Good day, ladies and gentlemen. Welcome to the CAE Third Quarter Financial Results for Fiscal Year 2025 Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Mr. Andrew Arnovitz. Please go ahead, Mr. Arnovitz.

Good morning, everyone and thank you for joining us. Before we begin, I'd like to remind you that today's remarks, including management's outlook and answers to questions, contain forward-looking statements. These forward-looking statements represents our expectations as of today, February 14, 2025, 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 risk factors and assumptions that may affect future results is contained in CAE's annual MD&A and MD&A for the three months ended December 31st, 2024 available on our corporate website and in our filings with the Canadian Securities Administrators on SEDAR+ and the US Securities and Exchange Commission on EDGAR. On the call with me this morning are Marc Parent, CAE's President and Chief Executive Officer; and Constantino Malatesta, our Interim Chief Financial Officer. Nick Leontidis, CAE's Chief Operating Officer is on hand for the question period. After remarks from Marc and Constantino we’ll open the call for questions from financial analysts. Before we begin, I'm sure you've all seen by now the news release we issued yesterday afternoon alongside our Q3, it announced the appointment of four new directors to CAE's board, with Kaylin Rovinescu as new Chair. The other appointees are Peter Lee, Catherine A. Lehman, and Louis Petit. These changes come after consultations with our stakeholders, focusing on the board's ongoing review of its composition, and a transition towards renewed board leadership. The four appointments are being made in conjunction with the retirement of four directors, with Calin Rovinescu as new Chair. The other three appointments are Peter Lee, Katherine A. Lehman and Louis Têtu. chair of the board since 2022, and as a director. These changes come after consultations with our stakeholders focusing on the Board’s ongoing review of its composition, and a transition towards renewed Board leadership. The four appointments are being made in conjunction with the retirement of four directors, Alan N. MacGibbon, who has served as Chair of the Board since 2022 and as a director since 2015. Margaret S. Billson, François Olivier, and David G. Perkins We extend our gratitude for their exceptional service and valuable contributions during their tenure, and we look forward to welcoming our new board members to CAE. Let me now turn the call over to Marc.

Thank you, Andrew, and good morning to everyone joining us on the call. Let me first say that I certainly echo Andrew's comments, and in particular, I want to express my heartfelt gratitude to Alan for his steadfast leadership and commitment to our shared vision for CAE. I'm also grateful to the other departing board members, François, Peg, and David, for their continued support and advice through the years. As we embark on the next chapter, I'm looking forward to working with our new board members in the coming months, and I'm confident that together we'll continue to build on our success. Before I move to our quarterly results, I also want to take a moment to share how proud I am that CAE has been recognized as one of Canada's Top 100 Employers for the third consecutive year, and has earned a spot on Forbes Canada's Best Employers list for 2025. These honors reflect the collaborative, innovative, and empowering culture that we've built at CAE, made possible by the dedication of our 13,000 employees. This strong foundation of talent and commitment continues to drive our success, as reflected in our outstanding third quarter performance. During this quarter, we generated a record $410 million in free cash flow, while further securing CAE's future with $2.2 billion in new orders, culminating in a record adjusted backlog of $20.3 billion. In Civil, we finalized the purchase of an increased stake in our SIMCOM joint venture, and extended our exclusive long-term training agreement with FlexJet and its affiliates, initiatives that generated more than $500 billion in additional order intake and backlog in our highly desirable business aviation training segment. In total for Civil, we booked $1.5 billion in orders or a two-times book-to-sales ratio on revenue that's 21% higher than Q3 of last…

