. and 12% in Europe compared to 2019, led by fractional fleets that have expanded more than 60% over the same time frame. These dynamics reaffirm the long-term trajectory of CAE. However, given the slower near-term cadence, we now expect Civil performance for the year to be roughly in line with the prior year. Consistent with that, as you heard from Dino, we are further reducing capital expenditures to reflect both the moderate pace of demand recovery and our disciplined approach to cash management and efficiency. We expect the benefits of the underlying market recovery to be more pronounced in fiscal 2027 and beyond. In defense, financial performance was also in line with our expectations, with steady margin improvement and double-digit growth, and we are maintaining our full year outlook. Momentum continues to build as we renew and strengthen the adjusted backlog with higher-value, longer-duration programs. Second quarter adjusted order intake totaled $556 million, reflecting the continued success across key franchise platforms. This contributed to a book-to-sales ratio of 0.98x for the quarter and 1.19x over the last 12 months, and resulted in an adjusted Defense backlog of $11.2 billion. The Defense pipeline also continues to be robust with some $6.1 billion of orders pending customer decisions. In the U.S., we were awarded a contract for 2 new F-16 mission training centers to be deployed to the Air National Guard base at Sioux Falls, South Dakota, and the Joint National Guard base at McEntire, South Carolina. The F-16 program is a great example of CAE's enduring role on long-life defense platforms. Over its nearly 5 decades of production, more than 4,600 aircraft have been built with roughly 3,100 still in active service across 29 nations, making it the most widely operated fighter jet in the world. The fleet has logged over 19 million flight hours and flown more than 13 million sorties. And CAE has delivered more than 280 high-fidelity F-16 pilot and mission training devices worldwide, including recent awards, the total will be over 300. We have delivered more than 90% of all high-fidelity F-16 simulators in service today, supporting over 15 nations. This installed base represents a significant opportunity for modernization and upgrades as operators look to bring their training devices up to the latest configuration. Since inception, the F-16 franchise has generated roughly $2.5 billion in cumulative sales for CAE and remains one of our largest defense product lines. And the F-16 is just one of several key platforms on which CAE continues to play a critical role in training and mission readiness across some of the most enduring and widely deployed military platforms in the world. So you can see across both Civil and Defense, what defines our portfolio is the quality and sustainability of our revenue base. From long-term infrastructure like training partnerships that generate highly recurring cash flows to enduring platform franchises that anchor multi-decade defense programs. So to summarize my take on current operations, both Civil and Defense are performing broadly as expected, and our near-term focus remains on disciplined execution, operational efficiency, and free cash flow generation, as we advance the company-wide transformation. Looking ahead, the outlook across CAE remains strong. We are uniquely positioned at the intersection of two enduring global growth markets, civil aviation and defense. In Defense, momentum continues to build across allied markets, supported by sustained modernization programs, including those underway in Canada, and we are well-positioned to capitalize on that growth through our proven capabilities in mission readiness and training systems. And in civil aviation, while near-term cadence remains uneven, the fundamentals are powerful. Structural pilot demand and record OEM backlogs continue to support the compelling long-term growth story. And across CAE, our focus remains on execution, driving higher margins, stronger free cash flow, and better returns on invested capital. These priorities are the foundation for sustained value creation and long-term shareholder returns. As I look forward, the same 3 priorities that are informing our transformation, sharpening our portfolio, strengthening capital discipline, and elevating performance will serve as my philosophy as CEO and as CAE's North Star going forward. This defines how we will operate, how we will invest, and how we will measure success. This is a deliberate and disciplined journey and the direction is clear. We are aligning CAE structure, resources, and incentives around performance, capital efficiency, and accountability. I'm excited to lead CAE forward with a world-class team, an unmatched training network, and a clear strategic vision. With discipline, focus, and the continued support of Calin and our Board, I am confident in our future and energized by the opportunity ahead. We are powered by leading-edge technology and strong secular growth tailwinds in both Civil and Defense. It gives us tremendous runway to deliver sustained performance and long-term shareholder value. Thank you, and I look forward to your questions.

