CAE Inc

TSX:CAE

Good day, ladies and gentlemen. Welcome to the CAE Fourth Quarter and Full Fiscal Year 2025 Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions]

I would now like to turn the conference over to Mr. Andrew Arnovitz. Please go ahead, Mr. Arnovitz.

Good morning, everyone, and thank you for joining us. Before we begin, I'd like to remind you that today's remarks, including management's outlook for fiscal '26 and answers to questions contain forward-looking statements. These forward-looking statements represent our expectations as of today, May 14, 2025 and, accordingly, are subject to change. Such statements are based on assumptions that may not materialize and are subject to risks and uncertainties.

Actual results may differ materially, and listeners are cautioned not to place undue reliance on these forward-looking statements. A description of the risks, factors and assumptions that may affect future results is contained in CAE's annual MD&A available on our corporate website and in our filings with the Canadian Securities Administrators on SEDAR+ and the U.S. Securities and Exchange Commission on EDGAR.

On the call with me this morning are Marc Parent, CAE's President and Chief Executive Officer; and Constantino Malatesta, our Interim Chief Financial Officer. Nick Leontidis, CAE's Chief Operating Officer, is also on hand for the question period. After remarks from Marc and Constantino, we'll open the call to questions from financial analysts. Let me now turn the call over to Marc.

Thanks, Andrew, and good morning, everyone. We delivered an exceptional fourth quarter that capped a strong year across all of our key financial and operational metrics. I'm very pleased with the performance and proud of how the team delivered with disciplined execution and efficient capital management.

We generated $289 million in free cash flow in the quarter and a record $814 million for the full year, translating to a very robust cash conversion rate of 211%. That level of cash generation enabled us to meet our year-end leverage target, giving us stronger financial position and increased flexibility as we look ahead.

Importantly, we also continued building momentum for long-term growth and profitability. We secured $1.3 billion in new orders in the quarter for a record end of year adjusted backlog of $20.1 billion, which is up 65% from last year. This achievement is a testament to the confidence of our customers that have in CAE and the strength of demand across our markets.

Turning to our segments. I'm extremely proud of what we've accomplished, executing our strategy with dedicated focus and operational rigor. On the Civil side, despite ongoing constraints in global aircraft supply and the temporary drop in U.S. pilot hiring, we delivered another strong quarter, demonstrating both the resilience of our business model and the strength of our global franchise.

Civil achieved a record adjusted segment operating margin of 28.6% in Q4 and 21.5% for the year. Adjusted segment operating income grew 6% year-over-year, a particularly good result given the factors that have been holding the commercial market back to more normalized operating levels.

Our backlog of Civil grew an impressive 37% to a record $8.8 billion, supported by $3.7 billion in new orders, including 56 full-flight simulators. During the quarter, Civil assigned training and operating support solutions contracts valued at $742 million, including the sale of 14 full-flight simulators and long-term training and airline operations, digital solutions contracts.

In Defense, we accelerated our path to greater profitability. We delivered an adjusted segment operating income margin of 9.2% in the quarter and 7.5% for the year, driven by solid program execution and a near doubling of the adjusted Defense backlog to $11.3. During the quarter, Defense booked orders for $596 million, bringing the full-year total to a record $4.0 billion. It's very clear that we're gaining traction and are well positioned for continued growth in a market with significant long-term tailwinds.

With that, I'll now turn the call over to Dino, who can provide some detailed look at our financial performance. I'll return at the end of the call to comment on our outlook. Dino?

Thank you, Marc, and good morning, everyone. Looking at our fourth quarter results on a consolidated basis, revenue of $1.3 billion was up 13% compared to the fourth quarter last year. Adjusted segment operating income was $258.8 million compared to $125.7 million last year. Quarterly EPS was $0.47 per share compared to $0.12 in the fourth quarter last year.

For the year, consolidated revenue was up 10% to $4.7 billion. Adjusted segment operating income was up 33% to $732 million, and annual adjusted net income was $385.5 million or $1.21 per share, which is up compared to $0.87 last year. Net finance expense this quarter amounted to $56.5 million, which is up from $52.4 million in the fourth quarter of last year.

