CAE (CAE) Q2 2027 Earnings Call Transcript

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DATE

Thursday, Nov. 12, 2026

CALL PARTICIPANTS

• Executive Chairman of the Board - Calin Rovinescu
• President and Chief Executive Officer - Matthew Bromberg
• Chief Financial Officer - Ryan McLeod
• Chief Strategy Officer - Andrew Arnovitz

TAKEAWAYS

• Revenue -- $1.2 billion, representing a 2.6% decrease reflecting lower simulator product sales and a lower contribution from contracts accounted for based on progress toward completion.
• Adjusted EPS -- $0.33, up 17.9% from $0.28 in the prior-year period driven by improved Defense performance and lower finance expenses.
• Adjusted Segment Operating Income -- $179.3 million, representing a 1.5% increase compared to $176.7 million due to higher profitability in Defense and business aviation training.
• Free Cash Flow -- $179.9 million, up from $109.8 million in the prior-year period driven by lower capital expenditures and the timing of working capital.
• Civil Aviation Revenue -- $652.3 million, down 2.6% year over year due to lower simulator product revenues and fewer simulator capacity sales structured as finance leases.
• Civil Adjusted Segment Operating Income Margin -- 15.9%, down from 18.5% reflecting temporary inefficiencies from network consolidation and elevated investments in tools and systems.
• Civil Training Center Utilization -- 65%, up from 62% in the second quarter of the previous year driven by increased activity across both commercial and business aviation.
• Defense and Security Revenue -- $552.4 million, down 2.5% year over year as product delivery timing offset growth in North American contract execution.
• Defense Adjusted Segment Operating Income -- $75.4 million, up 43.3% from $52.6 million driven by improved bid discipline and a discrete tax benefit.
• Defense Adjusted Segment Operating Income Margin -- 13.6%, up from 9.3% in the prior-year period, which included a couple of hundred basis points of tailwind from investment tax credits.
• Defense Underlying Margin -- 11.6%, excluding the $11 million benefit from investment tax credits related to prior years.
• Adjusted Backlog -- $19.6 billion, including $11.3 billion in the Defense segment and $8.3 billion in the Civil segment.
• Flightscape Sale -- $500 million U.S. dollars, representing the enterprise value of the airline operations software business divestiture expected to close in the first half of calendar year 2027.
• Transformation Plan Costs -- $42.6 million in the second quarter, bringing the total costs incurred to date to $175.3 million.
• Transformation Run-Rate Savings -- $125 million to $150 million, representing the annual target through fiscal 2030, with the company currently tracking ahead of milestone forecasts.
• Share Repurchase Activity -- 1.9 million common shares, repurchased for $67.1 million during the quarter, bringing the year-to-date total to 3 million shares for $106.1 million.
• Fiscal 2027 Adjusted EPS Guidance -- $1.28 to $1.35, raised from the previous range of $1.21 to $1.28 due to stronger operating performance and lower effective tax rates.
• Fiscal 2027 Adjusted Segment Operating Income Margin Guidance -- 14.9% to 15.4%, raised from the previous range of 14.6% to 15.1% based on increased execution confidence.
• Civil Full-Flight Simulator Deliveries -- 11 units, down from 12 units delivered in the second quarter of the prior year.
• C-130H Training Program Win -- $300 million, representing a 9-year competitive recompete contract to support the United States Air Force through 2035.

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RISKS

• McLeod stated, "For the full year, profitability is still expected to remain below the prior-year levels as a result of lower revenues, friction from our network optimization actions and investments being made to support long-term performance," regarding the Civil Aviation segment.
• McLeod warned that the Defense segment's second-quarter margin of 13.6% should not be treated as a recurring quarterly run rate because it was influenced by product delivery timing and discrete tax credits.
• Management noted in the earnings release that an intensification of the conflict in the Middle East or further deterioration in regional conditions, such as sustained fuel price increases, could place additional pressure on the company's performance.

SUMMARY

CAE Inc. (NASDAQ:CAE) reported second-quarter financial results and announced an upward revision to its full-year fiscal 2027 outlook for adjusted earnings per share and segment operating margins. Management indicated that the company is ahead of schedule on its multiyear transformation plan, which aims to streamline the organizational structure and optimize the civil aviation training network. The company reached a definitive agreement to divest its Flightscape airline operations software business as part of a strategy to concentrate resources on core simulation and training services. Management reported that improved defense profitability and strong free cash flow generation supported increased share repurchase activity during the period.

• The company raised its simulator retirement target for the fiscal year to 16 to 18 units, up from the previous goal of 13 to 15 units, as part of its network optimization strategy.
• Management is exploring a transition to U.S. GAAP reporting, which, if adopted, would become effective for the fourth quarter and fiscal year ending March 31, 2027.
• Bromberg noted that the company's relationship with United Airlines has resulted in the delivery of 40 training devices since 2022, describing the Denver location as the largest commercial training facility in the world.
• CAE established new strategic cooperation agreements with msg systems ag in Germany and WB Electronics in Poland to expand capabilities in mission readiness and autonomous systems.
• Bromberg indicated that the Defense pipeline is meaningfully larger than the current adjusted backlog, supported by rising NATO defense spending and increased personnel recruitment across allied nations.
• The company expects to retain more than 99% of its civil revenue while closing four to six training centers and reducing its total network footprint by approximately 10%.

INDUSTRY GLOSSARY

• FFS: Full-flight simulator, a high-fidelity replica of a specific aircraft cockpit used for pilot training.
• SEU: Simulator equivalent unit, a measure of the total average number of simulators available to generate earnings during a period.
• ITC: Investment tax credits, financial incentives provided by governments to encourage research and development or capital investment.
• NCIB: Normal course issuer bid, a method by which a Canadian company repurchases its own shares through a stock exchange.
• Flightscape: CAE's airline operations software business, currently under agreement for sale to SITA.
• SITA: A global aviation technology company and the counterparty in CAE's software business divestiture.

