CAE Q3 2025 Earnings Report

Good day, ladies and gentlemen. Welcome to the CAE Third Quarter Financial Results for Fiscal Year twenty twenty five Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions from analysts. I would now like to turn the conference over to Mr.

Andrew Arnovitz. Please go ahead, Mr. Arnovitz.

Thank you, Andrew, and good morning to everyone joining us on the call. Let me first say that I certainly echo Andrew's comments, and in particular, I want to express my heartfelt gratitude to Dalen for his steadfast leadership and commitment to our shared vision for CAE. I'm also grateful to the other departing board members, Francois, Peg and David, for their continued support and advice through the years. As we embark on the next chapter, I'm looking forward to working with our new board members in the coming months, and I'm confident that together, we'll continue to build on our success. Before I move to our quarterly results, I also want to take a moment to share how proud I am that CE has been recognized as one of Canada's top 100 employers for the third consecutive year and has earned a spot on Forbes Canada's Best Employers List for 2025.

These honours reflect the collaborative, innovative and empowering culture that we built at CAE made possible by the dedication of our 13,000 employees. This strong foundation of talent and commitment continues to drive our success as reflected in our outstanding third quarter performance. During this quarter, we generated a record $410,000,000 in free cash flow, while further securing CE's future with $2,200,000,000 in new orders, culminating in a record adjusted backlog of 20,300,000,000 In Civil, we finalized the purchase of an increased stake in our SymCom joint venture and extended our exclusive long term training agreement with Flexjet and its affiliates, initiatives that generated more than $500,000,000 in additional order intake and backlog in our highly desirable Business Aviation Training segment. In total for Civil, we booked $1,500,000,000 in orders for a two times books to sales ratio on revenue that's 21% higher than Q3 of last year. We ended the quarter with a record $8,800,000,000 total Civil adjusted backlog, which is up 44% year over year.

In products, we received orders for 15 full flight simulators, bringing the total to 42 as of the end of the third quarter. We delivered 20 full flight simulators this quarter, a notable increase from our first half cadence and from 13 in the same quarter last year. Combined commercial and business aviation training center utilization reached 76% consistent with last year's performance, although some softness persisted longer than we expected in commercial aviation training in The Americas. Pilot hiring remained modest in that region and some of our airline customers deferred their training bookings due to ongoing short term aircraft supply chain challenges. Partly offsetting this headwind was the continued positive momentum in business aviation training, driven by higher utilization and profitability as we ramped up of our newly deployed simulators and training centers.

We also continue to make excellent progress in a market for our flight services software solutions. We signed orders for more than $60,000,000 with major airlines in The Americas and Asia. And we just announced Turkish Airlines as another customer who will be adopting Sea's next generation unified task board and crew management solutions. The market is responding very positively to the CE innovation, which provides airline operations control centers with enhanced situational awareness and disruption management capabilities. We're also proudly inaugurated our first air traffic services training center in collaboration with NAV Canada.

Located in our main campus in Montreal, this newly opened training center extends CA's core mission of making the world safer. As a pilot, I could personally attest to the vital role that clear, effective communication between flight crews and air traffic control personnel plays in ensuring the safety of every flight. By leveraging Sea's expertise and competency based train design, advanced instructional delivery and data driven technologies, we're helping to prepare the next generation of air traffic professionals for this critical responsibility. In defense, performance tracked ahead of our expectations as we made more progress towards becoming a low double digit margin business. This was driven by strong execution, risk reduction, significant backlog growth and improving backlog quality.

During the quarter, we made excellent strides in advancing growth and expanding margins, including successfully completing another legacy contract from our backlog, our second this year. Orders included a contract under the Canadian Future Air Crew Training Program, auction awards to extend our support for U. S. Army fixed wing training and the KC-one 35 program for United States Air Force, as well as ongoing modifications and updates for F-sixteen fighter training devices. These agreements reinforce our commitment to long term success of our defense customers.

For the quarter, we recorded a total $7.00 $7,000,000 in defense orders, achieving a book to sales ratio of 1.5x, contributing to a record $11,500,000,000 in defense adjusted backlog, up 104% year over year. Over the last twelve months, the defense book to sales ratio stood at an impressive 2.19 times. With that, I'll turn the call over to Dino, who will provide additional details about our financial performance. Dino?

Thanks, Dino. The investment thesis for CE remains as compelling as ever and our record setting $20,000,000,000 backlog reinforces my confidence in the company's bright future. A common driver across both our Civil and Defense segments is the sustained high demand for pilots and pilot training, both to support industry growth and to replace retiring personnel. We're in an excellent position in strong markets and these structural factors continue to fuel long term demand for our training and operational support teams.

