Good day, ladies and gentlemen. Welcome to the CAE Fourth Quarter and Full Fiscal Year 2023 Conference Call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Mr. Andrew Arnovitz. Mr. Arnovitz, please proceed.

Good afternoon, everyone, and thank you for joining us today. Before we begin, I'd like to remind you that today's remarks, including management's outlook for fiscal year '24 and answers to questions contain forward-looking statements. These forward-looking statements represent our expectations as of today, May 31, 2023, and accordingly, are subject to change. Such statements are based on assumptions that may not materialize and are subject to risks and uncertainties. Actual results may differ materially, and listeners are cautioned not to place undue reliance on these forward-looking statements. A description of the risks, factors and assumptions that may affect future results is contained in CAE's annual MD&A available on our corporate website and in our filings with the Canadian Securities Administrators on SEDAR and the U.S. Securities and Exchange Commission on EDGAR. On the call with me this afternoon are Marc Parent, CAE's President and Chief Executive Officer; and Sonya Branco, our Chief Financial Officer. After remarks from Marc and Sonya, we'll open the call to questions from financial analysts. At the conclusion of that segment, we'll open the lines to 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'm pleased with CAE's accomplishments at fiscal 2023, having seized opportunities to expand our position in growing markets with our digitally immersive training and operational support solutions. We did so while navigating through some macroeconomic and legacy related challenges. And over the course of the year, we delivered sequentially stronger quarterly results. We had an excellent fourth quarter with over 40% adjusted segment operating income growth, leading to 23% growth for the year as a whole. As a testament to quality, we generated strong free cash flow with 120% conversion of annual adjusted net income. We also expanded our global reach and secured future growth with a record $5 billion in annual orders for a record $10.8 billion of adjusted backlog. In Civil, we launched several new training centers and deployed 23 full-flight simulators during the year to our global network to support the major customer outsourcing agreements we secured in the U.S., Europe and Australia and increased pilot train demand across all segments of aviation, exemplifying our more efficient cost structure we eclipsed prior peak Civil margins even before the market fully recovers to pre-pandemic levels in key regions like Asia. We also booked a record $2.8 billion in annual Civil orders for a 1.3x book-to-sales ratio, demonstrating the sustained high demand for pilot training solutions and our next-generation digital flight services. These included comprehensive long-term training agreements with airlines and business jet operators worldwide and a total of 62 full-flight simulator sales for the year. We also made excellent progress expanding our reach in digital flight services with the ongoing integration of AirCentre and the adoption of our next-generation solutions by our long-standing airline customers. Civil concluded the year with a record adjusted backlog of…

Thank you, Marc, and good afternoon, everyone. Looking at our results on a consolidated basis, revenue of $1.3 billion was up 32% compared to the fourth quarter last year. Adjusted segment operating income was $201.9 million compared to $142.7 million last year. Quarterly adjusted net income was $110.9 million or $0.35 per share compared to $0.29 in the fourth quarter last year. For the year, consolidated revenue was up 25% to $4.2 billion. Adjusted segment operating income was up 23% to $548.1 million, and annual adjusted net income was $279.2 million or $0.88 per share compared to $0.84 last year. We incurred restructuring integration and acquisition costs of $15.3 million during the quarter related mainly to the integration of AirCentre acquired last year. Net cash provided by operating activities was $180.6 million for the quarter compared to $206.8 million in the fourth quarter last year. And for the year, we generated $408.4 million from operating activities compared to $418.2 million last year. We had strong free cash flow in the quarter of $172 million and $335.7 million for the year for an annual cash conversion rate of 120%. We continue to target an average of 100% conversion rates going forward. Uses of cash involved funding capital expenditures for $62.9 million in the fourth quarter and $268.8 million for the year, driven mainly by the expansion of our civil aviation training network in with secured customer demand. These opportunities translate to some of our best returns as our simulators, assets ramp up within the first 2 years of their deployment. With a record order backlog and the large number of agreements we announced over the last year to secure airline outsourcing and training network expansions in Commercial and Business Aviation we are expecting a higher level of organic growth investment in…

