CAE(CAE) - 2026 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Consolidated revenue for the quarter was $1.24 billion, a 9% increase compared to the same quarter last year [8] - Adjusted segment operating income rose to $155.3 million, up 4% from $149 million in the previous year [8] - Adjusted EPS was $0.23, slightly down from $0.24 in the same quarter last year [8] - Net finance expense increased to $56.9 million from $52.9 million, primarily due to additional financing costs related to acquisitions and lease expenses [8] - Net cash from operating activities increased to $214 million from $162.1 million year-over-year [9] - Free cash flow rose by 44% to $201 million compared to $140 million in the previous year [9] - Capital expenditures totaled $87.6 million, with approximately 85% allocated to growth initiatives [10] - Net debt position was approximately $3.2 billion, with a net debt-to-adjusted EBITDA ratio of 2.66 times [11] Business Line Data and Key Metrics Changes - In the civil segment, revenue grew 5% year-over-year to $670 million, but adjusted segment operating income decreased by 6% to $108.7 million, resulting in a margin of 16.2% [11] - Training center utilization dropped to 64% from 70% in the prior year, reflecting a seasonal slowdown [11] - In the defense segment, revenue increased by 14% year-over-year to $566.6 million, with adjusted segment operating income rising 41% to $46.6 million, achieving an 8.2% margin [12] Market Data and Key Metrics Changes - The civil adjusted backlog increased by 27% year-over-year to $8.5 billion, indicating a strong foundation for future growth [34] - The defense adjusted backlog reached $11.2 billion, supported by a robust pipeline of $6.1 billion in pending orders [37] - The civil book-to-sales ratio was 0.88 times for the quarter, while the trailing 12-month ratio remained above 1 at 1.22 times [33] Company Strategy and Development Direction - The company is focusing on a transformation plan that includes sharpening its portfolio, disciplined capital management, and operational excellence [4][6] - The defense business is highlighted as a key growth area, particularly with Canada's increased defense spending projected at CAD 81.8 billion over the next five years [5] - The transformation plan aims to enhance cash flow and return on assets while leveraging existing technology and customer relationships [14][18] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's strategic advantages and the potential for growth in both civil aviation and defense markets [13][40] - The outlook for civil aviation remains strong despite near-term challenges, with expectations for a recovery in pilot hiring and simulator sales [36][40] - In defense, momentum is building with higher-value contracts and modernization programs, maintaining a positive full-year outlook [37][40] Other Important Information - The company is undergoing significant organizational changes to streamline operations and improve performance [19][23] - Leadership changes include the retirement of the Chief Operating Officer and the consolidation of defense operations into two segments [19][21] Q&A Session Summary Question: Changes in capital approval thresholds - Management indicated that the threshold for capital approval has been tightened, focusing on ensuring investments align with current market conditions and performance expectations [44][45] Question: Surprises encountered during the transition - The CEO noted positive surprises in organizational energy and customer relevance, confirming the company's strong position [47] Question: Potential for margin improvement and free cash flow - Management stated that some initiatives will yield immediate results, while others may take longer to realize benefits [60] Question: Opportunities for optimizing capital employed - The CEO acknowledged the need to optimize capital employed in the civil segment, particularly given the current utilization rates [53][54] Question: Insights from the Canadian Aerospace Summit - The CEO emphasized the opportunity for CAE to participate in the growth of Canada's defense industrial base, highlighting the importance of training and mission readiness [56][57]