Full Conference Call Transcript

Operator: Welcome to CAE's FY 2027 Second Quarter Financial Results and Conference Call. [Operator Instructions] The conference is being recorded. I would now like to turn the conference over to Mr. Andrew Arnovitz. Please go ahead, Mr. Arnovitz.

Andrew Arnovitz: Good morning, everyone, and thanks for joining us. Today's remarks, including management's outlook and answers to questions, contain forward-looking statements, which represent our expectations as of today, November 12, 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 risk factors and assumptions that may affect future results is contained in CAE's annual MD&A and MD&A for the 3 months ended September 30, 2026, as well as in 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 in our filings with the Canadian Securities Administrators on SEDAR+ and the U.S. Securities and Exchange Commission on EDGAR. On the call with me this 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.

Calin Rovinescu: Good morning, everyone. Before Matt and Ryan take you through the quarter in detail, I'd like to briefly share a few observations. When we first introduced CAE's transformation plan, we emphasized that this was about much more than just reducing costs. Our objective is to build a more focused, higher performing and higher-return CAE with stronger execution, increased financial flexibility and a greater capacity to invest in growth and return capital to shareholders and to do this in a fashion that is sustainable over the long term. At the halfway point of fiscal 2027, we are already seeing tangible progress against that strategy.

The transformation is advancing with discipline and speed, and the actions underway across the company are increasingly translating into improved financial and operational performance. In the second quarter, CAE delivered higher adjusted segment operating income and margin and strong free cash flow. This progress, combined with our outlook for the second half, gives us increased confidence in the earnings potential of the business and is reflected in the higher fiscal 2027 outlook announced today. We also reached an important milestone with our recently announced agreement to sell Flightscape to SITA for USD 500 million.

The transaction demonstrates our commitment to concentrating resources on areas where we have the strongest strategic positions, differentiated capabilities and attractive opportunities to generate growth and strong financial returns. Subject to closing, the proceeds from Flightscape will further increase our financial flexibility. Combined with improved cash generation and a stronger balance sheet, this gives us greater capacity to make disciplined investments in strategic opportunities in our core businesses and continue returning capital to shareholders. We demonstrated that commitment through increased share repurchase activity in the second quarter. Overall, the Board is encouraged by both the pace of the transformation and the progress we are seeing in the underlying business.

CAE has leading positions in 2 attractive growth markets, and we are becoming a more focused organization with stronger operating discipline, higher cash generation, an improved cost structure and greater flexibility to allocate capital towards the highest return opportunities. Taken together, the progress through the first half increases our confidence that CAE is well positioned to deliver attractive long-term growth and create value for shareholders. The Board and I look forward to continuing to support Matt and the leadership team on the execution of the next phase of CAE's strategy. With that, I will unfortunately have to leave you before the call is over to catch a flight.

I look forward to following the discussion and speaking with many of you soon. Matt, over to you.

Matthew Bromberg: Thanks, Calin. Good morning, everyone. Before we get started, I want to take a minute to recognize that yesterday was Remembrance Day in Canada and Veterans Day in the United States. As a former naval officer, I want to take a moment to thank all those who have served, and that includes many of the veterans across CAE who continue to contribute to our mission every day. As you all know, we operate in over 40 countries around the world and with almost every allied service. And today, 45% of our revenues is associated with supporting the war fighter.

And so a day like this is especially important to take a pause and remember those who have served and those who support. Now let's turn to second quarter. We delivered a solid quarter. We expanded margins in Defense. We improved Civil training utilization year-over-year, and we generated higher free cash flow. We increased share repurchases and made meaningful progress on our transformation plan. Our first half performance, together with increased confidence in our ability to execute our second half plan, supports our decision to increase our fiscal 2027 outlook. And we now expect adjusted earnings per share of $1.28 to $1.35 and adjusted segment operating income margin of 14.9% to 15.4%.

Our Civil business performed as expected in our second quarter, which is seasonally a bit soft. Overall, training utilization improved year-over-year across both commercial and business aviation. Our Middle East mitigation actions continue to work, and our market share of full-flight simulator sales remains at about 80%. And looking ahead, our bookings for the second half of the year give us good confidence for our second half performance. Defense had another strong quarter. Adjusted segment operating income and margin were meaningful higher year-over-year. The timing of investment tax credits provided a couple of hundred basis points of tailwind, bringing second quarter Defense margin to 13.6%. Excluding that benefit, margin was 11.6%.

The underlying improvement reflects our enhanced bid discipline, the benefit of structural cost reduction and our focus on strong program management. Turning to our transformation plan. We're now more than 50% complete across key milestones, which is ahead of our original forecast. I'll walk you through the three pillars. First, as we focus our portfolio, you've seen that last month, we announced an agreement to sell Flightscape to SITA for USD 500 million. We expect the transaction to close in the first half of calendar year 2027. This is an important step in our transformation plan. It sharpens our focus on the businesses where we see the strongest strategic fit and the best financial returns.

Make no mistake, Flightscape is an excellent business, and we're very proud of what the team has built. However, we believe that SITA is the right owner to support its customers, employees and continued growth. The other divestiture processes, while less material than Flightscape, remain on track. Subject to closing, we intend to put the proceeds to work with discipline. We will fund the remaining transformation activities. We will invest in attractive growth opportunities in our core businesses, and we will continue returning capital to shareholders. And our second pillar, it's improving our capital discipline and in particular, accelerating our network consolidation in the Civil training network.

We now expect to retire 16 to 18 simulators by the end of this fiscal year, up from our previous expectation of 13 to 15. And as of the quarter end, we'd already retired 13. Over time, we remain committed to closing between 4 and 6 of our Civil training centers and reducing our Civil network footprint by approximately 500,000 square feet or roughly 10%. And at the same time, we expect to retain more than 99% of our Civil revenue. This activity, one simulator at a time, one site at a time; will allow us to meet our customer demand, protect our strong customer relationships and significantly reduce operating infrastructure and real estate costs.

