CAE Inc. (CAE) Q1 2027 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to CAE's First Quarter and Full Year FY 2027 Financial Results and Conference Call. [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. Today's remarks, including management's outlook and answers to questions, contain forward-looking statements, which represent our expectations as of today, August 13, 2026, 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, 2026, as well as CAE's press release dated May 21, 2026, disclosing transformation plan targets to fiscal 2030, all of which are available on our corporate website and on 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 morning from CAE are Calin Rovinescu, Executive Chairman; Matthew Bromberg, the company's President and Chief Executive Officer; and Ryan McLeod, our Chief Financial Officer. After formal remarks, we'll open the call to questions from financial analysts. Let me now turn the call over to Calin.

Good morning, everyone. Before Matt and Ryan take us through the Q1 results and discuss progress against the transformation plan, I'd like to briefly share a few observations. CAE's transformation plan is continuing at pace. As we announced with the year-end results, the work is centered on sharpening our portfolio, strengthening capital discipline and enhancing operational and financial performance with several clear objectives, increase long-term resilience, improve execution against plan and support sustainable cash generation, profitability and returns. We wanted to start some of the heavy lifting required by the transformation plan right away, so we chose not to wait for an Investor Day to launch it. The Board receives regular updates on the plan, and we're encouraged by the progress being made across its multiple work streams. Fundamentally, I believe CAE's long-term growth prospects remain strong. Our Civil business continues to benefit from durable long-term aviation demand growth as expanding air travel and higher aircraft deliveries will continue to require more of CAE's training services and simulation products. In Defense, CAE is benefiting from the generational upturn in Defense spending happening around the world, especially in NATO countries, including, of course, here in Canada. Across the expanding Defense ecosystem, we continue to see CAE's heritage, strategy, technology and broad set of capabilities drive increased interest from governments and global OEMs, resulting in an expanded opportunity set. Overall, CAE has strong positions in 2 secular growth markets and an attractive long-term outlook supported by the idiosyncratic benefits of the transformation plan, improved free cash flow generation, higher returns on invested capital and significant opportunities to invest accretively across the business and provide better returns to shareholders. To support the execution of the company's long-term strategy, we are implementing a revised executive compensation framework that ensures incentives are aligned with transformation goals, growth aspirations and outcomes that matter most to shareholders. Our short-term incentive program is now focused on free cash flow and adjusted segment operating income margin. Our long-term incentive program will center around adjusted return on invested capital and adjusted earnings per share to emphasize efficiency, profitability, growth and long-term value creation. Additionally, as disclosed in the proxy circular, I announced my intention to transition to the role of Non-Executive Chairman of the Board effective January 1, 2027. This reflects our confidence in Matt and the rest of the leadership team and their ability to drive CAE's next chapter of growth and value creation as well as the significant progress that the company has made in developing and beginning to execute the transformation plan and long-term strategy. I look forward to continuing to support Matt and the leadership team in this evolution while remaining involved in engagements with key stakeholder groups involving government partners, customers and shareholders. Matt, over to you.

