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

Good afternoon, everyone, and thank you for joining us. 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 14, 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 Plus 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 open the call to questions from financial analysts. And at the end of that segment, we'll open the line to members of the media, should there be any questions.

Let me now turn the call over to Marc..

Thank you, Andrew, and good afternoon to everyone joining us on the call. We delivered a good performance overall in the second quarter with double-digit top and bottom line growth, driven mainly by continued strong momentum in Civil and higher contribution from Defense compared to the second quarter last year.

We made excellent progress to secure CAE's future with nearly $1.2 billion in total adjusted order intake for a record $11.8 billion of adjusted backlog. We further bolstered our financial position on the path to meeting our short-term leverage target.

In Civil, we had another quarter of excellent performance with demand for our training and flight operations solutions continued to be robust across all regions, and notably in Asia, which has lagged in the global recovery in air travel. We booked $618 million of orders with customers worldwide for a 1.08 times book-to-sales ratio.

We received orders for 15 full-flight simulators, including a multiyear purchase of eight new Boeing B737 MAX simulators for Ryanair and two Airbus A320 simulators to United Airlines.

In commercial aviation training, we signed a multiyear training agreement with Delta Airlines, and in business aviation, we signed a multiyear agreement with Windrose Air Jetcharter. In flight operations, we signed long-term next-generation solutions agreements with Wizz Air and Air India.

We delivered 11 full-flight simulators to customers during the quarter, and our average training center utilization was 71%, which is up nicely from 66% last year. The year-over-year increase points to the strength of the underlying commercial and business aviation training demand across all regions.

Anyone who's traveled by air this summer will know just how busy the airlines have been trying to meet passenger demand. The sequential decrease in training center utilization that we experienced during this summer is a direct reflection of seasonality. We expect -- we typically see as pilots are actively flying during that period.

In Defense, performance was a bit lower than the first quarter but still higher than the second quarter last year. We booked orders for $527 million for a 1.1 times book-to-sales ratio, giving us a record $5.9 billion of adjusted Defense backlog.

They include strategic opportunities, like the formalization of our contract with Bell Textron as part of Team Valor to provide simulation and training solutions for the all-important V280 tiltrotor, the platform for the Next Generation U.S. Army Future Long-Range Assault Aircraft program.

Other notable wins include the previously announced simulation-based training contract with U.S. Army's key next-generation airborne ISR system, which is called the High Accuracy Detection Exportation System, or HADES, which is based on Bombardier Global 6000, 6500 business jets. Defense also received an order to provide the U.S.

Army with support services for the Advanced Helicopter Flight Training Support Services contract for aircrew and non-aircrew personnel. Additionally, Defense was awarded contracts for modification and maintenance of F-16 training devices for United States Air Force as well as for the upgrade of various training devices.

With that, I'll now turn the call over to Sonya, who will provide additional details about our financial performance.

Sonya?.

Thank you, Marc, and good afternoon, everyone. Consolidated revenue of $1.09 billion was 10% higher compared to the second quarter last year, and adjusted segment operating income was $138.5 million compared to $124.7 million in the second quarter last year. Our quarterly adjusted EPS was $0.27 compared to $0.19 in the second quarter last year.

We incurred restructuring integration and acquisition costs of $37.9 million during the quarter relating to the AirCentre and L3H MT acquisition. Net cash from operating activities this quarter was $180.2 million compared to $138 million in the second quarter of fiscal 2023.

Free cash flow was $147.5 million compared to $108.4 million in the second quarter last year. The increase was mainly due to a higher contribution from non-cash working capital. We usually see a higher investment in noncash working capital accounts in the first half of the fiscal year.

This year, I'm pleased that we've already begun to see a reversal in that in the second quarter, and we expect that positive trend to continue into the back half of the fiscal year. We continue to target 100% conversion of adjusted net income to free cash flow for the year.

Capital expenditures totaled $61.9 million this quarter, with approximately 60% invested in growth to specifically add capacity to our civil global training network to deliver on the long-term training contracts in our backlog. Income tax recovery this quarter was $8.5 million for an effective tax rate of negative 16%.

