Earnings Call Transcript - CAE Q1 2024

Operator, Operator

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

Andrew Arnovitz, Senior Vice President

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, August 9, 2023, 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 is Marc Parent, CAE's President and Chief Executive Officer. Sonya Branco, our Chief Financial Officer, is unfortunately under the weather today, so I'll be covering off her remarks. Also, on hand with us is Constantino Malatesta, our Corporate Controller. After remarks from Marc and me, we'll open the call to questions from financial analysts. And at the conclusion of that segment, we'll open the line to members of the media. Let me now turn the call over to Marc.

Marc Parent, President and CEO

Thank you, Andrew. And good afternoon to everyone joining us on the call. We're off to a strong start to the fiscal year with first quarter results driven by double-digit year-over-year growth in Civil, continued strengthening and transformation in defense, and increased profitability in healthcare. We've made excellent progress to secure CAE's future growth with over $1 billion in total order intake for a record $11.2 billion backlog. We also further bolstered our financial position, and we're on track to meet our leverage target by mid fiscal year. In Civil, our markets are thriving, and we're addressing a greater share of our customers’ training and operational needs, as evidenced by our long-term training services agreements that now include nearly every major U.S. airline. We booked $730 million of orders with customers worldwide for a 1.35 times book-to-sales ratio, including 22 full-flight simulator sales and a range of multi-year training contracts in commercial and business aviation. We delivered 6 full-flight simulators during the quarter, and average training center utilization was 77%, up from 71% last year. As this increase suggests, commercial and business aviation training demand was strong across all regions, particularly as customers got their required training sessions done ahead of the busy summer travel period. While airlines in Asia Pacific are still not yet back to full capacity on international routes, they continue to make rapid progress to restore their operations to 2019 levels and beyond. During a recent Paris Air Show, several of our airline partners made sizable aircraft orders to execute on their growth plans, and we're excited to be in a position to serve their needs over the next several years. Also significant during the air show was our announcement of a strategic alliance with Boeing, whereby CAE will become a Boeing authorized training provider and the first to offer its competency-based training and assessment curriculum. With this arrangement, Boeing and CAE will expand accessibility to high-quality, innovative flight training to commercial aviation customers worldwide. We're immensely proud of this collaboration with Boeing, first and foremost in our mission to advance safety by bringing forth solutions that will revolutionize the future of training. As you can imagine, we welcome any and all opportunities to help advance the industry forward. We also used the occasion of the Paris Air Show to release our 2023 Aviation Talent Forecast, which anticipates the global need for 1.3 million new aviation professionals to join the industry as pilots, aircraft maintenance technicians and cabin crew over the next 10 years to support the expected growth of the commercial and business aviation markets. In Defense, performance was in line with our expectations, and we're making excellent progress to transform our business, as particularly demonstrated by our recent large strategic program wins and record $5.4 billion defense backlog. These involve larger and more profitable opportunities that we now have the capabilities to bid and win. This quarter, we booked the orders across multiple domains for training and mission support solutions with the funded portion of orders valued at $238 million, for a 0.5 times book-to-sales. Given the large size and number of major program wins in the U.S. this quarter, the unfunded portion of contracts awarded was even more significant and more than 3 times the funded portion. In total, these represent an additional $779 million contribution to adjusted backlog. Notable awards include the contracts we announced in May to support FSTSS at Fort Novosel, Alabama, and the U.S. Air Force IFT-R contract for initial helicopter flight training out of our existing training center in Dothan, Alabama. Both programs involve delivering simulation and training solutions that are very similar to what we offer in commercial aviation, except of course for Defense customers instead of airlines. Additionally, Defense was recently awarded a contract in the land domain that is critical to the U.S. Army's mission, namely Phase 2 of their rapid prototyping effort, supporting the Soldier Virtual Trainer program for the replacement of 800-plus legacy training systems. Since the end of the quarter, Defense has continued to leverage its Dothan Training Center and CAE’s leading business aviation training expertise to provide mission-critical solutions for the U.S. Army with a contract for simulation-based training for the Army’s key Next Generation ISR system, called HADES, meaning the High Accuracy Detection and Exploitation System, which is based on the Bombardier Global 6500 business jet, a platform for which we are the global authorized training provider in civil aviation. At the end of July, the government of Canada announced a selection of SkyAlyne, a partnership between CAE and KF Aerospace as the preferred bidder for the Future Aircrew Training program or FAcT, to provide next-generation pilot training and aircrew training for the Royal Canadian Air Force. This is a major development for CAE and underscores my excitement for a future in this space. We're now entering discussions with the Canadian government and our partners, and the award is anticipated in 2024. In context of securing CAE's future growth, we expect the FAcT program to become our largest contract win to date, representing a multi-billion dollar generational training opportunity that will ensure work for CAE over the next quarter century. Turning now to Healthcare. We continue to gain share in the simulation market, delivering above-market revenue growth and higher profitability with our dynamic team and highly innovative solutions. We had notable contract awards for our LearningSpace center management solution for the Thomas F. Frist, Jr. College of Medicine in Nashville, Tennessee, and a contract from the University of North Dakota for a multi-sim sale to outfit their Simulation in Motion mobile education system. And by leveraging our technology and subject matter expertise, Healthcare entered an agreement with Abbott Laboratories to develop a training program to support the launch of a new commercial pacemaker. With that, I'll now turn the call over to Andrew to provide additional details about our financial performance.