Thank you, Marc. Good morning, everyone. Consolidated revenues of $1.22 billion was 12% higher compared to the third quarter last year, while adjusted segment operating income was $190.0 million, up 31% compared to $145.1 million in the last quarter. Our quarterly adjusted EPS was $0.29 compared to $0.24 in the third quarter last year. Net finance expense this quarter amounted to $56.6 million, which is up from $52.9 million in the preceding quarter and $52.4 million in the quarter last year. The higher level of finance expense is mainly the result of higher lease liabilities in support of our training network expansions and additional borrowings to finance the SIMCOM on transaction this quarter. This was partially offset by lower finance expense on long-term debt due to a decreased level of borrowings during the period aligned with our ongoing deleveraging objectives. All things considered; we now expect that net finance expense for the year to be approximately $10 million higher than last year. Income tax expense this quarter was $34.8 million, for an effective tax rate of 17%. The adjusted effective income tax rate was 29%, which is the basis of the adjusted EPS. We continue to expect a run rate effective income tax rate of 25%. I am especially pleased with our strong cash flow performance this quarter. Net cash from operating activities was a record $424.6 million, compared to $220.8 million in the third quarter of fiscal 2024. Free cash flow was a record $409.8 million, compared to $190 million in the third quarter last year. The increase was mainly due to a higher contribution from non-cash working capital and higher net income. All told, we expect to generate strong free cash flow for the year, with a conversion of adjusted net income of over 150%, which is an…

Thanks Dino. The investment thesis for CAE remains as compelling as ever, and our record-setting $20 billion backlog reinforces my confidence in the company's bright future. A common driver across both our Civil and Defense segments is the sustained high demand for pilots and pilot training, both to support industry growth and to replace retiring personnel. We are in an excellent position in strong markets, and these structural factors continue to fuel long-term demand for our training and operational support services. In Civil, while commercial OEM aircraft supply disruptions have persisted, recent optimism surrounding production rate recovery and a return to service of aircraft that have been grounded by engine issues has occurred. Although, some airline customers in the Americas deferred initial training reservations this quarter, those same airlines are now actively engaging with us to plan the timing and scale of their pilot hiring ramp-up and associated training needs. This isn't a question of if or when. Looking ahead, the demand for air travel, ongoing pilot requirements, and the delivery of nearly 15,000 aircraft from Boeing and Airbus' combined backlogs over the next decade position us as a key player in a long-term secular growth story. Similarly, the outlook for business aviation training remains highly positive, especially as we continue strengthening our presence in this critical segment. Building on our increased investment in SIMCOM, FlexJet, one of the world's largest fractional jet operators, announced last week a $7 billion aircraft order and projected fleet expansion to approximately 600 aircraft by 2031. This move underscores the accelerating shift towards fractional jet ownership, which has been growing much faster than the overall market. As FlexJet's exclusive training partner, CAE is well positioned to benefit from this industry growth. In Defense, demand for our training solutions remains robust, driven by a global…

Thanks, Marc. Operator, please open the line for questions from financial analysts.

[Operator Instructions] Our first question is from Konark Gupta from Scotiabank.

Hi, this is Eli filling in for Konark. Good morning, everyone. My first question is on the CapEx targets reduction. Was it more a function of delays and demands in certain areas, or just more prudent?

I think it's prudent that we always align basically capacity with demand, so we always stay in lockstep, and that's what you see reflected here.

If I can add to that, I think we, I just wanted to add effectively that this is lower than previous market expectations. So again, a continued example of a disciplined approach to capital allocation and cash management. This, along with the $410 million of free cash flow, I think is evidence of our disciplined approach to capital allocation, and our focus on driving free cash flow up.

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

Well, look, I think, look, I mean let me start with maybe the flight activity, which leads to that. Maybe look at year-over-year figures. I think what drives everything is the commercial flight activity, right. So, airline passenger traffic. So, in the Americas, what we've seen is about 7% growth year-over-year, and that's driving actually, perversely, what you see in the Americas is, as we've talked about, we've seen the utilization of our training centers was down slightly, and that's driven by the lower pilot hiring in the United States. If I look at in Europe, Middle East, passenger traffic's up 5%. And in that case, we're seeing corresponding utilization increase. And in India, we're up about 7%. Anything you'd add to that, Nick?

No, I think the US utilization is down year-over-year. And it's really just a function of the hiring demand that is supposed to be happening right now.

The next question is from James McGarragle from RBC Capital Markets.

Hey, good morning. Congrats on a good quarter, and thanks for having me on. On the impact from potential tariffs, can you just discuss a little bit how you're positioned to react in the event we have tariffs that are sustained? And have you seen any shifts in your customers' decision-making from tariffs, delaying orders, looking for other options? I understand it's only been a few weeks. For any color you can provide, it will be very helpful. Thanks.