I expect run rate quarterly finance expense to be approximately $55 million in fiscal 2026, which is a bit higher than last year because of additional lease expenses related to recently opened training centers in our global network in support of growth and the financing costs associated with the consolidation of the SIMCOM joint venture in business aviation.

Income tax expense this quarter was $45.2 million, representing an effective tax rate of 25% compared to an effective tax rate of just 14% in the fourth quarter last year. The adjusted effective tax rate, which is the income tax rate used to determine adjusted net income and adjusted EPS was 25% this quarter compared to 47% in the fourth quarter last year.

The annual effective income tax rate in fiscal 2026 is expected to be approximately 25%, considering the income anticipated from various jurisdictions and the impact from global minimum tax legislative changes. Net cash provided by operating activities was $322.7 million for the quarter compared to $215.2 million in the fourth quarter last year. For the year, we generated $896.5 million from operating activities compared to $566.9 million last year.

The strong performance is a result of the team's focus on execution, hitting program milestones and being highly prudent about cash management. This effort translated into an excellent free cash flow performance this year, and we're now targeting a conversion rate of 150% for fiscal 2026 and beyond. This represents a step change increase from approximately 100% conversion rate, which we previously target and underscores the highly cash-generative nature of CAE's business.

Uses of cash involved funding CapEx for $109 million in the fourth quarter and $356.2 million for the year, driven mainly by expansion of our civil aviation training network in lockstep with secured customer demand. These opportunities translate to some of our best returns as our simulator assets ramp up with the first 3 years of development, reaching an average 20% to 30% pretax incremental return on capital employed. We remain highly focused on capital efficiency and expect total CapEx in fiscal 2026 to be modestly lower than in fiscal 2025.

This will be concentrated mainly on organic growth investments and similar capacity to be deployed to CAE's network of aviation training centers, which are backed by multiyear customer contracts. Our net debt position at the end of the quarter was $3.2 billion for a net debt to adjusted EBITDA of 2.77x, comfortably below our end of year target of below 3x. Consistent with our disciplined capital allocation strategy and commitment to financial resiliency, we expect to further reduce net leverage to 2.5x by the end of fiscal 2026, supported by strong and sustained free cash flow generation.

Now to briefly recap our segmented performance. In Civil, fourth quarter revenue was up 4% over year to $728.4 million and adjusted segment operating income was up 9% year-over-year to $208.4 million or a margin of 28.6%. For the year, Civil revenue was up 11% to $2.7 billion and adjusted segment operating income was up 6% to $581.5 million for an annual margin of 21.5%.

Average training center utilization was 75% for the fourth quarter, down from 78% the prior year, mainly due to reduction in pilot hiring in Americas related to OEM aircraft supply constraints. Utilization was 74% for the year, down from 76% the year prior. In Products, we delivered 15 civil full-flight simulators in the quarter and 61 for the year compared to 47 deliveries in the prior year. In Defense, fourth quarter revenue of $547 million was up 29% over Q4 of last year.

Adjusted segment operating income was $50.4 million for a 9.2% adjusted segment operating income margin. Legacy contracts remain on track with costs and schedules well managed and the margin, excluding legacy contracts was 9.9%. This compares to a negative adjusted segment operating income of $65.7 million in the fourth quarter last year. For the year, defense revenue was up 8% at $2 billion, and adjusted segment operating income reached $150.5 million for an adjusted segment operating income margin of 7.5%.

Before I turn the call over to Marc, I'll make a few comments about the potential impacts of tariffs. CAE is well insulated from direct tariff impacts. Approximately 70% of our CAE's total revenues come from services delivered within our customers' own countries, which significantly limits our exposure to cross-border tariffs. For the U.S. market, this proportion was even higher, around 80% last year. Moreover, our flagship product, the full-flight simulator is exempt from tariffs under the USMCA.

But from an enterprise risk standpoint, with roughly 1/3 of our workforce based in the United States, a substantial operating footprint and an already significant U.S. bill of materials, we're confident that we have the flexibility to effectively manage any residual risk exposure.