Thanks, Calin, and good morning, everyone. Overall, Q1 was a strong start to the year with good progress across the transformation plan, continued improvement in our Defense segment and Civil performance in line with expectations. While only 1 quarter into the year, we feel very good about our initial progress, the full year and how the transformation plan will strengthen CAE. By segment, Defense delivered a strong quarter of revenue growth and adjusted segment operating income margin expansion while growing our long-term pipeline of training and mission rehearsal opportunities. Civil performance was slightly down year-over-year, but the team is doing an excellent job managing a challenging macroeconomic backdrop while rationalizing the network. This morning, I'll provide an update on the progress we're making against our transformation plan and an update on key business developments across Civil and Defense. As I said before, fiscal 2027 is both an execution year and a reset year. The transformation plan focused on improving our internal cost structure and focus is necessary to improve our performance, to streamline our portfolio and focus on where we can differentiate and win. It will strengthen our capital discipline by rightsizing our training network and footprint and allow us to make key investments in internal systems in our factory and ERP, which are required to drive operational performance. As we do this, we are pivoting the culture to one centered on operations, continuous improvement, disciplined investment and strong cash flow generation. This will allow CAE to profitably grow for years to come. The transformation plan is progressing well. The projects are progressing to plan, and we will see returns start to mature in fiscal 2028 and beyond. We are committed to deliver the $125 million to $150 million of structural cost reduction by fiscal 2030. In terms of the $150 million savings, roughly 50% of our savings will come from improved labor productivity as we optimize our organizational and operating model, outsource noncore processes, leverage automation, improve systems and tools and consolidate our global footprint. Approximately 30% of the savings will come from reduced square footage. Including the portfolio actions, we are expecting square footage to decrease by almost 1.7 million square feet, which represents approximately 17% down from the end of fiscal year 2025. And finally, approximately 20% will come from early efforts at driving operational improvements, including our digital factory project, which will drive lean manufacturing to lower waste, improve quality and streamline and automate processes. Another example is on our ERP landscape. We're moving from 5 ERP systems to 2, which will reduce our technical debt and reduce expenses. As these work streams advance, we will continue to provide updates on our progress against the plans. Let me update you on some of the key projects and where we are. First, in focusing our portfolio, it consists of a strategic review of 3 businesses. The largest of the 3, Flightscape, which represents about 5% of our revenues, is a high-quality business with a world-class platform. The review process is well underway with strong buyer interest. We remain confident that the strategic review process will result in a positive outcome for both Flightscape and CAE, and we'll update you at the appropriate time. The other reviews are also progressing well. In our Civil training network, the capacity rationalization is also progressing well. We remain committed to retire the 25 commercial simulators. We now have more visibility and confidence as to the benefits of this project. There have been many questions about customer retention. And as I've said before, maintaining our customer intimacy is job one. Based on customer discussions to date, we expect to retain almost all of our customer contracts as we transition them to other CAE facilities. As of today, customer attrition will be less than 1% of our Civil revenue. This is a testament to our customer-facing teams. Not only will we retain the majority of our contracts as we retire the 25 commercial simulators, we are also able to close between 4 and 6 of our Civil training centers and remove the support and infrastructure costs associated with those facilities. All in, we expect this work stream to lead to the removal of approximately 500,000 square feet, which is roughly 10% of our Civil network capacity. This will not only improve the utilization rate of our network, it will also improve our Civil margins, and these savings are included in our $150 million target. Going forward, we will be more disciplined about incremental capacity and ensure that we consider regional options before adding square feet and devices. Overall, I continue to be very pleased with the progress we are making across all key transformation work streams. And while there is significant work ahead, the actions we are taking are in real time, reshaping how CAE operates, how we allocate capital and how we position ourselves to create long-term sustainable shareholder value. We continue to raise the bar across capital allocation decisions, commercial proposals and investment evaluations, ensuring that we establish the underlying discipline required to drive accelerated growth and ensure we drive higher returns and higher free cash flow over time. In addition to the advancements we're making across our transformation, what I'm increasingly bullish about is the evolving set of growth opportunities we are developing. As we transform how the business operates, we are remaining focused on driving growth across our end markets. Now let's look at some of the key business developments in the quarter. We recently attended the Farnborough Air Show, where we had meaningful engagements with customers, partners, governments and suppliers. The show is indicative of the strong demand outlook across our Civil and Defense markets. On the Civil side, Boeing and Airbus released their 20-year commercial market outlooks, which called for air traffic growth of approximately 4% annually and the delivery of more than 40,000 new aircraft and a near doubling of the global installed service fleet. These long-term secular trends drive stability, visibility and confidence in the long-term demand outlook for train pilots and by extension, CAE's training and simulation products and services for many, many years to come. As an example of CAE's ability to position ourselves to grow in commercial aviation markets and alongside partners that are seeing meaningful expansion is our 15-year training agreement with WestJet, which was finalized in the quarter. With nearly 200 aircraft in service and an order book of more than 100 aircraft for delivery into the 2030s, WestJet is positioned to realize continued growth in their capacity and network in Western Canada and beyond. Slated to open in 2028, the Alberta Training Center of Excellence for Aviation and Aerospace will house 8 full-flight simulators with capacity for expansion and means that aspiring pilots and aviation professionals will no longer need to leave the province for advanced aviation training. The agreement meaningfully expands our relationship with WestJet and with Alberta, which is becoming increasingly important as we think about future strategic opportunities across Canada. Additionally, we announced a multiyear contract with Turkish Airlines to deliver 5 full-flight simulators and 2 flight training devices with options for 2 additional full-flight simulators. Turkey is one of Europe's most attractive aviation growth markets with capacity expanding at high single-digit compound annual growth rate over the last 15 years. It's led by a rapidly expanding international passenger volume and a growing backlog of aircraft deliveries. Turkish Airlines is the largest airline in Turkey and is expecting to continue to grow significantly. The airline is targeting a fleet of over 800 aircraft in the 2030s, up from more than 500 today. And our agreement builds on a long-standing partnership of more than 20 years and supports Turkish Airlines' fleet and network expansion plans across Airbus and Boeing fleets. Shifting to the Defense side. We've had several busy months of business development activity and have made a number of significant announcements that expand our long-term opportunity pipeline and enable us to capture growth opportunities in Canada, expand internationally across NATO and other partners and meaningfully grow our addressable market by solidifying our position in large growing domains such as naval and maritime activities. Here in Canada, there's a clear shift towards bolstering sovereign capability, advancing collaboration with industry and fostering innovation to strengthen Defense readiness. Canada's Defense strategy as related Defense industrial strategy is rapidly advancing and the country plans to spend approximately $500 billion on Defense investment over the next decade. We believe that the country's Defense modernization priorities represent a multi-decade opportunity for CAE as our capabilities and priorities align directly with the Defense industrial strategy and where spending is going. We are continuing to work closely with the government of Canada to expand and create new Canadian franchise programs. We believe that we can successfully utilize our Canadian heritage and our expertise in training, mission readiness and operations to support and deepen relationships with OEMs and platform providers, which embed mission-enabling synthetic environments and simulation at the earlier stages of OEM procurement and throughout the program life cycle. Over time, this will enable CAE to expand our business in Canada, but also around the world with key international partners, including NATO, in particular, NATO countries, where European Defense spending will reach approximately EUR 800 billion annually by 2030. I'm extremely pleased with the progress we have made on this front since the start of the fiscal year. I'm excited to share some of the important developments for our business that occurred. These include the M-346 partnership with Leonardo, the partnership with Saab on GlobalEye and Gripen and the partnership with TKMS on the Canadian patrol submarine program and broader maritime opportunities. All in all, over the long term, these opportunities enable international and domain expansion, establish new franchise programs for CAE and represent more than $5 billion of potential pipeline value. It's a subset of our overall Defense pipeline. For reference, our Defense pipeline represents the collection of Defense opportunities and potential future adjusted order intake that we're actively pursuing across customers, programs and geographies. This pipeline, to be clear, spans from early proposals, qualification and early submittals, and there's time for it to evolve for bids and final contract. The conversion rates and timing can vary depending on the specific opportunity in the country involved. But our total Defense pipeline is growing meaningfully. And as our current Defense adjusted backlog is $10.7 billion, this new pipeline represents a significant opportunity to grow that further in the years to come. And strategically, these new platforms are new franchises and new domains and new countries that can span decades for CAE. Let me go into a little bit more detail. First, we announced the expansion of our collaboration with Leonardo around the next-generation M-346 Block 20 training ecosystem. The M-346 is one of the most advanced jet fighter training platforms in the world. And while the timing of future opportunities for this platform is dependent on different decisions by customers such as Canada, this agreement should open significant opportunities over the coming years as it further expands our role in military pilot training and reinforces CAE's position as a trusted training and simulation partner to major Defense OEMs. This includes developing training architectures to prepare pilots for increasingly networked, data-driven and autonomous operational environments, including those associated with fifth and sixth generation air operations. The partnership builds on the proven successes of the International Flight Training School in Sardinia, Italy, a joint venture between us and Leonardo, and the Italian Air Force that brings together live flying advanced simulation and mission rehearsal capabilities and expands the scope of collaboration into future integrated training capabilities across global campaigns. We also strengthened and solidified our partnership with Saab, announcing a teaming agreement to support Canada's Airborne Early Warning and Control program based on Saab's GlobalEye platform and an MOU to collaborate on advanced training, simulation and mission support for the Gripen Fighter. The GlobalEye agreement builds on our worldwide cooperation agreement established in November of 2025, which positions CAE as Saab's preferred partner for training and simulation solutions across its airborne early warning and control platforms, and this is a global partnership. In addition to the Canada program, CAE sees significant international pipeline for GlobalEye opportunities with multiple countries and geographies interested in the program overlapping where both Saab and CAE have capability and expertise in simulation, flight and mission reversal. For the Gripen, which is targeting an annual production of between 25 and 30 aircraft, a level that will almost certainly double current capacity, our agreement enables CAE to support potential future fighter capability, including training, mission support and sustainment in Canada and other international markets. Another example that I'm particularly proud of is our partnership activity with TKMS to support the largest Defense procurement program in Canada's history, the Canadian Petrol Submarine Project, or CPSP. This program is expected to reach approximately $100 billion over its life cycle, and Canada has announced that TKMS and their 212CD submarine has been selected as a preferred supplier. As part of this program, CAE is positioned to deliver training operation, advanced simulation systems, digital and physical training infrastructure and facility management, including long-term sustainment support. Beyond the domestic Canadian submarine program, our partnership with TKMS also opens avenues for CAE to support international naval customers with advanced naval training, simulation and mission readiness solutions for TKMS submarine and surface ship programs around the globe. This further expands our pipeline, solidifies our position in the naval domain and represents a potential long-term opportunity set that is in excess of the individual Canadian patrol submarine project opportunity. And as we look to the future and add domains, we're excited with the recently announced partnership with Shield AI to support their development of the CCA, or collaborative combat aircraft. Companies like Shield AI and their Defense tech rely on the capability that CAE has to bring training, simulation, mission rehearsal capability to their advanced platforms. We're excited by this and other developments to come. Overall, the specific exciting opportunities represent a subset of our current Defense pipeline, and we believe they align directly with CAE's core competencies and support our long-term growth strategy. As you can see, many exciting announcements across both the Civil and Defense landscape are painting a future growth for years to come. With that, I'll turn the call over to Ryan to discuss Q1 2027 financials and our fiscal 2027 outlook in more depth. When Ryan concludes his remarks, I'll provide some closing thoughts. Ryan?