Andrew Arnovitz, Senior Vice President

Thanks, Marc. Consolidated revenue of $1.05 billion was 13% higher compared to the first quarter last year. And adjusted segment operating income was $145.1 million compared to $60.9 million in the first quarter last year. Our quarterly adjusted EPS was $0.24, compared to $0.06 in the first quarter last year, which included a $0.07 negative EPS impact from contract profit adjustments in Defense. We incurred restructuring, integration, and acquisition costs of $15 million during the quarter, relating mostly to the AirCentre acquisition. Net cash from operating activities this quarter was negative $49.3 million compared to negative $162.6 million in the first quarter of fiscal 2023. Free cash flow was negative $104.9 million compared to negative $182.4 million in the first quarter last year. The increase was mainly due to higher cash provided by operating activities and a lower investment in non-cash working capital. Free cash flow performance in the quarter was in line with our expectations and outlook. We usually see a higher investment in non-cash working capital accounts in the first half of the fiscal year. And as in previous years, we expect a portion of this to reverse in the second half. We continue to target 100% conversion of adjusted net income for free cash flow for the year. Capital expenditures totaled $90.6 million this quarter, with approximately 60% invested in growth, to specifically add capacity to our Civil global training network to deliver on our long-term training contracts that are in our backlog. Income tax expense this quarter was $8.2 million for an effective tax rate of 11%. The adjusted effective income tax rate was 13%, which includes a one-time favorable impact to income tax expense from a tax court decision related to the SADI program. This was offset by a one-time negative impact from higher interest expense related to the same matter. Net finance expense this quarter amounted to $54.1 million, which is up from $51.4 million in the preceding quarter and $36.2 million in the first quarter last year. The increased finance expense relative to both prior periods mainly reflects the impact of higher interest rates on our variable rate debt instruments and the aforementioned tax court decision. Our net debt position at the end of the quarter was approximately $3.2 billion for a net debt to adjusted EBITDA of 3.22 times at the end of the quarter. With the continued strengthening of our financial position, we’re on-track to meet our expected leverage ratio of about 3 times net debt to adjusted EBITDA by the middle of the fiscal year. Now turning to our segmented performance. In Civil, first quarter revenue was up 12% to $540.3 million, compared to the first quarter last year, and adjusted segment operating income was up 37% to $119 million versus the first quarter last year, for a margin of 22%. As we expected, we are seeing the benefit of some mix improvements in the quarter with a greater proportion of revenue coming from training services overall. Compared to Q1 last year, we had higher training utilization and increased volume from some of the recently deployed simulators in our network. This was partially offset by lower stimulator deliveries, which as we previously indicated in our outlook, are profiled more to the back half of the fiscal year. In Defense, first quarter performance was in line with our expectations and outlook for the fiscal year. We generated revenue of $471.7 million, which is up 14% over Q1 last year, and adjusted segment operating income was $24.3 million for the quarter, giving us an adjusted segment operating income margin of 5.2%. This compares to a loss of $21.2 million in the first quarter last year. Defense revenue growth stems mainly from a higher level of activity on programs, while the higher adjusted segment operating income reflects the adjustments that we made last year and also the ongoing progress we've been making to execute on legacy contracts and mitigate costs, as well as the effects of a gradually easing of economic headwinds. And in Healthcare, first quarter revenue was $42.4 million, up from $39.6 million in Q1 last year. Adjusted segment operating income was $1.8 million in the quarter for an adjusted segment operating income margin of 4.2%, which is up quite nicely from Q1 last year. With that, I'll ask Marc to discuss the way forward.

