Good day, ladies and gentlemen. Welcome to the CAE First Quarter Financial Results for Fiscal Year 2026 Conference Call. [Operator Instructions] The conference is being recorded. [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 today. 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 represent our expectations as of today, August 13, 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 risks, factors and assumptions that may affect future results is contained in CAE's annual MD&A and MD&A for the 3 months ended June 30, 2025, 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 morning from CAE are Calin Rovinescu, the company's Chairman; Marc Parent, President and Chief Executive Officer; Matthew Bromberg, Incoming President and Chief Executive Officer; and Constantino Malatesta, our Interim Chief Financial Officer. Nick Leontidis, Chief Operating Officer, is on hand for the question period. After formal remarks, we'll open the call to questions from financial analysts. Let me now turn the call over to Calin.

Thank you, Andrew, and good morning, everyone. Since being appointed Chairman of CAE earlier this year, I've had the chance to connect with a number of our long-term investors, many of whom I've known through my years at Air Canada. While this is my first time addressing the broader investment community in this role, I want to share why I was compelled to accept the Chairman position, and more recently to take on expanded responsibilities as Executive Chairman. My relationship with CAE goes back many years. As President and CEO of Air Canada, I saw firsthand the value CAE brought as a trusted partner in building and sustaining a world-class training organization, particularly through our co-located training centers in Toronto and Vancouver. Earlier in my career, during my time in law and as a managing partner at Stikeman Elliott, I also had a connection to CAE through one of its original investors and longtime Chairman, Fraser Elliott, Co-Founder of that firm that bore his name. And as an investor, I've been a long-time supporter of the company's mission and potential. So it's both an honor and a privilege to now take on an active role as Executive Chairman. I've reoriented my professional commitments to dedicate the time required to support Matt and help guide CAE's long-term direction. In addition to Board duties, I'll work closely with him on strategy, operational excellence and capital allocation with a clear focus on enhancing the customer experience, improving free cash flow conversion and driving stronger returns on invested capital. A key priority will be deleveraging the balance sheet, not merely as a financial objective, but as a means to enhance shareholder value and strengthen CAE's long-term resilience. The company made solid progress last fiscal year, and we're targeting a net debt to adjusted EBITDA…

Thank you, Calin, for your very kind words. Let me start with a few highlights from the quarter. In Civil, we delivered solid results, supported by the essential nature of our services and the durability of our recurring training business. As indicated last quarter, we continue to make -- take a measured view of the first half of this year in light of macroeconomic uncertainty and ongoing aircraft supply constraints. In Q1, we saw an extension of the temporary pause in pilot hiring and a more cautious approach from commercial airlines, particularly in the U.S., where we believe hiring reach a trough. We have just 55 pilots hired in June by the 13 largest airlines. Similar dynamics were observed in other regions, and these factors contributed to lower utilization and fewer full-flight simulator orders in the quarter. By contrast, market conditions for business aviation, which accounts for about half of Civil's profit, remains strong throughout the period. Training center utilization came in at 71%, down from 76% in the prior year period, consistent with the short-term softness in commercial training we experienced last year. We also delivered 8 full flight simulators, which is the same number that we delivered last year. And while the early part of the year was shaped by macroeconomic uncertainty, we're beginning to see encouraging signs of stabilization, along with improvements in aircraft supply chains that are bringing greater clarity to airline hiring and fleet planning. The recovery in demand for commercial training solutions is really a matter of when, not if, and we continue to expect a positive inflection in the second half of the fiscal year. On the order front, we secured $511 million of business, including 5 full-flight simulators for a book-to-sales ratio of 0.84x and 1.27x on a trailing 12-month basis. We…

Thank you, Marc. Good morning, everyone. Consolidated revenue of $1.1 billion was 2% higher compared to the first quarter last year, while adjusted segment operating income was $147.8 million, up 10% compared to $134.2 million in the first quarter last year. Our quarterly adjusted EPS was $0.21, in line with the first quarter last year. Net finance expense this quarter amounted to $54.6 million, up from $49.5 million in the first quarter last year, mainly because of additional lease financing costs related to the recently opened training centers in our global network in support of growth. We also have additional financing costs associated with the consolidation of the SIMCOM joint venture in business aviation, which took place in Q3 last year. The increase was partially offset by lower finance expense on long-term debt on a lower level of borrowings during the period, in line with our ongoing deleveraging undertakings. Income tax expense this quarter was $19 million for an effective tax rate of 24%. The adjusted effective income tax rate was also 24%, which is the basis for the adjusted EPS. We continue to expect a run rate effective income tax rate of 25%, considering the income anticipated from various jurisdictions and the impact from global minimum tax legislative changes. Net cash from operating activities this quarter was negative $15.3 million compared to negative $12.9 million in the first quarter of fiscal 2025. Free cash flow was negative $36.2 million compared to negative $25.3 million in the first quarter last year. The decrease is mainly due to a higher investment in noncash working capital, partially offset by higher net income adjusted for noncash items and higher dividends received from equity accounted investees. With continued expected reversals in noncash working capital investments and our outlook for operations, we expect to generate…

