CAE Inc

NYSE:CAE

Earnings Call Transcript 2024-Q4

[Operator]

Good day, ladies and gentlemen. Welcome to the CAE Fourth Quarter and Full Year Financial Results for Fiscal Year 2024 Conference Call. [Operator Instructions]. I would now like to turn the conference over to Mr. Andrew Arnovitz. Please go ahead, Mr. Arnovitz.

[Andrew Arnovitz, executive]

Good morning, everyone, and thanks for joining us. Before we begin, I'd like to remind you that today's remarks, including management's outlook for fiscal '25 and answers to questions contain forward-looking statements. These forward-looking statements represent our expectations as of today, May 28, 2024, 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 us and the U.S. Securities and Exchange Commission on EDGAR. With the divestiture sees Healthcare business, all comparative figures discussed here and in our financial results have been reclassified to reflect discontinued operations. On the call with me this morning are Marc Parent, CAE's President and Chief Executive Officer; and Sonya Branco, our Chief Financial Officer. Nick Leontidis, CAE's newly appointed Chief Operating Officer, is also on hand for the question period. After remarks from Marc and Sonya, we'll open the call to questions from financial analysts. And at the conclusion of that segment, we'll open the lines to members of the media. With that, let me now turn the call over to Marc.

[Marc Parent, executive]

Thank you, Andrew, and good morning to everyone joining us on the call. As you'll have seen from our earnings release, fourth quarter results are unchanged from last week's preannouncement, which was mainly intended to communicate the re-baselining of our Defense business and the appointment of Nick Leontidis a proven CAE veteran as our Chief Operating Officer. To provide additional context, last week, we also offered an earnings preview in our preliminary fiscal 2025 outlook. This morning, Sonya and I will provide a bit more color on our performance and our very strong financial position. Last week, we took decisive actions, established a clear path for margin improvement in our Defense business. I certainly recognize that our Defense performance has significantly fallen short of our expectations and understand and share investors' frustrations. The impairments and accelerated risk recognition on the legacy contracts that we announced last week are disappointing, but necessary steps towards putting the overhang of these past issues behind us. These actions were made possible by renegotiating agreements with our customers and our suppliers adjusting the scope and the timing of these contracts for our mutual benefit. Ultimately, this enables us to address the programmatic risks that have been affecting our business. Alongside the re-baselining of the Defense business with the acceleration of risk recognition on legacy contracts and execution of a leadership or reorganization and implementation of targeted operational enhancement at both the segment and corporate levels. These initiatives are designed to fortify our execution capabilities and foster greater synergies between our Defense and our Civil businesses. I fully expect these changes to enable greater focus through the simplification of our operating structure with our COO overseeing the 5 P&Ls that encompass this entire business goal. This new structure and recent upskilling of talent and Defense will further enhance the execution and oversight of major Defense programs and facilitate the exploration and realization of synergies between our Civil and Defense operations. Also, and in the vein of further bolstering CAE future, our fourth quarter and full year results reflect continued strong growth in our core markets, robust order flow and consistent cash generation. For CAE overall, we grew adjusted backlog by approximately 13% year-over-year with $1.6 billion in orders in the quarter or a 1.38 book-to-sales ratio. And for the year, we booked over $4.9 billion in orders or a 1.15x book-to-sales ratio. As of the end of March, we had a record backlog of $12.2 billion. We also further strengthened our financial position, having generated $418 million of free cash flow during the fiscal year. And together with proceeds from the sale of health care, we reduced leverage to below 3x net debt to adjusted EBITDA, excluding legacy contract. In Civil, we booked orders in a fourth quarter fiscal quarter were $832 million, including contracts for 7 full-flight simulators. This brings the total Civil order intake to a record $3 billion for the year, including 64 full-flight simulator sales, demonstrating the sustained high demand for pilot training solutions and our flight solutions software platform. Civil concluded the year with a record adjusted backlog of $6.4 billion. Notable contracts in the quarter included a multiyear commercial aviation trading agreement with ITA Airways and a first of its kind partnership in Canada, where CAE structures will deliver initial training for flight service NAV CANADA Flight Service Specialists and Air Traffic Controllers. A testament to our progress in flight solutions, we announced yesterday the signing of European ultra-low-cost carrier, Wizz Air as a new partner under a multiyear supply agreement. We'll be supplying Wizz Air with CAE's operational control and crew management software and sees recovery manager solutions for operational and crew disruptions. Average trading center utilization was strong at 78% for the fourth quarter and 76% for the year, up from 72% the year prior. In products, we delivered 17 Civil full-flight simulators in the quarter and 47% for the year compared to 46 deliveries in the prior year. As disclosed last week, this is a bit lower than the approximately 50 that we had expected with timing difference due to customer requests to postpone deliveries because their own facilities weren't ready to receive the full-flight simulators as originally planned. Taking time delays from last year to account, we expect to deliver more than 50 full-flight simulators in fiscal 2025. Turning to Defense. At the same time, as we've been taking actions to re-baseline of business, we've continued to make headway with our transformation strategy. We reached $1.9 billion of adjusted order intake on an annual basis, evolving training and simulation solutions for 1.04x book-to-sales ratio. This contributed to a $5.7 billion of adjusted Defense backlog. In the quarter, we had orders totaling $718 million, including a transformative win involving a contract with General Atomics to support the Remotely Piloted Aircraft System or our RPAS program for delivering air crew and maintenance technician training and supporting train devices at course quarter to meet Canada's or past requirements. This, to me, is a prime example of kind of larger and more differentiated program that we're in a position to address and that will ultimately drive the Defense transformation that we did expecting. With that, I'll now turn the call over to Sonya who'll provide a detailed look at our financial performance. And I'll return at the end of the call to comment on our outlook. Sonya?

