Earnings Call Transcript - CAE Q2 2022

Operator, Operator

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

Andrew Arnovitz, Investor Relations

Good afternoon, everyone, and thank you for joining us today. Before we begin, I'd like to remind you that today's remarks, including management's outlook and answers to questions, contain forward-looking statements. These forward-looking statements represent our expectations as of today, November 11, 2021, and accordingly, are subject to change. Such statements are based on assumptions that may not materialize and are subject to risks and uncertainties. Actual results may differ materially, and listeners are cautioned not to place undue reliance on these forward-looking statements. A description of the risks, factors, and assumptions that may affect future results is contained in CAE's annual MD&A available on our corporate website and 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 afternoon are Marc Parent, CAE's President and Chief Executive Officer; and Sonya Branco, our Chief Financial Officer. After remarks from Marc and Sonya, we'll take questions from financial analysts and institutional investors. And following the conclusion of that Q&A period, we'll open the call to questions from members of the media. Let me now turn the call over to Marc.

Marc Parent, CEO

Thank you, Andrew, and good afternoon to everyone joining us on the call. Let me just start by reminding all of us that today is November 11th, Veterans Day in the United States, Remembrance Day in Canada. So let me just start by saying thank you to all veterans for their service. On this November 11th, we honor members of the military, both past and present, veterans of war and conflicts, those who made the ultimate sacrifice for our freedom, and those who served our countries to date. I'd say at CAE, we're privileged to work every day with many veterans. We have over 2,000 veterans as employees at CAE, and I can tell you, I'm honored to work and be in the company of heroes. They bring a unique point of view and skill centered on a company at a price that allows us to achieve new heights. Now onto the quarter. In an environment where we continue to experience an uneven recovery in the various markets and geographies where we operate, CAE delivered year-over-year growth in the second quarter. On a consolidated basis, we drove 16% year-over-year revenue growth and $0.17 of adjusted earnings per share. These results came mainly from the strengthening of our Civil training business, a continued progress of our structural cost savings program, and the integration of L3Harris Military Training into our Defence results. We also built continuing momentum with $871 million in orders for a positive book-to-sales ratio of 1.07 times and an $8.8 billion backlog. In Civil, second quarter average training center utilization was 53%, up from 49% last year, and 3% lower than last quarter, reflecting usual seasonality, but also the varying global realities with respect to the COVID-19 Delta variant and the measures taken to contain its spread. For example, in the Americas, with the benefit of high vaccination rates and easing travel restrictions, we saw near pre-pandemic demand during this period in both commercial and business aviation training. While at the same time, Asia Pacific took a step back and remained at low levels as countries including Malaysia, Thailand, and Vietnam renewed lockdowns. On the orders front, we signed Civil training solutions contracts valued at $409 million, or a 1.13 times book-to-sales ratio, including 9 full flight simulator sales, and a five-year aircraft maintenance training partnership with Air Canada, a three-year exclusive agreement with Brussels Airlines, a five-year agreement with Envoy Air, a four-year agreement with PGA Portugalia, and finally a five-year agreement with Alaska Airlines. We also announced new partnerships and relationships, including strategic partnerships with BETA Technologies to design and develop a best-in-class pilot and maintenance technician program for the ALIA eVTOL aircraft, as well as a relationship with Starr Insurance Companies for a first-of-its-kind program that combines a rigorous training regimen and insurance for single-pilot jet owners. Additionally, Innotech-Execaire Aviation Group has become the launch partner for CAE’s innovative suite of digital services specific to the business aviation market. On the expansion front, we deployed a Boeing 737 MAX full flight simulator in Europe at our Amsterdam training center. And we announced a new flight training location in Las Vegas, Nevada, in order to meet high demand and expand our business aviation footprint, which is expected to open next summer in Las Vegas. In Defence, we closed the acquisition of L3Harris Military Training on July 2nd, which delivered solid revenue with double-digit margins in the quarter, in line with what we expected. I had the pleasure to visit our new employees in facilities in Texas and Colorado in August through now during the closing. And I can tell you I'm highly impressed by the technologies we've acquired and the potential for even greater differentiation of our best training and mission support solutions. I'm also extremely pleased by the great cultural fit with CAE. We live and breathe simulation and training in support of our customers' most critical missions. The energy and excitement of our combined teams for the future is really powerful and palpable. Through the acquisition, we’ve retained, and I think this is a fantastic feat, all 67 members of the senior leadership team, which is a very strong statement in and of itself about the strength of our shared vision and the mutual passion for what we do. The organic Defence business was negatively impacted this quarter by delays in orders and program execution, particularly internationally, which has been largely due to the pandemic. Despite those headwinds, we’ve booked potential orders for $428 million in the quarter representing a book-to-sales ratio of 1.02 times. Those orders included our recently announced first-ever prime contract award from the U.S. Intelligence Community with the Beyond 3D prototype for the National Geospatial Intelligence Agency. We'll be integrating our capabilities across digital technologies, big data architectures, machine learning, and artificial intelligence, making this a prime example of CAE at the forefront of modeling and simulation expertise for mission and operations support across the multi-domain environment. Other notable Defence orders in the quarter involve a range of contracts for support services, simulator upgrades, and modifications in support of customers, including the U.S. Army, Navy, Air Force, and Air National Guard, and internationally for the German Armed Forces. In Healthcare, we also experienced COVID-related headwinds during the quarter, particularly in Florida, where our business is based. In light of the added challenges, I continue to be very encouraged by the dedication and achievements of our team to deliver double-digit year-over-year top-line growth in the quarter, excluding the ventilator contract from last year. Notably, this March marks the third quarter of year-over-year revenue growth for Healthcare as it ramps up and expands a reenergized organization. With that, I'll now turn the call over to Sonya who will provide additional details about our financial performance, and I'll return to the call at the end of the call to comment on our outlook.