Thank you, Dino, and good morning, everyone. I also want to thank Marc and Calin for the kind words, and the entire CAE team for a warm welcome. Let me start by saying what an honor it is to be joining CAE and to be stepping into the role of CEO later today. It is a privilege to follow Marc, whose leadership over the past 2 decades has shaped the CAE we know today. I'm also grateful to have had the opportunity to work closely with him in the recent weeks, which has helped ensure both continuity and a smooth handoff. Although my appointment becomes official following today's Annual General Meeting, I've already had a valuable introduction to CAE through time spent with our people and our customers and other key stakeholders. One of my first experiences was attending the Paris Air Show last month, along with the team. It was an intensive and energizing start. And I can say without hesitation, after attending air shows for more than 25 years, I have never seen a company so consistently respected. Every conversation spoke to CAE's professionalism, technical leadership, safety mindset and culture and a deep, deep commitment to customer success. In these early weeks, I've been extremely impressed by the caliber of CAE's people, the strength of our technology and the depth of our customer relationships. This is a fantastic organization. With tremendous potential to build upon past successes, it is clear to me that we have a world-class team, which is an excellent place to start. Over the next 90 days, I will take a pragmatic approach to evaluating the business, both operationally and strategically. My focus will be on understanding where we can further improve efficiency, sharpen execution and unlock synergies across our balanced portfolio. I value what…

Thanks, Matt. Operator, we'll now open the lines to questions from financial analysts.

[Operator Instructions] And your first question comes from the line of Fadi Chamoun from BMO Capital Markets.

Okay. First, I want to say congrats to Marc on the retirement and outstanding career. My question may be to Calin and Matt, but -- you both referenced, I think, in the press release operational focus excellence -- focus on operational efficiency side of the story. And maybe it seems also logical after significant growth in the buildup that happened in the last decade that there's kind of a road for optimization here. I just wanted to see if you have even high-level thoughts, I know it's kind of early days here in this transition, but if you have any high-level thoughts on where exactly you see the opportunities in terms of improving the margin, improving the cash flow conversion that you talked about.

Right. Calin here, and it's good to hear your voice again. Two things. One, as has been referenced in these remarks, CAE has invested significantly over the last period of time in building up capability. That investment is -- has started to pay dividends based on the earnings that we're seeing. But we think there's much more potential there. So that obviously requires an opportunity to leverage those investments, and that may result in some additional focus on cost, how it is we can best optimize. And from my vantage point, as you know, and I referenced as well this in my remarks, that's actually within Matt's wheelhouse in terms of operational excellence. And so it's a simple formula of saying when you look at the commercial side of the business, in particular, and frankly, the entire Civil side of the business, a lot of investment has been made, now is the time to optimize it, and we think that there are some great opportunities ahead. We're still early on, I'd say, in the early innings of that cycle. So there's a lot more room to go. And so that's quite an exciting time to see earnings growth there. On the Defense side, you've seen the positive results this quarter. And we'll continue to build sort of sustainable, profitable long-term contracts and execute well on these various programs. But I think that's as simple as that. I don't know, Matt, if you want to comment further?

Look, thanks, Calin, and thanks for the question. Recognizing that I'm on the doorstep of the role later today, I have spent my entire career looking at complex global organizations and understanding how to drive efficiency, improve operations, maintain quality and maintain safety. And from what I've seen, we have that opportunity to continue to do that CAE. And as I get into the next 90 days and find out and discover where that is, we'll come back and share that with you.

And your next question comes from the line of Kevin Chiang from CIBC.