Thank you, Matt, and good morning, everyone. As Matt noted, our first quarter results were consistent with our expectations and our full year outlook. Overall, execution was solid, free cash flow performance was strong and our transformation activities progressed as planned. Consistent with our fiscal 2027 outlook and the fiscal 2030 targets we outlined in May, we remain focused on successfully executing the transformation to reshape the business and improve its long-term performance while simultaneously building growth momentum in the core business. In Q1, as part of our transformation plan, we incurred $48 million of expenses, of which $12 million were noncash charges. This brings total spending on the transformation program to $133 million, of which $71 million is noncash. The overall program is tracking to plan, and we are still expecting total cost of $200 million to $250 million with approximately $100 million in noncash charges. Since our last update, we advanced across several of our key work streams in Q1, including retiring an additional simulator from our network, bringing the total to 6. We are tracking to our plan of having 13 to 15 simulators removed by the end of fiscal 2027 and remain on pace to retire approximately 10% of the commercial full-flight simulator fleet. All in, the completion of these actions will enable CAE to close between 4 and 6 of our training centers. We anticipate closing additional Civil training center by the end of this calendar year, which will bring the total to 2. As Matt discussed, we remain firmly on track for our fiscal 2030 target of $125 million to $150 million of transformation run rate savings. Turning to our results. In the first quarter, consolidated revenues of $1.2 billion increased 6.8% year-over-year. Adjusted segment operating income was $156.6 million, down 7.5% from $169.3 million in the first quarter last year, and adjusted EPS was $0.26 compared to $0.26 a year ago. Our adjusted segment operating income reflected strong performance in our business aviation training and Defense businesses. which was offset by higher costs related to credit charges, higher bid proposal activities in our Defense business, higher spend related to specific transformation initiatives and lower contributions from government R&D funding programs. Free cash flow was strong in the first quarter. We generated $104 million of free cash flow in Q1 under our updated definition that includes all capital and intangible investments, whether for maintenance or growth with no exclusions. This compares to negative free cash flow of $135 million in the first quarter of last year. The improvement in free cash flow generation and conversion reflects some timing benefits and our ongoing actions aimed at sharpening capital discipline, allocation and performance. Additionally, we continue to make cash investments in our transformation program and growing the business. We ended the quarter with net debt of $2.6 billion and a net debt to adjusted EBITDA ratio of 2.27x, in line with our long-term leverage target. In Q1, we repurchased 1.1 million shares for $39 million under our NCIB program. With our improved cash and leverage performance, we have increased optionality to deploy cash towards incremental organic growth opportunities or in their absence, return cash to shareholders. Our capital allocation commitment is to remain measured, disciplined and transparent while ensuring that we maximize shareholder value and deliver on our plans. Turning to the segment results. In Civil, first quarter revenues increased 5.6% year-over-year to $641.6 million. Adjusted segment operating income decreased 13.7% to $106.1 million, resulting in a margin of 16.5%, down from 20.2% in Q1 of last year. The decrease in Civil adjusted segment operating income was as expected and was due to higher selling, general and administrative expenses, driven in part by impacts from the conflict in the Middle East. Specific costs included credit-related charges on financial assets, a lower contribution from simulator sales and lower profitability in our joint ventures in the Middle East. The decrease was partially offset by a higher contribution from business aviation training services. Civil training center utilization was 72.2%, up from 68.8% in the prior year period and reflected improvements in both commercial and business aviation training. As a reminder, we have updated and standardized the definition of utilization across our network. This resulted in an approximate 200 basis point decline in the comparative period percentage. On the commercial side, we saw increased utilization in India, Europe and the Americas, partially offset by weaker performance in the Middle East. Notably, in business aviation training, we were able to successfully offset some of the headwinds in our Middle Eastern operations by transferring the volume to other areas of our network and are working through other mitigation activities aimed at limiting the impact on our financial performance. In Civil, we booked new orders worth $838 million in the quarter, representing a book-to-sales ratio of 1.31x, including the finalization of the WestJet order that Matt discussed. In Defense, revenues increased 8.3% year-over-year to $531.8 million and adjusted segment operating income increased 9.1% to $50.5 million and a 9.5% margin. This performance was driven by higher profitability and activity on our contracts in U.S. and Canada as well as the realization of program efficiencies resulting in the completion of key program milestones, partially offset by higher selling, general and administrative expenses related to increased bid and proposal activity as we pursue growth opportunities. Our Defense adjusted backlog sits at $10.7 billion with a pipeline of global opportunities meaningfully larger than our current adjusted order backlog. As we indicated when we introduced our fiscal 2027 outlook, we do not expect quarterly performance to progress in a perfectly linear fashion. The second quarter will reflect the impacts of seasonality, notably in our Civil business. Overall, we're encouraged by our start to fiscal 2027 and remain focused on delivering on our plans for the year. The transformation program is progressing as expected. Our businesses are executing well against their plans, and we have made no changes to the fiscal 2027 outlook or fiscal 2030 targets that we issued in May. We remain well positioned to achieve our goals. The work is well underway towards positioning CAE for stronger earnings growth, improved levels of profitability, higher free cash flow conversion and better returns on invested capital. With that, I'll turn the call back to Matt.