Sonya Branco, CFO

Thank you, Marc, and good afternoon, everyone. We delivered year-over-year growth during the second quarter, and our results continue to reflect the success of the measures that we have taken to strengthen the company both externally in terms of expanding our reach and adapting to dynamic market conditions, and internally by lowering our cost structure. Consolidated revenue was $814.9 million, which was 16% higher compared to the second quarter last year. Adjusted segment operating income was $90.7 million compared to $79.3 million last year. Quarterly adjusted net income was $53.2 million or $0.17 per share, compared to $0.13 in the second quarter last year. Cash provided by operating activities this quarter was down 32% to $30.9 million, compared to $45.6 million in the second quarter of fiscal 2021. Free cash flow was $19.4 million, compared to $44.9 million last year. The decrease was mainly due to a decrease in cash provided by operating activities due in part to cash costs for restructuring, integration, and acquisition costs this quarter, which amounted to approximately $52 million. We usually see a higher investment in non-cash working capital accounts in the first half of the fiscal year. As in previous years, we expect a portion of that non-cash working capital investment to reverse in the second half. Also, we continue to target a 100% conversion of net income to free cash flow for the year. Growth and maintenance capital expenditures totaled $46.7 million this quarter, mainly for growth, specifically to add capacity to our global training network to deliver on the long-term exclusive training contracts in our backlog. Our growth CapEx is directly linked to our opportunities to invest incremental capital with attractive returns and free cash flows. With several attractive market-led expansion investments on the horizon, we continue to expect total capital expenditures to be more than $250 million for fiscal year 2022. Income tax recovery this quarter amounted to $13 million, which, normalized for restructuring, integration, and acquisition costs, represents a rate of negative 1% compared to an effective tax rate of 14% for the second quarter of last year. On this basis, the decrease in the tax rate was due to impacts of changes in tax laws on tax assets, positive impacts of audits, and the mix of income from various jurisdictions. Our net debt position at the end of the quarter was $2.48 billion for a net debt to capital ratio of 38.2%. And net debt to adjusted EBITDA was 2.55 times at the end of the quarter. All told, between cash and available credit, we have approximately $2.2 billion of available liquidity. The increase in net debt this quarter was mainly attributed to the closing of the L3Harris Military Training acquisition and the execution of the related financing package. We see this increase flowing through interest expense should continue at about a $35 million quarterly run rate going forward. Now turning to our segmented performance. In Civil, second quarter revenue was stable compared to Q2 last year at $362.1 million, and adjusted segment operating income was up $13.4 million over the second quarter last year to $65.3 million for a margin of 18%. This was the result of higher training utilization in the Americas, offset by lower product revenues with the delivery of only five simulators this quarter, compared with 10 last year and 11 last quarter. The lower simulator deliveries number this quarter was on plan, and we continue to expect to deliver north of 30 simulators for the year. Our ability to drive an 18% margin on just 53% training utilization shows the benefits of the higher mix in training and the solid progress we're making to ramp up our recurring cost savings initiatives. In Defence, second quarter revenue of $417.9 million was up 38% over Q2 last year. This includes $135.1 million from the integration of the L3Harris Military Training in our financials. Adjusted segment operating income was $26.7 million, including $16.2 million from the acquisition for a margin of 6.4%. On an organic basis, our Defence business decreased this quarter most specifically in terms of adjusted segment operating income. As Marc pointed out, this was mainly driven by delays in product-related orders and program interruptions and delays, particularly internationally as COVID impacts persisted in several regions. Underlying the quarterly Defence book-to-sales ratio of 1.02 times were international orders which continued to lag at 0.75 times book-to-sales, and orders from the U.S., which were higher at 1.15 times. We closed the acquisition early, so synergies realized in the quarter were nominal. We are progressing well with integration efforts and are on track for the $35 million to $45 million of our total cost synergies by the end of year two following our closing of the transaction. And in healthcare, second quarter revenue was $34.9 million, up 17% excluding the ventilator contract last year. Adjusted segment operating loss was $1.3 million in the quarter, compared to an income of $3.2 million in Q2 of last year. Segment operating income reflects growth in SG&A expenses in preparation for higher revenue growth and the impacts of the quarter related to the severe COVID conditions in Florida, which affected supply chain and limited the capability to execute on orders. With that, I'll ask Marc to discuss the way forward.

