CAE Inc. Q4 FY2025 earnings call

Management Statement and Operational Highlights

• Delivered exceptional fourth quarter with $289 million in free cash flow and record $814 million for the full year, cash conversion rate 211%. Secured $1.3 billion in new orders, ending the year with a record adjusted backlog of $20.1 billion.
• Civil segment resilient despite aircraft supply constraints, achieved record adjusted segment operating margin of 28.6% in Q4 and 21.5% for the year. Backlog at Civil grew 37% to $8.8 billion.
• Defense segment accelerated profitability, adjusted segment operating income margin 9.2% in Q4 and 7.5% for the year. Backlog at Defense nearly doubled to $11.3 billion.
• Targeting 150% cash conversion rate for fiscal 2026 and beyond. CapEx for fiscal 2026 expected to be modestly lower than 2025, concentrated on organic growth investments.
• Civil business has recurring nature with 70% of training being recurrent, insulated from short-term economic volatility. Business Aviation sees growth with new training centers and simulator deployments. Air Traffic Controller training initiative launched in Montreal.
• Defense benefits from sustained global military spend increase, Canadian defense market growing with nearly doubling of defense spending by 2032.

Segment Performance

• Civil: Fourth quarter revenue was $728.4 million, up 4% year-over-year, with adjusted segment operating income of $208.4 million, up 9% and a margin of 28.6%. For the year, Civil revenue was $2.7 billion, up 11%, adjusted segment operating income was $581.5 million, up 6% with an annual margin of 21.5%. Backlog grew 37% to a record $8.8 billion, supported by $3.7 billion in new orders, including 56 full flight simulators. Quarterly training center utilization was 75%, down from 78% prior year, and 74% for the year, down from 76% prior year.
• Defense: Fourth quarter revenue was $547 million, up 29% year-over-year, with adjusted segment operating income of $50.4 million (9.2% margin). For the year, defense revenue was $2 billion, up 8%, adjusted segment operating income was $150.5 million with a margin of 7.5%. Backlog nearly doubled to $11.3 billion, driven by $596 million in new orders during the quarter.

Guidance

• Targeting a cash conversion rate of 150% for fiscal 2026 and beyond.
• Civil expects mid to high single digit percentage growth in segment operating income for the year, with a modest increase in the annual adjusted segment operating income margin.
• Defense expects low double digit percentage annual segment operating income growth and an annual segment operating margin in the 8% to 8.5% range.

Risks

• Tariff impacts: CAE is well insulated with ~70% of revenues from domestic services, Full Flight Simulators exempt from USMCA. However, macroeconomic uncertainty remains, affecting pilot hiring and aircraft deliveries.

Question and Answer

• Q: Kevin Chiang with CIBC asked about what's underpinning Civil outlook, commercial vs business jet training demand, and margin outlook. A: Marc Parent and Nick Leontidis discussed measured approach in Civil due to macro uncertainty, resilient training demand with regional variation, modestly lower simulator deliveries in first half due to aircraft supply chain constraints, and mid to high single digit growth in Civil segment operating income with margin expectations.
• Q: Fadi Chamoun with BMO inquired about Flight Operation business competitive position and performance relative to expectations. A: Marc Parent and Nick Leontidis stated CAE is winning in the market, has $700 million in added backlog with SaaS-like revenue recognition, and synergies between training and flight operations businesses.
• Q: Konark Gupta with Scotiabank asked about defense margin outlook. A: Marc Parent explained defense margin expectation of 8%-8.5% is due to strong program execution, ramping up higher margin programs, and reshaping business towards higher quality work.
• Q: Cameron Doerksen with National Bank Financial asked about CapEx and growth CapEx. A: Constantino Malatesta and Marc Parent discussed modest decline in CapEx for 2026, targeting deleveraging to 2.5 times, with CapEx focused on organic growth, including expanding training centers and simulators, with 75% of 2026 CapEx for market needs.
• Q: Greg Konrad with Scotiabank asked about Civil backlog and coverage for 2026. A: Andrew Arnovitz mentioned consolidation of SimCom JV and Flexjet contract contributing to backlog, with Civil's backlog conversion influenced by program milestones and revenue recognition over multiple years.
• Q: Tim James with TD Cowen asked about Canadian defense spending opportunities. **A: Marc Parent highlighted Canada's nearly doubling of defense spending by 2032, positioning CAE well as a strategic partner, with growth opportunities in training solutions for new military capabilities.