Marc Parent, President and CEO

Thanks, Andrew. Our outlook continues to be bullish for the fiscal year and beyond. We're delivering tangible success in driving strong order flow with a significant and growing backlog. Customers in each of our markets have a greater need for innovative training and operational support solutions to succeed in ever more complex environments. And as we look to the period ahead, we continue to be highly encouraged by the secular tailwinds in all segments and the growth that we expect to deliver by harnessing our global market and technology leadership, and the power of One CAE. In Civil, if you've traveled at all over the last few months, you'll know firsthand that demand for air travel is as strong as ever. For the first quarter of this calendar year alone, worldwide passenger traffic increased by 58% compared to last year. And in the United States, the TSA reported a new daily record for passenger screening at the end of June, and yet not all of our airline customers are back to their 2019 operating levels. Specifically in Asia, where international traffic is still lagging nearly 75% of pre-pandemic activity. We see significant demand ahead for air travel in the remainder of the cyclical recovery and beyond. We're proud to be the world's largest provider of civil aviation training services, and we're on track this year to deliver approximately 1.2 million hours of training in our broad global network of training centers. No matter where you fly, chances are that your pilot or first officer has been trained in a flight simulator designed and built by CAE or in one of our training centers around the world. Our highly differentiated solutions in the aviation market, including the most extensive global training network, world-leading simulation products, unique technology and software solutions, and strength in training partnerships with operators and OEMs position us very well for the long-term. We expect the pace of change in aviation to be substantial over the next few years. The demand for trained aviation professionals is greater than ever and continues to be driven by air traffic growth, personnel retirements, and by the number of new aircraft deliveries. Consider the fact that over half the commercial and business pilots will be active a decade from now and have yet to even begin their training. These growth dynamics, coupled with a highly regulated market together with our ability to win a bigger share of our customers’ training needs, are indeed very significant drivers for CAE. Given that context, we expect our Civil business to continue growing at an above-market rate for the foreseeable future. In fiscal 2024, we maintain our expectations for low- to mid-teen percentage annual growth at Civil adjusted segment operating income. With a higher level of flying activity this summer, especially in Europe, we also continue to expect a more typical seasonal pattern for training demand this fiscal year, weighted more heavily to the second half. Additionally, we still plan for about three quarters of our approximately 50 annual full-flight simulator deliveries to occur in the second half. Turning to Defense, we expect to continue executing on our multi-year transformation, which we expect to culminate in a substantially bigger and more profitable business. As we've shown with the recent FSTSS and HADES wins with the U.S. Army, we're uniquely positioned to leverage the full range of CAE’s civil aviation training expertise in the defense market. In fact, the solutions that we're providing on these two contracts are very similar to what we deliver to our airline and business jet customers. We're in a very good position with our recent strategic and generational wins, record $5.4 billion adjusted backlog, $8.8 billion pipeline of bids and proposals outstanding, and continued order momentum. To me, these are all positive signs of the transformation that is underway. As we look to the remainder of fiscal 2024, we continue to expect Defense to renew its backlog with larger and more profitable programs while simultaneously working its way through a critical mass of lower-margin legacy contracts. We're highly focused on execution. And for the fiscal year, we expect Defense to drive continued year-over-year quarterly performance improvements with a heavier weighting to the second half. In Healthcare, simulation-based training is one of the most effective ways to prepare healthcare practitioners for the moments that matter, treating patients, handling critical situations, and enhancing patient safety. We're on a path to accelerate value creation by continuing to gain share in the simulation and training market and driving top and bottom-line growth. We have a very strong team, and I expect to see Healthcare's positive momentum continue. In summary, I continue to be excited about the future, and we're on track for our targeted three-year EPS compound growth rate in the mid-20% range. I'm very pleased with the important progress we've made in the first quarter and expect us to continue for the fiscal year and beyond. With that, I thank you for your attention, and we're now ready to answer your questions.