And out of the $150 million transformation savings, approximately 20% is directly attributable to this activity. It's a lot of hard work, and I'm very proud of what the team has accomplished. Now let's look at some of the key business developments in the quarter. On the Civil side, 2027 is unfolding in line with our expectations and the long-term fundamentals across both commercial and business aviation markets remain incredibly strong, and we are seeing already positive indications for 2028. New aircraft platforms are an important driver of long-term demand for training and simulation, and the recently certified 737 MAX 10 is a clear example.

The MAX 10 accounts for approximately 1,500 orders, representing more than 30% of the 737 MAX's current order book. Another example is United Airlines, an important MAX 10 customer. It has been a key CAE partner for more than 4 decades, and I recently traveled to Denver to celebrate the completion of the largest simulator program in civil aviation history. From 2022 to 2026, CAE delivered 40 training devices to United. Every device was delivered on schedule and to the highest standards of quality and reliability. Our relationship with United Airlines demonstrates what CAE can do at scale. As United continues to expand its training footprint, we committed to support their growth.

On the business aviation side, the market continues to be extremely attractive, both near and long term. Industry forecast published at NBAA point to continued growth in the business aviation fleet, supported by increased flight activity and record OEM backlogs. The global fleet of business aircraft is expected to grow to approximately 51,000 by 2035. That's nearly 30% above today's level. And more aircraft means more flying, more flying means more pilots. And the regulatory requirements continue to drive not only type training, but recurring training, which increases our demand. I'm continuing to be amazed at the civil market.

And across our businesses, our retention in training, recurring training is north of 90%, and that demonstrates the scale and scope of our network and the strength of our customer relationships and the recurring nature of the business. On the Defense side, the second quarter order intake was very solid. The book-to-sales ratio was 1.06, and our adjusted backlog and pipeline support additional opportunities for long-term growth. In the United States, we won a 9-year $300 million competitive recompete to support the U.S. Air Force C-130H aircrew training system through December 2035. CAE has supported C-130 training for more than 20 years.

And today, that footprint includes 9 full mission simulators and more than 45 additional crew training devices across 5 U.S. locations. This win reinforces CAE's standing as the United States Air Force C-130 training partner and extend a long established core franchise well into the future. It's also a testament to our long-standing relationship and partnership with Lockheed Martin. Beyond our core franchises, we're expanding our capabilities into two attractive growth areas: Mission readiness and autonomy. During and following the quarter, we announced strategic cooperation agreements with msg systems ag in Germany and WB Electronics in Poland. These build on the Shield AI relationships discussed last quarter. Our planned cooperation with msg systems expands our capabilities and mission readiness.

Together, we intend to explore opportunities to better prepare customers for increasingly complex missions and operational environments. And this partnership builds on CAE's long-standing presence in Germany, where we've operated since 1961. In Poland, our planned cooperation with WB Electronics advances our capabilities in autonomy. By combining CAE's training and simulation expertise with WB's unmanned systems and command and control capabilities, we intend to explore new ways to prepare customers to operate effectively in contested environments. We are building on our strong core training and simulation franchises and extending CAE beyond traditional platform training into higher growth areas of the defense market.

These opportunities and others feed a Defense pipeline that is meaningfully larger than our current adjusted backlog and support our expectations for continued growth and higher profitability. With that, I'll turn the call over to Ryan to discuss the second quarter financials and our fiscal 2027 outlook in more depth. And after his remarks, I'll share some closing thoughts.

Ryan McLeod: Thank you, Matt, and good morning, everyone. As Matt noted, our second quarter results reflect continued progress across our operational and transformation plans. Based on our first half results and increased confidence in our ability to execute our second half plan across Civil and Defense, we are raising our adjusted segment operating income margin outlook for fiscal 2027. Combined with the benefits from a lower effective tax rate and lower finance costs, this also supports an increase to our adjusted EPS outlook for fiscal 2027. In Q2, as part of our transformation plan, we incurred $42.6 million of restructuring expenses, of which $16.3 million were noncash charges.

This brings total costs incurred under the transformation plan to $175 million, of which $87 million is noncash. The overall program is tracking to plan, and we still expect total costs of between $200 million and $250 million with approximately $100 million of noncash charges. The majority of the remaining costs are expected to be incurred in fiscal 2027. We remain on track for our fiscal 2030 targets of $125 million to $150 million of annual transformation run rate savings. Turning to our results, in the second quarter, consolidated revenues of $1.2 billion decreased 2.6% year-over-year. Adjusted segment operating income was $179.3 million, up 1.5% from $176.7 million in the second quarter last year.

Adjusted segment operating income margin increased to 14.9% compared to 14.3% last year. Adjusted EPS was $0.33 compared to $0.28 a year ago. The improvement in adjusted segment operating income and margin reflects stronger performance in Defense and business aviation training, partially offset by a softer Civil product business. Adjusted EPS also benefited from lower finance expenses and a lower effective tax rate. Free cash flow was strong again in Q2 at $179.9 million compared to $109.8 million in the second quarter last year. Year-to-date free cash flow of $283.9 million compares to a use of cash of $24.9 million through the first half of last year.

This year-over-year increase reflects strong execution as well as working capital and capital expenditure timing. With the strong performance through the first half, we've not made any changes to our fiscal 2027 cash conversion rate guidance of 85% to 95%. We ended the quarter with net debt of $2.5 billion and a net debt to adjusted EBITDA ratio of 2.16x, in line with our long-term leverage target. In Q2, we were active with our share buyback program and repurchased 1.9 million shares for $67.1 million under the NCIB program. As of the end of our second quarter, our share repurchases totaled 3 million shares and $106.1 million of cash outflow.