The adjusted effective income tax rate was nil, which includes the recognition of previously unrecognized deferred tax assets, which had an approximate $0.05 positive EPS impact this quarter.

Net finance expense this quarter ended at $48 million, which is down from $54.1 million in the preceding quarter and up from $41.3 million in the second quarter last year. Our net debt position at the end of the quarter was approximately $3.2 billion for net debt to adjusted EBITDA of 3.16 times at the end of the quarter.

Following the end of the quarter, we announced a definitive agreement to sell Healthcare for an enterprise value of $311 million, a decision which better positions CAE to efficiently allocate capital and resources to secure growth opportunities in our large core simulation and training markets.

We intend to apply a significant portion of the net proceeds to reduce debt. The transaction is expected to close before the end of the current fiscal year, subject to closing conditions, including customary regulatory approvals.

With leverage having decreased to a ratio of approximately 3 times, we will consider reinstating capital returns to shareholders following the closing of the Healthcare sales transaction.

We are prioritizing a balanced approach to capital allocation, including funding accretive growth, continuing to strengthen our financial position, commensurate with our investment-grade profile, and returning capital to shareholders. Now turning to our segmented performance.

In Civil, second quarter revenue was up 13% to $572.6 million compared to the second quarter last year. And adjusted segment operating income was up 9% to $114.3 million versus second quarter last year for a margin of 20%, both solid improvements over last year.

And as Marc referenced, CAE's second quarter is normally seasonally softer with respect to training center utilization, which typically has some impact on business mix.

In Defense, second quarter performance was better than the same period last year, with revenue up 8% to $477.4 million and adjusted segment operating income up 16% to $21.3 million, giving us an adjustment -- adjusted segment operating income margin of 4.5%.

The year-over-year growth came mainly from a higher level of activity on programs, partially offset by higher SG&A expenses from higher bid and proposal costs associated with the pursuit of larger pipeline of defense program opportunities.

Defense performance was lower than the preceding quarter, as we managed through the ongoing retirement of legacy programs from backlog. We also had lower revenue than we expected from newer and more profitable programs due to recent funding and award delays.

And in Healthcare, second quarter revenue was $38.5 million, down from $43.6 million in Q2 last year. Adjusted segment operating income was $2.9 million in the quarter for an adjusted segment operating income margin of 7.5%. This is up nicely from Q2 of last year. With that, I'll ask Marc to discuss the way forward..

Thanks, Sonya. Our outlook for CAE continues to be positive for the fiscal year and beyond. Our strong momentum is translating to robust order flow and a record backlog, which portend an excellent future for CAE.

In our core civil and defense markets, our customers increasingly require innovative training and operational support solutions to perform at their best in mission-critical environments.

And as we look ahead, we remain highly encouraged by the favorable secular trends that we see and in the growth that we anticipate by leveraging our global market position. As well, our technological expertise and the strength of our one CAE culture portends for optimism.

In Civil, we expect to continue growing at above market rate, driven by the growth in recovery in air travel, increased penetration of the existing addressable market for training and flight services solution, and a sustained high level of demand for pilots and pilot training across all segments of aviation.

For the current fiscal year, we now expect Civil to deliver growth in the mid- to high-teens percentage range of adjusted segment operating income. And given the profile of our planned simulator deliveries and the normal seasonality of training demand, performance will be mostly weighted to the fourth quarter.

The higher expected annual growth is based on our strong performance year-to-date and the visibility that we have in a highly regulated aviation training market.

In addition to continuing to grow our share of the aviation training market and expanding our position in digital flight services, we expect to maintain our leading share of full-flight simulator sales and to deliver approximately 50 full-flight simulators for the year. Approximately half of those deliveries are slated for the fourth quarter.

Turning to Defense. We expect to continue making good progress transforming our business by replenishing our backlog with more profitable programs and by retiring low-margin legacy contracts, which we expect to culminate in a substantially bigger and more profitable business.

We strengthened our future position in recent quarters with strategic and generational wins, including next-gen platforms, giving us a record $5.9 billion adjusted backlog. Together with a record $9.5 billion pipeline of bids and proposals outstanding, we continue to see positive signs of the transformation underway.