In civil While commercial OEM aircraft supply disruptions have persisted, recent optimism surrounding production rate recovery and the return to service of aircraft have been grounded by engine issues has occurred. Although some airline customers in The Americas deferred initial training reservations this quarter, those same airlines are now actively engaging with us to plan the timing and scale of their pilot hiring ramp up and associated training needs. This isn't a question of if or when. Looking ahead, the demand for air travel, ongoing pilot requirements and the delivery of nearly 15,000 aircraft on Boeing and Airbus' combined backlog over the next decade position us as a key player in a long term secular growth story. Similarly, the outlook for business aviation training remains highly positive, especially as we continue strengthening our presence in this critical segment.

Building on our increased investment in SIM COM, Flexjet, one of the world's largest fractional jet operators announced last week a $7,000,000,000 aircraft order and projected fleet expansion to approximately 600 aircraft by 02/1931. This move underscores the accelerating shift towards fractional jet ownership, which has been growing much faster than the overall market. As LexJet's exclusive training partner, CE is well positioned to benefit from this industry growth.

In

defense, demand for our training solutions remains robust, driven by a global shortage of uniformed personnel, prompting militaries to turn the CE to support readiness. We're very well positioned in a strengthening market as the sector enters a prolonged growth cycle with rising budgets across NATO and allied nations. Geopolitical tensions and evolving security threats are driving defense modernization efforts, increasing the need for the training and simulation solutions that we provide. These factors are creating substantial growth opportunities for Sea as governments and defense forces see innovative solutions to enhance mission readiness and operational effectiveness. A prime example is a strategic partnership we announced yesterday between CAE and the Government of Canada.

Through this partnership, CAE will leverage its chief expertise to work alongside the Royal Canadian Air Force in designing and co developing the Future Fighter Lead in Training Program. This initiative will play a critical role in preparing pilots for the transition to Canada's next generation fighter jets, ensuring the long term success of the CF-35A program. By integrating cutting edge technology and advanced training methods, FutureFlint will equip fighter pilot candidates with the skills required to operate highly sophisticated CF-35A in increasingly complex operational landscape. Looking ahead to the remainder of this fiscal year and civil, the ramp up of commercial aircraft deliveries is taking longer than expected and this is a key driver of initial training demand for newly hired pilots. With the short term impact that this is having on incremental trading demand in The Americas, we now expect annual civil adjusted segment operating income growth to be modestly below our previous outlook of approximately 10%.

Also, since product deliveries are expected to account for a higher proportion of Civil revenue than initially planned, we expect the annual Civil segment operating income margin to be modestly below our previously expected range of 22% to 23%. Looking beyond this period, we continue to foresee ample room for margin expansion in future years on volume, efficiencies and mix. In defense, with the benefit of our re baselining last fiscal year and the higher cadence quality of execution, we now expect to achieve high single digit percentage revenue growth for the year, which is up from our previous expectations in the low to mid single digit percentage range. We're also expecting the annual Defense adjusted segment operating income margin to be modestly above the previously indicated range of 6% to 7%. This puts us solidly on the path to becoming a low double digit margin business.

Taking our civil and defense outlook together, we remain on track to meet our previously stated three year EPS target while achieving strong order intake, backlog and free cash flow. With that, I thank you for your attention and we're now ready to answer questions.

We'll do. We'll now begin the question and answer session. You. Our first question is from Connor Gupta from Scotiabank. Please go ahead.

I think it's prudent and we always align basically capacity with demand. So we always see a lockstep and that's what you see reflected here.

Okay. Thank you. That's helpful. And maybe just one more question. How is your training utilization trending in The Americas versus Europe and Asia?

No, I think The U. S. Utilization is down year over year and it's really just a function of the hiring demand that is supposed to be happening right now.

The next question is from James McGarrigle from RBC Capital Markets. Please go ahead.

Thank you.

Sure. Thanks for the question. Look, it's obviously a situation that we like everybody else, hope reaches constructive and bilateral conclusion through negotiation. But look, I think as we said in the past, we don't we certainly don't expect to see a material impact in the short term certainly, so the next few months to a year from this on our business as a whole. But it's definitely something that we're monitoring closely.

And if any kind of tariffs become more lasting beyond that, beyond getting to more than a year or two, obviously, we would adapt and then we have the capacity to adapt. I mean, bear in mind, if you look if you think about our business, it's a business that's changed a lot over the last twenty years. And more than two thirds of our revenue is generated from services and we deliver that in country. So that's not an issue. And so the main product that we sell into The United States is the full flight simulator.

There's a lot of there's already a big proportion of that, which is U. S. Or EU origin. That's one factor. But again, I think there's a lot of ways for us to mitigate things if things, again, should last beyond, shall I say, next two months to a year.