Thanks, Ryan. 2027 is a transformational year, and we are making rapid progress. We are building on CAE's iconic franchise and strong customer relationships. While we are simplifying our portfolio around core businesses, while we are rationalizing our network capacity to improve utilization and margins and while we align a worldwide team on performance and cash flow generation. As we progress, we are pivoting to growth in our core areas and future opportunities across the Defense tech ecosystem, which is increasingly exciting, including prospects in synthetic environments, autonomy and multi-domain. We remain committed to our fiscal 2027 outlook and to our fiscal 2030 targets of reducing $125 million to $150 million of structural cost while driving CAE to $950 million to $1 billion of adjusted segment operating income. We are seeing early indications of growth. The Alberta Training Center is an example where we will invest in regions that are expanding and need capacity. Our partnerships with Leonardo, Saab, TKMS, Airbus, Boeing, Bombardier, Embraer and Shield AI continue to indicate the strength and value that CAE brings to the table with some of the world's leading platform companies and emerging Defense tech start-ups. Our worldwide footprint gives us the opportunity to invest centrally but grow locally to support sovereign Defense needs in over 40 countries. As we transform, we are evolving the culture from one that focused mostly on top line growth at the expense of our balance sheet, margins and returns to a team that is acting with discipline, focus and leveraging balanced scorecards to deliver what shareholders expect. We have the right strategy and the right team, and we are aligned around a clear plan motivated by updated incentives to act with speed and purpose. We have great businesses in attractive end markets, a rich heritage, exceptional people, differentiated technologies and trusted customer relationships. As we deliver on our transformation commitments, CAE's next phase will be defined by accelerating our growth. Thank you for your continued support, and we look forward to updating you on our progress next quarter. With that, we'd be happy to take your questions.