Marc Parent, CEO

Thanks, Sonya. As we look at the period ahead, we are confident that we will emerge from the pandemic a larger, more resilient, and more profitable CAE than ever before. I am very confident of that. Until then, we must manage in an environment with distress, rates of recovery in our markets, and in geographies where we operate. Something that will likely continue to be a factor for several more quarters until a more uniform global recovery takes hold. We have additional reason for optimism with the reopening of the U.S. order this week for vaccinated international travelers and the latest news about the potential of antivirals to mitigate the effects of COVID-19. Ultimately, the slope of our recovery to pre-pandemic levels and beyond rests on the timing and rate at which border restrictions and quarantine measures around the world can safely be lifted. We certainly haven't been standing still and waiting for the recovery to happen, and we've been focused on the things that we can control. Specifically, we became stronger by playing offense in a downturn, and I'm very encouraged by everything that we've done to reinforce CAE’s base over the last year and a half to expand our horizons for long-term sustainable growth. The pursuit of an expanded growth opportunities pipeline has so far netted CAE's nine accretive acquisitions, including the most recent announcement of our agreement to acquire Sabre’s AirCentre airline operations portfolio, a highly valuable suite of flight and crew management and optimization software solutions designed to enable airlines to operate their businesses efficiently and precisely. And we continue to secure highly attractive opportunities to deploy organic growth capital, including our recent expansion of business aviation training in Las Vegas, Nevada. And at the same time, as expanding CAE's reach externally, we are substantially lowering our cost structure and achieving even greater levels of operational excellence. In fact, we are on track to reach a run rate of $65 million to $70 million of annual recurring cost savings by the start of the next fiscal year in April 2022. In Civil, a greater desire by airlines to instruct CAE with their critical training and digital operational support and crew management needs, higher expected pilot demand, and strong growth in business jet travel are enduring positives underpinning the secular growth of markets. There is considerable pent-up demand for commercial passenger air travel and once unleashed, drives higher flight activity and training demand. We are seeing this chain of events manifest itself already in the Americas, where we are experiencing a near total recovery in training utilization and a strengthening pipeline of full flight simulator order activity. We believe that this provides a blueprint for what a broader global recovery in air travel should look like. Since the end of the quarter, the market has improved with average training center utilization trending to upwards of 60% globally, again, with the highest utilization rates currently in the Americas, combined with still relatively depressed levels in Asia and the Middle East. In business aviation, we're seeing strong demand for training across the network, propelled by flying activity in the United States and Europe that is now well above 2019 levels. The uneven nature of the global recovery is likely to persist for a while. But we're all at CAE in an excellent position to benefit from the multiyear cyclical market recovery that’s currently underway. For the current fiscal year, we expect continued strong growth in Civil weighted more heavily to the second half. In Defence, the paradigm shift from asymmetric to near-peer threats and recognition of the sharply increased need for digital immersion-based, synthetic solutions in national defence are tailwinds that favor CAE’s business. Given the increasing relevancy of training and simulation, our Defence unit is also on a multiyear path to become a larger and more profitable business. We are currently focused on the successful integration of L3Harris’ Military Training business and expect to fully realize the $35 million to $45 million of cost synergies that we laid out by fiscal year 2024. Defence is now more closely aligned with our defence customers’ utmost priority and is established as the world's leading platform-agnostic global training and simulation defence pure-play business. This is expected to bring increased potential to capture business around the world, accelerated with expanded capability and customer set that we now possess. The pandemic has made international opportunities slower to materialize in the current environment. But this headwind is temporary. We have a strong pipeline with some $6.5 billion of bids in proposal pending customer decisions. We continue to expect to deliver strong annual growth for fiscal year 2022 with sequential quarterly improvements in revenue and adjusted segment operating income expected in the second half. Supporting our view is our expectation for a re-acceleration in order intake, especially from bids involving international programs as pandemic-related disruptions ease, and with that, we also expect the Defence book-to-sales ratio for the fiscal year to exceed 1 for the first time in the last four years. Other drivers in the second half and beyond include higher levels of execution on programs, specifically those involving higher margin products, as well as a progressive realization of synergies as we integrate L3Harris Military Training. Lastly, our outlook for Healthcare has continued quarterly year-over-year growth as we ramp up our expanded and reenergized organization. Over the long term, we believe Healthcare is on track to become a sustainably material and profitable business. For the current fiscal year, we project double-digit growth compared to last year excluding the ventilator contract. In summary, while there's no doubt that COVID-related impacts continue to affect all of our business units, we increasingly see a clear path to recovery and a larger, more resilient, and more profitable CAE in the future. Specifically, we're currently targeting to reach a consolidated adjusted segment operating margin of approximately 17% by the time markets have generally recovered, with steady room for further improvement thereafter. We expect to reach this level of profitability on a significantly larger base of business with a post-pandemic capital structure that will allow us to sustain ample flexibility to further invest in our future. We continue to play offense during this period of disruption, as evidenced by our nine accretive acquisitions and continued growth capital deployment since the pandemic began. As business conditions continue to improve further, we look to extend this posture as it relates to both organic and inorganic growth investment. Our opportunity set continues to look very attractive. Personally, I've never been as excited about CAE's future as I am today. So with that, I thank you for your attention. And we're now ready to take your questions.