Thanks, Sonya. We continue to have a highly positive outlook for fiscal 2024 beyond notwithstanding some of the macro-level turbulence in the general economy. We see clearly defined secular trends that are highly favorable across all of CAE's business segments. In Civil, we've shown over the last year that there is indeed a growing desire by airlines to entrust CAE with their critical training and digital operational support and crew management needs. Demand for air travel continues to thrive, and our business is driven primarily by the regulated training required to maintain the pilots and crews who operate the global in-service fleet of commercial and business aircraft. As an additional secular driver, we expect to sustain high level of pilot movements from the growth and replacement of the active pilot population. According to our estimates, over half the commercial and business pilots will be active in a decade from now have yet to even begin their training. Given that backdrop, we expect our Civil business to continue growing at above market rate, driven by the remaining stages of the cyclical recovery, primarily in Asia and a sustained high level demand for pilot and pilot training across all segments of Civil aviation. In fiscal 2024, we expect low to mid-teen percentage annual growth in Civil adjusted segment operating income generated at the current higher margin level and driven by higher training and product volumes and the ongoing simulator deployments to expand our global training network. We expect to see a more typical seasonal pattern for training demand this fiscal year weighted more heavily the second half. We also expect about 3/4 of our approximately 50 annual full-flight simulator deliveries to occur in the second half. Turning to Defense. The sector is already in the early stages of an extended up cycle…

Thanks, Marc. Operator, would you now please open the call to questions from financial analysts.

. Our first question comes from Fadi Chamoun with BMO.

I have a couple on the Defense segment. The 2024 outlook for improving quarterly results year-on-year, I'm guessing that's based on the $82 million, which is corrected for kind of the contract write-off in the first quarter of last year?

I'm not. Well, I think what I'd tell you about Defense, I'll probably be able to let Sonya after. But what I'd say, Fadi, look, when I look at Defense, there's no doubt we're going to have strong growth in defense in the year. And that's really -- when we talk about continued year-over-year improvement each quarter this year, it's exactly that. We see a very good path to that. As you'll recall, I mean it's all about working through the existing backlog of lower margin legacy contracts that we executed during the time of with still some effects of our manpower shorter, part shortages and delayed orders due to Ukraine. I mean that's working itself through. We're quite well through it. And at the same time, reselling the backlog with larger and more profitable contracts. It takes phasing, it takes time. We're early in the year. I mean, again, I'm quite confident in that strong growth this year. I think as I said many times before, in this business look for the orders, look at the orders, and you see the orders have been strong. We had another year of 1.1 book-to-bill. And since the end of the quarter, I can tell you, I'm very excited about the contracts that we've announced. And I think 1 tidbit I'll give you now is that with the recent orders that we won with the Air Force on the IFT-R contract with the U.S. Army with the FSTSS contract, which is, as I since mentioned, the largest simulation contract in the world for helicopter training with the U.S. Army. No exaggeration. We touch all 43,000 U.S. Military pilots at some point in the career, I think it's pretty exciting going forward. So I mean that's long answer, I don't know if you want to add anything -- that's it, Fadi.

Okay. Just maybe a couple of follow-up on this. The EPS CAGR guidance for 2025, in the context that Civil growth is now settling in somewhere in that low double digit to mid-teens. That implies Defense very significant ramp-up in profitability of defense going into 2025 to somewhere near $200 million EBIT contribution. I just want to understand, is this a framework that we are thinking about? And maybe what is the cadence of that improvement? Is it more weighted to 2025 when you look at kind of the backlog and how the renewal of the P&L and overcoming some of these legacy contract margin issues that you have right now? Is it more 2025 weighted? Is it kind of more spread out in a linear fashion and this improvement going into the next couple of years? And one last point is on the contract you announced yesterday, which is a great contract going back on that, by the way. What is the CapEx -- total CapEx that is required to invest towards that USD 455 million revenue that you expect?

Okay. I'll start by the first part of that question there. I think that -- when I look at what basically going back and every number you said there, in Defense -- look, what we're going to see here, we'll see again, strong growth in Defense, we'll see more revenue improvement towards the second half. In terms of margins on Defense, we'll start seeing a bigger inflection in the absolute margins themselves as we get into fiscal '25. That's what we'll see. But and inevitably, that's going to support the EPS guidance that we have as you outlined. With regard to the CapEx on FSTSS. Look, we can't go into too much in terms of the contractual details for a few reasons. Again, we're -- I'm extremely excited about that contract. I think it's important to note that it's got a similar financial profile to our civil training business. And with respect to investment, we'll start to make investments later this year, but it's going to be spread over a multiple year over the 12-year contract. It kind of looks like an airline training contract. That's what I would tell you at the moment.