And as we look at the remainder of fiscal 2024, the positive inflection we expected this year in Defense has been delayed because of impact associated with the retirement of our lower-margin legacy contracts, specifically those awarded prior to COVID and current new program delays.

And while the inflationary impacts on these contracts are known and finite in nature, they continue to be the most significant factor contributing to the current low margin performance of the business and does not reflect its underlying potential.

The essential trendlines of replenishing our backlog with larger and more profitable programs, while simultaneously retiring legacy contracts, remain positive. However, the prevailing U.S. government budget appropriation uncertainty is slowing to ramp up of the new and higher-margin defense programs that we've been awarded.

This is also impacting the conversion of our bid pipeline to orders that we expected to generate higher margin revenue for this fiscal year. As a result, we now expect second half Defense adjusted segment operating income margins to remain in the current single-digit percentage range.

We expect to see Defense segment performance improvements materialize next fiscal year, but this will ultimately depend on the duration and magnitude of delays to new programs in the current environment. We're firmly focused on retiring legacy contracts as soon as possible and mitigating the margin pressures associated with them.

We remain pleased with the accretive margin profile on our newly awarded contracts, which should be the best indication of where the future performance of Defense is headed.

We maintain our conviction that the ongoing retirement of legacy programs and a new order backlog growth will result in a low-double-digit percentage margin business at a steady state. Lastly, on Healthcare. I want to thank Jeff Evans and the entire Healthcare team for their dedication and excellent performance.

We're proud of this significant contribution to patient safety that CAE Healthcare has made, and I believe that Madison Industries is the right home to take the business to the next level.

Like CAE, Madison's mission is rooted in making the world safer, and I believe it will be ideally positioned to support the future growth of the business, which will continue to focus on evolving simulation to drive patient safety and quality outcomes.

For CAE overall, we continue to be highly encouraged by the secular tailwinds at all segments and the growth we expect by harnessing our global market and technology leadership and the power of One CAE. With that, I thank you for your attention, and we're now ready to answer your questions. Operator, we'll now take questions from financial analysts..

[Operator Instructions]. Our first question comes from Fadi Chamoun with BMO. Please proceed..

Yes. So, first question I have is, is the mid-20% EPS growth guidance that you reaffirmed take into account the expected divestment of Healthcare? And secondly, I guess, I'm just trying to square off the pushback in the Defense margin inflection point and the maintaining of the guidance for fiscal 2025, effectively.

Like the -- so are you still expecting Defense margin to bounce back kind of in 2025? And to what level are you still thinking the double-digit is achievable, kind of in the back half of 2025? I'm just trying to square off the maintenance of this guidance in the context of the divestment of Healthcare and the weaker results in Defense..

Okay. Yes. Thanks for the question, Fadi. Look, look, our three-year guidance continues to be our target. We continue to see strong growth and profit improvements across the portfolio.

I think it's safe to say, obviously, that as you point out, that we see incremental risk in Defense related to the factors we talked about, new program ramps up, the timing of risk environment, the environment that we're in, in terms of the budgetary issues that we see in the United States specifically.

But as I mentioned, we're very focused on closing up the work on legacy contract as soon as we can. So, I'm not giving guidance today about fiscal '25. But as we get closer to fiscal '25, if there's more color to provide, then I will do so. But it's hard is the same.

And with regards to the Healthcare, I would say that the impact -- I mean, it's not nothing, but it's relatively minimal in terms of its impact to the guidance that we've given and the results coming out of the sale..

Okay. And maybe one follow-up. Like I think we understand kind of the budgetary issues and some of the ramp-up on the new business that you have been -- like the backlog, obviously, has been growing. You've reported few quarters of increasing backlog, and outlook for Defense is quite positive.

But if we put aside this budgetary issue and potential for ongoing delays, how can we kind of understand what is the margin impact today from these legacy contracts that are eventually going to move out of the P&L? Or whether that happens next year or the year after.

But is this 300-basis point, 200 basis point? Just trying to kind of understand what is the core profitability kind of run rate of Defense and notwithstanding whatever delays are happening on the ramp-up of new business..

Okay. Well, let me try to get to the -- to answer your question by pointing out some of the factors and hopefully, we get there. Look, first of all, when we talk about these lower-margin drag programs, we're talking about a really small number.