Andrew Arnovitz, Senior Vice President

Thanks, Marc. Operator, we'll now open the line to members of the analyst community for questions.

Operator, Operator

Our first question comes from Konark Gupta with Scotiabank.

Konark Gupta, Analyst

Yes. Good afternoon. My first question is on the defense contracts. Marc, you mentioned a couple of these big wins recently. They have very similar attributes to airline training contracts. Can you explain for us what the similarities are? Is it in respect of margin profiles, in terms of execution, or customer quality? And any background on that, please?

Marc Parent, President and CEO

I think there's elements of all that. Let me illustrate a little bit. If you think about, first of all, let me just go back a step to a story which I really love and am excited about: what we are doing in Lower Alabama, that's a big training base for the U.S. Army at Fort Novosel, and right down the road is our training center in Dothan, Alabama. A few years ago, as you may remember, in 2015, we invested to create a turnkey training facility where we put a greenfield because it literally was a peanut field where we set it up. We put buildings there. We put simulators. We bought aircraft. And we won the contract to train all the U.S. Army's fixed-wing pilots. Recently, this year, we won the recompete after seven years. That's good. We're good for another seven years there. It was a strong win, which is accretive to the margin expectations we have set in the market. Now think about what we're doing now. The recent contracts that we won, let me start by the one we won with IFT-R, which is the Air Force. We've won the contract to train all of their rotary wing pilots, which we'll be doing at our facility in Dothan. Imagine the synergistic benefits of utilizing our existing facilities—whether it be hangars, personnel, management. That's one example. The next example is the HADES contract with the U.S. Army, a different contracting authority and customer, which is exciting. The training is for a Global 6500 business aircraft where we provide simulators. We are the authorized training provider for Bombardier customers. So, we're going to put that simulator in Dothan, Alabama, and we will be selling training to the U.S. Army for years to come. We're leveraging our assets to derive better margins because these are commercial simulators we furnish. In essence, it's more business using the same assets.

Konark Gupta, Analyst

That's very good color, Marc. Thanks so much. And then if I can just quickly follow up, some of your peers have publicly mentioned how they want to move away from fixed-price contracts in Defense. You guys and others are trying to cover the cost of inflation and talking to customers. Any updates on those fronts? How are you positioning on the new contract wins with respect to fixed-price or cost-plus?

Marc Parent, President and CEO

The first thing I'd tell you is our bid discipline is very stringent. We did no secret that we talked about— in the past year—that we executed contracts, and we still have some in our backlog that were executed at a time of hyperinflation, parts shortages, and things like that. You can expect that as we bid now, especially on fixed-term price contracts, we are going to have either escalation criteria that protects us or we will execute with enough elements as pass-through.

Operator, Operator

Our next question comes from Noah Poponak with Goldman Sachs.

Noah Poponak, Analyst

Marc, how should we be thinking about the top-line growth rate Civil can see into the medium term? You've alluded to not having yet recovered all the pre-pandemic levels, and you have some exposure to geographies that have been a little slower to recover. And then once we kind of click back into 6% or 7% air traffic growth, you're taking market share, you're training a lot of new pilots, you're growing a software business that's becoming organic. Do we see multiple years beyond this year of continued double-digit organic revenue growth from Civil?