Our cash performance and current leverage ratio provide flexibility as we execute the transformation and evaluate future capital deployment opportunities. As Matt described, the expected proceeds from Flightscape will further enhance that flexibility, allowing us to fund the transformation, invest in our core businesses and continue to return capital to shareholders. We will remain measured, disciplined and transparent in our approach to capital allocation with a focus on long-term shareholder value. Turning to the segment results. In Civil, second quarter revenues decreased 2.6% year-over-year to $652.3 million. Adjusted segment operating income was $103.9 million compared with $124.1 million last year. Adjusted segment operating income margin was 15.9% compared with 18.5% in the prior year.

The year-over-year decreases in Civil revenue and adjusted segment operating income were in line with our expectations and primarily reflected lower simulator product revenues, partially offset by higher activity across our business aviation training network. Year-over-year margin headwinds also reflect temporary inefficiencies associated with repositioning our network and consolidating selected facilities as well as elevated investments in tools, systems and our factory. Civil training center utilization was 65%, up from 62% in the prior-year period, with improvement in both commercial and business aviation training. We continue to successfully mitigate impacts on our Middle East operations by transferring the volume to other parts of our global network.

Across Civil, we saw increased utilization year-over-year in our core markets in the Americas and Europe. In Civil, we booked new orders worth $580.6 million in the quarter, representing a book-to-sales ratio of 0.89. Our book-to-sales ratio in Civil over the last 12 months was 1.07x. In Defense, revenue was $552.4 million compared with $566.6 million in the prior-year quarter, a decrease of 2.5%. Adjusted segment operating income increased to $75.4 million from $52.6 million last year, an increase of 43.3% year-over-year. Adjusted segment operating income margin increased to 13.6% from 9.3% last year.

The increase reflected higher profitability from product sales, partially due to timing, strong execution on our contracts in North America and the recognition of $11 million in investment tax credits related to prior years. Defense adjusted order intake of $586 million resulted in a book-to-sales ratio of 1.06 and brings our adjusted order backlog to $11.3 billion. Moving to our fiscal 2027 outlook. Based on our first half results and the increased confidence in the performance of both segments, we are raising our fiscal 2027 adjusted segment operating income margin to a range between 14.9% and 15.4%, up from 14.6% to 15.1% previously.

We're also raising our adjusted EPS outlook for the year to between $1.28 and $1.35, up from $1.21 to $1.28 previously; reflecting the stronger operating outlook as well as lower finance expense and a lower effective tax rate. On Defense, for the year, we continue to expect mid-single-digit growth and improved profitability year-over-year, supported by the robust demand backdrop, adjusted backlog conversion and strong execution. Quarterly results will vary based on program milestones, product deliveries and mix. The second quarter margin should not be treated as a new quarterly run rate due to the discrete tax benefit and product delivery timing. That said, the direction of the underlying business remains very positive.

In Civil, we expect second half to be stronger than the first half, consistent with our normal seasonal pattern and supported by training activity and product delivery timing with a higher number of full-flight simulator deliveries expected in Q4. In the second half, year-over-year margin headwinds will be smaller than they were during the first half of the year. For the full year, profitability is still expected to remain below the prior-year levels as a result of lower revenues, friction from our network optimization actions and investments being made to support long-term performance. Lastly, as announced yesterday, we are evaluating a potential transition to U.S. GAAP reporting.

We've heard from several investors on this topic over the last year, and we're taking a closer look. If we proceed, this change would become effective as of the fourth quarter and fiscal year ending March 31, 2027. Consistent with the enhancements we've already implemented to multiple financial metrics, we believe a transition to U.S. GAAP could further improve the clarity of our financial reporting and enhance comparability with aerospace and defense peers. We expect to provide additional details in the coming quarters, including at our Analyst and Investor Day in February 2027. Overall, Defense continues to deliver improved profitability.

Civil is positioned for improved results in the second half, and our cash generation and leverage provide flexibility to deploy capital in support of our growth strategy and long-term shareholder value. Our plans remain on track, and we remain committed to our fiscal 2030 targets, including adjusted segment operating income of $950 million to $1 billion. With that, I'll turn the call back over to Matt.

Matthew Bromberg: Thanks, Ryan. Let me close with two thoughts. First, we're doing what we said we would do. We said fiscal year 2027 would be an execution year, and we are executing. Halfway through the year, we've improved defense profitability. We're generating stronger free cash flow. We're quickly advancing our transformation, and we've taken a significant step in streamlining our portfolio with the announced sale of Flightscape. And given all that and the strong visibility we have to the second half of the year, we've also raised our fiscal 2027 outlook for adjusted EPS and adjusted segment operating income margin. There's a lot more work to do, but the progress is real.

Secondly, we're positioning both businesses, Civil and Defense for stronger long-term profitable growth and cash generation. In Civil, we're optimizing our training network to remove a significant amount of cost while continuing to invest to capture long-term growth in aviation training, and we're starting to see the signs of underlying improvement in that business. In Defense, we're executing well and delivering strong profitability. We're strengthening our core and expanding our capabilities in growth areas, including mission readiness and autonomy. And across both businesses, the objective is clear: focus our resources where CAE has the strongest competitive positions and the best opportunities to generate attractive growth and returns.

18 months into the role, I'm often asked if I can see the change occurring in the organization. And the answer is yes. I can feel it. We're inflecting. We're becoming more focused on our end markets. We're becoming more focused on profitable growth and more focused on cash flow generation, and the results are starting to be clear. Recently, I participated in the Canadian Investment Summit in Toronto, where I met with and answered questions from some of the world's largest investors. The discussions around CAE and Canada were excellent and centered on why CAE is well positioned to win and grow from its Canadian base. My message was simple.