Andrew Arnovitz, Investor Relations

Thank you, Marc. Operator, I'd ask that you please open the lines to members of the financial community.

Operator, Operator

Our first question is from Fadi Chamoun from BMO.

Fadi Chamoun, Analyst

My first question is on the kind of legacy Defence business. It seems like we've been in this 7%, 8% EBIT margin for the past several quarters. This quarter, we dropped to 3.7%. I know you offered us some explanations of what's going on there. I'm not sure if you can maybe elaborate a little bit and give us a couple of examples of what's really happening in that business? And what do you expect in the second half of this year? Do we see a step back to where we were in past quarters? Or is this more of a gradual recovery that we should expect from this organic Defence business?

Marc Parent, CEO

Thank you, Fadi. As I mentioned earlier, we continue to anticipate robust year-over-year growth this year, indicating that we should have a solid second half. I previously discussed the Defence sector as a whole, particularly in relation to the integration of L3Harris. This legacy business, if you will, is facing ongoing COVID-related disruptions that affect both our order intake and our execution. I expected at least five international orders to come in this quarter, but that did not materialize due to the Delta variant and challenges accessing customers in the Far East. Additionally, Florida and Texas were severely impacted by COVID during the summer, which has also been a significant concern for CAE. This disruption has evidence in our training center, where we have not had international customers for C-130H. However, the situation is improving as borders are opening, international travel is returning, and the COVID situation is getting better across the United States, especially in Florida. These developments give us more confidence in our outlook. For the Defence business overall, with organic growth and the integration efforts, we are starting to see the benefits of our synergies, including workforce reductions towards the end of the quarter. The challenges we have faced are mainly attributed to COVID-related impacts, which have contributed to our book-to-bill ratio remaining below 1 for several quarters. Eventually, this leads to a depletion of our backlog. Nevertheless, we are still expecting a strong second half for Defence, despite having lost some opportunities that I would have preferred to see in the second quarter due to COVID. This does not alter my overall view for the year. Sonya, would you like to add anything?

Sonya Branco, CFO

Yes. Just a quick recap and laying it out the way we see it on the organic business, we're delivering, as you mentioned, Fadi, in the 7%, 8% range, and that's it in the 20s on SOI. And then, so as Marc explained, as we see those delayed orders ramp back up, as we advance the programs that we do have in the backlog that have been disturbed by COVID, either interrupted or fully stopped, some in the Middle East, as those back up as the pandemic-related disruptions ease, then you layer on the contribution of the acquisition as well as turn to ramp up the synergy, that will take us to the 30s and 40s in the upcoming quarters.

Fadi Chamoun, Analyst

Okay. Okay. So, that comment, 30s, 40s, you were talking about SOI in dollar terms.

Sonya Branco, CFO

Yes. SOI in terms of dollars spent.

Fadi Chamoun, Analyst

Okay. Okay. That's helpful. The other question I wanted to ask is on the leverage in the M&A and opportunities you're seeing. You are up to 3.55. Probably go up a little bit with the Sabre acquisition closing in a couple of quarters. Like how comfortable are you with this type of leverage, given the pipeline of maybe opportunities you're seeing at this point? Is M&A in the backbone now until you kind of get this profitability level back to deleverage the balance sheet? Or how are you kind of thinking about this leverage level, given the pipeline of acquisition and the opportunities you are seeing?

Sonya Branco, CFO

Well, I'll start out with, I'm very comfortable. So the quarter closed at 38% net debt to capital, 2.55 times net debt to adjusted EBITDA with all the financing related to the L3Harris Military Training acquisition. With the expected closing of the AirCentre operations in our Q4, we will be using our existing liquidity, which will drive our net debt to capital higher, probably a little above the 40%, but we're expecting to deleverage quickly in the next fiscal year with the Harris cash-generative business, organic business, and with the cash flow accretiveness of this new acquisition. Now, you'll remember all the previous capital arrangements that we did in FY '21, and that was exactly to provide the flexibility to support the organic and inorganic growth opportunities that we saw. We've seen some great opportunities come out of all these disruptions, and it allows us to seize on them, creating long-term value and strengthening the company to become bigger and more profitable. We continue to have a pipeline, but as you've seen, we're patient and disciplined. We will wait for the right opportunities at the right value, as we've done with AirCentre, L3Harris, and Bombardier Training. So, very comfortable; and ultimately, it goes back to our capital allocation priorities, balanced, accretive growth, organic, inorganic with a solid financial position.