Thank you, Matt. Operator, we'll now open the lines to financial analysts.

[Operator Instructions] Your first question comes from Konark Gupta with Scotiabank.

My first question is on the Civil margins. I understand that they met expectations you had. But can you just explain some of the transitory costs during the quarter, especially the credit-related charges and the transformation-related inefficiencies you saw in Civil and how sustainable these are during the quarters coming up?

Yes. Let me start and then turn it over to Ryan. In the Civil business, it's really driven 2/3 by what's going on in the Middle East. So we said we're happy that we're able to work with a lot of our airlines to reroute their training to put them in other facilities. But that has the cost as we move their training centers and sometimes instructors to other facilities. And so while we capture the revenue, the cost is a little higher. That's temporary. And then yes, the Middle East is causing disruption in fuel prices around the world, and that's affecting some of our customers. So 2/3 of the impact is Middle East driven, and we're mitigating it, and we view it as temporary. The other 1/3 is related to some heightened costs that I'll turn to Ryan now to give you a little detail on.

Yes. Thanks, Matt. So the other items, we talked about this leading into the quarter. So with the transformation, there's some discrete investments that we're making in the business that are going to serve the business long term and be margin accretive over time. And we had also talked about lower government funding in our R&D program. So that's really the other 1/3. But as we said in the prepared remarks, really pleased with the performance in the Civil business. Business Aviation had good growth in the quarter. Utilization has trended in the right direction. So overall, we're very pleased.

It is good to see, I guess, with Calin at the helm as a Direct Chair, new executive compensation structure in place. I'm particularly interested in the ROIC. I think you guys have pivoted from ROCE to ROIC now. Any guideposts you guys are looking at for the next few years in terms of how ROIC should be and what's the right ROIC level for CAE?

Yes, Konark, so I'll start. So we haven't put out targets on this. And a couple of comments. First, this has primarily been an internal driver of how we look at investment and projects. When we look at the -- if you look at the calculation based on our external numbers, you won't see a lot of difference. It's really how we're measuring and driving projects internally. And so it was important to have that alignment. And it really is focused more on cash-on-cash returns. The other comments I'll make is we're going to get towards the high single digits. We'll approach low double digits, but it's really going to be the pace of change as we start to see the benefits from the transformation program where you're going to see the benefit in our ROIC.

