CAE Inc. (CAE) Q3 2021 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to the CAE Third 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 today. Before we begin, I would like to remind you that today’s remarks, including management’s outlook for fiscal year ‘21 and answers to questions contain forward-looking statements. These forward-looking statements represent our expectations as of today, February 12, 2021 and accordingly are subject to change. Such statements are based on assumptions that may not materialize and are subject to risks and uncertainties. Actual results may differ materially and listeners are cautioned not to place undue reliance on these forward-looking statements. A description of the risks, factors and assumptions that may affect future results is contained in CAE’s annual MD&A available on our corporate website and in our filings with the Canadian Securities Administrators on SEDAR and at the U.S. Securities and Exchange Commission on EDGAR. On the call with me this afternoon are Marc Parent, CAE’s President and Chief Executive Officer; and Sonya Branco, our Chief Financial Officer. After remarks from Marc and Sonya, we’ll take questions from financial analysts and institutional investors. And following the conclusion of that Q&A period, we will open the call to questions from members of the media. Let me now turn the call over to Marc.

Thank you, Andrew, and good afternoon to everyone joining us on the call. I’ll first discuss some of the highlights of the quarter, and then, Sonya, will provide additional details about our financial performance. I’ll come back at the end about our -- to talk about our outlook. We continue to manage well through a challenging period. CAE’s stronger performance in third quarter compared to the first half of the fiscal year reflects our ability to adapt quickly to a new normal and also the resiliency of our business, which is largely recurring. On a consolidated basis, earnings per share before specific items of $0.22 was nearly 70% higher than last quarter and we had a near five-fold increase in free cash flow to $224 million, which is indicative of the cash generative nature of our business. We also made important progress to significantly enhance CAE’s position for future growth. During a quarter, we have bolstered our financial resources, with the issuance of $495 million of common equity, and we strengthened and expanded our market position with a succession of three acquisition announcements. In Civil, revenue increased by 13%, compared with a second quarter, driven by 50% average training center utilization and the delivery of 10 full-flight simulators. We also continued to book your orders, with Civil signing training solutions contracts valued at $329 million. These included three full-flight simulator sales and a five-year exclusive business aviation training agreement with Bundeswehr of Germany for the Global Vision. We also signed an exclusive training agreement with MasAir, a new cargo airline in Mexico and we signed a five-year extension of our exclusive training agreement with Iberia to do all of their training. And finally, we signed another five-year training agreement with TUI Airways, a British charter airline and an exclusive two-year pilot training agreement with LOT Polish Airlines on a broad range of aircraft platforms. In Defense, revenue remained stable with last quarter, while the Defense segment operating margin was 7.5%. As we continue to manage through COVID related impacts and disruption on the timing of execution and deliveries. Near-term challenges aside, Defense booked orders for $261 million, including a contract with Lockheed Martin for a suite of C-130J training devices for the binational French and German C-130J training facility. We also signed with Lockheed the supply of the CAE Magnetic Anomaly Detection-Extended Role system for U.S. Navy MH-60R Seahawk helicopters. Also during a quarter, Defense was a quarter -- awarded a contract for the next increment of a multiyear contract with the United States Air Force to provide comprehensive C-130H aircrew training services, as well as an order to continue providing the U.S. Navy with primary and advanced jet structure support for the Chief of Naval Air Training at five naval air stations. Finally, as a result of superior contract performance, Defense received the sole source extension award for T-44C aircrew training services through mid-2027. Defense also announced its involvement in a highly strategic contract to further develop and extend a Single Synthetic Environment technology demonstrator for the United Kingdom’s Strategic Command. The Single Synthetic Environment or SSE aims to deliver a virtual world to be used for operational planning and decision support across all domains, cyber, space, maritime, land and air. This together with the recent awards to support U.S. Special Operations Command last quarter are indicative of the good progress that we’ve been making with our digitally immersive solutions. At the end of the quarter, Defense won the competitive recompete of the U.S. Air Force KC-135 Training System contract, a program worth approximately US$275 million over the next eight years. This is a prime example of CAE’s ability to renew and expand major long-term training systems contracts as the training partner of choice. And in Healthcare, we continue to deliver CAE Air1 ventilators and segment revenue more than tripled with margins reach -- reaching 10.7%. I’m extremely proud of what we’ve been able to accomplish, first and rising to the challenge to develop a life saving ventilators in a time of great humanitarian needs and in our continued wartime efforts in the fight against COVID-19. We’re continuing to provide you tools and training capabilities in support of our customers training needs during this pandemic. These included solutions like CAE Vimedix 3.1, an ultrasound education platform with new remote learning and screen sharing capabilities, curriculum development tools for distance learning and Microsoft HoloLens 2 mixed reality interface for remote education. We also expanded our adaptive clinical digital learning courses covering mechanical ventilation to include basic, advanced and COVID-19 patient management. With that, I’ll now turn the call over Sonya, who will provide you additional details about our financial performance. So I will return at the end of the call to comment on our outlook. Sonya?

