CAE Q4 2025 Earnings Report

I would now like to turn the conference over to Mr. Andrew Arnovitz. Please go ahead, Mr. Arnovitz.

Thanks, Andrew, and good morning, everyone. We delivered an exceptional fourth quarter that capped a strong year across all of our key financial and operational metrics. I'm very pleased with the performance and proud of how the team delivered with disciplined execution and efficient capital management. We generated $289,000,000 in free cash flow in the quarter and a record $814,000,000 for the full year, translating to a very robust cash conversion rate of 211%. That level of cash generation enabled us to meet our year end leverage target, giving us stronger financial position and increased flexibility as we look ahead.

Importantly, we also continued building momentum for long term growth and profitability. We secured $1,300,000,000 in new orders in the quarter for a record end of year adjusted backlog of $20,100,000,000 which is up 65% from last year. This achievement is testament to the confidence of our customers that have NCE and the strength of demand across our markets. Turning to our segments, I'm extremely proud of what we've accomplished, executing our strategy with dedicated focus and operational rigor. On the Civil side, despite ongoing constraints in global aircraft supply and the temporary drop in U.

S. Pilot hiring, we delivered another strong quarter demonstrating both the resilience of our business model and the strength of our global franchise. Civil achieved a record adjusted segment operating margin of 28.6% in Q4 and 21.5% for the year. Adjusted segment operating income grew 6% year over year, a particularly good result given the factors that have been holding the commercial market back to more normalized operating loss. Our backlog in Civil grew an impressive 37% to a record $8,800,000,000 supported by $3,700,000,000 in new orders, including 56 full flight simulators.

During the quarter, Civil assigned training and operating support solutions contracts valued at $742,000,000 including the sale of 14 full flight simulators and long term training and airline operations digital solutions contracts. In Defense, we accelerated our path to greater profitability. We delivered an adjusted segment operating income margin of 9.2% in the quarter and 7.5% for the year, driven by solid program execution and a near doubling of the adjusted defense backlog to $11,300,000,000 During the quarter, Defense booked orders for $596,000,000 bringing the full year total to a record $4,000,000,000 It's very clear that we're gaining traction and are well positioned for continued growth in a market with significant long term tailwinds. With that, I'll now turn the call over to Dino who can provide some detailed look at our financial performance. I'll return at the end of the call to comment on our outlook. Dino?

Before getting into our outlook, I want to take a moment to reflect on how far we've come. Over the past few months, I've had the real privilege of onboarding our new directors and our new Chairman and spending time with our teams around the world, from training centers to manufacturing and engineering sites. And what I've seen confirms everything that I have always known about this remarkable company of ours. Key has transformed into a purpose driven high performance organization. Our mission to make the world safer isn't just words, it's really deeply embedded in who we are and what we do.

Whether it's preparing pilots for complex aerospace, enabling defense forces to be mission ready or supporting critical operations. We are there for the moments that matter. And what always strikes me most is the caliber and commitment of our people. Across two forty sites in more than 40 countries, our 13,000 employees show up every day with focus, resilience and a deep sense of purpose. That mindset combined with our unmatched technology, our operational excellence, our strategic position has made CA a clear leader in this industry.

And over the last couple of decades, we've evolved from an industrial products company to a global powerhouse in training and simulation. We're no longer working to meet the standard, we're defining it. And with the momentum that we've built, I believe that the best is still ahead. The market has begun to recognize our progress across the business as reflected in our stocks outperformance relative to broader North American indices this year. And as we look ahead to fiscal twenty twenty six, we're carrying forward significant momentum with confidence and clarity.

We have an over $20,100,000,000 of adjusted backlog and with the financial and operational discipline that we've demonstrated, we're entering a new fiscal year from a position of real strength. With continued focus on execution, innovation and value creation, I'm confident that we'll build on this foundation to deliver growth, higher margins and stronger free cash flow. In Civil, we remain well positioned with strong fundamentals and solid demand across both commercial and business aviation. Before getting into the specifics of our outlook, it's worth highlighting the recurring nature of our Civil business, which is a key reason that we remain confident in its long term resilience and growth. Recurrent training, which is required approximately every six months to maintain pilot certification represents about 70% of total training activity.

