CAE Inc. Q1 FY2027 earnings call

Transformation Plan Progress

• The 3-year-to-fiscal-2030 transformation plan is on track, targeting $125 million to $150 million in annual structural cost savings by 2030, with total expected transformation program costs of $200 million to $250 million (including ~$100 million in non-cash charges); $133 million in total transformation costs have been incurred as of Q1 FY2027.
• 50% of planned savings will come from improved labor productivity via organizational optimization, non-core outsourcing, automation, and footprint consolidation; 30% from reduced square footage (a 17% or ~1.7 million square foot reduction from FY2025 end levels); 20% from operational improvements including lean digital manufacturing and ERP consolidation from 5 systems to 2 to reduce technical debt.
• As of Q1, 6 of the planned 25 commercial simulator retirements are complete; the company is on track to retire 13 to 15 simulators by the end of FY2027 (10% of the global commercial full-flight simulator fleet) and close 4 to 6 training centers total, with 2 centers closed as of the quarter. Customer revenue attrition from simulator/center rationalization is expected to be less than 1%, with almost all customers retained by transitioning to other CAE facilities.
• A strategic review of three non-core businesses (including FlightScape) is underway, with strong buyer interest. An updated executive compensation framework has been implemented, aligning short-term incentives with free cash flow and adjusted segment operating income margin, and long-term incentives with adjusted return on invested capital (ROIC) and adjusted EPS.
• Executive Chairman Calin Rovinescu will transition to non-executive chairman effective January 1, 2027, reflecting confidence in the existing leadership team.

Civil Segment Business Developments

• Secular long-term growth drivers remain intact: industry forecasts project 4% annual air traffic growth and 40,000 new aircraft deliveries over 20 years, supporting sustained demand for pilot training and simulation products.
• The quarter closed a 15-year training agreement with WestJet for a new 8-full-flight-simulator training center in Alberta, Canada opening in 2028, and a multi-year contract to supply five full-flight simulators and two training devices to Turkish Airlines, with options for additional simulators.
• Current headwinds include transitory credit-related charges and operational costs from the Middle East conflict, which reduced joint venture profitability in the region; these impacts are being mitigated by rerouting training volume to other network facilities.

Defense Segment Business Developments

• Secular growth driven by a global generational uptick in defense spending, particularly in NATO and Canada, where Canada plans to spend $500 billion on defense over the next decade and European NATO defense spending is projected to hit 800 billion euros annually by 2030.
• CAE has announced new strategic OEM partnerships for high-value long-term opportunities, adding over $5 billion in new potential pipeline value: expanded collaboration with Leonardo for the M-346 Block 20 next-generation fighter training ecosystem, a global training/simulation partnership with Saab for GlobalEye and Gripen fighter platforms, a partnership with TKMS for the Canadian Patrol Submarine Program and global naval/maritime training opportunities, and a collaboration with Shield AI for Collaborative Combat Aircraft (CCA) autonomous systems training.
• These new partnerships leverage shared non-recurring engineering (NRE) with OEMs for global replication of training systems, reducing country-specific development costs and enabling long-term recurring service revenue.

Consolidated Q1 FY2027 total revenue was $1.2 billion, a 6.8% year-over-year increase. Adjusted segment operating income for the company was $156.6 million, down 7.5% year-over-year, and adjusted EPS was flat at $0.26 year-over-year.

• Civil Segment: Revenue was $641.6 million, up 5.6% year-over-year, accounting for 53.5% of total consolidated revenue. Adjusted segment operating income was $106.1 million, down 13.7% year-over-year, with an operating margin of 16.5% (down from 20.2% in the prior year quarter). Civil training center utilization improved to 72.2% from 68.8% year-over-year.
• Defense Segment: Revenue was $531.8 million, up 8.3% year-over-year, accounting for 44.3% of total consolidated revenue. Adjusted segment operating income was $50.5 million, up 9.1% year-over-year, with an operating margin of 9.5%. The defense segment's adjusted backlog stood at $10.7 billion at quarter end.

• Management has maintained the previously issued fiscal 2027 full-year guidance and all fiscal 2030 transformation and financial targets announced in May 2026.
• The fiscal 2030 target for annual structural cost reduction remains $125 million to $150 million, and the full-year adjusted segment operating income target remains $950 million to $1 billion.
• ROIC is expected to trend toward high single digits, approaching low double digits as transformation cost savings take effect, though no formal public ROIC target has been set.
• Higher bid and proposal spending for defense pipeline opportunities is expected to continue for the remainder of FY2027, and transitory Middle East-related headwinds for the civil segment are expected to subside within one to two quarters.

• Transitory financial and operational headwinds from the ongoing Middle East conflict have increased credit charges, reduced joint venture profitability, and added incremental costs from rerouting training volume to other facilities, though management views these impacts as temporary.
• New large defense development programs carry inherent upfront non-recurring engineering (NRE) and product development risk, though management mitigates this by sharing costs with OEM partners and designing common solutions for global replication to spread risk across multiple future contracts.
• While customer retention during civil network rationalization is expected to be very high, there is still limited risk of additional customer attrition, as small local competitors can offer alternative training services, requiring ongoing customer relationship management to retain contracts.
• Forward-looking statements, pipeline projections, and transformation targets are based on current assumptions that may not materialize, and actual results could differ materially from projections.

Q: What is the nature of transitory costs weighing on civil segment margins, and are these expected to persist? / A: Two-thirds of the margin impact comes from temporary operational costs from the Middle East conflict, including costs to reroute customer training volume to other facilities and credit-related charges on regional assets. The remaining one-third comes from discrete long-term transformation investments and lower government R&D funding. Management views the Middle East-related costs as temporary, with impacts expected to subside within 1-2 quarters, and notes core civil performance (including utilization and business aviation growth) remains strong.

Q: What is the product development risk for the new $5 billion defense pipeline, especially for new partnerships like the TKMS submarine program, and what is the expected mix of revenue from these opportunities? / A: Unlike past country-specific programs that required unique NRE for each market, these new NATO-aligned OEM partnerships use shared NRE developed once with the OEM, then replicated globally, reducing overall development risk per opportunity. The expected long-term revenue mix leans heavily toward recurring training services after the initial product development and installation, which improves long-term margin stability and lowers incremental risk. The $5 billion pipeline is overwhelmingly driven by the Leonardo, Saab, and TKMS partnerships, with CCA/drone opportunities making up only a small share.

Q: What can we expect for the proceeds from a potential sale of FlightScape, and how will that affect capital allocation decisions including share buybacks and dividends? / A: The strategic review process is still early, with strong buyer interest, so it is too soon to specify the size or use of proceeds. Proceeds will first fund ongoing transformation plan costs, which management views as the highest-return use of capital to drive immediate shareholder value. Once transformation is funded, any excess proceeds will be evaluated alongside other capital allocation options (including dividends and additional buybacks) consistent with the company's existing disciplined framework, though no decisions on dividend reinstatement have been made yet.

Q: What is the expected customer retention rate during civil training network rationalization, and what risks exist of customer switching? / A: Management confirms expected attrition is less than 1% of total civil revenue, with over 99% of customer contracts expected to be retained after transitioning to other CAE facilities. While there are small local competitor alternatives, no other provider has CAE's scale, global network footprint, and service breadth. Retention success stems from proactive, airline-by-airline customized solutions, and the company prioritizes customer intimacy to maintain trust, as contracts are not taken for granted even when locked into long-term agreements.