Thank you, Marc, and good afternoon, everyone. We continue to see good sequential performance improvements in the third quarter. Consolidated revenue of $832.4 million was up 18% compared to the second quarter and is 10% lower compared to the third quarter last year. Segment operating income before specific items was $97.2 million, compared to $79.3 million in Q2 and $157.2 million last year. Quarterly net income before specific items was $60 million or $0.22 per share, which on the same basis compares to $0.13 in Q2 and $0.37 in the third quarter last year. We have strong free cash flow in the quarter of $224 million, which is a solid improvement over the $44.9 million we generated in the second quarter and is the result of continued good cash flow from operations and reversals in non-cash working capital accounts. I’m especially pleased to see that even with a negative free cash flow performance we had in the first quarter when the brunt of the pandemic hit us. We’re now at positive $176.2 million of free cash flow for the nine months year-to-date. We still face challenging conditions, but we’re confident about our outlook for the free cash flow positive for the year. Growth and maintenance capital expenditures totaled $23.9 million this quarter and for the first nine months of the fiscal year totaled $57.1 million. We had indicated in our outlook that we expected total CapEx to be approximately $100 million for the year and this continues to be our view. Our growth CapEx is directly linked to our opportunities to invest incremental capital with attractive returns and free cash flows. Income tax recovery this quarter was $0.1 million, representing an effective tax rate of nil, which compares to 16% for the third quarter last year. The tax rate was low for two reasons; first, the positive impact of some tax audits, and second, because of the restructuring costs we incurred this quarter. Excluding the effect of these elements, the income tax rate would have been 16% this quarter, the same as Q3 of last year. Our net debt position at the end of the quarter was $1.8 billion or net debt to total capital ratio of 38.9%, which is back within our target range of 35% to 45%. And net debt-to-EBITDA before specific items was 2.65 times at the end of the quarter. All told, between cash and available credit, we have approximately $2.4 billion of available liquidity. CAE’s liquidity was further enhanced with the completion in November of a public offering in a concurrent private placement of common shares for aggregate gross proceeds of $495.3 million. The net proceeds are intended to fund growth investment, including the three acquisitions we recently completed, and other future potential acquisition and growth opportunities. Pending such uses we’ve been using the proceeds to repay indebtedness on our credit facilities and to hold them as cash and cash equivalents. On the restructuring front, we’re continuing to make good progress. The program is enabling CAE to best serve the market by optimizing a global asset base and footprint, adapting our global workforce and adjusting our business to correspond with the expected level command and enduring structural efficiency. We began executing our restructuring program last quarter, and as of the end of last December, we have incurred total of $65.4 million of restructuring expenses. We expect to record a total of approximately $140 million of restructuring expense this fiscal year, which is higher than our previous estimate, because we’ve identified additional measures to optimize our global asset base and footprint. Plus we now have some additional restructuring related to optimization and integration of our recent acquisition. In connection with these efforts, we expect additional restructuring expenses about $30 million in fiscal 2022. Taken together, we expect our restructuring program to translate into significant annual recurring cost savings commencing in fiscal 2022 and ramping up to a run rate of approximately $65 million to $70 million. With that, I will ask Marc to discuss the way forward.

Thanks, Sonya. Surely CAE is clearly in a much stronger position than it was back when the pandemic hits and we’re bullish about CAE’s long-term prospects to emerge from this period in a position of even greater strength. We’re successfully implementing measures to fortify a company internally and finding additional opportunities for greater efficiencies. We’ve also made excellent strides to capitalize on external opportunities to enhance our market position and deployed growth capital. We’re leaning in and focusing on the long-term, bolstering outstanding as the global market leader in our field through the application of advanced technologies and by expanding the aperture of our market reach. And we’re continuing to invest in CAE’s capabilities to revolutionize our customers training and critical operations, and increase market share with digitally immersive solutions. And while COVID-19 remains of persistent global reality, we’re encouraged by the light at the end of the tunnel and we recognize that market recovery is really a question of when and not if. Fundamentally, the secondary growth drivers for our business are unchanged. The resumption of CAE’s recovery remains highly dependent on the timing and rate at which travel restrictions and quarantines get eventually be safely limit -- lifted and normal activities resumed in our end market. Now looking at each of our business segments. In Civil, we expect to see a relatively stable performance in the fourth quarter compared to our current third quarter results. The global rollout of vaccines to combat COVID-19 is indeed encouraging. However, the renewed quarantine measures and border restrictions to contain the spread of the virus have contributed to expectations for potentially more protect -- protracted recovery periods for commercial air travel, particularly for cross-border and transcontinental operations. At the same time, we expect to continue expanding our market share and securing new customer partnerships with our innovative training and operational solutions. We’re in advanced discussions with airlines about potential outsourcings and partnerships, and while we don’t control the timeline of these agreements, we expect some of our pipeline to come to fruition in the period ahead. Business aviation training has been recovering faster in commercial and we continue to see this trend moving forward. Demand for Civil full-flight simulators has driven by new aircraft deliveries and while the total market is currently much smaller, we expect to maintain our leading share of available full-flight simulator sales. We benefit from a large backlog of customer funded full-flight simulator orders and we expect to substantially deliver this backlog over the next couple of years, including approximately 35 this fiscal year. In Defense, we’re managing through a transition year and as we work our way through the short-term challenges brought by the pandemic and ramp up a reinvigorated growth strategy under our highly piloted new leadership. The long-term outlook for Defense continues to be for growth, supported by a large addressable market for our innovative solutions and the realization of the benefits our bolstered team will bring to bear. I’m encouraged by our new competitive wins, large pipeline and our recent success in the security sector with a contract award to provide the United States Customs and Border Protection with aircraft pilot training services. This win leverages the CAE’s Dothan Training Center and CAE’s Commercial and Business Aviation Training Centers to deliver simulator and light-flight training services on a range of fixed-wing and rotary-wing platforms. We were also selected after a highly competitive process to demonstrate our capabilities to the U.S. Army Futures Command as part of a Synthetic Training Environment program, which is designed to provide a collective multi-echelon training and mission reversal capability across the army. And the takeaway here is that, while managing through our current period, we’re also focused on the long-term and we’re investing in our leading position as a training and mission support partner with leading edge capabilities and translating the physical world into the synthetic world. We’re implementing a strategy to expand beyond training to become a leader in digital immersion and the application of a synthetic environment to support analysis, planning and operational decision making. With our expertise in the integration of live, virtual and constructive training, along with capabilities to address mission and operations support, we believe will make significant inroads into the broader Defense market in the period ahead. And in Healthcare, we’re capitalizing on the greater market appreciation of the benefits of healthcare, simulation and training to improve safety and to help save lives. In addition to our core Healthcare business activity, we’re continuing to work towards the delivery of our ventilator contract with the Government of Canada. And we’re also continuing to find innovative ways to provide even more solutions to make the world a safer place. The contract we announced last week with PYURE to build and help develop high tech air sanitizers allows us the great benefit of maintaining manufacturing jobs in Montreal, while continuing to play a lead role in a fight against the pandemic. And it’s another great example of CAE’s agility and leveraging our strength in new ways. In fact, we obtained this particular contract by leveraging the expertise we gained developing ventilators, as well as the ISO certification for medical device, design, manufacturing and distribution that we obtained just last month. CAE has been an innovation powerhouse for more than seven years with world class engineering, intellectual property, supply chain and manufacturing capabilities, and I look forward to more great things to come. With that, I thank you for your attention and then we’re now ready to answer your questions.