Konark, it's Calin here. Yes. Thanks for that comment. Look, I think, as you know, I spoke with a lot of investors and with all the analysts in the earlier days of my appointment. And this is one of the recurring themes that we have been hearing is that a greater focus on ROIC and how we compare ourselves to organizations that are best-in-class or better-in-class than CAE was. And this cash-on-cash return dynamic that Ryan just indicated was a big driver of that. And so we're sort of looking to upscale, I would say, the way we are dealing with these long -- with these sort of LTIP, these long-term incentive programs. And we think that these are much better indicators and will drive better behavior as well.

Your next question comes from Daryl Young from Stifel.

I wanted to ask on the Defense business and the $5 billion pipeline is obviously very impressive. But I'm just wondering if the mix of training versus product development coming down the pipeline is -- if there's any skew there? And I guess, how we should think about the product development risk for some of these new mega project opportunities and I'm thinking specifically things like the Canadian submarine opportunity with TKMS. Just I don't think you've worked with that partner before. So how should we think about the product development risk, I guess?

Yes. Thanks for the question. Two parts. Really, the first is how do we think about the pipeline going forward? And what's the mix? So -- we feel good about these partnerships. If you've been tracking, we selected a partnership with Leonardo M-346, and that's the platform chosen by Canada to be its next training platform. We have a partnership with Saab on GlobalEye. That's also the platform that Canada and NATO has selected to support their upcoming needs. And then obviously, the partnership with TKMS leverages a decision on Canada for that platform as well. What's special about these arrangements is we will do the NRE once. We will do it with the OEM in collaboration, and then we will use that to develop training centers. That's very different than many of the activities that occurred over the past decade where it was done at a sovereign level and the development costs were unique to each particular country. There'll be configuration and customization, but these NATO programs will have a lot of commonality. And that's part of the strategy to an upfront engineering and development program, which has inherent development risks, but it's one that we're well suited to manage and then use that as a basis and then we reproduce the training centers where they're needed around the world. So that's why we view the NRE as acceptable. It's going to be a far less percentage of the overall program than in other programs in the past. And then if you ask me about the mix, it's going to be depending on the installation, it is going to be more services, training services and product because we'll develop these training centers and then put them in place and operate them.

Got it. That's great color. And then one other around capital allocation that's a 2 part. So the Flightscape, the commentary you gave around the strategic review progressing well. It sounds like you're seeing bids that are acceptable valuation to you. But the proceeds of a potential transaction there, would that be something you could immediately turn around and buy back on the NCIB? Or will the NCIB be more programmatic or opportunistic, I guess?

Yes. No, thanks for the question. First, it's early in the process. We've seen strong buyer interest, and that makes us excited about where we are in the strategic review. And that process is underway, and we'll inform everyone about the results at the appropriate time in the future. In terms of the proceeds, it's too early to predict exactly what they'll be. But in large part, we think the proceeds will fund the transformation at a minimum, and that is a great return on capital. Anything we do to fund the transformation is going to increase immediately shareholder value. As we've said, our average return is 2 to 3 years. After that, we'll pursue other capital allocation decisions in the same disciplined approach that we've been talking about.

Yes. It's Calin here. And as you know as we've said previously, people have asked about the reinstating of the dividend and this sort of thing. We haven't made any announcement on that. We're not -- we haven't made any decision on that. But obviously, once we get into a healthier dynamic, the leverage ratio is at the level we've said, we've got additional proceeds coming in. We will assess all of these capital allocation decisions then and look to deploy it in the best fashion. But as Matt says, the transformation is the first order of business here.

Your next question comes from Cameron Doerksen with National Bank.

I guess a question on the optimization in the network. I mean it's very good to see that the attrition on revenue from moving customers' contracts is going to be very minimal. So that's good to see. I guess the question I have is around pricing. I know this is one of the things you've been also focused on is maybe upgrading the quality of revenue with some of the customer contracts that you have. Can you update us, I guess, on any progress you're making there? And I guess, the reception from customers on future contract renewals on perhaps having to pay a little higher price than what they've been paying.

Yes. Look, I appreciate the question. It's early to be fair. And airlines are sophisticated buyers and airlines around the world are struggling with fuel prices and traffic disruptions, and these are our key partners. So we're going to work cautiously through this. But the counter side of that is we want to get the right economic value for our products and services around the world. The approach has been disciplined. We're starting with our aftermarket products and services, which is a small portion of our Civil business and putting in the discipline, the vocabulary, the tools to price that effectively. And we'll start to see the potential benefits of that as we close out the year. We then move to our product side for the same evaluation and improvement and then obviously, from there to our business and commercial training network. So it's still early to look at how we price and how we go to market and ensure we're getting the right economic value. We have 600, 700 different contracts out there with airlines of various time spans and then we go to market transactionally with many of our business pilots. So it's a fairly complex landscape and layer on top of that joint ventures and pricing agreements that are already in place and they have to burn off. So we're working it diligently. It's a key strategic focus of it. And when we get more mature about it, we'll be able to articulate what we see as a benefit, but we do see it as an opportunity.