Fadi Chamoun, Analyst

Okay, appreciate the feedback. The 17% target. Can you offer us what's the mix behind it, like how much of Defence representing, how much is aviation presenting? That's it for me, thanks.

Sonya Branco, CFO

I think we're providing that guidance on a consolidated basis really to underpin the messaging that all of these internal, external measures are really to drive a larger business, a more profitable business. What we're guiding at is that once you hit that recovery level, not only will we exceed pre-pandemic measures but on a much larger scale base of business.

Marc Parent, CEO

There's no doubt that we have reached new highs in Civil margins. A significant part of that is due to the leverage we have, along with the acquisitions we've made, as well as the double-digit margins in Defence. This is what will shape our overall mix.

Operator, Operator

Our next question is from the line of Konark Gupta from Scotiabank.

Konark Gupta, Analyst

So I have a few questions here just on Defence and Civil perhaps. Maybe turning to Defence for now. If I look back, revenue applied L3Harris, I think it was $500 million in U.S., I think revenue business also annually. And what you did in the second quarter obviously was somewhat below that run rate. So I'm kind of wondering if there was some sort of a transitionary impact in Q2 there. Will we see probably more contributions from L3Harris going forward as you integrate them? And then, with L3Harris, together with the Defence organic business, assuming it kind of rebounds to the 8%, 9% margin level or so and the synergy, is this 11%, 12% kind of range kind of an acceptable margin profile for the Defence business for you guys?

Marc Parent, CEO

Yes, we missed some of it but just the last part of your question, just say it again, Konark.

Konark Gupta, Analyst

Yes, concerning the margin profile, if the Defence organic business returns to an 8% or 9% margin and we factor in L3Harris along with synergies, they currently have double-digit margins. Overall, the Defence business appears capable of achieving 12% EBIT margins with these elements considered.

Marc Parent, CEO

Yes, as I said before, 11%, 12% is a good number to get longer term for sure. I mean, that's where we're headed. No doubt about that.

Konark Gupta, Analyst

Right. And on the first part of the question about L3Harris, is there the ability to ramp up revenues here, given it’s below their run rate before you apply them?

Marc Parent, CEO

It's still early with L3Harris, but I feel confident that we will deliver the old legacy business and the synergies we are generating together will allow us to achieve the margins we discussed when we acquired the business. I definitely see that potential. However, I'm not entirely satisfied with what we are observing in the first quarter, and more updates will follow.

Konark Gupta, Analyst

And then on the Civil side, you touched upon the utilization levels, and clearly Americas are doing better, Asia-Pacific are lagging. Where are you in Europe and what are you seeing there? And then, as we head into sort of the seasonally stronger second half with both commercial and business aviation, should utilization levels kind of go to 60% plus you think or we're kind of stuck in the 50s right now?

Marc Parent, CEO

I believe the COVID recovery is progressing, particularly in the Americas, and specifically in the United States where utilization rates have returned to pre-COVID levels. Business utilization is high, although there were seasonal effects this summer and challenges in Europe due to Delta. Looking ahead, utilization rates seem closely linked to vaccination rates. As vaccination rates improve, along with the easing of travel restrictions, we've seen strong pent-up demand driving business. My recent experience at the IATA General Meeting in Boston revealed widespread optimism among airline CEOs as U.S. vaccination rates rise. In regions with high vaccination and low infection rates, such as the U.S., there is increasing activity reflected in sales, indicating positive trends in orders and overall performance. While situations like the one in Germany are concerning and vaccination rates remain low in parts of the Far East, I believe the long-term outlook is improving. Utilization should enhance alongside increasing flight activity driven by vaccination growth. We will remain cautious, as predictions vary widely. Since the beginning, we've relied on IATA forecasts regarding vaccines, which have proven conservative in the U.S. As traffic returns, I am very confident in our potential to emerge as a larger, stronger, and more profitable business moving forward.

Konark Gupta, Analyst

If I can just follow up on the comment you mentioned about the airlines CEOs being optimistic. A lot of airlines have come out recently saying, they are scrambling for pilots. This is kind of counterintuitive. I mean the industry lost a lot of pilots. So, do you know what's happening there? Are people not willing to train as pilots here, is that the shortage is coming from? Or is there not enough supply to train pilots as much as airlines want?

Marc Parent, CEO

Well. I think I've said before, there is no doubt in my mind that there was a pilot shortage before the pandemic, and there is going to be a pilot shortage after. We're part of the solution to that problem, okay? And I think I've said this in a number of conference calls before the level of activity in our flight schools, and remember we are, I think, the largest network of flight schools in the world for training people to become airline pilots. The level of activity there has not reduced throughout the pandemic, except for winter. Schools were shut down because we couldn't operate because of the cold. I can tell you, carriers, including legacy carriers across the world have not only in most cases kept their orders with us for a number of pilots they want from us, but in a lot of cases increased it, and that's a trend that we see. There’s that. I think becoming a pilot is a good career right now. I can tell you that; that's my view. And I think that's a great thing for us as a business.