Thank you, Marc.

Thank you,

Sorry.

[Operator Instructions] Our first question comes from the line of Kevin Chiang from CIBC. Please proceed.

Good afternoon, everybody. Thanks for taking my question here. Maybe if I can ask about what you’re seeing from your customers as they prepare, the airlines prepare for an eventual recovery in air traffic. Are you having accelerated discussions about getting the workforce ready for that eventual recovery and I know, I guess, early in the pandemic, there was this thesis out there of a pilot training bubble that could potentially emerge as airlines rush to retrain their pilots here that have been furloughed. Just wondering how -- what you’re seeing sitting in a position today?

Well, I can tell you, Kevin, that we’re having a lot of discussion with airlines as they prepare themselves to -- for the recovery that will surely come as people get more and more vaccinated. Forward bookings, what we’re hearing forward bookings at the airlines are very high, especially on leisure travel. And so, we’re working with them hand -- basically a hand-to-hand so that they have the proper training their pilot crew trained to be able to handle that upswing. Now, of course, there is hypothesis of when everybody will be trained, so they’re keeping your pilot powder dry from that point of view. From our standpoint, look, we are -- it’s reflecting the utilization that we have now. We’re seeing we’re ramping up on, for example, 737 Max training. We will deploy more assets in support of that airplane coming back online. Look, the pilot training bubble, I think, not in material numbers. I would say, right now, it’s really going to -- that really is going to depend at the rate at which the recovery happens. And the rate at which, for example, wide-body aircraft that we put back online, relative the assumption is that are out there today, which is, what -- I think basically work again default, which is, the IATA has predictions as to when air traffic recovers, so to 2019 levels, so late ‘23, ‘24. I think that’s way I would characterize it.

That’s helpful. Maybe to my second question here, you’ve made a couple of acquisitions or three acquisitions, as you noted, maybe the one that I thought was the most interesting was the acquisition of Merlot, which expands -- expanded your capabilities into crew management and some of this optimization software. As you kind of come through the pandemic, can you speak to what you see in terms of maybe other ancillary services you think you can bolt-on to your core business and other digital solutions you can add to kind of grow overall, maybe total market size, relative to maybe the way you saw the market pre-pandemic?

Well, no, absolutely. We had identified this market before that. In fact, we were already serving it, perhaps, on an overly material way. But example I would point to is, for example, SAS Ireland, I’ve talked to that before, where we basically in the case of, that particular airline, CAE personnel, not -- we don’t only train the pilots, our employees with the pilots there, with the cabin crew and basically became airline employees when they basically operated the aircraft itself. So it’s a kind of a complete query resource offering. That was just one example of what we do it. Of course, we do a lot of that through our CAE Park. But so what we’re seeing is now to is move more -- even more aggressively into what I consider is a very large and aggressive mark, sorry, and sizable market there, that’s attractive, because it appeals to everything we know into about the whole pilot ecosystem. Remember, we’re in every part of the pilot ecosystem, from training people to become airline pilots, training them additionally on top of aircraft, doing their recurrent training throughout their career. And finally, providing, as I mentioned, through Park an opportunity like the airlines a complete solution. So that gives us unique skills and insights to offer a much broader set of services than PYURE provide train. That’s what you see us doing here and it’s a natural. It’s the same customers. And they have -- there’s very real pain points in their operations that they will, in many, many cases, very, very happy to look to someone like ourselves, who can basically take that oath for them and provide them synergies, and actually, through our digital offerings, to be able to give them insights into their operation, because of just the sheer scale that we can provide that they can’t do by themselves. That’s a thesis we’re going into it. Very happy about the [inaudible] Merlot great team that we have. Their headquarters in New Zealand, great set of customers and I felt very good about that. More to be said, but I think it’s going to be to me a very attractive market. For me what it does in terms of dollars and cents, it increases our addressable market in Civil from notionally about $4.6 billion to about $6.1 billion. And I’m talking pre-COVID kind of normalized figures here. But that’s -- that what I would tell you.