Your next question comes from Sheila Kahyaoglu with Jefferies.

Maybe I wanted to ask 2 questions on Civil, if possible. On just the revenue outlook, strong start to the year, but the guidance suggests flat to slightly down. I guess even with some of the headwinds like the product business, Middle East and, of course, the transformation, I guess, how do we think about the remainder of that business from a Civil and business aviation market perspective for the rest of the year?

Yes. Thanks, Sheila, for the question. If you look at the Civil market through 1 quarter or 1 month, it often appears discombobulating. It can be difficult to understand what's going on. If we step back from it, we still see a long-term growth trajectory of 4%, which we think is a very attractive market, and we are the market leader in there. We started this year, as you know, with a very light order intake last year. So the number of full-flight SIMs that we had orders last year that will deliver this year is down. Layer on top of it the Middle East impact, which wasn't anticipated a year ago, and we're mitigating. And now we're going into our summer seasonality. So we're being cautious on the outlook here given all those moving pieces. But again, if you step away from this quarter or the next couple of quarters, the long-term outlook of the industry is strong. It's incredibly resilient, and we're well positioned with our product sales and our training network to continue to grow.

That's super helpful. And I guess if I could ask on the margins as a follow-up, the color was super helpful on Middle East being 2/3 of the impact on reallocation. But I guess, how do we think about pricing with your Civil customers? How is that going? Because the airlines are seeing big pricing benefits. Is there some of that, especially given less than 1% attrition as you move simulators around?

Yes. I think in terms of -- Sheila, there's probably 2 answers to your question. In terms of moving customers and maintaining them as we go through the network rationalization, each time we assess the decision, it's going to be incrementally beneficial to us. That's why we're going through the rationalization exercise. And so each contract, each customer is approached with a unique solution, but we have to make sure it's incrementally better. This is about driving improved productivity and improved margin, and that's why we're going through this exercise. And it's hundreds of customers across the 4 to 6 sites and all the training centers. So the intent is to make incremental margin as well as drive utilization. And I think the other part of your question would go back to the earlier comment about we're approaching pricing diligently across portfolio, recognizing airlines are in a challenging year, and we work with them on a one-off basis there as well.

Your next question comes from Tim James with TD.

Just want to return to the Middle East and the impact the conflict there is having on the business. Obviously, it sounds like it's created some unexpected headwinds or at least some that may be carrying on further in the fiscal year. Has there been some unexpected positives in other parts of the business that offset that Middle East impact and that allows you to kind of maintain your full year guidance? Or is the Middle East conflict impact just not material enough to kind of bump you off your expected guidance range?

Yes, I appreciate the question. We anticipated at least a half year of impact in the Middle East, and we're seeing it. It's difficult to predict exactly when the Middle East issue will fully subside. And then there will be a tail of activity as fuel prices and other things manage their way through the system. It's a long-cycle business. So we are seeing training reroute to other parts of the network. It's one of the advantages of having a worldwide network. We can support our customers anywhere. Initially, that's having some incremental costs associated with the movement, but we have mitigation procedures in place, and it's working. So I don't see incremental headwind in the year. I do see us being cautious as we go through the seasonality of the Middle East effects, which will take another quarter or 2 to subside. But we don't see incremental risk in the year. We're mitigating it appropriately.

Okay. Great. And then just one follow-up question. I want to tie it back into an earlier question about your backlog and your pipeline in Defense. Correct me if I'm wrong, Matt, but I think you suggested training is the real powerhouse behind that backlog strength. Can you provide any insight as we think about longer-term margins and the difference between products, business and equipment and Defense versus training opportunities? Just what the differences are at a high level between the margin profile in those 2 revenue streams?

Yes, it's a great question. So a healthy Defense business will operate, as I've said many times before, in that low teens margin, and that's what we're driving. If you peel the layers back on why we weren't there, and we've talked about it, we are undertaking contracts that were lower margin, staffing contracts that we're no longer pursuing. And we're going to have a nice solid mix of product and service contracts going forward. And so the additional conservative approach is that we're going to try and leverage the development cost, which is where the risk occurs for any Defense company. Development programs are inherently risky, that we're going to minimize incremental development costs and focus on developing large service revenue base going forward. So that's the mix that we're looking at. That's why I feel good about the contract trajectory that we have. And these pipeline of opportunities are definitely consistent with our long-term plan. So it's a really good position to be in, and we're going to continue to drive these things to contract.

Next question comes from Kristine Liwag from Morgan Stanley.