Our next question comes from Konark Gupta with Scotiabank.

I just wanted to maybe follow up quickly on defense segment. So we saw the continuation of the SOI rebound sequentially in the fourth quarter. But what really kept the margin intact at 5.7%. It wasn't a huge improvement from the previous quarter sequentially. And how do you see that margin, to your point, Marc, as you see growth an inflection point, do you see margin at Defense higher in fiscal '24?

Well, as I said, I think we'll get more of a bigger inflection in the actual margin performance percentage margin as we get closer to the end of the year fiscal '25. What I do see is, obviously, we're going to see growth year-over-year in absolute numbers. So quarter-over-quarter, year-over-year, you're going to see growth. I mean, we'll be margin sell. I would see depreciation. I can't be precise to you because -- there's a lot of timing to this, I would tell you, timing of ramp-up of new programs and wind down of ones we have. So there'll be a crossover point, but it would be hard for me to be more precise on that rate at this moment in time.

Right. And what was -- to my question on the Q4 margin not improving much. Was there the same legacy issues still continuing? Or was there any improvement?

Yes. I mean, it's essentially the same issues. As we said before, there's no surprises. And as I said before, they're not going to be. We're continuing executing on the programs that we have, and we -- those are legacy programs that are being gradually replaced with the ones that we see as accretive to the margin objective that we have.

Okay. And just a quick follow-up on Civil. So you guys are expecting a pretty decent growth here in fiscal '24 on SOI for Civil, low to mid-teen. But you're also saying at the same time the percentage margin is going to be steady-ish relatively at high levels where you are right now. Is there any change in mix that you anticipate in fiscal '24, like business jet training is kind of maybe not growing as fast and the simulator sales are growing? And is there any change we should be mindful of with mix?

Well, definitely, it's not because business aircraft is not growing as fast, I can tell you that, quite confident about that. It's really a question about the ramp-up of new simulator deployments. As you saw, we deployed, I think it's 23 full-flight simulator last year. We opened up our new training centers, for example, in Las Vegas, very successful. But inevitably, I mean, they create great incremental margins within 2, 3 years, but initially, they're low margin as we ramp them up. So that's really what you're seeing right now. And there's room for margins to go and beyond that, that's for sure. But I think margin 22% range is, I think, in the range that we would expect at the moment.

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

So I just wanted to ask a question on the Civil outlook quarter came in great. The fiscal 2024 outlook was very strong as well. But I wanted to ask a question about the longer-term strategy where you potentially see some growth there post 2025 and more specifically on your position in India. What's your position in that country? If you can talk about some of the relationships you have with the country's major airlines? And any color on your strategy there?

Well, I can tell you, we're a very strong position in India. We have training centers in multiple locations there. I'm pretty sure that I'm correct in saying we have strong relationship with every carrier that is in India, of course. We have a long-term partnership with IndiGo Airlines there, where we provide not only training for probably all of their cadets and just right there. IndiGo is like 50% of the lift in India, for example. And so I feel very comfortable. And in terms of the long term, look, there's going to be a need for pilots just to fuel the growth in civil aviation, both in -- whether it be in airline traffic and business aircraft for years to come. And with the dominant position that we have in this market and the relationships that we have with the world's airlines I see it has very good growth potential. And I put on top of that, that I'm very happy with what we're seeing as the growth of our flight services business, which remember that there's -- in our flight services business, our training business has a huge amount over 90% customer overlap. And as airlines seek to modernize their infrastructure, whether it be on crew management, on flight planning and those kind of infrastructure needs. I think we're invested in a business at the right time.