Andrew Arnovitz, VP of Investor Relations

Thank you for that, Matt. Operator, we'd now like to open the lines to questions from financial analysts.

Operator, Operator

Your first question comes from Fadi Chamoun with BMO Capital Markets.

Fadi Chamoun, Analyst

Nick, I just want to say, first, congratulations on your retirement, and I appreciate all the insight and help over the years. Just a couple of questions, maybe around this capital efficiency focus, obviously. So you've talked a lot about harvesting capital after a period of growth. Can you share a little bit how the threshold approved capital has changed? And I'm curious, when you look at the business and you look at the opportunity to streamline the portfolio that you talked about and to sweat the assets more, what is the order of magnitude return on capital this business is able to generate over the medium and longer term? Not looking for guidance here, but you were, at one point in the past, CAE generated double-digit ROIC, mid-teens ROIC in a few years as well. Is this order of magnitude possible still to kind of look at over a period of 3, 4, 5 years, potentially to see that kind of leap forward in the ROIC performance?

Matthew Bromberg, President and Chief Executive Officer

Fadi, thank you for the question. It's good to hear your voice. First, let me just give Nick the mic, and then I'll approach your questions.

Nick Leontidis, Chief Operating Officer

Yes. Fadi, thanks for the kind words, and it's been a pleasure to work with you all of these years.

Matthew Bromberg, President and Chief Executive Officer

Thanks, again, Nick. So Fadi, you had several questions there, and I want to make sure I answer them in the right order. Why don't you slow down and ask the first one, and I'm going to make sure I answer it correctly.

Fadi Chamoun, Analyst

Yes. First, I'm curious if you can share how the threshold to approve capital change. You talked about kind of changing the mechanism within CAE and the threshold, how you approve capital? How has that changed? What does the threshold look like now?

Matthew Bromberg, President and Chief Executive Officer

So I appreciate the question, Fadi. Yes, we're evaluating all of our prior investments to make sure that the assumptions that went into them are still true. And that is a lens that we'll use to look at the current network and make sure it's located and optimized for today's performance. We're also reflecting today's market conditions. So when we make new investments, we're going to reflect the reality of where airlines are and what their growth prospects are. And through those 2 lenses, we're going to take a more disciplined approach going forward. Again, we have a world-leading network, one that we're very proud of, one that's a strategic advantage. And we think there's tremendous opportunity for us to leverage that network going forward given that we have the largest training network in the world.

Fadi Chamoun, Analyst

And the other question was around return on invested capital. This business did double-digit ROIC not very long ago. And through all this work that you're looking at in terms of portfolio streamlining and threshold and more capital discipline, do you see a vision where we can get back to that type of double-digit ROIC in the next few years?

Matthew Bromberg, President and Chief Executive Officer

Yes. Fadi, it would be premature for me to answer that question precisely today, but that is the top focus of me and the entire leadership team, looking at how we've invested capital over the past 5 years and how we will invest capital over the next 5 years and how we can make better decisions for future investment and maximize return on the current investment. So that's exactly what we're going to spend the next few months unpacking. We'll be able to share that with you as we talk about next year's financial outlook.

Operator, Operator

Next question comes from Krista Friesen with CIBC.

Krista Friesen, Analyst

I was just wondering if maybe you can speak to us about any surprises you've encountered so far? I appreciate you've only been in the seat for about 3 months now, but you've made some early changes. I'm just wondering if you've encountered anything unexpected?

Matthew Bromberg, President and Chief Executive Officer

Yes. Thank you for the question. I think there have been only positive surprises. The level of energy across the organization, the entrepreneurial focus, and the strong customer relevancy is something I've seen in every part of the franchise. And so that has been an incredible reassurance. I knew that coming in, but it's a pleasant surprise. I also think the depth of our technology and how we can better leverage Defense and Civil is an opportunity I hope to unlock and quantify over the next few quarters. So all that's been very reassuring.