Sure, thanks for the question. Look, it's obviously a situation that we, like everybody else, hope reaches constructive and bilateral conclusions through negotiations. But look, I think as we've said in the past, we certainly don't expect to see a material impact in the short term, certainly, so the next few months to a year, from this on our business as a whole. But it's definitely something that we're monitoring closely. And if any kind of tariffs become more lasting beyond that, beyond getting to more than a year or two, obviously we would adapt. And we have the capacity to adapt. I mean, bear in mind, if you think about our business, it's a business that's changed a lot over the last 20 years. And more than two-thirds of our revenue is generated from services. And we deliver that in-country, so that's not an issue. And so the main product that we sell into the United States is the full-flight simulator. There's a lot of, there's already a big proportion of that, which is U.S. or EU origin. That's one factor. But again, I think there's a lot of ways for us to mitigate things if things, again, should last beyond should I say, next few months to a year. And again, if I look at, I think conversely, what we're seeing this year, we're particularly not affected because with the lower pilot activity -- hiring activity that we've seen this year on the back of OEM delays, we've actually had relatively few sales to our U.S. customers this year. So we've only got a few deliveries going there this year, although simulator sales themselves remain strong. They're just coming from other parts of the world.

Hey, thanks for the color. And then on the defense results, the margins are obviously came in really strong in the quarter. Guidance maybe implies a little bit of a step down next quarter. So anything to call out there in terms of one-time items in Q3. Was there seasonality that might have helped the results in the quarter? Just trying to get it, see how things might evolve a little bit longer term. And then Nick, you've been looking at this business for a few quarters now. The team highlighted in the release, margins are expected to continue to expand. So can you just talk about your level of confidence in that? And anything in particular that you see as an opportunity in fiscal 2026? After that, I can turn the line over. Thanks.

Okay, good. So we'll tag team this. Okay, I'll kick it off. Turn over to Dino and then finish off with Nick. Look, I think what you reflect here is we're feeling very good about the direction of the business. Certainly the team in place of which Nick is leading with very good job. And the momentum at the front end, you just look at the order intake. I think it's nothing short of outstanding. And the geopolitical environment for unfortunate reasons, is fueling demand for the products and services that CAE’s are good at. So the team is executing extremely well. There's nothing really extraordinary in it. I'm sure that's what Dino's going to say. It really comes down here to execution, strong performance all around by the team. At the same time, there's risk reduction. Risk reduction is rampant. We're taking a very, very disciplined approach. And when we look at the fourth quarter, I think you always got to remember that defense is always shall we say, a lumpy business quarter-on-quarter, has the potential to be that as we execute contracts at any given time, you could generate plus or more revenue in a single quarter. So as we've talked about, we are raising the outlook. And I think we're still being prudent about defense business as a whole. But we remain very confident. So maybe just turn it over to you, Dino.

Thank you, Marc. And I would echo that. I'm really, really pleased with the 8.3% SY margin performance this quarter. It's an increase year-over-year, quarter-over-quarter. Again, you're right. I think you see a lot of this being a direct result of the process changes and things that we've changed as a team showing through in the performance and execution. We also closed off another legacy contract. And we expect another legacy contract to follow up by the end of next year. So we feel good about that as well. There was a little bit of help higher than usual R&D tax credits in the quarter. Nothing overly significant. Contributed maybe a 0.5 percentage point to the margin. And that's just usual timing that we see sometimes in quarter Q3. But overall, really strong performance in the margin and really good work done by the team.

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

The next question is from Fadi Chamoun from BMO Capital Markets.

Yes, good morning. Marc, I was wondering if you can offer some perspective on the board changes that were announced. Are there any specific kind of governance variable items that the board is focused on to the extent that you can share with us even from a high level kind of what does this change mean for? And my second question, I apologize I missed the beginning of the call a little bit. We had another call going on, but the puts and takes in terms of the organic growth in the civil aviation market like going forward, I'm guessing the U.S. market is a bit of a drag right now, but how should we think about the relationship in that market recovering to the delivery of the Boeing starting to ramp up? Is there a lag effect between the two that we should think about? And if you can offer kind of some maybe even high level perspective, what does the rate of organic growth look like when you put all things together between business aviation and what you're seeing on the commercial aviation side?