That’s great color. Thank you very much.

Thank you. Our next question comes from the line of Elizabeth Grenfell [ph] with Bank of America. Please go ahead.

Hi. Good afternoon, guys.

Hi, Elizabeth.

Hi. Hi. I’m calling on Ron’s behalf today. Is this the air travel back to 2019 levels in 2023? How do you expect that recovery to play out for you?

Well, I think, we’re pretty happy. What you’re going to look for us, two things, first of all, I mean, what I’m going to talk about that I’m talking about commercial aviation travel, not business aviation. Business aviation has already recovered quite nicely and we continue to be -- it’s already about, right now, as we said about 15% of pre-pandemic levels in the -- based on businesses cycles in the United States than in Europe. In terms of commercial aviation, the way it pans out for us is just watch the airplanes that are flying, because our business is regulated. So as long as there’s two pilots flying those airplanes at the front, they have to go back to training, literally, on an average basis throughout the world every six months. So for us is, look at the utilization of the aircraft themselves, so but at the moment utilization of the airplane, so it’s about 50% based on maybe 80% before pandemic. So for us, as airlines add more flights and more utilization, our business in terms of utilization in our training center is very, very highly correlated to that. So the utilization of the active fleet of aircraft and how they’re being used in the fleet, so what -- expect it to follow that trend. And the additional color, I would give you is that, we expect of that recovery to the narrow-body sector to recover faster. That’s, I think, pretty much consensus and that’s the consensus that we get based on talking to our customers, which of course, because of our market positioning represents the majority of the world’s airlines. So the fact that the narrow-body recovers faster is a good thing for us, because 75% of our network is full-flight simulators and our training centers are not narrow-body aircraft. And when I comes back to just additional cover on the business aircraft, about a third of our revenue in Civil also comes from business aircraft, which that’s important, because it’s also a more profitable segment. So that’s -- that factors into itself.

Thank you very much.

Thank you. And our next question comes from the line of Fadi Chamoun with BMO Capital Markets. Please go ahead.

Okay. Thank you. A couple of questions. First on the acquisitions, I guess, you addressed some of the strategic kind of positive for Merlot, but the other two acquisition now that you’ve kind of had a chance to take a look under the hood, can you share with us a little bit about the opportunities you see there, the integration process, how do you feel about these two acquisition now that you’ve had a chance to kind of take a look at them a little bit more closely? The other quick question is to Sonya, maybe if you can help us frame the restructuring benefits that you expect in 2022. I think you mentioned up to a run rate of $65 million to $70 million ramping up, but is that going to by end of 2022, like how much of that restructuring benefit should we expect to be realized next year?

Okay. Maybe I’ll just kick it off. Fadi, look, I will tell with the acquisition of -- the other two acquisitions, which is the FSC and TRU. Look, no surprises, except maybe to say, look, we’re very happy with what we see as well. It’s always great that, obviously we know our business. I think we knew them well, in terms of, if you think about FSC, they bought essentially all their new simulators from us over the years. I sold first sim back in 2006, I believe it was. But so we know them well and very, very happy with the team coming aboard. No surprises on the integration. And so it’s -- I would tell you, it’s exactly on track, if not ahead of where we expected to be. In terms of TRU, very similar question. They’re very down the street from us here in Montreal, great facilities and great bunch of people. I think that good book of business which we knew. I like what I see, I think that it reinforces our relationship as well with Boeing. I think that’s an important one, because Boeing was there supplier, what -- for the 777X and the 737 Max from original equipment simulators. So that’s very attractive for us. We knew about that. But, again, we are very happy about what we see it. In both cases, the iteration, I would say, is right on track, if not ahead. Yeah, Sonya?

And I guess, I’ll jump into there on your question for restructuring. So we started the program in Q2 and its progressing well. Now a good part of the program is about asset and footprint optimization. So these are long lead items, like relocating simulators and moving people and closing down these facilities. So and that’s underway. We’ve had a good amount under our belts, but it will continue on over the next couple of quarters, as well as kind of a lot of their process digitally driven process improvements underway. So we’re going to see those savings basically come through next year in FY ‘22, at least $50 million of recurrent payment for the full year of 20 -- FY ‘22, as we had talked to, and now with the additional measures that we’ve identified, as we continue on this quest for optimization and streamlining, we’ve identified additional measures, so different types of locations and opportunities that we’ll be starting this quarter and through the new year, the new fiscal year. So those will take a little longer to ramp up and so, probably, that incremental savings will come through towards the latter end of the year and ramp up to a run rate of $65 million to $70 million recurring annual savings.