CAE is an international leader with a world-class team that competes every day against the best in the industry. We benefit from calling Montreal, which is one of the world's leading aerospace hubs home, and Canada is increasingly focused on creating the conditions for investment and growth. And most importantly, when you invest in CAE, you are investing in a global company. We operate in over 40 countries and serve 2 end markets with attractive long-term growth fundamentals. We'll go much deeper on the path ahead at CAE's Analyst and Investor Day in New York in February. We'll lay out our strategy and the growth opportunities we see across both Civil and Defense.

We'll talk about our key technology investments, and we'll give you more detail to the financial and operational milestones we'll use to measure our progress. We see significant potential to drive higher margins, improved cash generation, attractive long-term growth and greater value creation. We have a clear plan. We're making good progress. We have great businesses and a fantastic team that is aligned around building a higher growth and higher returning CAE. Thank you.

Andrew Arnovitz: Thanks, Matt. Operator, we would now be pleased to take questions from financial analysts.

Operator: [Operator Instructions] First question comes from Konark Gupta with Scotiabank.

Konark Gupta: Maybe just on the margins first, Defense margins were pretty strong in the quarter, even if we strip out the onetime ITC benefit there. It seems like the margins were north of 11%. I think this is probably one of the best margins you have seen in a long time in Defense. I'm just curious, you mentioned there's some product mix timing in there. But how sustainable do you think these low double-digit margins are in Defense now on a quarterly basis?

Matthew Bromberg: Yes, Konark, thank you for the question. As I stated when I came in here a year ago that we had to earn our right in the Defense business, and I thought low double digits was where we needed to be. That's where we are, and that's where we'll stay. Now underlying the quarter, as you indicated, we do have some unique items, the tax benefit, which won't reoccur. We have a mix benefit as well. But it really comes down to more fundamentals. This starts with bid discipline. I've shared with many of our investors, there are certain businesses that we're not going to bid for because the margins and returns are unattractive.

And secondly, where we do bid, we've increased our focus on raising our margins in line with what our products and technology should earn, ensuring that we have a robust process to understand cost and risk and change management, everything that goes into a strong, robust bid and estimating process. That's part of how military contracts are bid and won. And secondly, our program management structure. We have over 500 programs around the world. So ensuring we have a very strong, robust central program management office that has strong processes and strong metrics so that we can overview, see, monitor and react to programs around the world is key. And the third item is structural cost reduction.

The transformation that we've talked about, if you look at the three buckets, corporate, Civil and Defense; each one of those organizations is looking at taking structural cost out, and that will further drive margins. So we intend to stay here. Thanks for the question, Konark.

Konark Gupta: If I can quickly follow up, Matt, you seem a little bit more positive on the second half today than before, perhaps. We are not seeing anything materially changing in the civil market from a macro perspective. Fuel still is high. I mean, obviously it's volatile. Middle East tensions are still continuing. What's driving this optimism? I mean, are you hearing the demand coming from your customers because they're preparing for the next year? Or is it they are catching up on something else?

Matthew Bromberg: No, great. It's really about execution. To back up, the market is performing as we expected this year and the mitigation plans we put in for the Middle East are holding. So given the way the market is unfolding in line with our expectations and the success of mitigation, we feel good about the outlying market. But more importantly, internally, we're executing better than we expected. So that gives us confidence in the second half of the year. And let me just talk a little bit about execution. We laid out a strategy.

And with that strategy, we put a team and organized around it, and we're developing better tools, better processes, whether they be digital or not, so that we can execute. And then we put in a very, very strong business cadence. This isn't easy, whether it's a transformation or running the training network or running our programs. And having that battle rhythm, that cadence, it's a grind. It requires a metronome. We have to work day in and day out to ensure that we keep focused on every customer, every delivery, every training hour, and the team is doing really well.

Operator: Next question comes from Benoit Poirier with Desjardins.

Benoit Poirier: Congrats on the solid execution. So just related to United, they have slightly over, I believe, 600 firm orders for delivery through 2034. And some articles mentioned that the new facility in Denver could bring 6,000 job and close to 60 full-flight simulators in the longer term. So how much is in your backlog? And does it give you confidence that the overall Civil product deliveries this year could be the trough and go -- increase thereafter?

Matthew Bromberg: Yes. Thanks for the question. I certainly don't want to get ahead of [ Scott ] and United. But being out there in Denver, let me tell you first, it's a marquee facility. It's the largest commercial training facility in the world. It has 40 full-flight simulators, another 40, 45 other devices and 95% of those are CAE, and we intend to grow that share. And standing on the stage with [ Scott ] talking about the successful partnership between the United training team, United pilots and CAE is a testament to the 40-year history. So as United looks to grow, we intend to grow with them. It's a marquee facility.

If you're in Denver, I encourage you to try and visit it. It tells you what we can do when we partner with an airline like United.

Benoit Poirier: That's great. And with the transformation plan on track and the divestiture of Flightscape, when I look at Civil margin, obviously, good execution in the quarter, but still far from some long-term target. How much of a lift could we see in Civil margins going into fiscal year '28?

Ryan McLeod: Benoit, it's Ryan. So I think, first of all, year-over-year, we do expect an improvement in Civil margins in the second half. And that's really embedded in our guidance update that we provided today. And that reflects a lot of the things Matt talked about. There's operational improvements. We're seeing costs come out related to the transformation. There's efficiency being built into -- or resulting from the actions we're taking. So I'm not going to get into fiscal '28 guidance yet, but we're certainly pleased with the progress of the business and the underlying operational improvements we're seeing.

Benoit Poirier: Perfect. And maybe just a quick one on Defense. Defense spending remains pretty solid. However, when we look at the federal government, they've reduced the scale of defense spending in the 2026 budget versus was unveiled back in 2025. Do you expect some programs pushed to the right? Or does it change something for your Defense outlook?

