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..

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..

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 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 with -- every day with many veterans. We have over 2,000 an employee CAE.

And I can tell you, I'm honored to work and be the company of heroes. They bring a unique point of view and skill centered company at a price that allows us to achieve new heights. Now on to 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 870 million -- $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 of countries including Malaysia, Thailand and Vietnam renewed lockdowns.

On the orders front, we signed Civil training solutions contract 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, and it 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 that they have for the future is really powerful, palpable.

And 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 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 international, which has been largely due to the pandemic. And not withstanding 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 a 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 this 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, the third quarter of year-over-year revenue growth for Healthcare, as it ramps up and expanded 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?.

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, 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 and 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 restructuring, integration and acquisition costs represents a rate of negative is 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 impact 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 $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 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.

And as Marc pointed out, this was mainly driven by delays in products related orders and program interruptions and delays, particularly internationally as COVID impacts persisted in several regions.

Underlying the quarterly Defence book-to-sales ratio 1.02 times were international order 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 since 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 revenues 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 discuss the way forward..

Thanks, Sonya. As we look at a 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 uniformed 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 have 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 on horizon 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 airlines operations portfolio, a highly valuable suite of flight and crew management and optimization software solutions, designed to enable airlines to operate their businesses with efficiency and precision.

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 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.

And 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. And 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 threat and recognition of the sharply increased need for digital immersion-based, synthetic solutions in national defence are tailwinds that favour CAE’s business.

Given the increasingly -- 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.

And 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 reacceleration 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.

And 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.

And 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 on markets are generally recovered, with steady room for further improvement after.

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. And 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 not ready to take your questions. .

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

[Operator Instructions] Our first question is from Fadi Chamoun from BMO..

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 towards what's going on there. I'm not sure if you can maybe elaborate a little bit.

Give us a couple of examples of what's really kind of 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, I guess organic Defence business?.

Thanks, Fadi. Look, as I said in the remarks, we're continuing to expect strong year-over-year growth in this year. So clearly we're going to have a good -- a pretty good second half. And that's -- and I talked about the Defence as a whole, but which is obviously combining the integration of L3Harris.

I mean this is the story with the legacy business, alright? Shall I call it? Because I hate using that term but we’ll use for the moment here, organic. Organic business is one of continued COVID related disruption, both on order intake and impacting our execution.

And I can tell you that there is at least five international orders I fully expected -- I'm not going to lie to you, I fully expected to come in this quarter, but did not happen because of Delta for example, inability to access customers in -- at least -- in the Far East. It is five at least internationally.

Other factors I could point you like, for example, Florida was -- during the summer was one of the hardest hit, if not the hardest hit as well as Texas which is another big state for CAE in terms of the COVID effects and the variants attacking that. So clearly that had an effect.

And it's just a testimony that as I said before, for our training center, we train international customers of C-130H. Imagine there are no customers coming, and I -- but the situation is changing, borders are opening, international travel has come back.

The COVID situation is relatively much better, not only across the United States, but in Florida specifically. So those are the kinds of things that we’ve been seeing near-term, which gives us more confidence in the outlook.

And when you look at the business as a whole, for Defence, I talked about organic plus the integration, we're going to be starting rolling out the benefits of our synergies. You see that with the -- most of that was started -- like for example, reductions in force that happened towards the end of the quarter.

So for all these reasons, it really is COVID-related impacts that we’ve seen that really drove that, because our book-to-bill for the last few quarters as you know, in the organic Defence business has been below 1. And eventually, you run out of backlog that you can execute in an efficient manner.

And that's really the situation that we're seeing here. But again, those orders come in. We've been selected on these orders. So, I would have always expected a back half in Defence to be the strong order. So -- and that's what I said last quarter.

But we’ve lost -- because of COVID we've lost some that I would have liked to gotten in the second quarter, no doubt, but it doesn't change my view of full year.

Maybe I could just let Sonya, you want to add something?.

Yes. If I -- just a quick recap and laying it out the way we see it on the organic business, we're delivering as you mentioned Fadi kind in the 7%, 8% range, 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, so as those that 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..