Krista Friesen, Analyst

Okay. Great. And as you've mentioned in your opening remarks and in the press release, there have been some initial organizational changes. Are there any opportunities you see in the near term in the next quarter or 2 for additional changes you can implement before maybe we get your full blueprint for the company?

Matthew Bromberg, President and Chief Executive Officer

Yes, I appreciate the question. So the focus now is on giving the new team time to assess the responsibilities and create the strategic path going forward. And as that team is in place, we'll be able to share the objectives and the measurements we're going to use to chart the progress forward. So give us a few quarters. I have led transformations like this many times over my 25 years, and it's about identifying the opportunity, putting a team in place, identifying the management objectives, and then letting them run. And that's what we intend to do.

Operator, Operator

Your next question comes from Konark Gupta with Scotiabank.

Konark Gupta, Analyst

And I echo congratulations, Nick, for the remarkable career you had at CAE. My first question is on the CapEx side. I think you guys announced a 10% reduction in CapEx versus last year. How much of that is market-condition driven as opposed to your capital allocation decisions you have taken early on? And of that CapEx, how much is that one large Defense contract if you can share?

Constantino Malatesta, Interim Chief Financial Officer

Konark, thank you for the question. It's good hearing from you. So what I think is important to reiterate effectively is that we are reducing CapEx by 10% compared to last year. About 1/3 of that is maintenance and 2/3 of that is growth and driven really by a 25% reduction in Civil CapEx. So that is a reflection of really a disciplined approach to capital. So it is a reflection of the slowdown, the lull, the temporary lull in the activity. And so we have adjusted and used the agility that we've implemented here to adjust the CapEx on a go-forward basis. About 40% of the growth CapEx this quarter was for the FSTSS program, specifically on the defense and security side of the business.

Konark Gupta, Analyst

Okay. That's helpful, Dino. And on the leverage ratio side of things, I think it's more sort of a broader strategic question long-term. But you guys are on very much track on 2.5x leverage ratio by the end of this fiscal year. And this is when the civil market is not running full steam at this point. And you have just started the transformation plan, Matt. So if you're disciplined on capital allocation, my guess is you might have an under-levered balance sheet over time. So how do you bring that to a reasonable level?

Matthew Bromberg, President and Chief Executive Officer

Yes. Thanks for the question. So our first and primary focus on the balance sheet is going to continue to delever. And secondly, as we look at investing for some transformation because it does take investment, we'll ensure that it meets our return thresholds going forward. And that will be the objective for the foreseeable future. Any change in the capital allocation strategy will be something we take up with the Board, but that's not in the near-term horizon.

Operator, Operator

Your next question comes from Benoit Poirier with Desjardins.

Benoit Poirier, Analyst

Just looking at the capital employed for Civil, Matt, it reached $6 billion at the end of Q2, which was up basically from $5.1 billion last year and has basically doubled over 7 years. And if I look at Civil revenue, it was up about only 50% over this time frame. So could you talk about the potential opportunity to maybe optimize capital employed? And when we look at the utilization rate of 64% in the quarter? If we put aside the pandemic, it looks like it's almost a trough level that was reached during the great financial crisis and also during September 2001. So any optimal level that you would consider for the overall training network?

Matthew Bromberg, President and Chief Executive Officer

Yes, it's a great question, and I appreciate you asking it. As we look over the past 5 years, we've made significant investments in acquisitions and building out our network and some of our research and technology. And so what we're doing now is charting the path going forward. I can tell you there's some strategic advantages to the investments of the past. One, we have this fantastic defense portfolio, which is timed perfectly with a worldwide increase in defense spending, a once-in-a-generational opportunity. And on the Civil side, we have the world's largest training network, one that's poised for the recovery, which is inevitable. So we're going to leverage both of those. But we will come back at the end of the year and talk about how we'll allocate capital going forward between M&A, between capital allocation in the civil network, and our research and development. In general, I think that the amount we spend on capital and the amount we spend on research and development is high for a company of CAE's size, and I see opportunity to reduce it, but that will be something we talk about as we get into next year's guidance.