I echo Fadi's comment there. Marc, congratulations on your upcoming retirement, and welcome, Matt, to CAE. Maybe as I look at the outlook you provided for fiscal 2026, it seems like you're facing some transit headwinds in Civil. Just wondering as you think about utilization, maybe being a little bit weaker than you anticipated. Does that change near-term CapEx spending opportunities? Like could you see upside to your CapEx guidance this year in the sense that maybe there's an opportunity to push some of that spend further out just as you look to better match near-term demand with supply just given some of the transient headwinds you noted in the prepared remarks?

Yes, Kevin, Calin here, and again, good to hear your voice as well. Listen, there's some timing noise for sure around pilot hiring this summer, but the big picture is that the earning potential can be a lot higher over time. And as I said, we're just at the beginning of that journey. But in terms of getting a bit more granular on capital, I'll ask Constantino to comment briefly.

Yes. Thanks for the question. Thanks, Calin. So effectively, we continue to expect CapEx to be slightly lower year-over-year in FY '26. Overall, in line with our disciplined approach, and I think that's going to be key disciplined approach to capital deployment. When you look at it, Civil CapEx is lower year-over-year in Q1 by about $10 million already. I mentioned it in my remarks, the 40% of the growth CapEx this quarter was for one specific program in Defense & Security. So we are being disciplined, making sure that we're not ahead of the market and we're listening carefully to -- and looking carefully to where we can find savings and push out CapEx, if necessary.

That's helpful. And maybe just -- maybe back to you as well. Just on the working capital, you mentioned typically seasonally, Q1 is a bigger working capital drag, and it sounds like we'll reverse that. But in fiscal '24 and '25, working capital was on an absolute basis for the full year, a tailwind. Is that something we can expect for fiscal 2026? Or is it a more neutral working capital year for CAE?

Yes. So definitely, it is typical to see higher investment in noncash working capital in the first half. It's not inconsistent with the seasonal profile of our business. So we do expect a stronger cash generation profile in the second half and remain on track to deliver strong free cash flow for the year, targeting our conversion and adjusted net income of 150%. With that, that comes with disciplined approach to noncash working capital. And yes, we are aiming to have a more neutral approach to noncash working capital this year.

And your next question comes from the line of Cameron Doerksen from National Bank Financial.

Congratulations, Marc, on the retirement, and welcome, Matt. I wanted to ask a question about, I guess, the Civil outlook obviously, some incremental softness that you've seen here. But it does sound like you're fairly confident that we'll see a better second half of the fiscal year for you. I guess what indicators do you have that provide that visibility in the second half rebound and, I guess, especially the airline pilot training part of the business. So is there anything that you're seeing specifically that I could point to that?

Yes. Cameron, Calin here, and good to hear your voice, too. So look, as I said, this appears to have been a trough in pilot hiring. And I think as you know, and obviously, I've lived this, when you hire pilots, there's a built-in lag before the training programs start. So this is a natural built-in lag. We've not only seen what we believe to be the trough, and Marc commented on that in his remarks. But we've also started to see some increased activity now which trends well for the rest of the year. However, we also have seen some of the airlines that were more cautious in their announcements. And so we're using the data that we have, and I'm going to ask Nick to comment what we're seeing on the -- in terms of commercial hirings, especially in the United States, but we are cautiously optimistic about the rest of the year. Nick?

Yes. Thank you, Calin. Yes, I guess a couple of things that, I guess, just to point to. One is, as we come out of August into September, we know our customers are going to resume hiring, and that's just through conversations and some discussions around access to capacity. So hiring is definitely going to ramp up in the second half. The other thing to remember is that Boeing and Airbus are now delivering more normal levels of airplanes. And that's now gone on for a couple of months. So it's not -- we're not going to call it a victory yet, but those levels of deliveries are going to start to drive more demand for capacity as we go forward. As you know, Airbus has reaffirmed our guidance. Boeing is at 35 or 40 airplanes a month. And these are numbers that will drive more demand as a lot of our customers are taking airplanes. So a combination of airplanes being ramped up and our customers starting to talk about capacity demands. I think we're pretty confident that we've got -- we're going to see an improvement in the take-up of the training operation.

And your next question comes from the line of Konark Gupta from Scotiabank.

Congrats to Marc for an outstanding career. As well as congrats to Matt and Calin. Calin, nice to hear your voice too on the earnings calls now. My first question, I guess, goes to I think some of the remarks that Calin, you, and Matt made about how you want to kind of tackle the operational efficiency, enhance free cash profile, return on capital, et cetera. How do you see the executive compensation alignment should evolve over time as you execute on those priorities? I mean, return on capital is obviously one of the metrics that you've been kind of factoring in. Free cash and other kind of metrics. Did you see any room for some innovation there on the executive competition side?