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

Yes. SOI in terms of dollars spent..

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 delever 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?.

Well, I'll start out with, I'm very comfortable. So the quarter closed at 38% net debt to cap 2.55 times net debt to adjusted EBITDA with all the financing related to the L3Harris Military Training acquisition.

And 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 cap higher, probably a little above the 40% but we're expecting quickly leveraging 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.

So, we've seen some great opportunities come out 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 happen to continue to have a pipeline. But as you've seen, we're patient, we’re 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..

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..

I think, we're providing that guidance on a consolidated basis really to underpin the messaging that all of these internal, external measures is really to drive a larger business, a more profitable business.

So what we're guiding at is that once you hit that recovery level, that not only will we exceed pre-pandemic measures but on a much larger scale base of business..

Yea, I think with that, I mean, there's no doubt that’s definitely made up new highs in Civil margins for sure. Some of that -- a lot of that with the leverage, as you said, plus the acquisitions that we made, and as well as the double-digit margins in Defence. That's what's going to comprise that mix..

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

So I have a few question here just on Defence and Civil perhaps. Maybe turning to Defence for now. Like 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, we will 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?.

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

Yes, I was -- on the margin profile. If Defence organic business goes back to 8%, 9% margin and then L3Harris plus synergies, obviously they are double-digit margins right now, the overall Defence business seems like it's going to work 12% EBIT margins with all those. .

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..

Right.

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

Well, it’s still early days with L3Harris but I'm quite comfortable when I'm saying that we're going to deliver -- the L3 Harris -- the old legacy L3Harris business and the synergies that we're -- that together that we're going to generate, we're going to be achieving the margins that we talked about when we acquired the business.

And I definitely see that. I'm not quite happy with what we're seeing in the first quarter, and more of that’s coming..

And then on the Civil side, so 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?.

Well, that’s certainly what I’m reading in terms of the COVID recovery. Look, the thing I would tell you is, as we said in the remarks that I like what I see in Americas right now, specifically, in United States. We're seeing utilization rates by the United States back in the levels of -- COVID -- we were prior to COVID-19.

We're seeing very high rates of utilization in business circa. This summer, obviously, as we talked about there’s seasonal effect and the fact that Europe kind of missed as a whole summer because of Delta. But going forward, to me, utilization rates are very much correlated by vaccination rates.

And if you look at -- if you’re extrapolating vaccination rates -- and of course, that comes with lifting of restrictions on the borders that governments have to do, and the ability for people to travel, we’ve seen the pent up demand and how that's driving business.

I can tell you, I was at -- in the early part of the month of October I was at the IATA General Meeting in Boston. And I can tell you, I met a lot of the airline CEOs. And I can tell you, there's a palpable optimism out there as vaccination rates increase and that's on U.S.

And when we're basically talking to airlines specifically in those areas like the United States, where we are seeing that increase in activity, because the vaccination rates are high and where level of infection is low, we can see a lot of activity as testimony by the rise in sales -- our sales activity, which is not only testimony to the orders that we've announced so far but in terms of the activity that I see, which is quite nice at the moment, the levels.

And so really look, in terms of going back to the root of your question to predicting -- again, I’ll go back to what I said, usually what I meant. I mean we have -- the situation seems to be degrading in Germany right now. We still have a very low level of vaccination in the Far East. So I think those happen.

But I think on the long-term, trend is getting better. So we will get better utilization in lockstep with the increase in flying activity driven by vaccination rates. We're not going to get ahead of it, because we don't know. I mean, at the end of the day, is you look at, there's a wide variety of estimates out here.

Since the beginning, we said, well, look, we'll follow the IADA forecast of what -- vaccines still be a pretty good one. Although I'd tell you, I think the U.S. has beat that, as the vaccination rates go up. So a long answer to your question.

But coming back this is all I can say is, when we do come across it, when the traffic does come back, which it will, with all the actions that we’ve taken, I'm extremely confident that we're going to be a much bigger, a much stronger and a much more profitable business, and that's where we're headed..