Operator, Operator

Thank you. Our next question is from the line of Kevin Chiang from CIBC. Please go ahead.

Kevin Chiang, Analyst

If I could ask the utilization question, let me just focus on the Americas. Marc, you mentioned, it looks like these are basically back to maybe pre-pandemic levels or close to, given the recovery in commercial aviation there. Are you seeing a difference in maybe the split between what was in-source training versus a third-party training? Because I guess there is a thesis out there that as we come out of the pandemic, there will be a greater opportunity for you to capture more third-party training as airlines might look to outsource some of this to reduce their costs. Are you seeing that in the U.S. as they bring back training much more aggressively?

Marc Parent, CEO

The answer is yes. We are indeed observing this trend. There have been numerous contracts announced this quarter, which highlights this reality for several reasons. First, airlines are seeking additional capacity to train their pilots, and we can provide that capacity. Our ongoing efforts include relocating simulators to more locations within the United States. When we increased our capital deployment forecast at the beginning of the year, part of that growth was directed towards this initiative. I see this as a trend that we had anticipated. The current environment presents more opportunities for us as a viable global third-party training option. Pre-COVID, we provided over a million hours of training each year, making us a solid alternative. We are actively engaged in discussions and securing contracts, including agreements with new airlines and overflow training partnerships. Many clients are seeking immediate excess capacity or wish to ensure availability as they increase operations in response to rising passenger traffic. As we move forward, these contracts tend to be longer-term, which will help sustain our business.

Kevin Chiang, Analyst

I’m not sure if we can pinpoint the breakdown of pilot training that was conducted in-house versus outsourced before the pandemic, but it seems like the current situation is quite fluid and difficult to define at this moment.

Marc Parent, CEO

I can't provide a specific number at this moment due to the current instability, which makes it difficult to make direct comparisons. Perhaps in two or three quarters, we can share that information. Right now, I can't give you a definite figure on that, but I can tell you there's certainly more happening. If you examine the contracts we've secured, traditional carriers that used to order simulators are now opting to sign contracts for us to provide the simulators. We've done this with Air France, Westjet, and Air Canada. So, while I can't offer a precise number or a detailed breakdown right now, there's definitely a shift occurring.

Kevin Chiang, Analyst

Regarding the AirCentre transaction you announced recently, can you discuss your thoughts on your overall crew management and flight management portfolio? Do you feel equipped with all the necessary tools to tap into the larger Total Addressable Market you've outlined, or is there still a need to fill gaps in your product line? Additionally, considering AirCentre's client base compared to yours, I would like to understand where the opportunities for cross-selling lie. Are there significant numbers of customers in their portfolio that you do not currently engage with, or vice versa, which could present chances for generating revenue synergies?

Marc Parent, CEO

I'm extremely excited about this acquisition as I mentioned when we first announced it in our press release. The primary reason is that the simulators and training operators software market exceeds $2 billion, and more than 50% of that spending is outsourced. With this acquisition, we are obtaining a significant leadership position in that market. This is a key element of our strategy. Over the past year, we have shifted from being primarily a training partner for airlines to becoming a technology partner. Our goal is to enhance our capacity in this area. Feedback has been very positive. During my meetings with CEOs at the IATA General Meeting, we did not discuss Sabre since the acquisition had not been announced yet. However, we did talk about Marlow, which is a much smaller and specialized offering in that market. I can affirm that there was no resistance from airline CEOs regarding our expertise in crew resourcing and flight planning. They view us as a natural extension of our services to airlines, similar to what we provide in training. This acquisition is a valuable asset, and many of Sabre's customers are already our clients, ensuring we are gaining more customers. There are ample opportunities to leverage these relationships for cross-selling. I am convinced that there is significant potential for expanding this business, which remains an untapped opportunity. To demonstrate my confidence in this venture, I have appointed our most senior executives to lead it, including Pascal Grenier. I am very confident that with Pascal collaborating with the talented team at Sabre AirCentre, we will succeed in this business.

Operator, Operator

Our next question is from Cameron Doerksen from National Bank Financial.

Cameron Doerksen, Analyst

I would like to revisit the longer-term margin targets you've set at 17%. This suggests a significant improvement compared to pre-pandemic levels. Could you discuss how you anticipate the returns on capital will evolve as your end markets stabilize? It's worth noting that your capital base has shifted with the acquisition of L3 and the upcoming AirCentre acquisition, which likely has a lower capital base. Any insights on the expected return on capital as conditions normalize would be appreciated.