Matthew Bromberg: No, we're confident about the Defense outlook, but let me back up a second. Defense contracting is a slow methodical process. When contracts are awarded, it can take years for them to mature into actual spend. That's universal. And contract monies move around year-over-year. In the U.S., I'd fully expect a continuing resolution and other changes in other countries. But what's unique about CAE is that we operate in 40 countries. And so what happens in one country with one budget is not critical or impactful to our overall portfolio. And secondly, a lot of our contracts are multiyear. So we're already contracted, will continue. And that's very, very important for visibility -- recurring visibility.

And then finally, if you think about the growth across NATO countries, today, NATO countries spend about $1.5 trillion, U.S. being roughly $1 trillion, the other countries making up the rest. If they all go to 5%, that's almost $3 trillion of spend in 10 years. If they miss that, it's still a huge, huge improvement, a massive amount of growth. If you think about training and simulation, roughly $0.10 on the dollar of every dollar spent, and we operate in every country. In addition across NATO countries today, there are about 6 million people in uniform, men and women. And by 2030, it's going to be close to 8 million people.

And if you factor in attrition, we're going to hire 300,000 people a year into the services. And so that's a huge training and opportunity. And then finally, independent of all that, there's a massive investment around the world in autonomy and mission readiness, and we're excited to be playing in that space as we can leverage our technology, our OEM partner relationships and our geographic spread to drive that market as well. So no, it doesn't change anything.

Operator: Next question comes from Fadi Chamoun with BMO.

Fadi Chamoun: Congrats on the progress that you're making. So I wanted to talk about the kind of the investment you're making in transformation. I think you're about 78% of the investment you wanted to make kind of through and you're suggesting you could be done by the end of fiscal '27. I'm hoping you can give us an idea of the cadence of the return on that investment in '28, '29, '30. I think you've highlighted $125 million to $150 million. But is there a cadence that you can share with us in terms of how we should think about the return on that investment as we go into next year?

And adjacent to that, kind of the question on transformation, are you finding other opportunities or transformation runway kind of you've been on? It seems like you've gone pretty well, pretty fast. Is there -- are you finding other opportunities that you can tackle as we go forward?

Matthew Bromberg: Thanks, Fadi. Thanks for, I think, three or four very good questions. So first, I'm going to give you a broad view. When we launch a transformation program, we have a very strict hurdle to invest and all the projects on average are 2- to 3-year paybacks. So you think about when the return comes, it's 2 to 3 years. Secondly, you talked about progress. There are various ways we measure progress. We're meeting on a weekly basis and every other week with the leadership team. If you think about spend by the end of the year, it would be 75%. If you think about our physical milestones, we track every project, we're about 50%.

If you think about square footage reduction, actually, that's much lower because that's the last part of any one of these projects to close down a facility. And for that reason, the timing will go into 2028 in terms of executing the projects, but the returns will start. On top of that, we're building a pipeline of additional projects because as you peel the layers back, you continue to sharpen your focus on where there's opportunity. So hopefully, that gives you a little bit of color as to how the program has been set up. It's 8 work streams. But underneath that, there are many, many projects. We talked about each simulator is a project, each site is a project.

So 2- to 3-year paybacks on average, some less, some higher, 50% on average progress ahead of where we thought we'd be. The bulk of the heavy lifting will be done this fiscal year. And then there'll be some additional work, especially site closures that will drift into 2028. But we're looking across the portfolio and finding new opportunities and building the pipeline. I'm going to turn it to Ryan to give you a little bit more fidelity.

Ryan McLeod: Well, I'll just add on to that, and it was noted in our prepared remarks. But in terms of return on investment and capital deployment, this is a high-value opportunity that we're pursuing right now with the transformation. And as Matt said, as other opportunities in the pipeline come up and get evaluated, we're continuing to look at and improve those to go forward. So I'm certainly very pleased with the progress.

Operator: Next question comes from Daryl Young with Stifel.

Daryl Young: Congrats on getting the Flightscape sale across the line. You've obviously given us good color on the revenue and the margin side. But I was wondering if there's any color you can give around CapEx savings, including investment in intangibles. I think in the past, Flightscape has consumed a disproportionate amount of capital.

Matthew Bromberg: Yes. Let me start and then turn it to Ryan. First, again, I want to commend the entire Flightscape team who maintained focus on running the business and serving their customers. And I do want to commend David Lavorel and the SITA team. They are fantastic counterparties. I think it's the perfect home, and I've had many reach outs from airlines because of that choice as well as David has. So one of the primary reasons why the process was successful is we had a team that focused on doing their job inside SITA and in the overall transaction team. So we feel very good about where it's going.

Obviously, as we've already indicated, the capital we raise is going to be allocated in accordance with our current program, focusing first on any additional transformation projects. Secondly, on growth. You saw we put the shovel on the ground for the WestJet Training Center. That's an attractive item. There'll be other projects like that. And obviously, returning capital to shareholders is a key priority. I'll let Ryan go into a little bit of detail on what it means to the rest of us.

Ryan McLeod: Yes. So the Flightscape business, it has typically been a higher percentage of spend that gets allocated towards investment capital, intangibles, R&D and so forth. So it does help reduce our overall capital intensity. But given the size of the business, it's not a material amount. I think we have other opportunities that I would call more self-help within the rest of the business that we're pursuing in order to drive down capital intensity.

Daryl Young: Got it. Okay. That's helpful. And then one quick follow-up on Benoit's question around the Denver facility with United. Are you able to remind us what your exposure is to the large North American airlines as a percent of revenue? And then maybe what opportunities or what changes you're seeing in your ability to take market share there and sort of grow with the larger network carriers?

Matthew Bromberg: Yes. Let me -- I didn't hear the second question, but let me answer the first. We're equally exposed to all major carriers around the world. We have 80% full flight sim market share up and down on a given quarter. We work in North America, South America, Europe, Asia, Middle East. So a given region is not a major concern of mine. In fact, the U.S. and North America is one of the slower-growing regions right now from a traffic perspective, given where fuel prices and things are, but it's also one of the larger regions. So we feel really good about all of our regions, and that balances out our portfolio. The U.S. airlines are fantastic customers.