Marc Parent, President and CEO

Well, I don't know if I can go out there and say double digits, but I can tell you I see very, very good years for Civil Aviation for years to come. Absolutely.

Noah Poponak, Analyst

Got it. On the margin in the segment, I wondered if you could just spend a second on the shape of the year. It seems like given the full-year target and the first quarter being the same, the seasonality this year might be slightly different than in the past. Is that down sequentially and then higher in the back half, or what can you share on the shape of the year and the Civil margin?

Marc Parent, President and CEO

What I’d tell you is that as you said in your question, we won't get ahead of ourselves. I'm pleased with the results that we have in our Civil business in Q1, and in all our businesses in Q1. Yes, to repeat again, we are in a more normal kind of flying activity, meaning anybody going to the airport sees it: airplanes are full and flights are booked. What you're seeing is when the airlines are flying and having trouble meeting demands, we're seeing less training across commercial and business aviation in the summer. What I would tell you is the bookings in the third and fourth quarters are strong and indicative of another good year ahead. But I'm not going to get ahead of myself in Q1 here.

Operator, Operator

Our next question comes from Kevin Chiang with CIBC.

Kevin Chiang, Analyst

Maybe just following up on some of the color you provided to Konark there, on some of these recent Defense wins, which look to be highly accretive, do you get to leverage some of the fixed assets you already have in place? Does that strategically change how you think about the capital allocation in Defense? Historically, I've thought of that as being more of an asset-light business, where your partners typically put in the capital. But it seems like you're having some wins here where you've deployed capital, and now you can leverage those fixed costs. Is there a bit of a change in thinking about deploying capital into this segment?

Marc Parent, President and CEO

Not really. Look, we've done this before. We've deployed our first facility in Lower Alabama, and at that time we had 0% market share with the U.S. Army. Today, I would tell you, we have a very high market share in both rotary and fixed-wing contracts with the U.S. Army. This will be a very attractive opportunity for years to come. It really depends on the opportunity. What you're seeing here is really the—what I use the term—the One CAE mentality. That applies to teamwork and how we go to market leveraging our advantages. Your question really highlights the fact that we're putting a Global 6500 simulator up, and we're selling training to this new part of the U.S. Army. It will be at margins we expect because we're furnishing the assets. So, the mindset does not change with regards to how we market; it depends on the opportunity. You’ve seen the kind of incremental returns we get in training.

Kevin Chiang, Analyst

And maybe just my second question to stick with Defense. If I go back to your last earnings call, you talked about some of these problem contracts broadly running off by the end of this fiscal year, which gave you that visibility to inflect into double-digit SOI margins maybe sometime in fiscal 2025. Just an update there in terms of how that runoff is progressing. Is that still the broad timeline we should be thinking about in terms of margin progression in Defense this year and next year?

Marc Parent, President and CEO

Yes, I would emphasize that those contracts—lower margin profile—make up a very small number comparatively speaking to the hundreds of contracts we execute quarterly in Defense. We are steadily closing out the lower margin contracts. We have been making steady progress, as we thought we would be. I expect the second half performance in Defense to step up, both in margin and absolute levels. Yes, I would expect Q2 to look similar to Q1 and anticipate things stepping up in the second half, as we communicated about the inflection in margins next fiscal year.

Operator, Operator

Our next question comes from James McGarragle with RBC Capital Markets. Please proceed.

James McGarragle, Analyst

I wanted to ask a question on the Civil segment and the potential impact of a slowdown in the economy. I know pilot training is regulated and travel demand is extremely strong right now. But would past recessions be a good indicator of what we could expect on the Civil side of the business if the economy slows? Or do you think some of those changes you’ve made during the pandemic and some of the M&A that you did might change how the Civil business performs in a potential downturn?