We're talking about a relatively small number of contracts here, a fraction, a small fraction of our overall backlog. And I think it's important to note as well that none of those contracts are recent awards. In fact, I look at the whole list of these finite programs, and they were all awarded before COVID.

So, we will imagine that the impacts that we see, although a small number of programs, the impacts of inflation, we're starting the inflation at 2% escalation, clearly, we're seeing inflation at 10%, 15% and compounded, has an impact. Staffing shortage has an impact.

And those are the programs that were most impacted by those factors as well as manpower shortages that we have. So those programs are more profoundly affected, and those are the ones that are weighing on the profitability of the business. And at the same time, there's other factors. We see the impact of this inflationary environment.

And part of it is some of those programs, we have very, very strong business cases to be reimbursed for the actually egregious cost increase that we've seen. But in this kind of environment, there is no appetite for anything but very -- we've been competitive for a very small portion of what we think we should be.

I mean as well, not to pile on, but in this kind of budgetary environment that we see where we have a normal kind of end of budget year, what we call sweep-up money on defense budget we haven't seen this quarter. So, I mean, that's what's kind of happening with these drag programs.

But when I think about the new programs coming up, first of all, and what we call our transformational programs, the ones that we talked about in the release, programs like FTSS, like FAT, like HADES.

I think a no-wording point to make when you think about the profitability impact and when they start impacting is that if I look at Q2, those -- when I think about the revenue coming from those transformational programs, only 3% of that was in our revenues for this quarter.

For 3% of those transformational programs were in the quarter, but yet, they make up 20% of our backlog. And those programs -- transformation programs are at very accretive margins that basically give us strong confidence in the targets that we put to our business, which is low-double-digit profitability.

So those are the elements that are at play here..

Our next question comes from Tim James with TD Cowen. Please proceed..

Just have one question here. And I'm just wondering if you could give us an update on the progress with AirCentre, how it's performing versus expectations? And sort of year-over-year comparisons? I know there was some integration costs in the quarter.

Maybe just some details on what those costs were around and what that provides for the business going forward?.

Well, look, yes, I think the first -- thanks for the question, Tim. What I would tell you, I'm very happy with the business, the progress that we're making. We are -- especially when I think about the success we're having in the market. You look at -- I mean you've seen that going back to Paris Air Show.

So, the strong -- very strong orders that came out, for example, of airlines in India that specifically saw Air India, while we just signed a major contract with Air India with our AirCentre suite of products.

And considering that Air India is bringing together a number of airlines together as part of Air India group, that is very, very promising in terms of the business. As well, I was just recently in Budapest, and the CEO and his team at Wizz Air. And they selected us for our AirCentre suite. So -- and that's just a couple.

So, we make business front-end standpoint, I'm quite happy with the business. And I should say that's the only thing I'm satisfied with. I'm very, very happy with the impact that we're making with our customers with regards to how they see CAE, which is something you see as a natural owner of this business.

Look, it's taking -- it will take time to recognize revenue because this is Software as a Service. Well, remember that we bought AirCentre at 7 times EBITDA. So, when I think about that and the money we're spending, we are making the investments that we wanted to make at the rate we want to make to develop that business.

And look, we're on track where we want it to be, and it's contributing positively to this quarter..

Okay. That's really helpful. I want to just actually ask one more question, if I could. The working capital in the quarter was great, really impressive.

Just wondering maybe if you can talk a little bit about were there surprises in there? What drove that? Is that kind of more indicative of what second quarters might look like going forward? Just any details on that strong performance..

Thanks for the question. Yes. No, like I said in the remarks, very pleased to see strong reversal in working capital in the quarter. And really, this is not a surprise. This is really the outcome of continued focus on optimizing capital and our metrics.

So, we saw good improvements all across the board, whether it's on our day sales outstanding, contract assets, and deposits on contracts. And so, these all contributed to the positive reversal of working capital. We expect that to continue that momentum to continue in the second half we should that..

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

Just a couple of questions on the restructuring activity. We see that ongoing in Q2.

Can you just maybe update us on where we are in that restructuring program? And how much of that at this point is reflected in your cost base?.