With that, I will ask Marc to discuss the way forward.

Thanks, Dino. Before getting into our outlook, I want to take a moment to reflect on how far we've come. Over the past few months, I've had the real privilege of onboarding our new directors and our new Chairman and spending time with our teams around the world from training centers to manufacturing and engineering sites.

And what I've seen confirms everything that I have always known about this remarkable company of ours. CAE has transformed into a purpose-driven, high-performance organization. Our mission to make the world safer isn't just words. It's really deeply embedded in who we are and what we do, whether it's preparing pilots for complex aerospace, enabling defense forces to be mission-ready or supporting critical operations, we are there for the moments that matter. And what always strikes me most is the caliber and the commitment of our people.

Across 240 sites in more than 40 countries, our 13,000 employees show up every day with focus, resilience and a deep sense of purpose. That mindset, combined with our unmatched technology, our operational excellence, our strategic position has made CAE a clear leader in this industry. And over the last couple of decades, we've evolved from an industrial products company to a global powerhouse in training and simulation. We're no longer working to meet the standard. We're defining it.

And with the momentum that we've built, I believe that the best is still ahead. The market has begun to recognize our progress across the business as reflected in our stock's outperformance relative to broader North American indices this year. And as we look ahead to fiscal 2026, we're carrying forward significant momentum with confidence and clarity. We have an over $20.1 billion of adjusted backlog.

And with the financial and operational discipline that we've demonstrated, we're entering a new fiscal year from a position of real strength with continued focus on execution, innovation and value creation. I'm confident that we'll build on this foundation to deliver growth, higher margins and stronger free cash flow.

In Civil, we remain well positioned with strong fundamentals and solid demand across both commercial and business aviation. Before getting into the specifics of our outlook, it's worth highlighting the recurring nature of our civil business, which is a key reason that we remain confident in its long-term resilience and growth.

Recurrent training, which is required approximately every 6 months to maintain pilot certification represents about 70% of total training activity. And these regulatory requirements are consistent worldwide, making this portion of demand durable and relatively insulated from short-term economic volatility.

And the remaining 30% of training demand comes from new pilot certifications and aircraft type transitions driven by fleet growth and pilot retirements. In the civil business, we also lead the market in the sale and support of full-flight simulators. And while this is inherently more cyclical and closely tied to aircraft deliveries, this part of the business is all supported by very strong long-term fundamentals.

Because of the short-term supply chain constraints that have impacted OEM aircraft output, we expect modestly lower simulator deliveries this fiscal year with a greater proportion occurring in the second half. For the year as a whole, we expect to continue winning our fair share of full-flight simulator orders.

Looking longer term, the outlook remains highly compelling. Boeing and Airbus have a combined backlog of over 17,500 aircraft and both project the global in-service fleet to nearly double over the next 20 years. On top of that, more than 280,000 new pilots will be needed globally over the next decade to support this growth and offset pilot retirements. These structural drivers create a clear and compelling runway for sustained growth in pilot training long term.

In Business Aviation, we expect to see continued momentum as we scale operations at new training centers and ramp up recent simulator deployments. The business segment is benefiting from growth in the number of high net worth individuals in the world strong OEM backlog and structural shifts towards fractional ownership.

Flight activity levels in the United States are 15% above 2019 levels and fractional operators like Flexjet have seen a nearly 60% increase in flight hours over the same period, reinforcing the underlying demand fundamentals. Our exposure is weighted towards larger business aircraft types, which have historically demonstrated greater resilience to economic cycles, a dynamic that gives us added confidence in the current macroeconomic environment.

In any event, we see no significant indications of worsening conditions at this time. Another example of growth and resiliency of our civil business is our strategic expansion into the air traffic controller training market, which is a natural adjacency that builds on our decades of experience in simulation-based training for highly regulated safety critical roles.

This initiative has been notably capital efficient with the launch last year of our first Air Traffic Services, or ATS training center in Montreal, which leverages our existing asset base and is in partnership with NAV CANADA, which manages one of the largest airspace areas in the world. A mere 6 months later, the center welcomed its first students in just over a year.