[Sonya Branco, executive]

Thank you, Marc, and good morning, everyone. Looking at our fourth quarter results. On a consolidated basis, revenue of $1.1 billion was down 6% compared to the fourth quarter last year. Adjusted segment operating income was $125.7 million or $216 million, excluding the impact of the legacy contracts compared to $193 million last year. Quarterly adjusted EPS was $0.12 per share or $0.37, excluding the legacy contracts compared to $0.33 in the fourth quarter last year. We incurred restructuring integration and acquisition costs of $55 million during the quarter in connection with the previously announced restructuring program related to portfolio-shaping actions, including the sale of health care and to the continued integration of AirCentre. The AirCentre integration is progressing as planned and is expected to wind down by the end of June. The restructuring program is related to portfolio shaping actions of the streamlined CAE's operating model and portfolio, optimize our cost structure and create efficiencies. Total restructuring costs incurred since the start of this restructuring program this quarter amounted to $39.3 million, and we expect to record approximately $10 million of additional restructuring expenses over the next 2 quarters in light of the organizational and operational changes announced last week to re-baseline the Defense business, further strengthen our execution capabilities and drive additional synergies between CAE's Defense and Civil aviation businesses. For the year, consolidated revenue was up 7% at $4.3 billion. Adjusted segment operating income was up 2% to $549.7 million, and annual adjusted net income was $276.8 million or $0.87 per share which is stable compared to $0.87 last year. Excluding legacy contracts, adjusted segment operating income was up 19% to $640 million and annual net adjusted net income was $355.3 million or $1.12 per share, which is up 29% compared to last year. Net finance expense this quarter amounted to $52.4 million, which is stable from the preceding quarter and up from $50.4 million in the fourth quarter last year. I expect our annual finance expense in fiscal 2025 to be similar to fiscal 2024 on lower interest expense on debt, offset by higher lease expense related to recently deployed training centers in our global training network in support of growth. Income tax recovery this quarter was $80.6 million, representing an effective tax rate of 14% compared to an effective tax rate of 24% 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 47% this quarter compared to 23% in the fourth quarter last year. The increase in the adjusted effective tax rate was mainly due to the derecognition of tax assets in Europe, partially offset by the change in mix of income from various jurisdictions. On the same basis, the adjusted effective income tax rate for the year was 17%. The annual effective income tax rate in fiscal 2025 is expected to be approximately 25%, considering the income expected from the various jurisdictions and the implementation of global minimum tax policy. With the closing of the sale of our health care business, net income from discontinued operations was $20.5 million this quarter compared to $4.8 million in the fourth quarter last year. The increase compared to the fourth quarter was mainly attributable to the after-tax gain on the disposal of discontinued ops of $16.5 million in relation to the sale of the health care business. Net cash provided by operating activities was $215.2 million for the quarter compared to $180.6 million in the fourth quarter last year. And for the year, we