So, I wouldn't think that -- Cameron, I wouldn't necessarily call it a restructuring program anymore. The restructuring program, we closed out last year. This is really continued integration of the two acquisitions.

So, the flight services one, Marc just spoke of it, we bought that at 7 times EBITDA, knowing that there would be investments to harmonizing and modernizing the structure. And what we're seeing is investments in our more modernized IT infrastructure and migration of customers, which we expect to complete by mid next year.

On the L3H MT, this is really a second phase of our integration, which was -- which we had catalyst was a major ERP implementation to harmonize all of those businesses, the legacy, and the new businesses together. So, this triggered a second phase of further planned integration and synergies on that side. And that's relatively towards this end..

Okay.

So, we should expect, I guess, the outcome of these sort of integration activity to have maybe a more meaningful impact on -- on margins as we look ahead to 2025, is that fair?.

Sure. Yes..

Okay.

And maybe just secondly, just wondering if you could maybe talk about, I guess, what you're seeing as far as opportunities to deploy additional capital into the training network? What are you seeing on outsourcing opportunities, JV opportunities?.

Lots of opportunities out there, Cameron. You've seen what we're doing. I think we've -- from the outset, we came into this with a lot of dry powder. I mean, when we think about what we did, going back a little bit through COVID, we didn't reduce the asset size. We put it at the right place.

And in doing so, we took a lot of structural cost back in the neighborhood of $70 million, structural hard cost out of business. And we're seeing a lot of that come to fore today. Since then, we've been seeing -- we've been seizing the opportunities that the market gives us.

And you've seen that in the business aviation training centers that we've deployed. We had Singapore, we're opening up at Savannah very soon. We opened up Las Vegas, which has been very successful thus far. We have Orlando, together with SIMCom opening up, and we've announced it in Vienna next year.

Outsourcing, look, I can tell you the progress is pretty much as I indicated in the past, I'm very happy with what we've seen. We talked about Qantas before, was that -- I was just -- in the last month, I was in Athens with the CEO and his team at Aegean, and they're the largest carrier in Greece, and we've done a deal with them.

There's other deals that I can't really talk about right now, but I can -- suffice to say that we're traveling a lot, we're meeting a lot of customers, and we see opportunities to continue to grow and efficiently deploy capital, particularly in the civil network, which as you know, is very accretive to margins..

Our next question comes from Kevin Chiang with CIBC. Please proceed..

Maybe just turning back to Defense. Maybe if I look at it at a high level -- and I know this math is overly simplistic. But if I just look at your run rate, I guess, adjusted segmented operating income and I look at the capital employed into Defense, your returns are kind of 3%, 4%.

Presumably, with margins double or a little bit more than double, you'll get high single-digit returns on that capital employed. That still feels like relatively low to me, just thinking about the margin cadence you've kind of laid out over the medium term.

Just wondering, how do you think about driving that return higher? Is it kind of being able to grow revenue while keeping that capital employed relatively static? Do margins need to actually get closer to the mid-teens over time to -- to maybe drive better returns? Just trying to think of the cadence of the return -- the returns on capital here over -- maybe over a longer period of time..

Well, as I said, over a long period of time, we feel very comfortable about the service and -- and achieving the target that we've given of low double-digit margins. And look, it's clear that we're not where we want to be today. We'd rather not be here, but it's finite, it's temporary. It's not reflective of the long-term potential business.

And again, the same factors are at play here. I mean, really, the two overall factors that are were. Number one, it's on risk retirement. And risk retirement on what we call these drag programs, and we're making progress. In some cases, we're actually moving to accelerated.

I can tell you, like in this past quarter, there were a few programs that we've shifted to 7-day work weeks to basically accelerate the schedule and get this behind us. Obviously, when we do that, we encourage the cost, but I think it's worth it to make sure that we exercise contractual opportunity obligation to meet the schedule on those contracts.

In the case of new programs, as I talked about during my remarks, we remain very bullish about the profitability of those new programs we're winning for all kinds of reasons. And such as something that I've talked about on previous calls, like being able to leverage and exercise what we call commercial rates on government contracts.