And these regulatory requirements are consistent worldwide making this portion of that demand durable and relatively insulated from short term economic volatility. And the remaining 30% of trading demand comes from new pilot certifications and aircraft type transitions driven by fleet growth and pilot retirements. In the Civil business, we also lead the market in the sale and support of full flight simulators. And while this is entirely more cyclical and closely tied to aircraft deliveries, this part of the business is all supported by very strong long term fundamentals. Because of the short term supply chain constraints that have impacted OEM aircraft output, we expect modestly lower simulator deliveries this fiscal year with a greater proportion occurring in the second half. For the year as a whole, we expect to continue winning our fair share of full flight simulator. Looking longer term, the outlook remains highly compelling. Boeing and Airbus have a combined backlog of over 17,500 aircraft and both projects the global in service fleet to nearly double over the next twenty years. On top of that, more than 280,000 new pilots will be needed globally over the next decade to support this growth and offset pilot retirements. These structural drivers create a clear and compelling runway for sustained growth in pilot training long term.

In Business Aviation, we expect to see continued momentum as we scale operations at new training centers and ramp up recent simulator deployments. The business segment is benefiting from growth in the number of high net worth individuals in the world, strong OEM backlogs, the structural shifts towards fractional ownership. Flight activity levels in The United States are 15% above twenty nineteen levels and fractional operators like Flexjet have seen a nearly 60% increase in flight hours over the same period reinforcing the underlying demand fundamentals. Our exposures weighted towards larger business aircraft types, which have historically demonstrated greater resilience to economic cycles, a dynamic that gives us added confidence in the current macroeconomic environment. In any event, we see no significant indications of worsening conditions at this time.

Another example of growth and resiliency of our Civil business is our strategic expansion into the air traffic controller training market, which is a natural adjacency that builds on our decades of experience in simulation based training for highly regulated safety critical roles. This initiative has been notably capital efficient with the launch last year of our first air traffic services or ATS training center in Montreal, which leverages our existing asset base and is in partnership with NAF Canada, which manages one of the largest airspace areas in the world. A mere six months later, the center welcomed its first students in just over a year since announcing our entry into the ATS training, CEE has now successfully trained seven cohorts of air traffic controllers and flight service specialists who've now completed their basic training and transitioned back to NAF Canada for their on the job training. Through this partnership, aim to train approximately 500 personnel by 2028. And our decision to extend into this segment was driven by clear and growing global need.

By our own estimates, some 70,000 new air traffic controllers are going to be required over the next decade. And shortages, particularly in The United States and parts of Europe are already putting pressure on aerospace capacity and system efficiency. With our established expertise in high consequence training environments, we're well positioned to support this essential function of the aviation ecosystem, enhancing both safety and throughput while adding a new durable revenue stream to CAE's Civil portfolio. For Civil overall, we're taking a measured view of the first half of fiscal twenty twenty six as we monitor broader macroeconomic conditions and OEM aircraft delivery rates. In terms of our quarterly cadence in Civil, we expect this fiscal year to begin much like last year in both revenue and margins with performance building progressively towards a stronger second half driven by increased training activity and product deliveries. For the year ahead, we expect segment operating income to grow in the mid to high single digit percentage range with a modest increase in the annual adjusted segment operating income margin.

In defense, Sea is well positioned to benefit from a sustained global up cycle in military spend. The European Commission recently introduced a rearm EU program targeting EUR800 billion in defense investment by 02/1930 and could potentially be even greater with proposed fiscal rule exemptions. Across NATO and allied nations, including a notably stronger commitment from Canada, increasing defense budgets are driving the ban for the advanced training and simulation solutions we're seeing as a clear competitive differentiation. We've built a strong franchise in Canada over the past several years with major program wins and extension including contracts like SAT contract, the RPAS contract, fixed wing search and rescue, NFTC and the CF-eighteen systems engineering support contract. The Canadian federal government plans to nearly double its annual defense spending from approximately $40,000,000,000 to over $80,000,000,000 by 02/1932.

And in spite of this substantial growth opportunity or in light actually of this substantial growth opportunity and the scale of our current program base, we've recently evolved our defense organizational structure to establish Canada as a standalone region with its own dedicated P and L alongside our U. S. And international segments. This change reflects the growing strategic importance of the Canadian defense market and our leadership position within it, while also enabling our international team to sharpen its focus on broader global opportunities. We're immensely proud to have been ranked another once more as Canada's top defense company by Canadian Defense Review Magazine marking the third time that SEES has received this honor.

To me this recognition highlights our commitment advancing global defense capabilities through cutting edge training solutions ensuring that we remain a trusted ally in pursuit of security and operational readiness. Our aim is to be Canada's premier training partner and one clear validation of the progress we're making came in February when Sea was named the strategic partner to the Government of Canada for the future fighter leading training program. Under this initiative, we'll design and co develop the next generation of training for Royal Canadian Air Force fighter pilots, supporting Canada's Fifth generation fighter readiness and reinforcing our leadership in high consequence training and mission support. This is just another example of a long term high value opportunities that we see unfolding and it highlights these growing role and strengthening the capabilities of Canada and its allies. With a defense backlog that nearly doubled year over year and a solid foundation of program execution, we expect continued progress toward reaching our goal of a low double digit percentage margin and above market long term growth.