generated $566.9 million from operating activities compared to $18.4 million last year. We had free cash flow in the quarter of $191.1 million and $418.2 million for the year for an annual cash conversion of 151%. We continue to target an average 100% conversion rate going forward. Uses of cash involved funding capital expenditures for $91.7 million in the fourth quarter and $329.8 million for the year, driven mainly by the expansion of our Civil aviation training network in lockstep with secured customer demand. These opportunities translate to some of our best returns as our simulators assets ramp up within the first few years of their deployment. Commensurate with our ongoing success to capture market opportunities and training, I expect total CapEx in fiscal '20 to '25 to be $50 million to $100 million higher than fiscal 2024. Approximately 3/4 of this relates to organic growth investment and simulated apt to be deployed to our global network of primarily Civil aviation training centers and backed by multiyear customer contracts. Our net debt position at the end of the quarter was $2.9 billion for a net debt to adjusted EBITDA of 3.17x. Excluding legacy contracts, leverage was at 2.89x at the end of the same period. We're prioritizing a balanced approach to capital allocation, including funding accretive growth, continuing to strengthen our financial position, commensurate with our investment-grade profile and returning capital to shareholders. Given our progress in strengthening CAE's financial position, as we announced last week, we are reestablishing a normal course issuer bid as part of our capital allocation strategy. The NCIB is currently intended to be used opportunistically over time with excess free cash flow. Given our outlook and the cash-generative nature of our highly recurring business, CAE's Board of Directors will also continue to evaluate the possibility of reintroducing a shareholder dividend. At the same time, I expect that we'll maintain a very solid financial position, bolstering our balance sheet through ongoing deleveraging consistent with our investment-grade profile. Now to briefly recap our segmented performance. In Civil, fourth quarter revenue was up 6% year-over-year to $700.8 million and adjusted segment operating income was up 17% year-over-year to $191.4 million for a record margin of 27.3%. For the year, Civil revenue was up 12% to $2.4 billion, and adjusted segment operating income was up 13% to $548.9 million for an annual margin of 22.5%. In Defense, as we disclosed last week, we accelerated the recognition of risks associated with our legacy contracts in the fourth quarter, following revised agreements on scope and timing with customers, suppliers and other stakeholders. These actions resulted in profit adjustments associated with the reassessment of our estimated costs. Fourth quarter Defense revenue of $425.5 million was down 21% over Q4 last year. This includes a $54.3 million impact from the accelerated risk recognition on legacy contracts and the conclusion of certain service contracts we decided to no longer pursue. Adjusted segment operating loss was $65.7 million and adjusted segment operating income, excluding legacy contracts, was $24.2 million compared to an adjusted segment operating income of $30.5 million in the fourth quarter last year. For the year, Defense revenue was stable at $1.8 billion and adjusted segment operating income was down 98% to $0.8 million. Adjusted segment operating income, excluding the legacy contracts, was up 72% to $91.1 million. With that, I'll ask Marc to discuss the way forward.

[Marc Parent, executive]