Okay. Great. Thank you.

Thank you. And our next question comes from the line of Noah Poponak with Goldman Sachs. Please proceed.

Hi. Good afternoon, everybody.

Good afternoon.

Hello.

Good afternoon.

Hey, Marc, just staying on the topic of the recovery in Civil training and sort of, I guess, the lead lag for you and how you’re tethered to that. On the one hand, it is clearly not visible exactly when the recovery stars and the pace of recovery. But on the other hand, I’ve been pretty surprised at, just how many airlines are out there talking about, especially domestic-oriented airlines talking about flying this summer, 80%, 90% of their 2019 capacity. And you just mentioned being more tethered to narrow-body than wide-body. So, I guess, I’m a little surprised you’re not seeing that already. Maybe you could just speak to that. And I guess, specifically, what is the lead time for training pilots tethered to specific capacity that is coming back and can it be done in pretty short order? Is that why you’re not seeing it yet?

Well, I think that the level of activity that we’re seeing is certainly not representing 90% flying right now. And I think, hopefully, we will see that this summer and I fully expect that, when people -- there’s a lot of pent-up demand that all of us want to get back on airplanes, all of us want to go, they say, Sidney and Montreal, with minus 18, I want to go south. So I think it’s, look, for us, it’s going to be, when a board is going to open, when are these quarantine rules going to be lifted. And again, in Montreal, we have an 8 o’clock curfew. So that basically it’s -- for us it’s just, as I mentioned before, we’re highly correlated to the level of airplanes fly, the level of flying activity. So, yeah, a lot of airplanes flying, you’ve got a question, how many flights per day, right? When that frequency starts increasing, because there’s more volume, you’re going to see, obviously, no more pilots we needed. So we are going to see more training activity, more utilization of our training centers. So, about 50% utilization of aircraft right now, you see about 50% average utilization in our commercial aviation training activity. So I think that’s what we’re going to see, watch that metric, we’re highly correlated to it.

That makes a ton of sense. And again, I recognize that, we’re nowhere near 90% of 2019 on much of anything right now. But, again, if there are a bunch of U.S. domestic airlines or there’s just a decent amount of airlines talking about flying, a surprising -- capacity level surprisingly close to 2019 this summer, wouldn’t -- how far in advance of doing that? Do they have to do the training? Are they able to do the training pretty close to doing that? I would have thought it would have been a few months in advance?

It depends if you’re talking about pilots that are on staff that are maintaining your certifications, then as long as they keep doing their -- every six months going back into a simulator, maintaining stuff, like they have to do a certain number of landings every 90 days, those kind of things, then they’re easy to bring back on online. Where you really have the issue where it takes months is if a pilot falls out of certification, that would typically fall, if you really haven’t gone back to training after a year, then you’re out, then you have to go back, essentially to square one, that can take months. Because once you have any individual pilot, let’s say, flying narrow-body 737 or A320, you’ll get to go back to school, go back to type rating course, maybe a month out. But of course, yeah, that’s one month for one pilot, but then you have to have the available infrastructure and training, number of simulators, number training slots, to be able to train any volume of personnel back online. I think maybe the other thing that, if you’re talking about only U.S. to say, for example, what we call the main carriers, they have their own simulators.

Right.

So that may be where you don’t see a translation in our training activity. But we will see that…

Right.

… in other ways in terms of the update activity that happened. And for us, talking to them and actually doing stuff about supporting them with regards to overflow training, when they will need that delta training that -- those are kind of discussions we have with…

I guess…

… the network.

When I roll it all up, given what you saw in the quarter and then you discussing next quarter being pretty stable, it doesn’t sound like I should be counting on much of a jump in your revenue that leads the global system wide capacity. And instead, I should really just tether you to that, is that the conclusion?

Well, what I said, I think is, when I look at the utilization or training centers, I suspect, very similar level in the quarter that we’re in, based on what I’ve seen in the third quarter. So that’s what we’re seeing and we have pretty good visibility on it, because, obviously, where we sit in terms of date, we’ve got a month and some behind us, month and a half behind us, and we have a pretty good view of bookings in our network of training centers. So that’s where I’m coming from.

I see. That’s helpful.

And to me that’s -- but again, to me is like we are talking about weeks now, we are talking about…

Yeah. Yeah.

… nothing change at all, fundamental thesis of CAE, even going into at the end of the year.

Yeah. No. I don’t think it, I hear you there. I probably just had the lead time confused. But that’s all helpful. In the healthcare business, it’s a very significant, at least percentage change in the quarterly revenue and we’ve seen the new product announcements. Can you help us out with what from this increase is long-term sustainable versus only short-term related to COVID versus was literally just this quarter?

Well, the beat, I mean, I would tell you, it’s not just this quarter, but it is related to the Canadian ventilator contract, which, we said, from the outset, this is a stepping up as part of the wartime effort to help our fellow citizens with being developing from scratch ventilator of which we got the contract with Canadian Government. So what you’re seeing there is the contribution in earnest of the ventilators and that’s about, I would tell you about half of the order. We -- the good news is that, the fact is that, with the current the pandemic, where it’s at and with less severity overall, in terms of the use of ventilator, there’s not going to be as many needed. So I think we got a contract for about 10, well, not for about 10,000, we’ll deliver about 8,200. So, a little over double -- well, we delivered, I think, 4,200 and 5,700 this past quarter. We will deliver a total of 8,200. So it’s just a little bit more less than 4,000. So the contribution over the next quarters, couple quarters will probably be similar to -- in terms of the -- from that contrast to what you see and you’re talking about teams kind of margins on that contribution. Beyond that -- so I think, going back to your question, so the big increase is due to that one contract and that contract is…

Okay.