Since announcing our entry into the ATS training, CAE has now successfully trained 7 cohorts of air traffic controllers and flight service specialists, who have now completed their basic training and transitioned back to NAV CANADA for their on-the-job training. Through this partnership, we aim to train approximately 500 personnel by 2028.

And our decision to expand into this segment was driven by clear and growing global need. By our own estimates, some 70,000 new air traffic controllers are going to be required over the next decade. And shortages, particularly in the United States and parts of Europe, are already putting pressure on airspace capacity and system efficiency.

With our established expertise in high consequence training environments, we're well positioned to support this essential function of the aviation ecosystem, enhancing both safety and throughput while adding a new durable revenue stream to CAE's Civil portfolio. For Civil overall, we're taking a measured view of the first half of fiscal '26 as we monitor broader macroeconomic conditions and OEM aircraft delivery rates.

In terms of our quarterly cadence in Civil, we expect this fiscal year to begin much like last year in both revenue and margins, with performance building progressively towards a stronger second half, driven by increased training activity and product deliveries. For the year ahead, we expect segment operating income to grow in the mid- to high single-digit percentage range with a modest increase in the annual adjusted segment operating income margin.

In Defense, CAE is well positioned to benefit from a sustained global up cycle in military spending. The European Commission recently introduced the ReArm EU program targeting EUR 800 billion in defense investment by 2030 and could potentially be even greater with proposed fiscal rule exemptions. Across NATO and allied nations, including a notably stronger commitment from Canada, increasing defense budgets are driving demand for the advanced training and simulation solutions where CAE has a clear competitive differentiation.

We've built a strong franchise in Canada over the past several years with major program wins and extension, including contracts like FAcT contract; the RPAS contract; Fixed-Wing Search and Rescue; NFTC, the CF-18 systems engineering support contract. The Canadian federal government plans to nearly double its annual defense spending from approximately $40 billion to over $80 billion by 2032.

And in spite of the substantial growth opportunity or in light actually of the substantial growth opportunity and the scale of our current program base, we've recently evolved our defense organizational structure to establish Canada as a stand-alone region with its own dedicated P&L alongside our U.S. and international segments.

This change reflects the growing strategic importance of the Canadian defense market and our leadership position within it, while also enabling our international team to sharpen its focus on broader global opportunities. We're immensely proud to have been ranked another -- once more as Canada's top defense company by Canadian Defense Review Magazine, marking the third time that CAE has received this honor.

To me, this recognition highlights our commitment to advancing global defense capabilities through cutting-edge training solutions, ensuring that we remain a trusted ally in the pursuit of security and operational readiness. Our aim is to be Canada's premier training partner and one clear validation of the progress we're making came in February when CAE was named a strategic partner to the Government of Canada for the Future Fighter Lead-in Training program.

Under this initiative, we'll design and co-develop the next generation of training for Royal Canadian Air Force fighter pilots, supporting Canada's fifth-generation fighter readiness and reinforcing our leadership in high consequence training and mission support. This is just another example of the long-term high-value opportunities that we see unfolding, and it highlights CAE's growing role in strengthening the capabilities of Canada and its allies.

With a defense backlog that nearly doubled year-over-year and a solid foundation of program execution, we expect continued progress toward reaching our goal of a low double-digit percentage margin and above-market long-term growth. Specifically for the year ahead, we expect defense to have low double-digit percentage annual segment operating income growth and an annual segment operating margin in the 8% to 8.5% range.

To sum up, CAE is entering fiscal 2026 from a position of strength. CAE remains both a highly compelling long-term growth story and, at the same time, a very good port in a storm. We've built a resilient, high-performing company, one that's winning in the market, delivering for customers and creating long-term value for shareholders.

We bring together all the hallmarks of an excellent company, a record order backlog, deep customer intimacy, strong competitive differentiation, a high proportion of recurring revenue and cash flow and exposure to secular growth markets. Our focus remains squarely on innovation and delighting our customers, coupled with capital efficiency, operational excellence and disciplined execution.