Benoit Poirier, Analyst

Okay. And Matt, maybe any thoughts about the potential training opportunity for the sizable Biz Jet order placed by Bond Aviation? And whether any new investment would be required or if the current training network can support such a training opportunity?

Matthew Bromberg, President and Chief Executive Officer

Yes. I'll turn that over to Nick.

Nick Leontidis, Chief Operating Officer

Yes. Bond is going to be a customer. This is a Bombardier win with a large order. So as they start to ramp up the deliveries, we're going to be training Bond as a customer.

Benoit Poirier, Analyst

That's great. And maybe last one for me. Matt, you attended the Canadian Aerospace Summit in Ottawa towards the end of October. I suspect you met several industry participants. So any key takeaways from your meeting? And what are the next steps for building Canada's defense industrial strategy?

Matthew Bromberg, President and Chief Executive Officer

Thank you for the question. I enjoyed the conference, and I'm just getting to know all the defense industrial base participants here in Canada. As Calin mentioned, this is a unique opportunity for Canada to expand its defense industrial base. My message to the conference attendees and our internal team is that this is our moment as a Canadian company to engage in the development of a Canadian-based defense industrial base that will be significant not only for Canada but also for the world. This was the focus of my speech, and I am very committed to driving this initiative from CAE's perspective.

Calin Rovinescu, Executive Chairman

Benoit, it's Calin here. I want to add a thought. One potential opportunity is when Canada acquires aircraft equipment and capabilities from international providers where it lacks current capabilities. If there is a training component or a mission readiness aspect involved, there are chances for CAE and other Canadian companies to engage in these global opportunities as almost a requirement from the Canadian government. The government is more receptive to this now than in the past, with a focus on supporting Canadian companies from an industrial policy standpoint. Thus, there is a chance for defense spending within Canada, along with additional opportunities internationally when Canada buys capabilities abroad. This presents an intriguing secondary opportunity that will unfold over time.

Operator, Operator

Your next question comes from Kristine Liwag with Morgan Stanley.

Kristine Liwag, Analyst

Matt, I wanted to understand a little bit better where you are in the process of the new ROIC threshold. It sounds like it's going to be higher than where it is. But I want to understand better, are you in the process of identifying and firming up where this new level should be? Or have you already identified it and we'll share it at a later date? Any more information on this and your process would be helpful.

Matthew Bromberg, President and Chief Executive Officer

Sorry, Mike. Thanks for the question. The answer is yes. We've ended at higher thresholds. But our capital base is large and doesn't move quickly, and we need to take time to sort out how we can drive top line performance out of the existing investments and ensure we make the right decisions going forward for future investments. We're not going to miss opportunities to grow our business. We're committed to growing our core markets, but we need to figure out how to leverage this capital base, which is a strategic asset. So all that guidance will come out as we announce financial guidance for 2027 and beyond. So thanks for the question.

Operator, Operator

Your next question comes from Cameron Doerksen with National Bank.

Cameron Doerksen, Analyst

Just I guess a question on the timeline when we should expect to see margin improvement, free cash flow improvement? I mean certainly, we can appreciate that you've got a lot of initiatives here that you've talked about today that are going to take some time. But is it to be expected that we would see some benefit to the bottom line as we get into fiscal 2027 from these initiatives? Or is this something that you think might take longer than that to really realize some of the benefits?

Matthew Bromberg, President and Chief Executive Officer

Yes. Thank you for the question. As I said earlier, we're not going to be giving 2027 guidance today. But having led transformations like this in the past, some initiatives will be shorter term and yield immediate results, and some will take quarters or years to develop, but that's what we're going to spend the next couple of quarters refining and then articulate that at the end of the year. So I commit to providing you more guidance and more visibility as we present 2027 guidance.