Thanks, Sonya. I'm going to separately address the outlook for our 2 segments. But before I offer any numbers, I'd like to mention that our combination of our Civil and Defense businesses have significant strategic advantage. Now let me reiterate that and be very clear that our Defense performance in terms of profitability certainly hasn't met my expectations so far, but our strategy remains solid. Over the past 2 years, we've achieved some 20% growth in adjusted backlog and expanded our pipeline with bid opportunities that align very well with our core strengths in training and simulation, offering attractive risk-return profile. Our simulators, our training products are very complementary for both Civil and Defense purposes. The synergies are strong in terms of technology, manufacturing as well as go-to-market approach. There's hardware and software commonality in the products. And increasingly, there's operational synergy in how we optimize training across the 2 businesses. I am very confident that Nick Leontidis will strengthen our execution capabilities and drive additional focus and synergies between both of our business segments. For Civil, the secular demand picture for aviation train solutions remain very compelling, underpinned by growth in air travel, demand for pilots and the need for them to stay current with always advancing aviation technology and regulation. Our business is driven primarily by the regulated training required to maintain the pilots and crews who operate the global in-service fleet of commercial and business aircraft. And as an additional secular driver, we expect to sustain high level of pilot movements from the growth and replacement of the active pilot population. According to our estimates, over half the commercial and business jet pilots will be active in a decade from now have yet to even begin their train. With that background, I expect low double-digit percentage Civil annual adjusted segment operating income growth in fiscal 2025 and continued margin strengthening with an annual segment operating income margin of approximately 23%. The expected increase in Civil margins reflects the ongoing ramp-up of fewer training centers and recently deployed full-plate simulators partially offset by the SaaS conversion that's currently underway in our Flight Operation Solutions software business. As in previous years, I expect annual Civil performance to be more heavily weighted to the second half.In Defense, we're also in a secular growth market as the sector enters an extended up cycle marked by rising budgets across NATO and allied nations. Key trends include heightened focus on near peer threats, greater government commitments to Defense modernization and readiness amid geopolitical tensions and a growing demand for the training and simulate solutions that we provide. Our expertise in both Civil aviation and Defense positions us well to meet those needs. And specific to CAE, we're seeing a consistent demand driver across regions for our training solutions, a shortage of uniform personnel for Defense, which has led militaries to rely on industry partners like CAE for training solutions to ensure readiness. This aligns perfectly with our core strengths at our Defense transformation strategy over the past few years has focused on expanding our leadership position on integrated training and simulation solutions. This strategic focus has allowed us to streamline our project selection to ensure a better risk-return balance. Moreover, we've renegotiated favorable terms such as cost plus contracts for development work and tighter pricing bands on service contracts while leveraging Civil-like business models in Defense. These improved terms will positively impact our risk-adjusted returns as new contracts ramp up. This approach has already resulted in significant backlog growth with larger, more profitable programs, and we anticipate even greater growth in fiscal 2025. Our expectations for fiscal 2025 reflect the re-baselining of the business and the enhanced visibility that this obviously gives us. We're extremely focused on acting on what we can control and we'll prove it through execution in the coming quarters. We expect annual revenue growth in the low to mid-single-digit percentage range and annual Defense and SOI margin to increase to the 6% to 7% range and like Civil, to be more heavily weighted to the second half. We have large multiyear programs currently in negotiation that should add significantly to our backlog soon. Beyond our selection on transformational Defense contracts in Canada, we're well positioned over the next year on several strategic programs across the Indo-Pacific regions, Europe and in the United States. In particular, the demand for aircrew training program similar to Canada FACT and RPAS across the Five Eyes and NATO partners as well as the allies continues to increase. These programs require the type of technologies and proficiency that are CAE's strength. We intend to leverage our position on these generational programs in Canada to enable multi-domain training and secure synthetic environments across our global network. With that, I thank you for your attention, and we're now ready to answer your questions.

[Andrew Arnovitz, executive]

Thank you, Marc. Thank you, operator. We'll take our first question from the financial community.

[Operator]

Great. So, we'll begin the analyst question-and-answer session. [Operator Instructions]. The first question is from Kevin Chiang from CIBC.

[Kevin Chiang, analyst]

We also start with a Civil question. Just the slippage of some of the full-flight simulators, it sounds like the client wasn't a position to take those products. But I'm wondering if you're starting to see any impact on pilot training demand just with some of the aircraft delivery issues at the large OEMs. Is that impacting what you're seeing from the airlines in terms of the demand for training maybe relative to what you would have been forecasting or expecting let's say, 6 to 9 months ago? Just wondering if you see anything to turn over there.

[Marc Parent, executive]

Okay. Let me take it, Kevin. Look, first and foremost, you're right. I mean the changes that we saw just relative to our outlook on delivery simulators and therefore, the adjusted operating income growth was purely because of those training centers that weren't ready, our customer training centers were ready. And basically, those similars will deliver this year. So that's really what happened there. It's not a reflection of any type of demand change in the market. I mean if I could ask maybe Nick color for before. But look, I mean we've been living in the environment lower than when I say lower than potentially anticipate deliveries of 737MAX aircraft as well as less activity because of the engine issue that's affecting mainly Airbus airplanes that, as you know, have literally hundreds of airplanes grounded around the world. So we've been living in that environment for quite a while. So really, that isn't really changing. So, I would say there's pockets. And I think there's pockets that you see that airlines are affected by their slowdowns. They're not able to get the airplanes that they want to secure the demand. The demand itself is very strong. And what you see is pooling airplanes out of mothballs, basically taking airplanes are coming off lease and maintaining a long lease. But we're not really seeing a change in the demand environment at this time. We're watching it. And the guidance that we put for Civil for this coming year reflects our cautious outlook in that regard.