… coming then. Now, having said that, what I will tell you is that, that just demonstrates the capabilities that we have at CAE, when you think about that we’re able to literally from scratch design and engineer and deliver a highly technical device like a ventilator, tells you what we’re able to do. We transition -- we announced last week, we transition our workforce here in Montreal into fabrication, 50,000 air purifier units that are revolutionary what they do. So that’ll help us not only to basically feel like maintain 100 jobs for production line, which is good, because it absorbs overhead and it has -- I wouldn’t say a material contribution to earnings, but certainly not diluted by any measure. And -- but more importantly, yeah, I think, there’s more links potentially to that, early days. But -- and from the larger standpoint, I am very bullish on the future growth in Healthcare, very good. If there’s anything that this pandemic has demonstrated is not only what we can do in Healthcare, but the receptivity of customers to the kind of products and services in Healthcare that CAE’s brand can bring to bear. And early days and under the leadership of Heidi Wood leveraging that division in earnest and adding our digital capabilities. I’m -- I’ve never been more bullish that the Healthcare will become a meaningful part of CAE and in -- not in 10 years.

Yeah. Okay. Thanks so much.

Thank you.

Thank you.

Thank you. Continuing on, our next question comes from the line of Konark Gupta with Scotiabank. Please go ahead.

Thanks, and good afternoon, everyone. So perhaps the first one on Defense, the order activity seems to be good. Like it’s kind of holding up, despite obviously, all the pandemic related issues you spoke about. But what’s -- I am wondering what’s kind of putting pressure on revenue and margin compared to where this thing is in your backlog, I mean, like, it’s a 10%, 12% kind of margin backlog. But we are not seeing those margins yet and revenue is kind of maybe capped because of those pandemic issues. But any additional color you can provide on what’s causing Defense program execution here?

Well, look, I think, first of all, I will maybe say that, my thesis hasn’t changed at all that Defense is a going business. And we were -- we’re in a transition year right now for a number of reasons. Although, we have had some good order activity, the fact is that, and I’m very happy, but as I mentioned on the call, during my conference call remarks here, the kind of awards that we are winning, to me are marquee contracts that really demonstrate CAE’s credentials in training across the world. You just think about the KC135 contract, very major contracts for the U.S. Air Force. And a contract that we have with special forces on Synthetic Environment contracts that demonstrate the expertise and the technology that we can bring to bear that is really going to be critical going forward. So I think short-term, what we’re seeing here is, there’s some of it, and I think, that’s going to persist for a little while is that there is some order activity. Because, like it or not, the military support areas like procurement engineering are just like everything else hit by COVID related absenteeism and disruption. So that is affecting near-term order activity. Not that orders go away, but in fact that they get protracted in terms of when they’re actually going to be awarded, because the work required to be able to do that. Nearer term right now, we are being affected by COVID. I can give you a specific examples, we have for example, in our Tampa training facility, we have a major training facility where we do see 138 training and the large -- the largest part of training we do that were for militaries and that tends to be good business. Unfortunately, because of border restrictions and travel restrictions, the customers can’t get to the training center. That’s just one example. Again, near-term issues, but so -- those -- that’s the major color I would give you that’s affecting our results in Defense at the moment. I -- is that -- and that’s what I’ve -- okay, that’s where I’ll end it right now, may unless you want to expand the question.

No. Absolutely not. That makes sense. Maybe I think that’s what I thought the travel restrictions, but I was just curious as to if there’s anything overly materially incremental that that kind of explains. But no that’s good. On the full-flight simulators on the Civil side, so you’ve talked about in the MD&A and disclosures, that the backlog is pretty strong and should support production for the next couple of years at least? Just curious as to the 35 deliveries you are planning for this fiscal year? Is that sustainable with the current backlog for the next two years or do you need to win more orders on the FFS side to produce 35 each year?

Well, I don’t think we’ve given a lot of guidance to that, if you’re going down to a level of guidance right now. But I would say, look, it doesn’t -- I’ll remain what -- to what I said is that, we will deliver that backlog over next couple of years. Look, if we were to, let’s say, we have -- we get no orders, well, which is not going to happen. We’re already getting orders and we still -- and we have a lot of interest in our -- with customers, as they ramp up taking on airplanes, because deliveries are being restarted. I think we will get orders. So this situation that you talked about really doesn’t occur. But I really -- those contracts that we have -- a backlog that we have, the real driving factor here is the dates that we’ve committed to the airlines and those are firm. And pretty much every one -- not pretty -- but every one of those contracts has been looked at in terms of, in some cases, the customers wanted to basically defer the delivery because of the situation, defer -- deferment of the aircraft and everyone now has a new date, which is firm and that’s what we’re executing to and that -- and so the long answer short -- long answer, but the delivery of that backlog is pretty firm over next couple of years.