Specifically for the year ahead, we expect Defense to have low double digit percentage annual segment operating income growth and an annual segment operating margin in the 8% to 8.5% range. To sum up, is entering fiscal twenty twenty six from a position of strength. CE remains both a highly compelling long term growth story and at the same time a very good quarter storm. We've built a resilient high performing company, one that's winning in the market, delivering for customers and creating long term value for shareholders. We bring together all the hallmarks of an excellent company, a record order backlog, deep customer intimacy, strong competitive differentiation, a high proportion of recurring revenue and cash flow and exposure to secular growth markets.

Our focus remains squarely on innovation and delighting our customers coupled with capital efficiency, operational excellence and disciplined execution. Lastly, as we manage our planned CEO transition later this summer, the Board and I are committed to smooth and seamless handover. The process to identify the next CEO is well underway and we're confident it's going to result a leader will carry forward C's strategy, culture and momentum. I feel very good about our strong foundation, our deep leadership team and a clear path ahead. Steve is exceptionally well positioned for continued success and sustainable growth well into the future.

With that, I thank you for your attention and we're now ready to answer your questions.

Thank you. We will now begin the question and answer session. Our first question is from Kevin Chiang with CIBC. Please go ahead.

Okay. Well, look, I'll kick it off and maybe turn over to Nick for some additional color on some of it. Look, I'm just going back to the Civil outlook. I mean, what we're doing, we're taking a measured approach, specifically in light of the more cautious tone that we hear from airlines and a bit of softness that we saw late in fiscal year. As we point out, the second half is typically stronger.

We've seen that, I think, every year at VINCI. So we're expecting a more moderated environment in the first half, both in terms of what we see in terms of deliveries of simulators that we're going to execute and some near term uncertainty. But all that's reflected in the guidance that we had. I think we'll hasten one thing is on the train side and again, I'll turn over to Nick, train demand remains very resilient. That means we see some regional variation.

We see the pilot activity pick up recently in United States. So we're watching that very closely. Coming back to similar deliveries, will really function of delivery of aircraft out of Boeing and Airbus. I mean, what we see is the supply chain issues are getting better, but they continue to constrain the aircraft production itself. We're certainly not at peak production rates.

So we're expecting modestly lower deliveries this in the first half of this year. So that's going be way for the back half. So those are some of the components. So maybe just add a little bit to that, Nick.

That's helpful. I'll leave it there. This is super helpful. Thank you very much.

The next question is from Konark Gupta with Scotiabank. Please go ahead.

Well, I'll start by saying we're not putting a lid on anything. We're if you think about going to 8.5% on average, what's inherent in that is you could continue to see inherently the progression that kind of progression that you saw this year. I think, look, we'll I like to walk before we can run and we've been watching pretty fast. And I think we're going to continue to do that. So look, I'd say I think you saw it in the numbers.

We were confident in this year. We continue to feel very good about where we are, how we close the fiscal year. We're carrying very strong momentum into the new year. Look, and there's really two drivers behind the outlook that we're giving. First, what you're seeing is the benefit of strong program execution.

We're hitting the milestone. We're unlocking the cash, which by the way was a key contributor to the very strong free cash flow performance that we had this in the fourth quarter. And second, really we're ramping up higher margin programs that we won and committed to backlog. If you remember the story that we had for quite a few quarters now is that basically what we've been doing is basically retiring programs, executing on program that are inherently been won at margins that are basically, if you like, dilutive or not accretive to the low double digit margin expectations we have at the business, replacing them with contracts that do. And that continues to be the story here.

And when you look at the size of the backlog, ending the year at 11,300,000,000.0 backlog, which by the way, I would say, and that's not over, we have like over $7,000,000,000 in bids and proposals are outstanding. So submitted to customers waiting in terms of a customer decision. I mean, I really position this extremely well, continue shaping the business towards a high towards our goal of higher quality, higher margin work. So look, we'll so I continue to again, going back to say there's no lid on this business. I don't certainly expect a perfectly linear upward trajectory.

We've done very well. There's always going to be quarterly variability in this business because inherently when you execute depending on which programs you execute in any given quarter. But look, we anticipate look, I would say cadence similar to last year, performance building progressively from Q1 onward. So look, mean, line is the fundamentals have very clearly improved. We've done a turnaround in this business, and we're very good about this trajectory.