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 there is not enough supply to train pilots as much as airlines want?.

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 largest network of flight schools in the world for training people to become airline pilots.

And 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 cold.

I can tell you, carriers, including legacy carriers across the world had 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 trend that we see. There’s that. I think become 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..

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

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 maybe 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?.

The answer is yes. Yes, we are seeing it. The fact is, there is a lot of the contracts that we have announced in this quarter. These are just testimony to that, for a number of reasons. Number one that is, that people are seeking capacity and they're looking for capacity to train their pilots and we can offer that capacity.

We've been part of -- the activity we've been doing is moving simulators into the United States for more locations. And actually when we increased our forecast on capital deployment this year that we announced at the beginning of the year, some of that was going exactly towards this.

So to me, that is a trend, we predicted that trend that this is an environment where there's going to be a lot more opportunities for people considering us as a really only viable global third-party option, where -- and in fact -- because pre-COVID you do 1 million hours plus a year of training, we offer a very, very good alternative.

And so to me, it's what -- we have a lot of discussions. We have a lot of discussions at IATA. We have a lot of discussions ongoing, and we're signing contracts.

We're signing contracts for new airlines, we're signing contracts for overflow training agreements, where people want excess capacity right now in a lot of cases because -- the immediate -- like right now, or they want to ensure that they will have it as they ramp up operations to be able to seize the opportunity afforded by increased passenger traffic.

And when we do that, we're signing people for longer term contracts, so that, that activity for us will sustain..

That makes a -- I'm not sure -- give a sense of like maybe what that breakdown is or was maybe pre-pandemic between pilot training that would have been in-source versus outsources? Because what it looks today, I suspect is probably pretty fluid and maybe it's tough to pin down at the moment..

Well, I can't give you a hard number right now because it's -- first of all, it's such steady and it would be very hard to compare on apples-to-apples, or a number. Maybe in two, three quarters we can give it. But right now I couldn’t give you with certainty a number on that but I can tell you there’s more.

If you look at the contracts that we got, traditional carriers that were ordering simulators and now they say no, we'll basically just sign up a contract with you to -- for you to provide the simulator and position that. We did that with Air France, we did it with Westjet, we did it with Air Canada.

So it's definitely more of -- again, I can’t give you a precise number or that sort of a breakdown..

Maybe just on the AirCentre transaction you announced maybe a week or two ago.

Just speak to how you feel about your -- I guess your broader crew management, flight management portfolio? Like do you feel like you have all the tools now to kind of capture the higher TAM that you put out there or do you think you need to kind of backfill some of that product line still? And then I guess when we look at the AirCentre’s client base, or the customers that they're dealing with versus the ones that you're dealing with, I guess I'm interested in knowing, I guess, where the opportunity to cross sell are? Do they have a large subset of customers that you don't deal with or vice versa that maybe offers an ability to maybe capture revenue synergies?.

Well, all of that. I think it could be -- I'm extremely excited by this acquisition as I said, when we first stepped out in our press release.

The reason being, first and foremost -- and then we said this at the time we acquired Marlow with Roster Buster, the simulation -- the simulators and training operators software market, it's over $2 billion, over 50% of that spend is outsourced. And what we're acquiring now, we are acquiring a huge stake, a leadership stake in that market.

So to me, this is a crowning instrument in that strategy. And really what we're doing here is, you've seen us over the year move from what was a few years ago, certainly when I joined CAE, move from being really a simulator partner to airlines moving deliberately towards being a training partner to the airline.

What we were doing in the past few years are digital offerings to make ourselves essential to customers, providing them insights on their business that really -- that we could deliver to them using the data that we have on their operations. And now what we're doing is we're moving from being this training partner to becoming a technology.

And that's really just about growing the amount of work that we could do in this era. And I can tell you, it's very well received. Again I was talking about my meetings with CEOs at the IATA General Meeting. And obviously, we weren't talking about Sabre at that time, because we hadn't announced the acquisition at that time.