Sonya Branco, CFO

We expect those increased margins to flow through as increasing on the return on capital. You saw a few years ago, before the pandemic, we had driven more than 300 basis points improvement in just a few years. That's optimized disciplined deployment of organic and inorganic capital, right? So the CapEx that we're deploying, the organic capital, all have significant incremental returns, driving 20% to 30% incremental returns within just a few years. As we've seen, we've got very interesting and accretive acquisitions in inorganic. As those deliver on our expectations, that will be driving improved free cash flow. All of these are free cash flow accretive and return on capital.

Cameron Doerksen, Analyst

Okay. I guess, it'd be a second question for me just on the restructuring activity. Just wonder if you could update on where we stand there. I'm particularly interested in the status of kind of the training network reorganization. Some of the training centers have been consolidated and things like that. So, where are we in that process?

Sonya Branco, CFO

Absolutely. Some great progress in optimizing the footprint. As Marc mentioned, we’re relocating them, so taking them where there is lesser demand and deploying them in the Americas, and so on to serve market demand. Really, we’re optimizing that need for capital and matching up demand or capital with the demand. In this quarter, we incurred about $13 million of costs, $20 million utilized on the restructuring program. Ultimately, this quarter, we did finalize some additional UK consolidations, so the UK is pretty much done. We’ve got the bulk done, however a couple of remaining consolidations in Europe and in South America that we'll see closing out in Q4. We are already seeing a significant amount of savings. You’ve seen that in the quarter with a really good step up on the savings, on a year-to-date basis and in the quarter, and you see that on the Civil margin, right? I’ll note that despite the timing of the delivery revenue on the product because of the lower deliveries, the SOI margin expanded to 18%. That was the impact of the higher training revenue with an utilization of only 53%. It really highlights the great progress on the structural cost savings that were delivered in the quarter.

Cameron Doerksen, Analyst

And I guess the consolidation activity and the moving of simulators into the U.S. as you mentioned, would that have had a negative impact on the utilization rate in the quarter?

Sonya Branco, CFO

Absolutely. When you are moving a simulator, you turn it down, and it takes a few months to bring it down, to move it, and then start it back up. So that does have some noise in the utilization metric, yes.

Marc Parent, CEO

And don't forget seasonality, Cameron. This quarter had a different effect but was very similar in terms of business this year. It won’t commercially affect us.

Operator, Operator

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

Noah Poponak, Analyst

Marc, I'm having a bit of difficulty understanding the explanation regarding the utilization rate and how it relates to geographic differences. The utilization rate reached about 50% for the first time in the September 2020 quarter, and since then, global ASMs have nearly doubled. I recognize that there are different geographic exposures, with Europe being weighted more heavily, followed by Asia Pacific and then North America, which has performed the best. However, the seat miles flown in Europe during this period have also almost doubled, and there has been significant growth in Asia Pacific. It seems that your simulator network is more focused on narrowbody than widebody. Therefore, I'm having trouble reconciling that, as I understand you have these exposures outside of North America, but there have been considerable recoveries in those areas. If I calculate a weighted average of those geographies according to your exposure, it doesn’t quite account for the flat utilization rate. Can you clarify this for me?

Marc Parent, CEO

I wish I had a model that was that straightforward. It's not possible to simply take a weighted average to analyze our business due to the numerous training centers we have worldwide. It's important to remember that in Europe, when people are flying, they aren't training as much, which leads to a seasonal dip in that quarter. Significant training activities typically occur when crews are preparing to ramp up. Currently, we see utilization rates in the Americas in the mid-70s range, occasionally higher, while Europe is approaching the 60s, and Asia remains at depressed levels, around 50%. However, only the United States has nearly recovered to pre-pandemic levels, so you can't take a weighted average as a perfect correlation, and it's just not feasible.

Noah Poponak, Analyst

Is there an element where, in a very severe downturn like we had, when you're working your way back up, you have airlines that do their own simulation and training, those that have outsourced it, and those that do a combination, that you just have airlines that want to use all their own capacity before they then move back to outsourced capacity? Is that an…?

Marc Parent, CEO

Absolutely, people do that. They would do that but I would tell you though that people that have all that capacity, in the end of the day, that they still have to drive a lot of pilot demand where those areas that ramp up like United States, they have to ramp up a huge amount of pilots in a short amount of time. That’s somewhat mitigated in the Americas by the fact that because of government support, they haven't by and large reduced the level of activity to a depressed level. So they have utilized their pilot capacity, but do not get into that situation. But even with that, and that testimony by a higher levels of simulator sales, so far this year, and the activity levels, full flight simulators makes me pretty darned optimistic. I would also basically correlate that with all the conversations I have, specifically with CEOs of airlines across the world, which is what gives me confidence that what I'm seeing in the United States is a blueprint for what's going to happen elsewhere. That gives me confidence.

Noah Poponak, Analyst

And then just last one, can you square us up on where your business jet revenues and margins are disappointing on a run-rate basis compared to pre-pandemic?

Marc Parent, CEO

They're high.