Lastly, as we manage a planned CEO transition later this summer, the Board and I are committed to a smooth and seamless handover. The process to identify the next CEO is well underway, and we're confident it's going to result a leader will carry forward CAE strategy, culture and momentum. I feel very good about our strong foundation, our deep leadership team and the clear path ahead. CAE is exceptionally well positioned for continued success and sustainable growth well into the future.

With that, I thank you for your attention, and we're now ready to answer your questions.

Thanks, Marc. Operator, we'll now open the line to financial analysts.

[Operator Instructions] Our first question is from Kevin Chiang with CIBC.

Maybe just my first one, maybe I can dig into what's underpinning your civil outlook. I understand the prudency just given all the macro uncertainty. But maybe if we can dig into what you're seeing in terms of commercial training demand versus business jet training demand. And then on the margin outlook for the year, I guess I would have thought mix would have been more of a tailwind if you're selling fewer FFS this year and you have the full benefit of SIMCOM. Maybe if you can just walk me through some of the puts and takes on the margin outlook as well?

Okay. Well, look, I'll kick it off and maybe turn it over to Nick for some additional color on some of it. Look, I'm just going back to the Civil outlook. I mean what we're doing is we're taking a measured approach, specifically in light of the more cautious tone that we hear from airlines and a little bit of softness that we saw late in the fiscal year. As we point out, the second half is typically stronger. We've seen that, I think, every year I've been at CAE.

So we're expecting a more moderated environment in the first half, both in terms of what we see in terms of deliveries of simulators that we're going to execute and some near-term uncertainty. But all that's reflected in the guidance that we had. I think we'll hasten one thing is on the train side and, again, I'll turn it over to Nick, trade demand remains very resilient. I mean we see some regional variation. We've seen pilot activity pick up recently in the United States.

So we're watching that very closely. Coming back to simulator deliveries, which are really a function of delivery of aircraft out of Boeing and Airbus. I mean what we see is the supply chain issues are getting better, but they continue to constrain the aircraft production itself. We're certainly not at peak production rates. So we're expecting modestly lower deliveries this -- in the first half of this year. So that's going to be a way for the back half. So those are some of the components. So maybe just add a little bit to that, Nick.

I'm just going to say, Kevin, it's just the pilot hiring, if you go through the drivers, pilot hiring, which is one driver, is improving for sure, but not where they were last year. Aircraft deliveries, same thing. I mean, things are improving actually with Boeing, but we've been pretty lopsided with Airbus being the vast majority of the deliveries and, therefore, a lot of our product sales have been in Airbus versus Boeing.

And so you -- and of course, the customers themselves, there is a certain amount of, I guess, slack in the system right now because they were hiring at a certain level. So we just like to let all this kind of balance out a little bit, I think. And so when we look at the year and we look at the forecast, and the guidance that we've given, I mean, it's taking a little bit of that into consideration because, obviously, we see it improving.

As Marc said, demand in the training centers is still quite strong. I mean, obviously, it can always be stronger, but the difference is not that big as you see. And we are -- I mean, mid- to high single-digit growth on a base of civil, which is -- this high is something that is not -- we need some of these drivers to improve.

The next question is from Fadi Chamoun with BMO.

I want to ask about the flight operation business. You put together a few small acquisitions in Sabre. And I think I recall you have been investing in kind of modernizing the software and modernizing the approach to market in that business.

We recently saw Boeing sell the competing assets to a private equity. I wanted to get your thoughts like what state of readiness that business segment is at right now from a competitive position perspective? And if you can give us some color about how it's performing relative to the level that you had expected by this time?

Okay. Yes, Fadi, thanks for the question. And I'll kick it off, maybe again with Nick. But look, I mean, we're winning in the market. That's the first thing I'll say. We're very -- and this is just continuing what I said in previous call. We're winning a disproportion proportion of the business that we get in campaigns that we see out there. So our order book is growing. I can tell you that basically, I would say, we're at capacity for the work that we can take on right now.