There are some of our more significant product customers, but we also have a very large training network in the United States. And so we feel well diversified across the globe, and that's one of the advantages of our scale. What was the second question? I apologize.

Daryl Young: Just any shifts or changes in your ability to grow a greater percentage of share with those customers going forward?

Matthew Bromberg: Well, if you go to a United or a Southwest American facility, you'll walk in and see the CAE logo from top to bottom from wall to wall. And as I indicated, with [ Scott ] and his leadership team in United, yes, there are a few other logos in that facility, but we hope to take them out over the next few years, and that's what we try to do with our customers. But we compete every day. We have to earn our customers' trust. We have to earn our right to put our logo into any facility.

But you'll go to one of these facilities and you'll see our logo, our team, our technology, our pride, our customer support everywhere.

Operator: Next question comes from Tim James with TD Cowen.

Tim James: I just have one question, Matt. The 99% retention of your Civil customers while you go through this transformation plan, it seems like quite an accomplishment. And correct me if I'm wrong, but I think that might be stronger than maybe you had kind of thought going into this. Could you just describe what you think the key is to that? Why you've been so successful at retaining customers through this process?

Matthew Bromberg: Yes. So you're talking about 99% Civil retention as we go through the rationalization, right? And it's of revenue. We have some customers that we're losing. It really is a testament, I think, to, first, our customer-facing teams. We have the largest customer-facing team in the world, and it's not a Montreal team. It's a team that lives, operates around the world with the customers day-to-day. And that intimacy and that relationship is extremely strong. Secondly, we, by nature, are very flexible. We understand that every airline has a different strategy, and we've developed a tool set, a set of offerings that allow us to work around that. And third, most importantly, we have the largest network in the world.

And so when we're looking at other options, the scale of our network, our capability to handle these changes has allowed us to work creatively with them to find solutions. And so I could walk you through examples and we could do it offline. There's not a single solution that's worked in each one of these facilities, each sim. It's different every time, but each one is developing a creative solution. And we work tirelessly to try and retain each customer in every contract. So I'm very proud of what the team had done. They've worked diligently to do this, which is why we're taking our time to get through it.

But to take roughly 10% of our operating costs out of the network and retain 99% of our revenues in a relatively soft market for Civil is a fantastic accomplishment by half of the team. It really sets us up well to grow in the future.

Operator: Your next question comes from Mark Neville with Canaccord Genuity.

Mark Neville: Again, congrats on the progress. I've got two questions. First one, just on the transformation and a bit of a follow-up to one of the earlier questions. But when you unveiled this plan, I think you had line of sight on the cost takeout -- on the full cost takeout. I guess as you're working through this without maybe giving numbers, but I guess, how much larger is the quantum of the opportunity that you're discovering as you work through this program? And then the second question, just on the balance sheet. I appreciate everything you're telling us and how you want to be disciplined in how you want to allocate your capital.

When you think about the business and optimizing things, I assume that includes the balance sheet. So would there be a leverage ratio -- I think it'd be around 1.5 with the sale of Flightscape. But would there be a leverage ratio where you would consider maybe too low? I'll leave it there.

Matthew Bromberg: Thank you for the question. I'll take the first one, and I'll have Ryan answer the second. First, as indicated by our raise as we talk about the second half and the transformation plan, I'm more confident than ever in our ability to deliver the targeted savings, and we're going to increase that pipeline. And right now, I don't want to get ahead of the team because we have a process that reviews every project to ensure that it meets that 2- to 3-year payback that we've talked about, but that pipeline is large. And when we get fidelity on it and get confidence, then we'll make it clear to you and everyone else on what we intend to do.

But I'm more confident than ever about what we've stated and excited about the future pipeline and intending to accelerate that as much as possible. Let me turn it to Ryan to talk about leverage.

Ryan McLeod: So I think we finished the quarter at 2.2. Flightscape after closing that, it's half a turn, just over half a turn. So pro forma doesn't get us down to 1, but in the 1.5 range. I think we talked about being disciplined. We've talked about allocating capital to the highest return opportunities, and that's what our commitment is. If that means that we go down to 1.5 and we stay there for a period because there's not attractive capital deployment opportunities, that's okay. I think we're going to remain patient. We're not going to deploy capital for the sake of deploying capital. We've been active with the NCIB program over the first half of the year.

We expect to continue to be active with that. We've talked about having a long-term leverage target in the 2.5 range, and we're comfortable with that. That allows us to remain investment grade, which is important. But overall, I would just reinforce that our intent is to be disciplined and patient and really look to allocate capital where we do see the highest value opportunities.

Operator: Next question comes from Sheila Kahyaoglu with Jefferies.

Sheila Kahyaoglu: Matt, if I could ask maybe just starting on utilization. There's been a lot of moving pieces that have affected utilization over the past few years, whether it's the Middle East [ complex ], pilot training, cyclicality, MAX 10. Maybe over time, now that you've been in the seat for over a year, how are you thinking about utilization and the sort of right level of growth for utilization?

Matthew Bromberg: Sheila, thanks for the question. As I said before, utilization is a good metric, but it's not a perfect metric. And utilization got too low because we overbuilt the network. And hence, rationalizing and taking out about 10% of our square footage and more than 10% of our devices will improve utilization. I think we put out a marker that it would increase utilization, given everything being equal, by 400 or 500 basis points. And sitting here today, we're on track, if not going to exceed that. What really matters is optimizing the profit per sim. So you're going to see utilization go up. You're already seeing it given where the market is unfolding as we predicted.

And I think that you're going to see it continue to go up. I've said that a healthy utilization for our network is going to be in the mid-70s. That's where we want to be, and we were below that. And everything we're doing is going to support that. And then being disciplined going forward about not adding training centers or devices too quickly so that we don't end up in the same position. So utilization is one marker. But more importantly, over the next few years, you're going to watch us grow revenue and increase margins. And that tells you that we're allocating our capital and putting costs in the right places at the right time.