No. Okay. That’s good. And just kind of expand -- expanding on that a little bit, because you talked about Max earlier on the call, the TRU’s acquisition and clearly they were kind of align with Boeing on that Max sim orders. I am wondering if your backlog for Max sim here, where it’s at right now and what are your plans for production on the Max side, please?

Well, I can tell you, and yeah, TRU fit in very, very well with that. As CAE, if I look at the situation on Max today, at CAE we delivered 41 Max simulators to-date and that includes five in our network. We have sold 53. Now, I would say, we have sold 57 total. But we had -- we defer two in our network and we had two deferrals from another airline. So I would say net 53 sold to-date. TRU have 11 simulators delivered to-date and they have 14 sold and that’s the entirety of all the 737 Max simulators. And we are continuing to support Boeing through a Max overflow training agreement and that’s -- what -- that’s exciting, because it’s our first training cooperation with Boeing. I am quite excited about that and that’s specifically on the Max.

That’s great. That’s a really good color, Marc, there. And last one for me...

Last thing I would tell you is, maybe just a little bit more color, this based on the number of aircraft that are out there. I certainly expect northwards of 50 to 60 737 Max simulators over the next five years minimum.

Okay. That’s great. Thanks. And lastly for Sonya, free cash flow wise, obviously, Q3 was so good in terms of cash flow and working capital generally tends to contribute a lot in the third quarter. But just wondering, Sonya, looking at the historical numbers, usually working capitals seasonality wise comes off in Q4. Anything this time you think it’s different than last few years in terms of seasonality? And then, obviously, CapEx kind of picks up as well right in Q4 this year? So, any color on the free cash flow and heading into Q4?

Yeah. Absolutely. So I agree with you, a solid Q3 performance were $224 million and really that’s a reflection of improving operating performance flowing through in the cash from ops that you see quarter-over-quarter, continued improvement there. And obviously if the operating performance and continued costs and cash preservation measures and so on that we put into place. And just absolutely continued focus on each of these and it really kind of demonstrates the cash generative nature of the business. So we add to that the non-cash working capital performance. But to your question on seasonality, we are seeing a similar pattern investment in the first half and a reversal in -- partial reversal in the second half. We do expect it to stay in an investment position for the year. So it should follow in the trend. So Q3 being one of the strongest performers in a non-cash working capital. Where we saw that was really a nice step up on collections and our DSO and if you can imagine with a pandemic and all that was going on, there was, I guess, an increase in the day sales outstanding and with all of the focus that’s starting to come back down and also really good view and visibility and management on inventory and supply chain. So, we continue to focus on generating cash and minimizing the working capital. So and it will follow pretty much the seasonality that you’ve seen in the past. In terms of CapEx, we’ve spent almost about a little less than $60 million to-date and we do expect to ramp up in the fourth quarter in pace with the plans that we have, some of the spend that will do to support the restructuring program as we move at some of the locations, but also investing in the opportunities that we have. We’ll still continue to see good opportunities to deploy accretive CapEx. So -- and frankly, especially in the business aviation field where those organic investments are really kind of deliver significant incremental returns, as you have seen an entirely organic deployments we’ve done. It drives 20% to 30% incremental return on capital within two years to three years. So as we see those opportunities and lockstep with the demand, secure demand from the customers then we’re deploying the capital accordingly.

Thanks. I appreciate the time.

Operator…

Thank you.

…we’re running a little bit on time here. I think we’ll take two more last questions before we open up to members of the media.

Absolutely sir. Our next question comes from a line of Cameron Doerksen with National Bank Financial. Please go ahead.

Yeah. Thanks. Good afternoon. Just really kind of wanted to follow up on an earlier question just with the -- with regards to the Healthcare segment, I mean, obviously, CAE is known as a training and simulation company. And I get that that you’ve won this ventilator contract and you’ve stepped up there and it’s obviously a pretty nice win there. But I just sort of wondering about this air purifier contract and that sounds more like a contract manufacturing type of deal. I’m just wondering if there’s like a shift in strategy here in Healthcare, where it’s kind of no longer solely focused on training and simulation, and now you’re just kind of looking for other opportunities. So maybe you can just describe what sort of the go-forward strategy is in the Healthcare segment?

No. You’re correct, Cameron. Our strategy hasn’t changed. We’re saying we’re very much focused on the opportunities that we have and there’s quite a market there and it’s a growing market with regards to what we can do in simulation and training. So if there is a change in strategy, well, but there is not now. We have been, I’d say, these both contracts are part of the humanitarian effort that we’ve done to support, again, our fellow global citizens on a fight against COVID-19. But it just demonstrates what we’re able to do at CAE and I think that speaks of itself. But that’s speaks of itself in all of our business, the systems engineering expertise, the manufacturing expertise, we have the global sourcing opportunities, software and the integration of it all, with the subject matter expertise that we have in areas such as Healthcare. That’s where it all comes together and I think that’s applicable. But, again, no change in strategy in terms of Healthcare.

Okay. That’s great. Just wanted to clarify that. Thanks very much.

Thank you. And our next question comes from the line of Benoit Poirier with Desjardins Capital Markets. Please go ahead.

Yeah. Good afternoon, everyone. Just to come back on Defense, obviously, you talk about the pandemic that contributed to delays in the execution. But as we go beyond this pandemic and this transition year, especially with the new President in the years, how should we be thinking about CAE’s ability to rebound in terms of revenue growth and margin in fiscal ‘22 and beyond?