Noah Poponak, Analyst

Are they above pre-pandemic?

Marc Parent, CEO

They are high. We're doing well. The activity levels we see are currently higher than pre-COVID levels in the Americas. I'm performing well, and I don't want to predict too far ahead. That's already considered in our outlook regarding our margin moving forward. It's not surprising; it's a matter of leverage. We're increasing activity levels in training because our primary expense remains depreciation. In this case, we have some differences. We're not selling dry pads; we're offering courses, so we need to increase our number of instructors and related resources. Ultimately, I want to emphasize that we're achieving an 18% margin with 53% utilization, which highlights the progress we're making.

Operator, Operator

Our next question is from Benoit Poirier with Desjardins Capital Markets.

Benoit Poirier, Analyst

Given the current utilization rates, do you see further opportunities to redeploy the single serve fleet around the network?

Marc Parent, CEO

We've done a lot of that already. I was telling you, Benoit, that we want to do more, well we’re doing some. But for the past couple of quarters, we've been moving everything that's not tied down to that space, figuratively speaking. But no, there's been a lot of opportunities there. We've done that, but I don't think that's a huge factor going forward.

Benoit Poirier, Analyst

And obviously, with Marlow and also Sabre, you're kind of entering a big addressable market for flight and crew management and optimization solutions. So it seems that you're running at about $180 million in terms of exposure versus a market that you are calling close to $2 billion. So I would be curious to know more about the opportunity to capture market share among the $2 billion market within the next five years. Do you see opportunity to increase your market share on an organic basis and maybe do further M&A?

Marc Parent, CEO

I believe it's premature to discuss that, Benoit. However, I want to express my strong confidence in the business, as I've mentioned before. Our immediate priority is to ensure a smooth transition for the company. This business is crucial for the airlines' daily operations, potentially even more so than training. Our focus is to manage the transition without disruption for our customers, and this consideration is integral to our business strategy regarding this acquisition. We've allocated funds to strengthen and set our business apart with the airlines, which offers significant potential. Following that, we will look at organic growth. The aviation sector itself is expected to grow significantly, with double-digit growth anticipated for several years as it recovers from the pandemic, along with the opportunity to gain market share. We should also not overlook the possibilities in the business aircraft sector, which I see as largely untapped, and I believe we have substantial potential there. We haven't specified that yet.

Sonya Branco, CFO

In terms of net debt to EBITDA, from the 4 times post the Sabre acquisition, what would be the timing to get back to 2.5 times? Assuming there are still further M&A opportunities on the horizon, what would be the max level you would feel comfortable with? We have a solid balance sheet with these accretive investments. The timing of whether it's organic or inorganic investments will drive some of that. We are at investment grade profile and that's where we stay comfortable, which is in the 35% to 45% net debt to cap. We expect it to go a little higher in Q4 and then to deleverage quickly as we generate cash and generate cash out of these new acquisitions. Our EBITDA ramps up quickly, and so drives an improved net debt to EBITDA ratio.

Andrew Arnovitz, Investor Relations

Operator, I think we've run a little longer than usual here. I think we'd like to use the last few minutes, if we can, to open the lines to members of the media, should there be any questions from media.

Operator, Operator

Our first question is from Andre Alour from Bellezels Quebec. Please go ahead.

Unidentified Analyst, Journalist

Our EBITDA increases rapidly, which leads to a better net debt to EBITDA ratio. I believe we have extended our time a bit, and we would like to spend the final moments opening the floor to any questions from the media. Our first question is from Andre Alour from Bellezels Quebec. Please proceed.

Marc Parent, CEO

Our EBITDA increases rapidly, which enhances our net debt to EBITDA ratio. I believe we have exceeded our usual time today. We would like to take the remaining moments to allow questions from the media, if there are any. The first question comes from Andre Alour from Bellezels Quebec. Please proceed.

Unidentified Analyst, Journalist

I think we've run a little longer than usual here. We would like to use the last few minutes to open the lines to members of the media for any questions. Our first question is from Andre Alour from Bellezels Quebec. Please go ahead.

Marc Parent, CEO

Sonya Branco, CFO

I think we've run a little longer than usual here. We would like to use the last few minutes to open the lines to members of the media, should there be any questions. Our first question is from Andre Alour from Bellezels Quebec. Please go ahead.

Unidentified Analyst, Journalist

I think we'd like to use the last few minutes to open the lines to members of the media, should there be any questions from the media. Our first question is from Andre Alour from Bellezels Quebec. Please go ahead.

Marc Parent, CEO

Please go ahead, our first question is from Andre Alour from Bellezels Quebec.

Andrew Arnovitz, Investor Relations

Thank you, operator. That concludes our call for today. I would like to express my gratitude to all the participants. I want to remind everyone that a transcript of today’s call can be found on our website at cae.com. Thank you.

Operator, Operator

That does conclude the conference call for today. We thank you all for your participation, and we ask that you please disconnect your lines.