And again, if I look at, I think, conversely, what we're seeing this year, we're particularly not affected because with the lower pilot activity, hiring activity that we've seen this year on the back of OEM delays, we've actually had relatively few sales to our U. S. Customers this year. So we've only got a few deliveries going there this year. Although Schimmelaire sales themselves remain strong, they're just coming from other parts of the world.

Okay. Good. So, hi, team. Okay. I'll take it off, turn it over to Dino and then finish off with Nick.

Look, I think what you reflect here is we're feeling very good about the direction of the business. And certainly, the team in place of which Nick is leading with very, very good jobs and the momentum at the front end. You just look at the order intake, I think it's nothing short of outstanding and the geopolitical environment for unfortunate reasons is fueling demand for the products and services that sees their tune in. So the team is executing extremely well. There's nothing really extraordinary and I'm sure that's what Dino is going to say.

It really comes down here to execution, strong performance all around by the team. At the same time, there's risk reduction. Risk reduction is rampant. We're taking a very, very disciplined approach. And when we look at the fourth quarter, I think you always got to remember that defense is always, shall we say, a lumpy business quarter to quarter and has some potential to be because as we execute contracts in any given time, you could generate plus or more revenue in a single quarter.

So as we talk about, we are raising the outlook and I think we're still being prudent about the defense business as a whole, but we remain very confident. So Ben, just turn over to you, Dion.

Yes. Just to echo the comments already, in terms of performance,

I think the team's

been certainly, we have a different attitude towards executing on the programs for the plan. I think also the mix is better. So legacy contracts, low margin contracts, I mean, there's always some of that, but the pipeline also because you would have seen the order intake and the performance on new orders this year for Defense has been quite strong. So that's also going to help us as we look out in the future. So I think we're certainly, I'm pretty confident that we can maintain and or exceed this level of performance.

The next question is from Fadi Chamoun from BMO Capital Markets. Please go ahead.

Well, maybe I'll start with our last question, not to deflect the first one, but just because we got my head around that one. Look, I think civil notwithstanding the softness that we've seen in the quarter again in The U. S, as you said, and it's quite right. I mean, the Civil had excellent results this quarter. And it reflects the diversification in our Civil business in itself.

And you highlighted a lot of the components there. Look, in this quarter, what we saw is basically the continuation of what we saw in previous quarters and this year in pilot hiring in The U. S. Is basically a fraction of what it was just last year. And actually third quarter was our worst quarter in that regard.

And that's just basically because we saw continuation and perhaps more than well, certainly more than we anticipated. I think we're not alone in that in the amount of airplanes that were delivered by OEMs and the amount of disruption caused by groundings of aircraft across the world that really affected customers of Airbus aircraft primarily. So for us in the how that reflects itself in The United States is that you don't have strong pilot hiring. You don't have a lot of new aircraft being delivered to airlines. You see the airlines basically essentially they increased pilot hiring substantially over the last couple of years.

And now basically they have, if you like for a short amount of time, too many people too many pilots hired for the needs that they have on the aircraft that they're flying. So typically, when they stop hiring pilots, what happens is that the like the you said, the large carriers are taking pilots when they hire to take them from the regionals and the regionals themselves, they're basing hiring new pilots and that creates a disproportionate amount of training in our training centers for regional aircraft in The United States. So centers like for example, we have a strong center for regional pilot training in Minneapolis for example. And although that's not a very big impact in terms of revenue itself, it kind of has a disproportionate effect in margins because the training we do on the type of aircraft that the regional fly regional aircraft carriers fly are aircraft like CRJ's, like Dash eight's, which those airplanes have been around for a long time and so have our simulators. So they tend to be far down the depreciation curve and therefore we make a larger amount of profit on it.

So that's what you see happening here and it's the same factor we had before. What's changed in this particular quarter is that because of the sustained situation around OEMs, we've seen actually airlines actually canceling or deferring their training slots in the quarter. Now as I said in my remarks, you see those same airlines with the positive news that we're seeing now. You saw Boeing just recently announced that they delivered 40 airplanes in the quarter. So that's resulting obviously in people saying, okay, well, there's renewed optimism happening here.

So look, again, as I said, watch the deliveries. And as they recover, I mean, the utilization in our U. S. Training center should follow, and they should follow relatively quickly behind. Of course, that's not the only story.

We're talking about commercial aircraft. Sales of simulators are still very strong, and you see just testimony of the strong order intake. You see that certainly the airlines' enthusiasm for the future certainly dampened that testimony by the book to bill that we have. As well, of course, business aircraft. Well, business aircraft is doing extremely well.