And that don't -- it's going to be a mix of programs. But in aggregate, the [indiscernible] of all those new programs that we're winning are very -- they are very accretive to the margin obligation that we did. So that's really what's happening here. And as I said, where we are today on those transformational programs.

Again, in the second half, they make only 3% of our revenue. Next year, that's probably going to be about 15%. And obviously, accelerating as we go through the year.

As you get into the end of the year, you're going to have more of -- basically, the revenue has been driven throughout the business, that's going to be from those transformational programs. And at the same time, we'll be substantially down the curve of retiring the risk on the drag program. So that's where what's at play here.

And of course, what's affecting those two trend lines are some of the factors I talked about, like basically contracts moving to the right in terms of us being able to execute on a contract or in a lot of cases, no fault of our own, if I should say, like in some cases, we've been selected for training contracts, but we've been delayed as much as six months because the customer is not getting the airplanes on time because the OEMs have been themselves affected by supply chain challenges that are not able to meet the production rates.

And of course, that means delays for us. So, all of those factors are at play here. But again, from a long-term standpoint, we feel very comfortable about the business..

I appreciate the color there, Marc. Maybe just trying to Civil, we've been reading more -- obviously, there's a pilot shortage, and airlines are doing all they can to fill that backlog here. One of the things we're reading about is just the advancements of pilots, pilots are moving first officers to captain much faster.

And I'm just wondering, does that create more training opportunities for you? Does that shift how you think about wet versus dry hours? Like if an individual can kind of move to their career faster than maybe what it looked like pre-pandemic, does that impact maybe the mix of that commercial revenue between wet and dry or even the number of events you're typically seeing over a one-year period with an airline or with a specific pilot?.

Well, I think it does a few things. I think first of all, to your question about anything that causes a pilot to change airplanes or change their position from being a first officer to being a captain, then by necessity and by regulation, and that's on a global basis, requires retraining.

And our business is training, and we're by far the largest in the world. So obviously, that's going to be a first order catalyst for us. So, for us, it's a positive catalyst for our business. There is no doubt about that.

The other component about this is that we -- this -- the growth -- everyone is focused, as you would expect to make sure that we do that safely. Everything is [indiscernible] that basically plays to CAE's strength because no one trains more pilots in the world than we do.

And that's where you see, for example, agreements that we have with example, we announced last quarter with Boeing that we signed at the Paris Air Show and we're immensely proud of the partnership with Boeing because that partnership is all about Boeing selecting us to deliver their competency-based training program, starting the -- more we announced and Boeing announced is starting in India.

And to me, so that's -- that's CC bringing technology to bear, bringing the sheer size of the footprint that we have, the amount of training hours that we do, the technology we bring to be able to give objective data-based insights to OEMs such as Boeing and to airlines across the world to make sure that they can efficiently -- basically bring on pilots, new pilots, move pilots to different positions at an earlier age while still maintaining the safety of the skies that we enjoy.

That's what we do..

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

Marc, so maybe going back to the Healthcare business. The past few quarters, we finally see it to be profitable. Can you just give us a little background of why now for the sale? And then also as a follow-on, I mean, the Healthcare business was supposed to be an industry in which you have low market share, that you had the opportunity for growth.

Now that you won't have Healthcare anymore, are you thinking about another potential leg to the business as a strategic area for growth?.

Well, let me start with Healthcare. Together in concert with the Board, obviously, we're always looking at the portfolio. We make sure that we're maximizing the value, and that's the value to all stakeholders. And so, it's a specific case at Healthcare.

We find ourselves in a place today -- and we've been looking at this for -- not overnight, obviously, but that the next wave of investment that's going to be required for this business is probably best made by new capital providers so that we can drive more focused investment and synergy in our core. So, we think now is the right time.

And I'm absolutely convinced that Madison Industries is the right owner for this business. I've had an opportunity to talk with the CEO, I think a couple of times, our shared values and our similar cultures, to me, make this transaction a perfect fit, again, for all stakeholders. And -- so that's really how I see that.

With regards to another leg, I mean, what you've seen is we've already done the other leg, and that's software. So, to a certain extent here, we're changing Healthcare for software..

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

So, I just wanted to ask another question on the Defense margins with regards to that low-margin business rolling off. So, I'm just trying to better understand how these contracts get retired.