Yes. We look at these -- thank you very much, Konark, and good to hear your voice as well. We look at the various metrics, and we also compare the various drivers that other organizations have looked at. We've done a deep dive on the aerospace and defense. There's this whole discussion whether ROCE is the right measure to do it. We'll continue to assess that. And I'm not convinced of that. And again, this is early days for Matt. We need Matt to kind of get up to speed and sort of see what are the right drivers. But capital allocation is one of the main objectives of this new exercise, this new chapter, if I can say. So as we look to compare ourselves to best-in-class within the aerospace and defense industry and recognizing that the 2 segments have got obviously different capital allocation basis and targets, it's clear that we see room for steady improvement. And this is the -- this is not a situation where you're going to have like an overnight dynamic that changes everything. This is room for steady improvement, and we are still extremely committed to both segments of the business, the aerospace and defense side. And so when you put all that together, that means that we will be looking at different capital allocation measures and measuring ourselves and comparing ourselves to best-in-class.

Okay. That's a fair comment, Calin. If I can quickly follow up on Defense. The margin in Defense for the first quarter was pretty solid, I would say, like 8% plus. Usually, you have high-pronounced seasonality and lock-ins in Defense orders. I think, Marc, you mentioned about some of the weaker margin, also lower margin contracts rolling over and the mix, et cetera. Can you speak to the mix shifts between the legacy contracts and the non-legacy contracts and like what kind of contributed this margin? And I mean, does it give you even more confidence in the top end of the range that we have for the full year?

Yes. Look, I think the short answer here is we're executing exactly what we said we would. We're on plan. Actually, we're slightly ahead of plan. And we're -- I'm very, very happy with where we are. I mean the plan we put in place a few quarters ago as we were well known with regards to the legacy contracts, we're right on plan, and see no issue at all would be able to execute the remaining programs that are there. We're executing a strategy that we had to basically replace programs that are dilutive to our margin expectations, which those are quite nicely accretive to gross margin expectations, which is, as you know, low double digits in Defense, which again, we've said is more of a way point to a destination. So we're on track to do that. We're very happy with what we're seeing. We're very happy with regard to the order intake as well, as I mentioned, and the backlog growth. So look, I think it's just steady, very disciplined program execution here. So I think that -- I think in terms of revenue, we might see, as we've always seen, revenue being lumpy quarter-over-quarter, but that's just the nature of the beast as you execute programs. But I think we're very confident. We're not changing our guidance, but we're very confident.

And your next question comes from the line of Benoit Poirier from Desjardins.

Yes. Congrats, Marc for those 21 years, and welcome, Calin and Matt, to the CAE team. I know, Matt, it's early on in the role, but you know obviously quite well the U.S. defense market. I would be curious to have your view about how this market is different from other regions. And what's your first impression of CAE's positioning and potential for margin improvement, especially for the U.S. specifically.

Yes. Thanks, Benoit. I appreciate the question and look forward to getting to know you. I think we're in a very unique period in defense. First, CAE's role in mission safety and mission reversal transcends borders. But we also have tremendous once-in-a- generational growth in defense, not only in the U.S. but in other parts of the world. And I think CAE is well positioned to do several things. One, capitalize on those opportunities; two, leverage the defense business across our commercial enterprise, as I mentioned earlier, from technology; and three, create scalable international solutions among our defense partners. So I see a huge opportunity, and I'm excited to have work to unlock that over the next few months.

Okay. That's great. And when we look in Canada, obviously, very bullish defense outlook with the intent to reach 5% of GDP. CAE extremely well positioned with the FAcT program, but also the future flip. Where do you see the greatest opportunities for CAE outside those 2 sizable programs?