And if anything, we're paced right now in terms of the growth at the speed at which the airlines can actually undergo the changes in our operational control centers because when you're making a change, you're adopting a system like ours, it takes a lot of time and effort to implement, think like for a company implementing an ERP program. It's the same kind of thing. So there's -- it takes a lot. So you're working hand-in-hand with airlines and -- so we're kind of paced from that standpoint.

But look, again, we're winning in the market. We're very clear that we have a growth business over the next few years. What we're seeing -- what you're seeing us do right now is we're winning orders that are basically SaaS kind of profile orders, which means that we are going to be recognizing the revenue and the earnings over a number of years as we execute those orders. It's kind of like the analogy we're moving rather it's selling a simulator, so selling like an on-premise solution or delivery training, which is over quite a few years.

So in terms of the execution of our business, that's where we stand. Quite happy with our position in market, and we're executing well. We have a strong order book. In terms of the question you asked about Boeing selling and the Jeppesen deal, I think the strong level of interest that we saw in the market demonstrate the attractiveness of this side of the market. So I mean, I think basically, that's what I pointed out.

I don't know, Nick, if you want anything more with regards to...

No, I was just going to say right now that the business -- the number of implementations have ramped up significantly with all of the wins. So the way I would look at this is we have about $700 million of orders and the average contract is about 5 years. So we have $100 million, $150 million of revenue sitting there that we need to implement solutions that we've sold and start to generate revenue. So the best is yet to come, I guess, is the way I would put it.

Okay. And just kind of follow-up on these comments. Like from a scale perspective, do you think you have the scale ultimately to be effective in this part of the business? And are you finding -- I mean, from the backlog, I guess the answer is yes, but are you finding a lot of synergies in your commercial approach between kind of what you're doing on the training side and what you're doing on the flight operations side?

Well, I'll just point to one thing, just recent example. We just had a big customer meeting of the business just last week in Greece, and we hosted that at the new AEGEAN training center. And that was with the CEOs, co-CEOs of AEGEAN. And I can tell you that the reaction of airlines to basically witnessing the scope of CAE, both in its training market and now in the service market, just from a brand capability, I think there was definitely synergies there, but that's just anecdotal. Nick, do you want to add anything to that?

No, I mean, the synergies for this business are primarily in the front end. We have teams that are active on both sides of the house when it comes to capturing customers, and we leverage everything that we do with our customers to support more business with Flightscape in particular. So I mean, it's a different business, but it's another way for us to become -- at the end, we want to become as important as we can to our customers, and this is another way to do that.

And maybe just to add on, and I don't think that -- maybe that was part of your question, Fadi. I mean, to be specific, I mean, we have what we need in this business. It's not like we need to add any more capability through M&A or anything like that in this business. Again, the portfolio that we have and the various software platforms that we have allows us to have the success we have in the market, which is going to fuel a strong business for us as demonstrated in the $700 million of added backlog that Nick talked about.

The next question is from Konark Gupta with Scotiabank.

I just wanted to kind of touch on defense margin a bit here. Looking at, obviously, the last year, the sequential progression has been pretty remarkable with the margin exiting the fiscal year at about, call it, 9%, if we exclude the tax credit and the legacy dilution. What's keeping sort of the lid on your expectation for this fiscal year when you're expecting 8% to 8.5% margin? I mean, is there a timing in terms of how the legacy programs unfold? Or is there something in the mix in the backlog that's not letting the margin kind of exceed that 9% you saw in the latest quarter?

Well, I'll start by saying we're not putting a lid on anything. If you think about going to 8.5% on average, what's inherent in that is you continue to see inherently the progression, that kind of progression you saw this year. I think, look, I'd like to walk before we can run, and we've been walking pretty fast, and I think we're going to continue to do that. So look, I think you saw it in the numbers. We were confident in this year. We continue to feel very good about where we are, how we close the fiscal year. We're carrying very strong momentum into the new year.

Look, and there's really 2 drivers behind the outlook that we're giving. First, what you're seeing is the benefit of strong program execution. We're hitting the milestone -- we're unlocking the cash, which, by the way, was a key contributor to the very strong free cash flow performance that we had in the fourth quarter. And second, really, we're ramping up higher-margin programs that we've won and committed to backlog.