We continue to ramp up more recently deployed training centers, for example, like our new training center with SIMCOM that now it's wholly owned by us in Orlando, our training center in Las Vegas. And we're seeing higher utilization and growth in all of those cases. And you just look at the order intake and we just added $500,000,000 to the order intake in business aircraft as a result of the SIM COM acquisition and associated Flexjet orders or delivery is going to come out of that in terms of the trading slot. So look, I think as I said in my remarks, it's not a question of if there's a question of when and we're going to see strong demand. Yes.

And maybe sorry, go back to your previous question. Look, I think what you're seeing here, and I'm not going to answer for the Board, but what you're saying is a function of ongoing Board renewal. You have my succession and at the same time, you have a new Chairman coming in. And Alan has done an outstanding job leading his company over the last few years. We've worked very well together.

And I think there's a very I think smart timing in terms of transition my transition with bringing on a very, very strong new Chairman in Caylen Roganescu, but with his background in Air Canada, Chairman of IATA in the past, to be able to be someone that's going to be able to play a very, very strong role in terms of certainly hiring my successor and having a very effective transition with the current Board and leading the Board into the future. So I think we're all very encouraged by it.

The next question is from Kevin Chang from CIBC. Please go ahead.

I'll start it off and maybe hand it over to Nick. It's extremely positive for us because again, we're at Sousse at the flight jet. We know them very, very well because we've been training them for years. What's positive is not only the amount of aircraft that they're buying, but they're buying the mix of aircraft, which really basically grows the accessibility that we have of training on the whole fleet of Flexjet aircraft. So again, I couldn't be more happy with that order, but maybe if Nick want to add.

No, definitely makes sense. It seems like a pretty nice tailwind for you, especially post the SIM COM transaction. Maybe to my second question, I generally think of CAE as broadly immunized from kind of marginal change in U. S. Fed spending or broader U.

S. Budgets just given the type of stuff you do. Just wondering if that's changed as a new administration, they're obviously looking at cost cutting maybe in a different way than previous administrations. Just wondering if you see anything at risk or anything that might have been impacted within your backlog given the change in administration?

That's great color. Thank you very much and have a great weekend.

The next question is from Cameron Duerksen from National Bank Financial. Please go ahead.

Cameron, thank you for answering that question. I'm particularly pleased with our record free cash flow generation $4,000,000 to $10,000,000 this quarter. I think what you're seeing here really is the direct benefit of strong execution. That's especially in defense, this is allowing us to hit our building milestones, right? And then we use our levers that we have at our disposal to unlock and reduce noncash working capital to generate cash Alongside continued strict inventory management, disciplined organic investments, obviously, lockstep with the market, this is a disciplined approach to managing our cash and it's giving us continued confidence that we will meet our deleveraging commitments.

So I think you saw in the guidance, we expect to deliver a cash conversion rate exceeding 150% in FY25 compared to our previous stated conversion rate target of about 100. So this really is because of our focus on cash generation.

Yes. Thanks for the question, Cameron. I'm particularly very pleased of that particular announcement. I mean, this is just another really great example of just how well CE is positioned in a growth market. So what you see here, and I can tell you, and this I've been having personally these in-depth discussions with the government and then it's been shared there specifically in defense.

Canada is looking, stepping up, government is stepping up significantly its expenditures in defense to maintain the preparedness and readiness of Canadian troops. And basically, again, that's Canada joining a course of nations that are doing just that. So what you see here is definitely a shift in previous practice. This is government putting a new mechanism in place to accelerate the procurement of military programs. And I can tell you, I have had a very personal role in working with government to make that happen.

And I think this is a I would tell you, I mean, I'm very excited about this. It's good for Canada, it's good for the Canadian industry in a very, very big way. And what you see here is we are becoming a key strategic partner. And what we're going to be doing here is being recognized as a strategic partner on this program, FutureSplit is to essentially design and assist their project team in finalizing the procurement requirements, accelerating the procurement process beyond anything that's done and that's been done in the past on the future fighter leading program, which of course, as I said, is going to prepare and train pilots for the transitions to the CF-35A. So we had the announcement this week with the Ministry of Defense, Ministry of Public Works responsible for the acquisition.

So I mean just follow what they said. They've got budgeted $5,000,000,000 program and that covers the acquisition of aircraft, training, courseware, procurement, instructors, on-site support for daily train delivery, asset management, base support. By the way, all of the kind of stuff that we do, not only in Canada, but around the world, I mean, if you look at a huge contract that was signed just recently, the fact contract in Canada, we're doing exactly that for like the phases of training that are before future flip. It's too early to stay as to basically get very precise with regards to the timelines here, except that we're obviously starting like immediately on this program and the whole idea is to accelerate the procurement of this program so that the base of the capability will be there on the CF-thirty five inter service.

Thank you.

That brings a close to today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.