Yeah. Well, look, I think, you should be -- you should feel good about it. As I said, I certainly do. I am -- as I mentioned, I repeat as you said, we’re managing through a transition here and we’re working through challenges which are short-term and they’re real. They’re brought about by the pandemic. And but we have a growth strategy that has been reinvigorated to the input that we have, not only from Heidi Wood would run it in the interim that we’re in the beginning for about six months and Dan Gelston, who runs the business. Now with a wealth of experience in the Defense sector and the security sectors, I’m very, very bullish on what we can do here. And what we’re focusing more is on the technological capability at CAE and leveraging into specific in -- specific high value areas, like, there is -- what we’ve been talking about what -- talking about the Single Synthetic Environment. This is the ability, as you know, Benoit, very well than we do very well is to be able to mimic the world and create a digital twin of the world in which people can exercise and that becomes very, very important. And you’ve heard me talk about before, as the world -- as the nature of training changes, because the Defense priorities are changing. We -- we’ve gone from, if you look at the Defense priorities of the United States, for example, the priorities, they’ve switched from what used to be -- we’ve talked for years about supporting that kind of threats that are -- those that we saw on what we would call the war on terror. Now what people are focused on is training for fight a near peer point, which is important that you cannot be assured that you have control of the air, control of the airwaves, control space assets. So you have to train, you can -- you obviously heaven forbid, never have to deal for real if that happens. But what does the military do when they’re not in conflict? Well, they train for conflict. So you obviously can’t train for fighting a near peer threat. But so what we do is provide an artificial world, a synthetic world, a digital sim -- digital twin of the world, in which you can exercise, where all the domains come together, the air assets, the ground assets, the naval assets, the space assets, the cyber environment. Those are the things that are going to be -- are actually becoming what is required to be able to support training and we have a leading edge capabilities, and we are winning contracts in that area. Like, for example, the one we’re winning with SOCOM Global Situational Awareness. So, again, as we always do at CAE, we’re an innovation powerhouse. We continue to invest in differentiating technology. So you’ve heard us talk about CAE Cracks, the e-Series of Visual Systems, all of which support the thesis I just mentioned. Again, near peer challenges that affect our ability to raise margins. Now near-term, basically issues with regards to be it order activity because COVID related, but it’s the transition, it doesn’t change anything about my bullish stance with regards to the future Defense.

Okay. And on Healthcare market, you’ve been quite successful with the ventilator and air sanitizer opportunities. I would like to hear more about what type of revenues are sustainable or what would you see as a permanent result and also what kind of opportunities you have aside the -- this air sanitizer and ventilator because it might open the door for more opportunities for CAE down the road for Healthcare.

I think the ventilator contract is coming to an end. I said over next couple of quarters I think that’ll be done. But we’ll produce the rest of the 4,000 odd units that we have remaining to go. The purifying contracts, I think we’ll get it done. It’s a huge numbers, because these things are maybe $5,000 a piece, if they look on average. So it’s not big numbers, but it is important. The technology beyond those, I think, is very exciting and I think it has potential even beyond COVID-19 in terms of his capability to literally eliminate bacteria right up to black mold, for example. But, again, yeah, so we’ll see if we can build -- get more of those. Beyond that, I would say, as I was saying to Cameron, okay, our strategy hasn’t changed. We see growth in Healthcare -- significant growth in Healthcare through staying to our knitting, which is simulation-based training and services in the Healthcare sector and that’s going to be fueled by our digital capabilities, which, as you know, as we all live, digital is not -- is being incredibly accelerated during this pandemic and that will continue. And we have very, very specific skills and capabilities there that I think will propel not only Healthcare, but the rest of our business.

And maybe I’ll just add, Marc…

Okay. That’s…

… to that. So, Benoit, just -- I will just add that this is a manufacturing contract. So we’re not actually selling it directly to the client. And ultimately, from CAE perspective, although, really important, it’s not that significant from a financial perspective.

Yeah. Okay. That’s great color. And maybe a very quick one for you, Sonya, when we look, in terms of financial perspective, what would you like to see before reconsidering or revisiting your dividend and buyback program?

Yeah. I think, it’s like we said, the capital allocation priorities have not changed. The first priority remains to invest in accretive growth, and as we’ve seen, with three acquisitions, actions in the quarter and we continue to see opportunities on the organic growth capital front. And we balance that with maintaining a solid financial position. So, on the current returns, dividends and buybacks, it’s always been a function of the level of excess free cash flow and the level of accretive investments we see ahead of us, so remains an ongoing dialogue with the CAE Board.

Okay. Thank you very much for the time.

Thank you.

Thank you.

Operator, that’s all the time we have for members of the investment community. We do want to take the last few moments that we can to open up the lines to members of the media.

Most certainly. [Operator Instructions] Sir, it appears that currently there are no questions from the media sector. I will return the presentation to you once again.

Okay. Thank you, Operator. We will then conclude this call for CAE’s third quarter fiscal year 2021. I want to thank all participants and remind them that a transcript of today’s call could be found on CAE’s websites. Thank you and good afternoon.

Thank you. And that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect your lines. [Foreign Language] Have a great day everyone.