Benoit, it's Calin here. And likewise, good to reconnect. Canada is a huge opportunity, of course, because we're -- Prime Minister Carney's announcements on increasing spend is, frankly, exponential. It's -- we've never seen that before in this country. So they are in many, many, many different areas. But one of the things that we believe, and certainly as the country takes on more responsibility in protecting its own sovereignty, it's where the data is maintained, where the training is maintained. If it buys fighter aircraft, who is it that is doing the training on those fighter aircraft, expected to be CAE. As we look forward to programs in other countries, if Canada buys equipment from other countries, we would want to accompany the government on those initiatives. And I think that this is something that we look to leverage the opportunities for CAE not only directly in connection with government of Canada, not only in relation to government of Canada programs, but quite frankly, international programs throughout. And so this is an extremely unique opportunity for us. And this is not something that is going to happen overnight because, obviously, defense programs take time to be approved. We've also raised the question of some urgency with government that there are opportunities to exercise the prerogatives that they have as a government to expedite programs and not go through normal procurement processes that can bog down. But we see this as being a fairly exciting long-term growth opportunity as we get to this 5% of GDP spending over time.

And your next question comes from the line of James McGarragle from RBC Capital Markets.

Congrats, Marc, on a great career, and Matt, on the new role. I'm sure it's an exciting time for you. But I just have one on the Defense results here. The margin guidance implies kind of mostly stable margins for the rest of the year, whereas last year, margins kind of stepped up as the year progressed. So anything to call out in Q1 that might have helped out margins here? Or should we kind of expect similar sequential trends in margin improvement that we saw in the prior fiscal year?

James, thanks for the question. So we guide on an annual basis because effectively, there's always potential for volatility in the margins. We did have a step-up in the margins. It really is, as we remarked, some lower margin contracts falling off and some higher- margin contracts being ramped up. So it will be depending on the ramp-up of other contracts, and we can see that change throughout the year. But that's why we guide on an annual basis because we're confident we're going to meet that and guidance is unchanged.

Yes. And then on the Civil margin outlook and some of the utilization drop we saw in Q1, can you just walk me through the puts and takes on the margin outlook for the rest of the year? I guess, given the drop in utilization, the stable margins kind of implies you're working on some things operationally to drive an improvement in margins. Can you just kind of talk us through what those things are? And then is to look out into fiscal 2027, as we kind of see utilization to kind of normalize and pick back up, we be kind of modeling for kind of a step function improvement in margin as we look out longer term, as utilization starts to improve back up to where it has trended historically. And after that, I can turn the line over.

So I guess margin improvement in the second half obviously is going to come from utilization. We're going to have -- we're going to have improvements in utilization for the rest of the year. The other thing is cost controls. I mean, like anything else, I mean, cost measures are always part of everyday life. And so this particular -- for this particular period in the second half, we're making some assumptions around cost avoidance to be able to maintain these numbers. Dino?

I just want to add that we had reflected back in May that the first half of this year will be similar to the first half of last year. And so that was a ramp-up, meaning a ramp-up in the second half of this quarter. And again, based on all the things that Nick talked about. So we are expecting, as usual, more deliveries back-ended and some of the efficiencies you're driving through to make sure that we deliver as we committed.

And we have time for one last question, and that comes from the line of Tim James from TD Cowen.

Okay. Best wishes for the future, Marc. It's been a real privilege watching your career and learning from you over the years. Welcome, Matt and Calin. I look forward to your insights and soaking up all I can on CAE's way forward. Just one question here. It was mentioned earlier in the call about the trend towards fleet operators and fractionals and the business aviation side. I know CAE's really well positioned for whatever way the wind blows in business aviation. But is there anything specifically the company can do or needs to do strategically to really take advantage of that trend towards fleet operators and business aviation?

Well, I can start it off, Tim, look, I think one of the big things I think we've already done, right, is the acquisition of the remaining part of SIMCOM, which obviously gives us extended exclusivity with regards to train a Flexjet, which is, as you know, one of the -- I think the second largest fleet operator fractional jets. So we're very well exposed to that segment. And the fact that -- because of the fact that we trained the majority of the airlines around the world, either in simulators or in our training centers, makes us obviously, very fluid in executing airline-type training, which is really when you look at fractional owners, that's what they're looking for because they're operating -- their pilots are our quasi airline pilots. So they're looking for that kind of train which is different than with your traditional business aircraft training, which is having smaller flight departments. So I think we're very well positioned. And we have everything. You look at our -- I mentioned Flexjet, but you look across the board in terms of our fleet operators that we service, I just mentioned, for example, AirSprint in Canada, a very, very good customer. So look, I'm quite optimistic that we'll continue to do very well as a result of that exposure, that fractional ship plus the preponderance of the larger cabin business jets that we cover.

Operator, that's all the time we have for the call this morning. I want to thank all of our participants for joining in, and remind you that a transcript of the call will be on CAE's website later today. Thank you. Have a good day.

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