Is it as simple on a specific date, these contracts come off the books? And then the day after that, the margin profile improves by a certain percentage basis? Or is there -- a little bit more nuanced than that? Because I'm just trying to get a better understanding on how these contracts get retired and then what visibility, I guess, that you guys have in the margin improvement on the back of these contracts coming off the books..

It's really a question of finishing the contracts. There are a number of contracts that we're executing that are to deliver products and services to specific customers without getting the specific nature of each one.

Each one has a contractual end date, and there's assumptions on our part with regards to the cost it's going to take us to be able to complete those programs and deliver what we promised to the customers on time.

So -- and at -- literally on a weekly basis, we manage that to make sure that we basically can achieve what we said we're going to do, complete on time at the schedule at cost that we assume. And that's really what we're talking about. And with regards to the assumptions we've made with -- for us to be able to do that portends the outlook of a deal..

Okay.

And are you able to provide some color on those dates when those are going to be coming off the book?.

Look, I think that to me, it's again in aggregate, the trend lines are what -- or what we've said. Look, I think if I look at overall the programs that we have, I think it's safe to say that we'll be substantially complete with those in totality by the end of next year.

That's what -- obviously, they will close on -- not all at the same time, but again, substantially complete by the end of next fiscal year..

Okay. And then just turning to the Civil side of the business, and I'm not asking for a fiscal 2025 guide, but more so thinking about how much room there is to recover to pre-pandemic levels of activity? And just looking at the most recent IATA data, still has passenger kilometers down 10% in Asia, down 4% in Europe.

International travel is still down 7% versus pre-pandemic.

So, on a high-level basis, is the right way to think about growth in fiscal 2025 whatever we assume that the base business can do in Civil in a normal environment? Plus, then, a continued recovery to pre-pandemic levels in Asia, Europe and international travel?.

I think it's for sure that we're going to write it above pre-pandemic levels, no doubt about that. And again, as I was saying a while ago, when you think about the cost savings that we've taken out of the business, just by itself, even at pre-pandemic levels, would mean a higher margin, which you're already seeing in the results. A couple on to that.

There's -- business aviation is very, very strong. And that's a very good part of our business from a profit standpoint. You saw the outsourcings that we're making. There's more coming down that path. So, I'm quite comfortable with it, as well as a very strong demand environment that we're seeing across the whole business.

So, we don't have a target today for margins, except they're going to go higher..

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

Just to come back on the transformational program that you were awarded, Marc, you mentioned that there was only a 3% contribution in the quarter, and this will go up to about 15% next year.

Could you maybe provide some color about the profitability early days for those transformational programs? Just wondering about the accretion early days, whether they still contribute at a good profitability level or it takes two years or three years before ramping up at a good profitability level..

It depends on the program, okay, Benoit? Because it's a service contract, typically, they will -- it will take longer to -- because obviously, you're delivering service over time. Rather than products, which tends to do it -- tends to turn into revenue faster. In both cases, they're going to be accretive to the double-digit goal that we have.

So -- and that will happen right -- right from the get-go, right from the start. So, you won't have to wait long for that to start being accretive to the numbers that we see..

Okay. And just based on the comments made earlier about the pace for the legacy programs to ramp down, you mentioned mostly completed at the end of fiscal year '25, consensus is currently expecting Defense margin to high-single-digit next year, almost pretty close to double digit.

Is that fair to say that it might be difficult to achieve, based on the comments made earlier?.

Well, as I said, we're not giving guidance of fiscal '25 today. So, I'll keep it -- what we say throughout the presentation here, not any new guidance from what I've said..

Okay. Okay. And last one for me. Capital deployment, Sonya, you made great color about reinstating returns to shareholders. In the opening remarks, you mentioned the focus on growth, debt repayment, investment-grade, and then return to shareholders.

Are there any optimal ratio you would like to operate going forward?.

I think like we mentioned in the past, the 3 times was not necessarily the goal but a waypoint.

So really, what we're seeing is that we continue on the balanced capital deployment with deploying accretive capital, especially in the Civil network, whether it's the training centers and the simulators to address demand, and these are highly accretive within 24 to 36 months, as we've seen in the past.