So we certainly weren’t talking about it. But we did have Marlow a much smaller but differentiated offering in that market. And I can tell you, there was no pushback whatsoever with regards to airline CEOs, which our customers about see bringing our expertise as a partner in crew resourcing and flight planning.

In fact, they will see is a natural extension of what we do with them, because it's all about delivering essential services to the airline, just like we do in training. So this is a great asset. We have pretty much all of -- almost all of Sabre's customers or our customers, there is -- we are getting more customers, that there's for sure.

But -- so to me, there's a lot of opportunities to leverage those relationships, to cross-sell. And as well don't forget, I really believe that’s testimony by a contract -- the first contract we announced this quarter literally is a contact with Innotech-Execaire.

I really believe that there is an opportunity set here for rolling this out across business here, which is an untapped opportunity. So again -- and by the way, leading testimony to my confidence in this business, I put our most senior executives in the company to lead this business, Pascal Grenier.

And I am very, very confident that with Pascal working with the fantastic people that I've seen so far have been met as part of Sabre AirCentre, I think we'll do well in this business..

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

I just want to come back to the -- I guess sort of the longer term margin targets that you got out there, 17%. Obviously, that would imply some nice improvement from where you were pre-pandemic.

I wonder if you could talk a little bit about how you see the returns on capital evolving as your end markets normalize? Because obviously the capital base has changed here with the acquisition of L3 and also with the pending AirCentre acquisition, which presumably has a lower capital base.

So any comments around the return on capital you would expect to see as things normalize?.

We expect the return -- those increased margins to flow through as increasing on the return on capital. So you saw a few years ago, before the pandemic we had driven more than 300 basis points improvement in just a few years.

And that's optimized discipline 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. And as we've seen, we've got very interesting and accretive acquisitions in inorganic.

So 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..

Okay. And I guess, it'd be 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?.

Absolutely. So some great progress in optimizing the footprint. And as Marc mentioned, relocating them, so taking them where there is lesser demand and deploying them in the Americas, and so on to serve a market demand. So, really kind of optimizing that need for capital and matching up demand or capital with the demand.

So in this quarter, we incurred about $13 million of costs, $20 million utilize on the restructuring program. And ultimately this quarter, we did finalize some additional UK consolidation, so the UK is pretty much done. And we have got the bulk done.

However, a couple of remaining consolidations in Europe and in South America that we'll see closing out in Q4. But we already are seeing significant amount of savings.

So 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? So, what I'll note is that, despite the timing of the delivery revenue on the product, because of the lower deliveries, the SOI margin expanded to 18%.

So, that was the impact of the higher training revenue, with an utilization of only 53%. And it really highlights the great progress on the structural cost savings that were delivered in the quarter..

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?.

Well, 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..

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

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

Marc, I'm struggling a little bit to follow the explanation of the utilization rate and the attribution to the geographic difference, because if I look at the progression in the utilization rate, it made it to this kind of 50%, approximate 50% level for the first time in the September 2020 quarter. And since then global ASMs have nearly doubled.

And I understand you have the different geographic exposures with the weighting to Europe, then Asia Pacific, then North America and that North America has been strongest. But seat miles flown in Europe in that period of time have also almost doubled. They've grown a lot in Asia Pacific.

I think your simulator network is more exposed to narrowbody than widebody. So, I'm just not following -- like I understand you're you have these exposures outside of North America but there've been decent recoveries there.

And if I just take a sort of weighted average of those geographies relative to your exposure, it doesn't really explain that utilization rate being flat.

Can you help me square that circle?.

Well, I wish I had a model that was that simple to be honest. It's really -- you can’t take a weighted average to look at our business just because of the number of training centers that we have across the world.

I mean at the end of the day -- and don't forget that, when -- if you look at Europe, which you’re talking about there, when people are flying around, they're not training a lot. So -- and that's why we always have a seasonal dip in the quarter.

So really, really when you get the big training activities there, is when you're preparing -- they're preparing -- when you have a steady state I'm talking about, they're preparing their crews making sure that they can ramp up.