If you remember the story that we've had for quite a few quarters now is that basically what we've been doing is basically retiring programs, executing on programs that have inherently been won at margins that are basically, if you like, dilutive or not accretive to the low double-digit margin expectations we have in the business, replacing them with contracts that do. And that continues to be the story here.

And when you look at the size of the backlog, ending the year at 11.3% backlog, which, by the way, I would say, and that's not over, we have like over $7 billion in bids and proposals are outstanding, so submitted to customers waiting in terms of a customer decision. I mean it really positions us extremely well to continue shaping the business towards -- towards our goal of higher quality, higher-margin work. So look, we'll -- so I continue -- again, going back to say there's no lid on this business.

I don't certainly expect a perfectly linear upward trajectory. We've done very well. There's always going to be quarterly variability in this business because inherently, when you execute, depending on which programs you execute in any given quarter. But look, we anticipate -- look, to me, I would say, cadence similar to last year, performance building progressively from Q1 onward. So look, I mean, bottom line, the fundamentals have clearly improved. We've done a turnaround in this business, and we're very good about this trajectory.

Makes sense, Marc. And I think you touched on the working capital aspect there. So I wanted to ask maybe from Dino, how should we think about the working capital in this fiscal year? Do you see these cash conversions continuing at a similar clip or the mix will have some implications?

So thanks for the question. Effectively, I'm really, really pleased with the free cash flow generation of $290 million this quarter and a record $814 million free cash flow generated for FY '25. So that's a conversion rate of 211%. So the capital allocation priorities do remain unchanged. Deleveraging is a central part of what we're envisioning going forward. We are aiming to take our leverage down to 2.5x by the end of the year.

And that is, again, as a result of our confidence in the cash -- the recurring cash generation nature of our business moving forward as well as maintaining a focus on capital discipline, including noncash working capital. Now we -- in this year, we unlocked a lot from the noncash working capital for FY '26 to help with the cash flow generation and the deleveraging goals. Next year, we'll see a continued focus on noncash working capital efficiency and allowing us to maintain our 2.5x deleveraging target for next year.

The next question is from Cameron Doerksen with National Bank Financial.

Just maybe to follow up on the cash question. Just on the CapEx indicating a modest decline year-over-year. Maybe just 2 quick questions on this. I mean, one, what is your expectation for maintenance CapEx for 2026? Should we expect something similar to what we saw in 2025? And then secondly, maybe you can just sort of detail where, I guess, the growth CapEx is going for this year? What specific areas are you investing in?

Yes. Thank you for the question, Cameron. So effectively, we had adjusted our CapEx guidance to be $30 million higher than FY '24, and we achieved that by hitting $356 million this year. So total CapEx is expected to be modestly lower than last year. Again, continued example of disciplined capital approach. We invest organically to keep pace with the growth of our existing customers. Around 75% of next year's CapEx will be effectively to address some of the market needs going forward, 25% on maintenance CapEx. So very similar to what we had this year.

Generally speaking, these opportunities give us the highest returns ramping up with the first years of deployment and reaching an average 20% to 30% pretax incremental return on capital employed, right? We have experienced a more intensive multiyear deployment schedule recently. Now we're focused on cash generating, returning capital and return on capital as well as long-term margin profile. So a lot of discipline in our execution going forward next year, working lockstep with the market to make sure that we have the ability to address and reduce any CapEx, if the market calls for it.

Just closing it off to Dino's comments, Cameron. Look, we just come off as kind of multiyear investment cycle. We invest a lot in new training locations. We played offense during the downturn in a big way. We seized the opportunity, we took share. We help customers outsource their training. We built new centers for new programs, expanded a lot particularly in business aircraft. So now we find ourselves in a place, a very attractive place where we're now consolidating and operationalizing that opportunity, and that really translates into the guidance we have that basically both CapEx volumes and CapEx intensity is going off its peak.