And we'll continue to delever to kind of remain very comfortably investment-grade. So ultimately, it's a balance of those and an ongoing conversation with the Board on potential capital returns -- shareholder returns, yes..

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

Good afternoon, everyone. This is Mariana Perez Mora up for Ronald today. So, my first question is about utilization rates. You have been growing a lot and penetrating in the civil training market and with all these training centers, and utilization rate is up to 71%. But you keep opening like new sites.

What is the sweet utilization rate kind of like spot when you think about both profitability but also being able to capture these opportunities? And when do you think you could achieve those type of like peak utilization, sweet spot rates?.

Well, look, I think basically, it's tough to answer your question specifically because you could -- I mean, we can theoretic can go up to 100% utilization, not higher on any of the training centers. And you know what, we actually do that today on a number of training centers.

But you can't maintain it there for the cold fleet as a whole because, obviously, you've got to spend time for maintenance, things like that. And I would say that 100% is not like every hour of a year.

I mean, in terms of our commercial [indiscernible], about 6,000 hours a year or business aviation training centers, 4,500 hours a year, which is more reflective of the kind of schedules we can do with business aircraft. But look, our utilization here is going higher on average. We saw seasonality in Q2 because airlines have been flying a lot.

If I looked at Europe this summer, it was -- they were -- it was very, very busy, and our utilization was substantially low in Europe the summer, but that's actually normal. We're back to seasonal rates, and that's bled a little bit on to Q3. But as we look forward, that's recovering at a quite substantial way.

So, our focus is on maximizing utilization. And with the demand that's there for us to be able to do that. So, I think watch for increased utilization. And the last thing I would say is while we're opening up these new training centers and deploying a number of simulators, obviously, they're taking time to ramp up.

So that's affecting the utilization that you see because they may be half empty or quarter empty or not full at all yet. So that will affect the overall utilization that you see..

And is it fair to think about 80% kind of level, whenever you get to this like normalized ramp up?.

Well, we can achieve 80%. We've done it in the past. So, we don't have a target to stop. We'll maximize the utilization. There really is no sweet spot. And we're continuing -- all training centers are different, different whether it's business aircraft or commercial aircraft.

Again, for us, it's about meeting the unmet demand that's out there and ramping up to satisfy it.

And -- we are deploying a lot of efforts and a lot of resources or both financial and human resources to -- as part of our digital transformation, to improve the efficiency and the return that we get to maximize the schedules on the simulators and those training centers so we can increase the amount of training we do and increase the returns on those assets.

That's part of what we're doing here..

Okay. And then I'll dig a little bit deeper on capital deployment and shareholder-friendly capital deployment.

Getting to this like net leverage targets, how are you thinking about this? Like are you thinking about a regular dividend again or more opportunistic kind of like special dividends or share buybacks?.

So, we haven't come out with that view yet. We're on ongoing discussions, and so I won't necessarily get ahead of our Board today, but I can assure you that we're focused on first of all, closing the transaction, the sale transaction, continuing to generate cash.

As a result, we'll continue that discussion and come back with Quantum and vehicle in the future..

Our next question comes from Konark Gupta with Scotiabank..

Thanks, I'll just stick to one question. A lot of U.S. airlines are talking about their domestic demand as kind of plateauing or coming down, but they are kind of reallocating some capacity to wide-body aircraft for international travel.

I'm curious if you are seeing any significant changes in reassignment training with pilots, especially with respect to your North American customers?.

No. All of those factors are just adding to what I talked about, Konark, in terms of the what we call the churn. Churn pilots moving either narrow bodies to widebodies or copilot to pilot or on 1 plane to another from a regional. Anything like that triggers demand for training.

And I could tell you, there's a lot of unmet demand out there, both in commercial aviation and business aviation. And as I said before, we're ramping up to satisfy it.

And that is part what really gives me the optimism for the future and basically the reality of what I see that leads me to raise the outlook that we have for Civil in the back half of the year..

Mr. Arnovitz, there are no further questions at this time..

Thank you, operator. I want to thank all participants on the call today and remind you that a transcript of the call can be found later on CAE's website. Thank you, and good afternoon..

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