Well, maybe I'll just start with the last question not to deflect the first one, but just basically if you got my head around that one. Look, I think Civil, notwithstanding the softness that we've seen in the quarter again in the U.S. as you said, it's quite right. I mean, Civil had excellent results this quarter and it reflects the diversification in our Civil business in itself. And you highlighted a lot of the components there. Look, in this quarter what we saw is basically the continuation of what we saw in previous quarters and this year in pilot hiring in the U.S. is that basically a fraction of what it was just last year. And actually third quarter was our worst quarter in that regard. And that's just basically because we saw a continuation and perhaps more than that well, certainly more than we anticipated I think we're not alone in that in the amount of airplanes that were delivered by OEMs and the amount of disruption caused by groundings of aircraft across the world really that affect the customers of Airbus aircraft primarily. So for us in the where how that reflects itself in the United States is that when you don't have strong pilot hiring you don't have sorry, you don't have a lot of new aircraft being delivered to airlines, either you see the airlines basically essentially they increased pilot hiring substantially over the last couple years and now basically they have if you like for a short amount of time too many people too many pilots hired for the needs that they have on the aircraft that they're flying. So, typically when they stop hiring pilots what happens is that the like the effect of the large carriers are taking pilots when they hire…

The next question is from Kevin Chiang from CIBC.

Good morning. Thanks for taking my question. I apologize if you went through some of this in your prepared remarks. I was also on a call earlier. But just on the I guess on the announced Flexjet order with Embraer, obviously pretty large order for them. Just wondering, how you see that opportunity for CAE post the SIMCOM deal? And I know it's probably early days, but are there any investments you'd be required to make to support trading related to that large fleet order on the business aviation side?

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

Yes. I mean the FlexJet placed in order for 180 plus Praetor and Phenom, those are aircraft that we currently serve in the training center. I mean, we don't have enough capacity to deal with 183 aircraft with what we've got right now. So, yes, there will be investment in more Praetor capacity and more Phenom capacity. So but there's no need for anything beyond that. Like NONA can take that capacity in terms of space and deliver the training. And this is part of the reason why you saw the order intake and you also see the order intake as a function because one of the things we did was so this contract when we originally consummated the JV was a 15-year agreement. We were five years in. So the agreement was reset to 15 years. And so this justifies the investments for the next batch of aircraft.

Definitely makes sense. Seems like a pretty nice tailwind for you, especially post-SIMCOM transaction. Maybe to my second question I generally think of CAE as broadly immunized from kind of marginal change in U.S. spending or broader U.S. budgets just given the type of stuff you do. Just wondering if that's changed as a new administration. They're obviously looking at cost cutting maybe in a different way than previous administrations. Just wondering if you see anything at risk or anything that might have been impacted within your backlog given the changing administration.

The first thing I'll say to that one is, as I've always said, the day that CAE's forces will be a proxy to the U.S. defense budget, I would be very happy. But that's not the case. I think the reality is what you see is a focus in the United States and all of its allies, Canada, NATO, NORAD, is a strive to increase readiness of forces. And readiness means training. When you think about what a military does when they're not in situation conflict, they train. That's all they do. And with increasing readiness, what that means is more demand for the kinds of services and products that we do. You see that as reflected in very strong order backlog that we've already won. And the opportunity that we have out there in terms of the business we have out there for basically selection by customers. So I'm not, I mean, what you could see is short-term variations, like if we see some, for example, like a shutdown of the U.S. government, well, that could happen. I'm not saying it will. I have no crystal ball into that. Or if you have continuous resolutions that has been somehow the norm in the past few years, that can cause short-term disruptions if we're basically, let's say we're on a, we've won a new contract, which we have won a lot, and you get into a situation, for example, of a continuous resolution, where in that particular case, what happens is the government is precluded to be able to start activity on a new contract. But those are short-term issues that are not reflective of long-term trends. And finally, I think the big thing about it is in defense, as in civil, we enjoy the benefit of having very long-term contracts. So the backdrop that you see will go without many, many years.

The next question is from Sheila Kahyaoglu from Jefferies.