Marc Parent, President and CEO

Without appearing to be hypothetical here, all I see out there is unmet demand. I don't see any sign of a slowdown in training activity in our forecast, either in commercial or business aviation training. I will just give you some anecdotal evidence. We are ramping up to satisfy the demand. We deployed 23 full-flight simulators last year, and we’ve opened new training centers. I got anecdotal feedback from two different people today looking for training slots. It's a situation where we're filling slots as quickly as possible. I'm not seeing any signs of a slowdown, and there are many people who would appreciate it so they could catch up.

James McGarragle, Analyst

Another follow-up I have is how your team is viewing some organic opportunities or potentially M&A in the current environment? Demand is strong right now, and we're seeing that in the results. Is this kind of creating any opportunities for additional organic investment or M&A as we start to look into fiscal 2025? If so, how would you prioritize this investment given the progress you're making on your balance sheet target?

Marc Parent, President and CEO

Right now, as we said before, our priority has been on deleveraging. We are well on track to reach our target this year. We've made excellent progress and are very happy to be down to 3.2 this quarter, and I’m confident about achieving that leverage target of 3x midyear. This opens up possibilities for us in terms of capital allocation. I will say this again, there is nothing we need to buy; we have everything we need. However, if there are opportunities out there that are accretive to the growth we have, we will pursue those. I wouldn’t be looking for anything in the short-term; we’ll continue deploying assets in line with market demand, and we won’t deploy capital unless we have long-term contracts to back them up.

Operator, Operator

Our next question comes from Tim James with TD Securities.

Tim James, Analyst

I'm wondering first, Marc, about the Boeing authorized training provider agreement. It seems to be quite an interesting position regarding the future of commercial training and the Company's positioning. Can you talk about what that agreement means for CAE?

Marc Parent, President and CEO

I think it's great. I couldn’t be more proud of the partnership we have with Boeing. This is about safety. It’s an honor that Boeing trusts us to deliver their new competency-based training curriculum to the airlines. This is an umbrella contract covering the world. We're launching in India, where a lot of airplanes have been sold, so that’s a good business opportunity for us. Again, it's about safety here, and we're very proud of it.

Tim James, Analyst

Is it about scale for Boeing, helping them roll out their competency-based training to a bigger footprint, or is it about being aligned with CAE because of the safety aspect, or is it both?

Marc Parent, President and CEO

Boeing recognizes CAE for what we do: simulation and aircrew training. This year, we will do 1.2 million hours of training. We provide insights based on the sheer amount of training we do. Part of it is leveraging our simulations and the facilities we have to deliver training using their curriculum, but we also provide insights into how well the curriculum has been assimilated, making CAE a critical partner for Boeing regarding safety.

Tim James, Analyst

And lastly, are you noticing any changes in the competitive environment given your strong competitive position and outlook?

Marc Parent, President and CEO

I don't see any difference in the competitive environment. I concentrate on customers and meeting their needs; that's our focus. Our mantra is not just to satisfy customers but to delight them. Airlines are much more amenable to outsourcing now because we provide the only real global alternative. Six out of the top seven U.S. airlines are now training within our network compared to zero before the pandemic. We are also building relationships with marquee airlines like AEGEAN and Qantas. This highlights the dynamics and the competitive environment, but overall I don't see significant changes.

Operator, Operator

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

Cameron Doerksen, Analyst

Just a question on full-flight simulator orders. You reported 22 in the quarter, which is very strong. Can you talk about the outlook for order activity for the remainder of the year? I know it’s only one quarter, but it looks like you might be on pace to exceed last year's total, which was also pretty strong.

Marc Parent, President and CEO

I would expect it to be elevated. We've got 22 so far, and what we always focus on is maintaining our leading share. We're not going to take every order if it doesn't make sense. It has to meet our expectations. With our commanding market share, we compete on the fact that our sims are going to be out there for decades, and we will continue providing support. I expect demand to remain high.

Cameron Doerksen, Analyst

Also, regarding the Future Aircrew Training contract that you have been selected as the preferred bidder for—obviously, this is a huge contract over a long period of time. Assuming that it gets awarded in 2024, can you talk about how that will scale? Would we see work flow into CAE fairly quickly after the contract is awarded?