I appreciate the color. Just kind of a longer-term question on the Defense side as well. One of the things that's come out of the Ukraine War is the need for some common standards, excuse me, which NATO could potentially help set. For example, I know you guys don't produce ammunition, but we have British tanks with certain types of guns, and they can't fire ammunition for a smooth board German or American tank, but I think this is really highlighting some of the growing importance of data in weaponry, potentially some open architecture software that could potentially allow some plug-and-play kits. So could you just share your thoughts on these opportunities for CAE if NATO countries potentially move to more common standards and how your business is set up to compete if that were to be the case?

Well, I think what I would say at the aggregate level is that CAE -- we've got a long history of supporting allied forces and our support is training, and that's what we do. And when you think about what do militaries do when they're not in operations, they train. That's all they do. They train for conducting their missions and accomplishing what we see as part of our noble mission is making sure that the men and women in uniform are able to execute their missions and return home safely. That's what we do. We do it across a host of platforms in the in aviation in the Army, on the naval side, in fact, in all 5 battle domains. And then maybe to a broader point to your question is that the nature of warfare is a lot more complex. It involves warfare and contested environments. And you need to be able to train in a very realistic manner. And there is no better, more realistic way. The only real way to be able to do it involving all 5 battle space domain than virtually. And for us, being the dominant virtual training provider in the world, I think we're in a very good position to support that growth in the years to come.

Our next question comes from Tim James with TD Securities.

Maybe a question here for Sonya, I suppose. Just thinking about the investments that the company has been making in intangible assets and that's been kind of ramping up with company growth over the last 4 or 5 quarters. I'm just wondering how we should think about the cash requirements for intangibles in fiscal '24 and beyond and sort of what that -- those investments will be focused on?

Tim. So yes, we have seen a bit of a ramp-up, and that was expected. It came along with our commitment to develop on the civil flight services business. As you'll remember, we bought it at quite an interesting multiple knowing that we would develop and take and advance the technology on that front. So that's been the driver, and I expect that to be similar this year.

Okay. My second question, just thinking about -- and I'm not sure you can parse it out this way, but let me ask the question. Could you talk about your exposure to regional aircraft training, really where I think the pilot shortage is maybe most acute or maybe most evident. Are you seeing that drive that initial enrollments or kind of demand throughout your business where you can kind of point specifically to that part of the market?

Well, I can take it. I mean I appreciate the question because we're very strong in training regional airlines. I think we're by far the largest provider of training for regionals in the United States, all of them and as well, very, very strong on the flight services side. You've seen us just recently in the last few days, signed a landmark agreement with SkyWest and that was on top of a deal that we signed a few months ago with Frontier, which is not a regional airline, but you gave at the point. So look, if I could tell you if I could have another couple of CRJ simulators ready now, let's put them in right now. So, the amount of demand is quite unprecedented. And I can tell you, our training centers supporting regional craft are very busy. And yes, to your point, that is driving activity from an SEO standpoint flight training organization .

Our next question comes from Kristine Liwag with Morgan Stanley.

And Marc, maybe going back to Defense & Security margins. You've been very clear about you've been filling the defense backlog with more profitable contracts. But can you help us quantify how much of these -- the composition of the fiscal year '24 revenue will be? How much of that is from legacy less profitable contracts versus the more profitable ones that you've been booking? Is that 50% more or less. That would really help us understand the bridge? And then also any indication for what that looks like for fiscal year '25 would be really helpful.

Well, I'll tell it's getting much more in fiscal '25 as we -- there's some certain programs that we call drag programs that were executed years ago that are at quite low margin. So I mean it's offsetting itself over the next 12 months. Being more precise to you on exactly where does that happen? How much percentage? Look I would hazard a guess at 50-50. And when I say yes, it's a pretty educated guess as I look at that. But I think look at margins start getting towards our target as we get into the latter end of the year.

And if I could ask another one on Civil. Last quarter, you mentioned that the Sabre AirCentre was about 10% of Civil revenue. What was it this quarter? And then also, how should we think about the margin composition for AirCentre versus the overall Civil business? Is that accretive or dilutive to the segment margins?

So I think it's around 10% still, Kristine, so holding around that. And as we've said before, it's accretive to the Civil margins as well.

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

Just maybe a bigger picture question, looking at the longer-term guide. How should we think about growth for -- in fiscal '24, you're looking for mid- to -low teens growth in the Civil segment. But then the longer-term growth for the business you're looking at in the . So does that mean we're seeing that kind of the growth is going to be kind of rear end loaded? I mean, how should we think about that transition from fiscal '24 to your longer-term guide?