Okay. That's helpful. And maybe just to follow up. I mean, just thinking about the growth CapEx, I mean, largely driven by customer needs. I mean, should we think about the investment here is largely just adding simulators to existing training centers? Or are there still some areas where you think you need a new training center either on the civil side or on the business jet side?

Nick, do you want to take?

Yes. No. So right this year, the -- most of the CapEx that we're spending is we're opening Vienna, and we're expanding in Orlando after the acquisition. There's a few SIMs there. So -- and we have a couple of SIMs in one of our existing training centers in [ CAC. ] So there's no planned new facilities. It's really just growing some of the training operations that we -- as part of the business case like SIMCOM is a good example. The business case called for a bunch of simulators. So these simulators are starting to be manufactured now.

The next question is from Greg Konrad with Jefferies.

Maybe just to focus on Civil backlog. I mean you gave a little bit of color around flight operations, but if we think about 2025 growth in backlog of 37%, maybe mid-single-digit revenue growth, it implies a much higher coverage of 2026 revenue than you've historically have. What shifted in backlog, either from a margin perspective or just recognition just given the high coverage in 2026?

I was a bit confused about where you were. So you started with basically your question with I think flight service or [ Flightscape ], in that regard.

Maybe add a little bit what segment overall, Civil as a whole you're talking about?

Yes. Just given the strong backlog growth and revenue outlook for 2026, I mean, how you think about that backlog converting to revenue, just given there seems to be a much higher coverage for 2026 than you've historically had, just given the size of the backlog.

Yes, Greg, it's Andrew. I think I know where you're coming from. One of the big components of the increase is the consolidation of the SIMCOM JV and the Flexjet contract, which is spread over 15 years. So you can't sort of align the period of backlog increase 1:1 with the revenue generation year 1.

Perfect. And then maybe just given on the civil side, you talked about the U.S. a little bit, but just given most of the training or most of the revenue in '26 is coming from training. Can you maybe just talk about regionally where you're seeing the biggest areas of strength within civil aviation?

Yes. So I think for -- in terms of by region, I would say, Americas would be probably our weakest region right at the moment. And Asia is probably our strongest because of all the -- I guess, all the things that you're probably inferring in your question, there's a lot of new airlines, a lot of growth in some of our customers. And in particular, in some of our customers, we're seeing some good growth.

Business aircraft, I would say, relatively stable. I mean we are expecting some improvement in utilization in business aircraft, but nothing outrageous. So I think training demand is pretty strong across the board. But of course, the U.S. is the one which is a little bit more muted for us.

[Operator Instructions] Our next question is from Tim James with TD Cowen.

Just one question. Marc, you're highlighting the great growth outlook now for Canadian defense spending, doubling, as you mentioned, by 2032. CAE already has just a great presence and a lot of very strong contracts in Canada. Can you talk about -- and maybe it's early, but anything you can say in terms of what that big pickup in defense spending could mean in terms of additional opportunities for CAE and what those might look like, if you have any kind of sense for that at this point?

Well, I can only give directional. And you just look at what I talked about in terms of the doubling of the size of the expenditure of the defense budget in Canada over the next few years. I mean, I feel very, very good that, that's going to translate into significant growth for CAE on top of the already very significant level of order intake and actually revenue that we're generating right now on contracts in Canada.

And I think we will get, what I would say, our disproportionate share because we actually literally are a strategic partner, and those are the strategic partner to the government of Canada as they want to operationalize the acceleration of defense spending in Canada. And when you think about what militaries do when they're not in conflict, hopefully, you're never in conflict, but what do militaries do?

Well, basically, they train. They train -- that's all they do, train, train, train. So obviously, that's what we do. So you can be -- you could see right off the bat that any capability that they deploy, whether it's new aircraft, it's new helicopters, is new ships, new submarines, all that is going to require very significant and realistic training. So as Canada's strategic partner, I think we were going to continue to do very well in that market in Canada.

Great. Well, operator, I think we'll bring the call to a close. I want to thank all participants for joining us this morning and remind you that a transcript of the call and Q&A will be made available on CAE's website. Thanks very much, and a good day to all.

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