Good morning and thank you. Maybe if I could ask a two-part question in terms of simulator deliveries, how you're thinking about this year with 50 as your previous guidance being waited for Q4 but obviously there was a pull forward into Q3 and how we think about the exit margin rate for fiscal Q4 given potentially less simulator deliveries that are implied and what it means for fiscal ’26?

Want to add handle it, Nick?

Sure. I mean on the simulator deliveries, obviously we're not changing any of our guidance. We have the same it's going to be more than 50 sims and obviously you'll see the actual number. Some of this just depends when we're on the edge of March 31st. Some may be delivered in next fiscal year. But I don't see an issue with the guidance that we've given today. In terms of Q3, maybe I'll let Constantino. Q4, excuse me.

Yes, no, so what I think we'll see is, again, products being a higher proportion of the revenue mix going forward and that's why we've also adjusted the guidance to say that we'll be modestly below the adjusted 22% to 23% adjusted SOI margin range for the year.

Okay. That makes sense. And then maybe just another question on, again, we're seeing a growing divide among operators outlining expectations for GTF AOGs over the coming years. Some suggest AOGs should be unwinding from peak levels steadily in line with RTX's own commentary. Others like Wes, they are talking about beyond 2026. So just maybe if you could touch on the GTF and what you're seeing for 2026, how we should be thinking about framing that?

Maybe I think, yes, I think we can talk about it because typically some of our large customers, like IndiGo Airlines have that issue. Comments on it, Nick.

Yes, I mean overall, I mean we do track the aircraft grounded, the 320 NEOs, so the number is going down. I mean it's certainly coming down from where it was. I mean we have Indigo, as an example, they're the largest airbus operator of NEOs and have the largest fleet of grounded aircraft. They are improving. So I think it's just a question of time as they catch up on some of the capacity issues, they have to service all these engines in a timely manner. Definitely, I mean they're a barometer to how this is going. And their fleet is improving. We can see it through obviously training. How long it's going to take, it's not for me to say, but we definitely see improvement.

The next question is from Matthew Lee from Canaccord Genuity.

Hey, thanks for taking my question. I noticed in the quarter you didn't touch the NCIB. I joined this call late. But just given the focus on deleveraging and maybe opportunity for tuck-in and loss in the CapEx you mentioned, how much of a priority is buying back shares at this juncture?

I think we’d be able to kick off, I mean we've always had the same priority that we've had that we prioritized accretive growth, but deleveraging is close behind. So let's pick up on that one. We've said that NCIB we would use it opportunistically and we did. But I think today I think we reflect where the stock is at that we thought we had better opportunities to use our cash flow a bit, pick up on, Dino.

No, thanks, Mark, and good morning, Matthew. So we do we continue to talk to take a real balanced capital allocation approach organic investments where it makes sense and then further bolstering our financial position through deleveraging. So we look at NCIB effectively, like Mark said, opportunistically over time with excess free cash flow. You saw in Q3, we did not purchase any additional shares because our focus is deleveraging.

Do you have a target for the year in terms of NCIB usage or something we can point to in that regard or is it more opportunistic?

Absolutely more opportunistic. We focus on capital allocation, looking at all opportunities depending on excess free cash flow but definitely more of an opportunistic approach.

Next question is from Cameron Doerksen from National Bank Financial.

Yes, thanks, good morning. Just a quick question on working capital. Obviously, no significant positive, working capital reverse on in Q3. Just wondering if there is anything I guess that you are doing differently to manage your working capital flows to I guess improve over time. Just anything you can point to specifically that maybe there is a change in from past practices to improve cash flow from working capital?

Thank you for asking the question. I'm particularly pleased with our record free cash flow generation $410 million this quarter. I think what you are seeing here really is the direct benefit of strong execution. Especially in the sense this is allowing us to hit our building milestones, right. Then we use the levers that we have at our disposal to unlock and reduce non-cash working capital to generate cash. Alongside continued strict inventory management, discipline, organic investments, obviously lockstep with the market, this is the discipline approach to managing our cash and is giving us continued confidence that we will make our deleveraging commitments. So I think you saw in the guidance we expect to deliver cash conversion rate exceeding 150% compared in 2025 compare to our previous stated conversion rate target of about 100%. So this is really because of our focus on cash generation.