I want to dive in a little bit on Civil as you go through this transitory period. I was wondering, can you provide more detail regarding your expectations for customer retention during this transition? Also for your customers, what are the key factors that could cause them to switch? Are there a significant number of alternatives that they could go to? And how are those initial conversations going?

Look, I appreciate the question. Thank you. So as I mentioned before, as we take out 10% of our capacity, we're going to retain more than 99% of our contracts. The attrition is less than 1% at the Civil level. We feel very, very good about that. But it is an airline-by-airline discussion involving where they operate, the regional capacity we have this near and what arrangement we make to work with them. There are alternatives out there. There is no other provider with a network as capable, as widespread and as professional as ours, and we're going to leverage that to ensure we provide the right solution. But it's a competitive industry, and there are small players out there that provide training on a one-off basis. And so we're being very diligent about handling our customer relationship. That intimacy is job one. So the conversations are going well. That's why we're able to characterize attrition to be less than 1% of our overall revenue base, but we've got to continue to work to earn their trust every day.

Great. Super helpful. And for that 99% confidence, is that now backed with long-term agreements signed with these customers? How should we think about the risks related to that?

Most of our contracts with customers, it's a mix of joint ventures with some airlines, term agreements, master service agreements, others and long terms. So it varies significantly. And that's why from a company perspective, our job is to maintain and earn that trust every single day and continue to provide the best full-flight simulators with the best technical devices and the best instructors and the best courseware. So we never take a contract for granted. Every day, we're there to earn and reearn our customer trust.

Next question comes from Krista Friesen with CIBC.

Just one on the Defense side. You talked about higher bid proposal costs in the quarter. Just wondering how we should think about that for the remainder of 2027 and when you think that could subside?

Yes. Krista, this is Ryan. So I think we're going to continue to see some of that throughout the balance of the year. There's -- as Matt talked about in his remarks, there's a very healthy pipeline of opportunities, and this is a key growth area for the business. So we do expect to see that spend continue throughout most of the balance of the year.

And then maybe if you can just speak to -- obviously, you've announced a lot of partnerships on the Defense side recently. Are there a lot of other large partnerships that you're targeting at this point? Or are you pretty happy with where you sit right now?

Yes. Thanks for the question. The answer is yes. We're targeting many other partnerships. We're really feeling to be in a unique position. We're the largest independent Defense training company in the world. We have strong relationships in 40 countries and in particular, NATO. Clearly, we're going to operate with haste here in Canada, where we have a fantastic position as a sovereign training provider, and we're going to try and leverage all these decisions that Canada makes to provide incremental capability for Canada and Canada's allies. But we have conversations underway with virtually every OEM around the world and many countries for sovereign solutions. So we're just getting started.

[Operator Instructions] Your next question comes from Andrew Steinhardt with Bank of America, Canada.

This is Andrew on for Ron. Just piggybacking off the last question on the Shield AI partnership. Obviously, it's early, but I was wondering if you could just talk a little bit about what that work has looked like so far? And how will that build as PCA actually progresses here?

Yes. Thanks for the question. So Shield AI has positioned itself as a very interesting provider of AI or autonomy solutions in the Defense ecosystem, trying to work across a variety of platforms. And that autonomy solution, that algorithm needs to be trained and it needs to be able to work in a synthetic environment, and it needs to work side-by-side with humans. And that's where we come in. So they have the algorithm, but we come in to help them provide that training ecosystem that surrounds it so that not only does the algorithm operate the way Shield AI intends, but we can get humans that will inevitably work with it to operate as well. So it is because of the CCA platform that we're working on, but we're excited with the partnership with Shield that could expand beyond that. These systems that are going -- that are being built in the Defense ecosystem are increasingly complex. And for operators to understand how to work with them, whether they're side-by-side as a CCA or remote as remote pilot vehicle or a drone is where the future lies. And it's something we've been doing for the past 15 years. We have fantastic relationships with companies like General Atomics, and we provide that training ecosystem today, and we're excited with the partnership of Shield as they continue to drive their algorithm, we'll provide the training ecosystem with them.

Got you. I appreciate that color. And I guess just a follow-up, what portion of that $5 billion pipeline is related to CCA or other types of drones, I guess?

A very small portion of the $5 billion. The $5 billion that I articulated is driven mostly by the Leonardo, the Saab GlobalEye and the TKMS Maritime submarine pipeline. As we get more granular on other partnership opportunities or sovereign, then we'll start to articulate more fidelity around the pipeline. But the $5 billion is a conservative pipeline estimate around primarily those programs.

We have no further questions. Mr. Arnovitz.

Operator, thank you very much. I want to thank all of the participants on the call this morning and remind you that a transcript of the call and the Q&A can be found later on CAE's website. The team and I are, of course, at your disposal. Should you have any follow-up questions, please do reach out. Thanks very much. Have a great day.

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