[Kevin Chiang, analyst]

That's helpful. And maybe just my second question. I appreciate all the color you provided in terms of the rebasing of Defense. It also seems like a segment that feels like it's been in some perpetual restructuring for quite some time now or at least some strategic repositioning with the acquisition of L3Harris' military training division. Maybe if I were to ask, when you look out 2 years from now or whatever the time frame is, what should the fence look like? Like does revenue need to be bigger in order to get the margins you want and maybe derisk a backlog in terms of -- there's always risks around execution. Is it being more focused on the addressable markets you're trying to go after? I'm just trying to get a sense of if all goes well to your in Defense, you pass forward 2 years, what exactly does Defense look like? Is it a bigger business with better margins? Is it a smaller business with better margins? Just any color there would be helpful.

[Marc Parent, executive]

Well, look, I think I would start by all of those, Kevin. Clearly, as I said, look, the numbers that we're printing now certainly don't meet my expectation and neither are the investors clearly. But I think what we've done here is re-baseline to business. We've been talking about the issues that are affecting us in Defense for or at least a couple of quarters here, at least in the detail. Last quarter, we gave you precision on that really, there were 8 contracts, we call the legacy contracts that were really undermining the profitability of our business. I mean those contracts all have the same [ ammo ] signed prior to COVID, fixed firm price contracts and they were very much adversely affected by supply chain those manpower issues, runaway inflation, of which we're not immune. A lot of our Defense clients and sister companies across the Defense environment, particularly in -- well, actually, I would should say only United States across the world actually. Those affected us. We bring sense in this quarter, what we've done here is basically work extremely hard to renegotiate with our customers in this regard to figure out exactly what the remaining scope on those programs is the time it's going to take a cut those contracts. The cost is going to take these services with those contracts. And the difference between that and the cost that we anticipate in the past is $90 million. And that's, to a certain extent, maybe shouldn't be much of a surprise because if you remember in the third quarter, what we had said is that those 8 contracts, we're really going to drive for next by 200, 300 basis points for the next 6 quarters while we execute on contracts. What we've done here is through the actions that we've taken through the agreements we've made for our customers, we're able basically to take that risk, say off the table or principle because we're taking it now. So that gives us a clear view of the future and the programmatic risk now going forward, not only in those 8 programs, but overall, across all the programs and the best is balanced. So that's one major component. The other component is I'll go back to the success of the strategy on the front end. Our reach rate, the fact that when we look at the book of business, we are winning business, we are winning a larger business in the areas where we have core capabilities, training centers, training products, meaning full-flight simulators, where this is core to us. We know how to do that. We know how to do it well. We've signed them at margins that are accretive to the outlook that we have in Defense, which is 10% or more in terms of profitability. Those programs are going to materialize in our backlog, I expect about 15% of those to materialize in our revenue this year. That's all going to contribute to the answer to your question is stable revenue growth, higher margins on the way to the low teens or north of 10% margins. I want this and generating stable cash flows, you should expect out of the Defense business because we're basically selling the customers with sovereign guarantee. So that's what I expect out of the Defense business.

[Operator]

The next question is from James McGarragle from RBC Capital Markets.

[James McGarragle, analyst]

Thanks for having me on just on the Defense margin guidance, the pick up in the back half. So, can you just talk to the visibility that you have into that higher margin in the back half? And is there any seasonality in the Defense side going forward? Or should we expect that back half margins to be the exit rate for margin into the upcoming fiscal year?

[Marc Parent, executive]

Look, I think that if you look at our performance in the past few years, you always see that it's back half loaded. And there is reasons for that, the budgets in specific countries. There's programs are ramping up. This year, I mean, we have high visibility of this year. The majority of the revenue and ergo the profit that we need to execute this year plan and meet the guidance of 6% to 7% that we put out there, we've already won those contracts. They're in the backlog is were. We obviously have very high visibility on the legacy contracts that we talked about having a re-baseline the programmatic risk there. So, what I'd say is basically, again, in terms of variability in the year, it's basically just the same way we've seen in the previous years. I think maybe to provide a little bit more color on it, I'd say that when we look at the year, the average margin we talked about would be 6% to 7%. I would expect that it will start the year where we ended it in terms of profitability. So, call it in the north of 5% range, with stronger than the second half. That's what I would say.