Okay. That's helpful. And maybe just as a follow-up, I mean, on the defense side and this question for Mark, just on the future lead in fighter program in Canada. Obviously, CAE selected to, I guess, to manage that program and then cements you as the for that future program. Could you just talk a little bit about what exactly your role is here on this program and kind of what the timeline might be for this to start actually contributing financially?

Yes, Thanks for the question, Cameron, particularly, we are pleased of that particular announcement. I mean this is just another really great example of how well CAE is positioned in a growth market. So what you see here and I can tell you and this I've been having personally these in-depth discussions with the government and Minister Blair specifically in defense. Canada is looking, stepping up, government is stepping up significantly its expenditures in defense to maintain the preparedness and readiness of Canadian troops. Yes, basically, again, that's Canada joining a course of nations that are doing just that. So what you see here is definitely a shift in previous practice. This is government putting a new mechanism in place to accelerate the procurement of military programs. I can tell you I've had a very personal role in working with government to make that happen. I think this is I would tell you I'm very excited about this. It's good for Canada, it's good for CAE, it’s good for Canadian industry in a very, very big way. So what you see here is we're becoming a key strategic partner. And what we're going to be doing here is being recognized as a strategic partner on this program on future fleet is to essentially design and assist their project team in finalizing the requirements, accelerating the procurement process beyond anything that's been done in the past on the future fighter leading program which of course as I said is going to prepare and train us for the transition to CF-35A. So we had the announcement this week with the Ministry of Defense, Ministry of Public Works responsible for the acquisition. So I mean just following what they said, they've got budgeted a $5 billion program that covers the acquisition of aircraft, training, courseware, procurement, instructors, onsite support for training delivery, asset management, base support. By the way, all of the kind of stuff that we do, not only in Canada but around the world. I mean if you look at a huge contract that was signed recently, the FACT contract in Canada, we're doing exactly that for I guess if you like the phases of training that are before future flip. It’s too early to stay as to basically get very precise with regards to the timelines here except that we're obviously starting like immediately on this program and the whole idea is to accelerate the procurement of this program so that the basically capability will be there on the CF-35 inter service.

The next question is Noah Poponak from Goldman Sachs.

Hey, good morning, everyone. Just wanted to go further on the civil margin, appreciate all the detail you've provided thus far. I know you've expanded business jet capacity pretty significantly. Is that full or are you in the process of filling that such that there's a utilization, temporary issue in the margin? And then if we look at the aggregate acquired revenue in civil of the last five years, has that been accretive or dilutive to the margin?

I'll turn it over to Nick. The last question, I definitely would say accretive. But go ahead, Nick.

Your first question, so yes, we do have a couple of training centers that are ramping up at the moment, namely Las Vegas and Savannah. We are, as you saw from the announcement, but the training center in Lake Nona is also in, I would say, almost at capacity. So I think there is definitely some drag that is coming from the ramp up of those two training centers. And come next year, come in April, we will be also opening Vienna. So there will be some there as well, although Vienna will be ramped up quickly because we are just moving a lot of the assets that are going into Vienna, initially are going to be assets that we already own and just moving around. So it shouldn't be too disruptive to the numbers themselves.

Maybe just adding, Noah, I mean just basically look at the market itself. The global business fleet itself is the same. It’s just not order from FlexJet, the deliveries of aircraft out of this jet OEM expect to be 12% higher year-over-year, 2025. And consistent with the previous forecast, the proportion of that is large jets. And I say large jets because that is what we are disproportionately amount of training we lose on large jets like Gulfstream, Falcons, Global Express. They are expected to account about two-thirds of all expenditures of new business jets for the next five years. So if you look at the market, I mean you see about four, I think I'm just reading the forecast here, 4.7% higher of large cabin business jet forecast between the next five years versus about 2.9% CAGR for medium cabin. And I think even another factor that is particularly important for us and in concert of the SIMCOM acquisition is the fractional and charter operators, fractional such as FlexJet of course continue to show extremely strong performance on a year-over-year basis, going much faster than the market itself. I mean just the fractional owner flight activity, to give you an example, is up 65% from 2019 levels, obviously prior to COVID. So and year-over-year to take closer to now, year-over-year fractional own operators are up 11%. Of course, all of that reflects in the amount of expenditure we've made expanding our business centers like the ones that Nick mentioned, Las Vegas, and of course the acquisition of SIMCOM.