I mean what we see right now is, we have utilization rates currently in the Americas at mid-70s range that are some days higher, and we followed that by Europe, which has been approaching 60s and in Asian release, which is at still pretty depressed levels. I mean it's in fact -- it's moving to around 50%.

So -- but, I can't stop that, and the fact that it's really -- except for the United States, which is pretty darned, like I said recovered to pre-pandemic levels, you just can't take the weighted average as a perfect correlation to it and we just can't..

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 then 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…?.

Well, absolutely, I mean 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.

Now, that's been somewhat mitigated in the Americas by the fact that because of the government support they haven't by and large reduced the level of activity to a depressed level. So they have utilized their pilot power that they -- 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.

And that as well, I would basically correlate that with all the conversations I have, specifically with CEOs of airlines across the world, which is what gives me the confidence that what I'm seeing United States is a blueprint for what's going to happen elsewhere. That gives me confidence..

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?.

They're high. .

Are they above pre pandemic?.

They are high. We're doing well. We are doing well. Look, I think we're -- no I'm not being flippant here, but our -- the activity levels that we see is, we're higher than pre-COVID levels in the Americas certainly, we are right now. And I think we're doing well in terms of -- and I don't think I want to get too much ahead of that prediction stuff.

That’s factored into the outlook that we gave with regards to our margin going forwards. And it's no surprise that you wouldn't be -- it's a question of leverage. We're throwing more level of training activity, because I fixed base of business, the base -- the major expense was depreciation. I mean in this we got somewhat differences.

We are not selling [dry pads], we are selling courses. So we have to with a ramp up with instructors, that kind of thing. And in the end of the day I think -- look, I just want to say, consider the fact that we're making an 18% margin with 53% utilization. And I think when you look at that, it does kind of underscore the progress that we're making..

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

Given the current utilization rates, do you see further opportunities to reach a full or redeploy the single serve fleet around the network?.

We've done a lot of that already. I was telling you, Benoit, I got to say 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. So we've done that.

But I think -- I don't think that's a huge factor going forward..

And obviously, with Marlow and also Sabre, you're kind of entering a big addressable market for flight and crew management and optimization solution. 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 year whether you see opportunity to increase your market share on the organic basis and maybe do further M&A?.

I think it's too early to talk about that Benoit. I would tell you I'm very confident in the business as I said. But our first order of business is to transition the business, I mean as you well know, this is a business that’s extremely critical to the airlines day-to-day. Just like training is, even perhaps even more.

So for us, is to make sure to transition the business very well without skipping a beat with regards to our customers at the same time and that's factored into the case and the -- our business case on this acquisition. We've factored money to basically solidify and differentiate the business with airlines. That alone I think has a lot of potential.

And then yes, then you're talking about the organic growth, just testimony about the growth of aviation by itself, which will be double-digit for quite a few years just recovering from pandemic, then comes market share gains.

And don't forget what I said about -- there's opportunities to me on business aircraft, which to me is Virgin territory, that's directionally in terms of -- quantitatively, I think it’s way through. We haven’t called out yet..

And last one for me maybe for Sonya.

In terms of net debt to EBITDA from the 4 time post the Sabre acquisition, what about the timing to get back to 2.5 times? And assuming there are still further M&A opportunities on the horizon, what would be kind of the max level you would feel comfortable with?.

I mean it’s a solid balance sheet, with these accretive investments. And so, the timing of whether it's organic or inorganic investments will drive some of that. So, we're at investment grade profile and that's where we stay comfortable, which is in the 35% to 45% net debt to cap.

So what I'll say is, we expect it to go a little higher in Q4 and then to delever quickly as we generate cash and generate cash out of these new acquisitions. And as our EBITDA ramps up quickly, and so drives an improved net debt to EBITDA ratio..

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

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Thank you, operator. So that's all the time we have for the call today. I want to thank all participants. [Foreign Language]. And I'd like to remind listeners that a transcript of today's call can be found on the website at cae.com. Thank you..

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