[James McGarragle, analyst]

And then as a follow-up on the Civil side, you picked like that a lot of that organic investment you're making this year is going to be in the Civil business. You previously flagged really solid returns, 20% to 30% in that business, 2 to 3-year ramp up. Does that mean we should be thinking about growth at current levels or even higher over the next 2 or 3 years? Can you talk to the visibility and the conversations you're having with your customers a little longer term on the Civil side?

[Marc Parent, executive]

Well, look, I think I fully expect that the demand environment in Civil business is strong for years to come. I think maybe just provide a little bit more color on Civil. I think if you think about the how Civil business, you saw the changes we've made under Nick now as COO, where we're giving more visibility on the leaders of that business, the 3 leaders that we have [ Alex Petrilli ] running the business aircraft, [ Michelle Horn ] running commercial aviation training and [indiscernible] running the software business. We'll be able to provide you, I think, a broader view of those specific individual business that's going Civil. But let me just have a shot at that maybe goes to your answer here. And to break down the revenue in our Civil business, about 1/3 of it comes from selling simulators to World's Airlines. About 1/3 of it comes training for the world's airlines. So. our training centers for airlines around the world and 1/3 of it comes from business aviation trading. And the final really 10% comes from our software business. Each of these businesses has its own dynamics that drives margin. We talk a lot about utilization, which is a strong metric, but it's not the only metric, and it is affected by seasonality, especially when you get into the second half, where you have lower utilization in our training centers because the airlines certainly in the Western Hemisphere, they're flying, so they're not training in a large part. Within our product segment, which is selling simulators, the margins and actually the revenue can be affected quite significantly by who's the customer, the product mix of that similar, whether the equipment is supplied by the buyer in terms of the cost equipment, for example. There's an impact from joint ventures as well because we do a lot of joint ventures. And in those cases, you don't see the revenue, but you'll see the city income pick up. And finally, the software, that's really affected by the timing of the contracts, whether or not they are SaaS contracts, which we are prioritizing and that has a lower margin, at least while we're going through that shaft conversion. And that the reason I'm explaining all that, that's why we tend to drive -- we guide on an annual basis at Civil. So, look, I mean, going forward, the trend is going to be higher in Civil in all of those segments. With the advisory, as I talked about, the SaaS conversion, which is probably a true that 3 year basically ramp up as we go through the SaaS conversion.

[Operator]

The next question is from Benoit Poirier from Desjardins Capital Markets.

[Benoit Poirier, analyst]

Yes. Just to come back on the assumption behind the 6%, 7% EBIT margin target for Defense in fiscal year '25. I think I heard that about 15% of the total revenue is expected to come from those transformative deals that are already in the backlog. So, could you maybe provide some color about what was the contribution in Q4? And what makes you confident or the visibility you have with respect to the ramp up in the second part of the year?

[Marc Parent, executive]

I may not be as clear or maybe when I answered that question. It's not 50%. It's 15% of the revenue that we're going to get this year comes from those transformational programs, Benoit, and that's relative to 3% last year. So, last year, we had like of our backlog in Defense was these new transformational programs, and that translated in 3% of revenue. Again, this year, that will be 15% this year and obviously growing in the years to come as they ramp up.

[Benoit Poirier, analyst]

Okay. And obviously, you provide some color about fiscal year '25. Previously, you mentioned that it would take 6 to 8 quarters to achieve the completion of those legacy contracts. How should we be thinking beyond fiscal year '25? And is the 10% target still achievable?

[Marc Parent, executive]

Well, the 10% margin is absolutely still achievable and that all the actions we've put in place is going to make that happen. Now we have guided next year that we haven't been precise, but it will happen within the planned period, so within the next few years, but we haven't gotten ahead of ourselves beyond this year.

[Benoit Poirier, analyst]

Okay. And with respect to the appointment of Nick as the COO, obviously, has been for over 35 years. Could you talk maybe, Marc, about the strategy here, the action that Nick is going to undertake? And maybe more color about the expected synergies that you would like to extract between Civil and Defense.