And that's consistent with what Ryan said. We're going to be very disciplined and stringent about where we build training centers and where we allocate our capital.

Sheila Kahyaoglu: Sure. Can I ask another one on just the quarter in terms of the Civil orders, the sequential decline there. Is that just timing? Or are you seeing any changes to customer behavior with higher oil and just how they're thinking about capacity next year?

Matthew Bromberg: Yes, I'll start and then allow Ryan to get into more detail. I think the quarter is unfolding as we expected, right? And we're seeing utilization go up. We're seeing the industry perform largely in line with last year, and that's a strong outlook. If you think about the margins, it really is a product mix issue. We have the same number of full flight -- same number, sorry, full flight sims this year as we did last year roughly, but it's a different mix of them, and they have different margin coming with them. So the quarter, the year is unfolding as we expected, and we feel good about that. Utilization is going up.

I'll let Ryan go into a little bit more detail.

Ryan McLeod: Sheila. So specifically on the order bookings, there is some variability, normal course lumpiness in that metric. And so Matt talked about the product sales. The quarter was 0.89 for the trailing 12-month period, we're 1.07. So very pleased with the trailing 12-month metric. But keep in mind, some of these training agreements cover 10, sometimes 20 years in some cases. So it's not the most -- it's not a single metric to drive a view on quarter end market activity because of some of that inherent variability in it.

Operator: Next question comes from [ Ryan ] Epstein with Bank of America.

Unknown Analyst: So a question for you, Matt. When we think about the changing Canadian Defense fundamentals, right? So Canada has, I guess, maybe an upgraded status on GCAP. And what potential opportunities do you see flowing from the increased defense spending, a, in Canada? And then b, as the Europeans at large attempt to grow their defense budgets, what opportunities do you see there being, a, a Canadian company; and b, having services and products that maybe aren't available everywhere?

Matthew Bromberg: Yes. Thanks for the question. I see a huge opportunity. We're the right company at the right place at the right time. So let me talk about Canada. Canada has had a nascent defense industry for the past 25 years, and we're well aware of that here. But the speed at which the Prime Minister and his team are moving is something I haven't seen with 25 years in the industry.

In roughly 1.5 years, he's gone from relatively no spend to a 5% target of GDP, launched the defense industrial strategy in our facility, created the Defense Investment Agency to make the decisions, has made several major source selections, including Leonardo for trainer jets, Saab for the GlobalEye platform and TKMS for the submarine, of which we're partnered on all of those; and then created the Crown Corp. to accelerate further what DI is capable of doing, and now they're working diligently on getting the contract. Across any country in the world, that's fast. And given the size of the Canadian economy, the aspiration to go to 5% makes it material.

And we're thrilled to be the largest publicly traded defense company in Canada, and we have one of the largest franchises in the world for training and simulation. So we couldn't be happier to be here. Now we have to earn our right to work with the Canadian government. We have to earn a right to work on either of those programs. But we have the team, we have the technology, and we've got the footprint. If you expand that to NATO, we have a presence in 40 countries. I mentioned in Germany, we've been there for 65 years. We've been in the U.K. for decades.

I was just out in Germany talking to the Air Chief and the Naval Air Chief. And our team on the ground is a mix of employees from Canada and Montreal, and many are retired from the German Air Force or the German Naval Force. And they are thrilled to work side-by-side with us as we bring the most sophisticated technology to help them prepare for their mission readiness. In fact, the NH90 Sea Lion is one of the most sophisticated simulators on the planet. It's a highly capable multi-simulator device that shows the best of what we do.

And so as these NATO countries are also going to increase their spending, because we're local in these countries on the ground, we work side-by-side with them to develop solutions for them that leverage our technology and capabilities. So it's a unique company to be geographically located around the world, yet have the strong technology, manufacturing development base here in Montreal. So I'm very, very excited about what it means.

Unknown Analyst: And earlier this year, you mentioned having a fairly strong pipeline internationally and some of the opportunities you mentioned were from Leonardo, Saab and some others. How is that proceeding?

Matthew Bromberg: So it's proceeding well. We've structured great relationships with Saab, with Leonardo, with TKMS. Those were all selected by Canada as the preferred platform. And now they're diligently in the room as we speak, working on going to contract. And I can't get ahead of that, but it's really a match of our capabilities with what the world needs. And the fact that we will operate not only here in Canada, but set up training facilities in Europe to support the submarine program or the GlobalEye program is really an exciting place to be. So I know having talked to the teams that progress is being made at a very rapid clip.

I outlined for you the progress having been made to date. So I think in the near future, we'll start to see more progress as those contracts are signed with the providers, and then that will work -- that will flow to us as we start working on the training solution.

Unknown Analyst: Got you. Got you. And then maybe just one quick follow-up to some of the questions that were asked before. When we think about the utilization in the commercial network, is it because there's fewer sims? Or is it because there's more demand? Or is it because there's both?

Matthew Bromberg: It's because there's fewer sims. I mean the year, the quarter is unfolding as we expected. We do have better visibility sitting here today in the second half of the year than when I sat here a year ago. So our bookings are stronger. We're focusing the team on advanced bookings and filling the facilities, but we are actually taking out these devices faster than we thought. So demand is in line with expectations. Visibility is higher, but a lot of the utilization is driven by taking out the devices.

Operator: That concludes the Q&A session. I would like to turn the conference back over to Mr. Arnovitz.

Andrew Arnovitz: Yes. Thank you, operator. That's all the time we have this morning. I want to thank all of the participants and for those who ask questions for their very thoughtful questions. And I would remind you that a copy of today's call, a transcript can be found on CAE's website. Thanks very much. Have a good day.

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

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