So I guess without putting a specific year on it, but if we just think about the period of time in the future when you have the full utilization of the business jet expansion you've done, and then you do not face Boeing and Airbus are delivering somewhere near demand, you don't have engines, grounding airplanes, so that market's normal. Again, not putting a year on it, but just in the period of time in the future when all of your inputs are relatively normalized, what do the civil margins look like?

Higher. No, look, I mean, we're not going to get into the outlook today, but I think I said in my notes, I think I used the words and I'll repeat them. I think we have ample rooms to grow beyond that for the factors that you mentioned, and of course more absorption of overhead, more of the leverage effect in our training centers, so I think all things be equal. I think the factors you mentioned will inevitably and quite deliberately make margins go higher.

Okay. And then I just also wanted to ask a little bit more about the defense margin. Did I hear correctly you say that there's only one more legacy challenge contract that rolls off in your fiscal ‘26?

In fiscal ‘25. By the end of fiscal ‘25, there's one more that we expect to roll off.

Okay.

No, that will leave five contracts going into next fiscal year. We started with eight, we'll have taken out three in the fiscal year.

And so maybe just add a bit of color.

Yes, go ahead.

No, I was just going to ask maybe Nick, you want to add color on how you feel about those five programs?

Yes, I mean, I think I don't see, at least for now, we're on track with the remainder. Some of them are out next year or the year after, but they roll off as planned. And we feel pretty good about all the decisions taken to manage the remaining work and to manage the risk with the customers. So it's good that we have three out of the way, but we still have five and we still need to pay close attention to execution on those programs. But I don't see, at least at the moment, I don't see any issues.

Operator, we'll take just one more question as we come up on the hour.

Our last question is from Benoit Poirier from Desjardins Capital Markets.

Yes. Good morning, everyone. Just obviously on the free cash flow side, better than expected. You provide great color around the working cap for Q3. But when we look in terms of capital deployment, you intend to be below three times by yearend, so it's going to be a great achievement. Could you remind us your targeted level in terms of leverage longer term? And given the nice inflection on free cash flow, discipline around CapEx, I'm just wondering how you see capital deployment once you're at the targeted level?

Benoit, thanks for the question. So effectively, like I said, I'm really proud of the free cash flow conversion this year, this quarter $410 million. So when we look at CapEx, again, it's a matter of working and talking to deploying FFSs on the market based on what we see and from our situation we see with our customers. We don't want to be ahead of our customers. That's the approach we've been taking. We don't deploy FFSs in a market on spec. We invest organically to keep pace with the growth of our existing customer base. So that's why we constantly monitor the market situation. We are taking a focused approach, pro forma leverage. We want to make sure we continue to focus on investor-grade performance, and we're looking to be below the 2.5x net debt adjusted EBITDA range by the end of the next fiscal year. So continue to focus on generating free cash flow, disciplined approach to CapEx, working lockstep with the market, move forward.

Really quick. Just in terms of defense margin, obviously, when we look at fiscal year ‘26, you're going to ramp down further legacy contract, but also at the same time you'll be ramping up new business that I would assume will be accretive to margins. Can you point out some direction we might see on defense for margins for fiscal year ‘26? That's it.

It does sound a little bit higher, obviously, Benoit, I mean to the factors that we talked about before. I mean as you said, the fact we're winning a lot of backlog here and we're replacing the new backlog as they are accretive in the margin and target that we have in low double digit. And I've always said 10% is a way point, not a destination, but we're not going to get into that today. You saw the strong execution. We'll be very prudent how we execute business for obvious reason so look I think we’ll give you as usual outlook as we get into next quarter.

Thanks very much to everyone joining us on the call today. I'll remind you the transcript will be available later on our website. And we’ll talk to you after the fact that should we have any additional question. Thanks very much.

That brings the close to today’s conference call. You may disconnect your line. Thank you for participating. And have a pleasant day.