I don't see it back-end loaded, Ron. I'm not sure how you arrived to that conclusion, but we definitely will see back-end loaded.

No, it's going to be a progression in margins. We all had said in that 3-year guidance that Civil margins would expand. But it's also volume. So with all of these agreements and outsourcing and the additional organic CapEx, it's also -- it's higher margin on higher volume. So both take you there.

So that gets you to that kind of mid-20 growth or whatever kind of the 20-plus growth?

Yes.

Our next question comes from Michael Kypreos with Desjardin Capital Markets.

Maybe in defense, the active bids and proposals jumped from $7.3 billion to $9.3 billion over the last quarter. Maybe just any additional color on that, the bidding pipeline and maybe any delay expectations related to the current U.S. budget negotiations that are ongoing?

Look, I'm going to answer the last part of your question, but what I would like to say is that the day that -- the Defense business is a proxy to the U.S. government budget, I'll be very happy. Having said that, look, you can always -- you could -- the only concern you would have that might see short term something dramatic happens that stops new orders from happening. I don't see that, that would just be timing on short term. To me -- to me, the position we have in the market is very, very strong. And we're -- the backlog that we see in terms of -- actually the bids outstanding is just basically the fact that with our position in the market, we see opportunities to bid a much larger group of business. And that's right in our sweet spot. And we -- as I've said many time before, we don't prepare bids on U.S. military or any military contract unless we think that we have a pretty good chance to win because preparing those base is very manpower intensive, it's very labor-intensive is constantly. So if we believe -- if we bid on them is because, as I said, we think the probability of win is high. And that's -- it's just a reflection what CAE looks like post the L3Harris acquisition, where we've really transformed this business to become the large the #2 -- OEM-independent training provider in the world for simulation. So the scale that we have is really unprecedented in a number of platforms, I mean, aviation platform and platforms of all segments are much higher than they were at any time before. And again, all of that contributes to the amount of business that we can go out after with a reasonable and high level of probability win.

That's very helpful. And maybe just a quick one on the flight operating solution contract you signed with SkyWest. There's been some airlines in the U.S. that are budgeting large budgets for IT overhauls. You see anything picking up in that space as maybe government regulation on cancellation service increases? Or is it still a steady state as usual?

Well, we're seeing a lot of activity, and we have a lot of discussions with airlines as they want to renew and modernize their infrastructure. They all have to do it. They all realize that we have in order to keep up with the enhanced demand that there is out there, they are having to modernize their platform. So that's what we're seeing. So to me, I see lots of potential for growth in this sector, and we're doing well in it. I'm quite pleased as I said, results where we are into integration and the timing of our investment in Flight Services.

Our next question comes from Noah Poponak with Goldman Sachs.

Marc, you answered to a prior question about the mix of defense this upcoming year, that's high-margin programs versus what you call drag programs, and you tossed out 50-50. Are you saying that half of the defense business is what you call a drag program? Or you're saying half of what's been a drag program has gone or is rolling off in 2024?

No, I definitely not half our drag program. No, not at all, no.

So you're saying that half of what's been a drag is rolling off in 2024? Or what is 50-50 mean in that context?

Yes. I think I'm going to bring you back to what the outlook is in Defense Noah is that what we're going to see is strong growth in a year defense. We're going to have continued year-over-year improvement in the amount of SOI that we generate every quarter relative to the same quarter the year before. And that's -- we have a very good path on that. And that's why I'm comfortable guiding to that today, even though it's pretty early days in the year. And in terms of the margin itself, as new programs come on, replacing the other ones that are dragging and dragging doesn't mean 0 necessarily. Just dragging to the marriages that we're targeting to do. So the margin inflection starts happening later in the year and certainly as we begin in fiscal '25.

How many programs in Defense approximately would you call a drag program at this point?

I won't get into that. because then I define to you what exactly is the drag program. We execute literally probably in the region of 500 or 600 program that's at once in Defense at any given time. That's about the number that we have that we're executing at this moment in time. And they believe it at that Noah.