Marc Parent, President and CEO

Short answer: yes. This is a generational contract. I'm proud of the opportunity it creates; we will likely hire people who will spend their careers on this contract. It will start delivering fairly early, as we have a lot of work to prepare: new buildings, new aircraft, and new simulators. But I can’t go into specifics until we negotiate the terms and sign the contract.

Operator, Operator

Our next question comes from Kristine Liwag with Morgan Stanley. Please proceed.

Kristine Liwag, Analyst

Marc, the pilot shortage issue in the industry has been ongoing for years. Are we midway through addressing this issue? When you talk to airline customers about their needs, what's the urgency level to attract new pilots? Lastly, if the industry acted with appropriate urgency to address this issue, what would it look like for CAE?

Marc Parent, President and CEO

I think we're still in the early innings across the market. There is a lot of room to play this out, and urgency among our customers is high. Airlines are actively focused on attracting and retaining pilots; the urgency exists. Our recently released aviation forecast anticipates significant needs for training over the next decade, which is our business. CAE, as the number one in the world at it, anticipates growth in the scenario.

Kristine Liwag, Analyst

If they actually take the necessary actions, what does that mean for CAE? Would you need to open new aviation training facilities, and can you size the market opportunity?

Marc Parent, President and CEO

We are doing it. We launched 23 new simulators last year and opened or broke ground on 8 new simulator centers recently. We move in lockstep with demand; that’s what we have always done. If we deploy capacity, it will be backed by long-term contracts to support it profitably and meet expectations in those segments.

Operator, Operator

Our next question comes from Ron Epstein with Bank of America.

Unidentified Analyst, Analyst

This is Jordan on for Ron. I just had a question. On about $800 million in unfunded backlog, could you provide more color on when you expect that funding to come through?

Marc Parent, President and CEO

When we talk about unfunded backlog, it usually relates to long-term contracts. For example, with the FSTSS contract, while the full contract value—around $455 million—won't show immediately in our order intake, it will be realized over the 12 years of the contract.

Unidentified Analyst, Analyst

What do you view as your competitive advantage for the $8.8 billion in bids and proposals you have out?

Marc Parent, President and CEO

We wouldn’t bid if we didn’t think we had a strong chance of winning. Our scale, technology, and market leadership are advantages. CAE is unique because we are the only pure-play platform-independent training company in defense simulation. That’s attractive in the market.

Operator, Operator

Our next question comes from Michael Kypreos with Desjardins Capital Markets.

Michael Kypreos, Analyst

On the IndiGo order for 500 A320s, I know CAE has some exposure through the IndiGo Cadet Pilot Program. When should we expect any Civil top-line or simulator deliveries potentially to be impacted by this order? Is it possible that IndiGo might front-run this training to be ready for fleet capacity when the aircraft start delivering?

Marc Parent, President and CEO

We're very well exposed because of our partnership with IndiGo, which we established at the onset to launch training. They carry over 50% of the passenger traffic in India and fly to every airport there, so it creates great opportunities for both parties.

Michael Kypreos, Analyst

Finally, on Defense, your margin came in slightly below that of Q3 and Q4 of last year. Was that mostly due to seasonality, or were there one-time costs or other elements impacting that?

Marc Parent, President and CEO

It's been in line with our expectations. There's no drop; it’s merely what I thought it would be as we've talked about the margin profile for this year.

Andrew Arnovitz, Senior Vice President

Thank you. Operator, I think that's all the time we have for financial analysts. We do want to open the lines in the minutes remaining to members of the media. So, I'd ask you to please open the queue to members of the media.

Operator, Operator

Are there any questions from the media?

Andrew Arnovitz, Senior Vice President

Operator, are there no questions from the media? Okay. Well, that being the case, we will conclude the conference call. I want to thank those participants who joined us today and remind you the transcript will later be posted on CAE's website. Thank you.

Operator, Operator

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Thank you.