So thanks for the question. Effectively, I'm really, really pleased with our free cash flow generation of $290,000,000 this quarter and the record $840,000,000 free cash flow generated record $25,000,000 so that's a conversion rate of 211%. So the capital allocation priorities do remain unchanged. Deleveraging is a central part of what we're envisioning going forward. We are aiming to take our leverage down to 2.5 times by the end of the year and that is again as a result of our confidence in the cash, recurring cash generation nature of our business moving forward as well as maintaining a focus on capital discipline including non cash working capital.

Now we in this year we unlocked a lot from the non cash working capital for F426 to help with the cash flow generation and the deleveraging goals. Next year we'll see a continued focus on non cash working capital efficiency and allowing us to maintain our 2.5 times deleveraging target for next year.

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

Yes. Thank you for the question, Cameron. So effectively, we had adjusted our CapEx guidance to be $30,000,000 higher than $2,024,000,000 and we achieved that by hitting $356,000,000 this year. So total CapEx expected to be modestly lower than last year. Again, continued example of disciplined capital approach.

We invest organically to keep pace with the growth of our existing customers. Around 75% of next year's CapEx will be effectively to address some of the market needs going forward 25% maintenance CapEx. So very similar to what we had this year. Generally speaking these opportunities give us the highest returns ramping up with the first years of deployment and reaching an average 20% to 30% pretax incremental return on capital employed, right. We have experienced a more intensive multiyear deployment schedule recently.

Now we're focused on cash generating, returning capital and return on capital as well as long term margin profile. So a lot of discipline in our execution going forward next year, working lockstep with the market to make sure that we have the ability to address and reduce or any CapEx that's going to the market calls for that.

Okay. That's helpful. And maybe just to follow-up. I mean, just thinking about the growth CapEx, I mean, largely driven by customer needs. I mean, should we think about the investment here is largely just adding simulators to existing training centers?

Or are there still some areas where you think you need a new training center either on the civil side or on the business jet side?

Yes. No. So right this year, the most of the CapEx that we're spending is we're opening Vienna, and we're expanding in Orlando after the acquisition. 's a few SIMs there. So and we have a couple of SIMs in one of our existing training centers in CAT.

So there's no planned new facilities. It's really just growing some of the training operations that we've it's part of the business case, like SimComm is a good example. The business case calls for a bunch of simulators. So these simulators are starting to be manufactured now.

The next question is from Greg Connard with Jefferies. Please go ahead.

Good morning.

Going to it was a bit confused about where you were. You started with basically your question Maybe add a little bit more segment overall. Civil as a whole you're talking about?

Yes Greg it's Andrew. I think I know where you're coming from. One of the big components of the increase is the consolidation of the SimCom JV and Flexjet contract which is spread over fifteen years. So you can't sort of align the period of backlog increase one to one with revenue generation year one.

Yes. So I think for in terms of by region, I would say Americas would be probably our weakest region right at the moment, and Asia is probably our strongest because of all the, I guess, the things that you're probably inferring in your question, there's a lot of new airlines, a lot of growth in some of our customers. And in particular, in some of our customers, we're seeing some good growth. Business aircraft, I would say, stable. I mean we are expecting some improvement in utilization in Business Aircraft, but nothing outrageous.

So I think training demand is pretty strong across the board, but of course, The U. S. Is the one which is a little bit more muted for us.

Our next question is from Tim James with TD Cowen. Please go ahead.

Well, I can only give directional. And you just look at what I talked about in terms of doubling of the size of the expenditure of the defense budget in Canada over the next few years. I mean, I feel very, very good that, that's going to translate into significant growth for CAE on top of the already very significant level of order intake and actually revenue that we're generating right now and contracts in Canada. And I think we will get our what I would say, our disproportionate share because we actually literally are a strategic partner and those are their words, strategic partner to the government of Canada as they want to operationalize the acceleration of defense spending in Canada. And when you think about what militaries do when they're not in conflict, hopefully you're never in conflict, but what do you permit militaries do?

Well, basically they train. They train, that's all they do, train, train, train. So obviously, that's what we do. So you can be you could see right off the bat that any capability that they deploy, whether it's new aircraft, which new helicopters, it's new ship, it's new submarines, All that is going to require very significant and realistic training. So as Canada's strategic partner, I think we were going to continue to do very well in that market in Canada.

Great. Well, I think we'll bring the call to a close. I want to thank all participants for joining us this morning and remind you that a transcript of the call and Q and A will be made available on CE's website. Thanks very much and a good day to all.