Okay. Yes. I mean, it's been asked about a bunch. I don't want to keep asking the same question, but my understanding of what happened there was you acquired a business realized, there were just a handful of bad contracts written and that those just need to roll off. And I appreciate the reasons you wouldn't want to get into all the details of this on this call. But at the same time, the kind of reluctance to give the specifics here, I think, risks just leaving everybody still confused as to exactly what's going on and when it looks better other than just kind of taking the high-level workflow? Do you know what I mean?

It's not just the business we acquired. Don't forget that we've been winning contracts. We've been executing program both from legacy CAE, whether it be U.S. and international as well as the L3Harris contract under an environment where we had -- just like the rest of the industry, pretty significant part shortages issues, manpower shortages and delays in orders, which we expected to get that were a little delayed because you focused on Ukraine war, which in the longer term, obviously drives budgetary pressures higher, which is a good thing, but in the short term, certainly affected the amount of contracts that were worked on that we can translate into revenue for us is we just got delays in orders. I mean, in terms of specific drive programs, as you might want to think about it very -- I mean, very low profitability, that's a very small number of contracts.

Okay. Okay. That's helpful. The capital expenditure increase this year, what's that for? And then should we be thinking of that as a new base that you then grow off again beyond '24? Or is there a sort of onetime step-up this year?

A lot of it has to do with the success that we've had in convincing airlines to convert more of their training to us. If you look at, for example, 4 out of -- 4 out of 5 major airlines in the U.S. are now training with us. That's a big step up. And once you do that, I've never seen it go the other way. At the same time, you seen us deploy new centers for business aircraft, which are highly accretive, very good margin performance in a market which I see as structurally higher going forward. That's really what you're seeing right now. I'm not going to get beyond this year, but that's really a bulk of it.

Our next question comes from Fai Lee with Odlum Brown.

Marc, I just had a couple of questions on Civil aviation. The utilization rate this quarter was 78%, but Asia isn't fully recovered. I'm just wondering in terms of how should we be thinking about where the utilization could settle in under a more, I guess, call it, normal utilization in Asia?

Well, I think there's room to grow still in Asia. It has been recovering rapidly since the start of fiscal year in -- our Q4 utilization in Asia was certainly substantially improved versus the start of the year. So there's still room gas in the tank, if I should say on that one. I mean, utilization is not a perfect number, I would say, because don't forget, as we ramp up new simulators, we've ramped up a lot of simulators that will kind of serve to depress the utilization in the short term because, obviously, if the ramp and use training center or you do simulator up, it's not going to be a full utilization right off the bat. So and maybe just Asia Pacific, in terms of China, I would add that that's mainly a simulator market for us. We typically sell maybe 6 to 8 full-flight simulators a year to China. Over the last couple of years, we've only sold 3 in total, but we're definitely seeing a pickup in the sales-related activity in China.

Okay. So in terms of like -- I know there's some noise on the simulators, but in terms of like utilization rate on a more normalized longer-term basis? Is it sounds like there's scope for it to go up maybe in the 80s. Is that kind of the way to think about maybe mid-80s a maximum or on a normal...

It can. It certainly can. We're operating at a very high level now if you look at the global fleet at those kind of levels. But we have printing centers that operate north of 100%. That's I mean, practically to operate the whole fleet of 300-odd simulators at that level, it would not be tenable because you have to have time to maintain them, that kind of thing. But you definitely could see it go up above 78%. That's definitely possible. And don't forget, we always work on making sure that we get the best returns out of utilization we get.

Okay. And just a follow-up on -- in the -- your guidance, you mentioned that civil is going to continue growing at "above market rate" I'm just curious what -- I know you gave guidance on the SOI and where you think that's going. But I'm just wondering what is that market rate that you're talking about?

Well, we're talking about the underlying rate of growth of mainly airline passenger travel or .

Operator, I think that's all done, we have for members of the analyst community. We'll now open the line to members of the media, if there are any questions there.

. We have a question from Stephane Rolland from La Presse Canadienne. Stéphane Rolland:

There are no further questions.

Yes. Thank you. I want to thank all participants today, financial analysts and members of the media for joining the call. Remind you that a transcript that today's discussion can be found on CAE's website. Thank you.

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