[Marc Parent, executive]

You're going to have to ask me to put Nick on the spot. But before I do, let me talk about how I do think. Nick, as you said, Nick is a [ difference ] of this company. And interestingly, you may or may not know, actually, Nick started his career in Defense. So having led starting as an engineer, but have -- like I was, but having led some major Defense contracts, including the most complicated the more extensive that we have ever had probably before FACT, which was putting together the first PFI contract in the U.K. in Defense, which was standing up our Benson Training center where we train all medium helicopters for our Air Force. I think you may have visited at one point, that training center that we have in Royal Air Force, which is still one of the most prestigious and technology advance in the world. So, Nick put that together. So just suffice to say, having no one Nick and Nick has worked for me directly ever since I've been at CAE in various roles. Nick understands the business. Nick has a very strong operational mindset and focus on execution as well as strategy. And that's basically the reason I put them in charge of expense over 10 years ago. And I think he's done a pretty good job as tripling the operating income in Civil in that period and building us the franchise that we have in Defense. He's going to put those strengths to focus in Defense. Beyond that, I mean, specifics, look, I see there's a lot of simplification here that we had through greater focus. It's very clear to me that one of the reasons -- certainly not the only one, but key reason that we've been successful in stable is the focus. I talked about the 3 P&L leaders that are fully accountable and have all the tools to be able to execute in their business. We're providing through the changes we're making here, we're enhancing the focus here to very specific P&L leaders in the United States, the largest business, our largest military market in the world by far, very specific focus with Jason Goodfriend as present interim present, they're working through the U.S. Board for Nick and [ Marcos ] running all our international programs, including Canada, where we have some very large contracts that I announced today.So number one is greater focus. That's very important. And beyond that, a synergy capture, it's clear to me that there's a lot of synergy left to be had by leveraging our scale and technologies across the entire enterprise. And that's going to be key to [indiscernible]. But beyond that, Nick maybe a couple of words on our part.

[Nick Leontidis, executive]

Yes. I was just going to reinforce, I mean, the simplification and accountability, I think we went a little bit of straight trying to do all of that under the guides of the 2 business units. I think we have go-to-market business units in business aircraft in commercial, in D&S, U.S., D&S international, and then we'll drive synergies across that. Of course, there's going to be some restructuring. I will use the word restructuring, of course, because we have some duplication, which were necessary at the time, but I think it's one of those things when you look at it and you say, okay, well, we need to make change. And by the way, right now, I'm just asking questions. And I'll ask questions about everything. Why is this like this? Why is it like that? And it's amazing the answers that you get. So, I think a lot of times, we get people working on this. The people know what to do. I'm just going to enable them to do it. And as I tell we play as a team and we're going to have to do this together as a team. And people know where the inefficiencies are and they know what they need to stop doing.

[Benoit Poirier, analyst]

That's great color, gentlemen. And maybe a very quick one for Sonya. Just looking at your CapEx that is expected to be up $50 million to $100 million. How should we be thinking about the sustainable CapEx? It seems a bit elevated versus the history. So, I'm just wondering, I understand the growth opportunity, but just want to try to look beyond fiscal year '25 about what could be the sustainable level of CapEx. Thank you.

[Sonya Branco, executive]

Yes, thanks for the question. So, the CapEx is really the spend really are reflection of the success that we've had with all of the orders we secured to outsource more training. So, 3 quarters of this CapEx is simulators to our network. So, whether it's Quanta at [ GN, ] we've got plenty of Las Vegas and plenty of examples through that record order intake that we've got in the year. So, we don't deploy simulators to our network on a speculative basis. Every single one of them are backstopped by signed long-term recurring revenue customer contracts. So, what we see this year's CapEx is really a reflection of the secured order intake that we have, and this is to deliver to growth and our customers. And frankly, we have a proven track record of delivering really accretive returns on this organic CapEx, the 20% to 30% range of incremental return on capital on our organic growth. So, what we're necessarily going to guide beyond that year, but it will be a function of the level of orders and market capture that will succeed.

[Operator]

The next question is from Konark Gupta from Scotiabank.

[Konark Gupta, analyst]

Just on the Defense, I'm wondering, Marc, how does the re-baselining of legacy contracts affect your market position and your ability to structure future bids appropriately?

[Marc Parent, executive]

I think it reinforces them because I think what's important here is that to me, this is a very successful renegotiation we've done. The teams have been on this for quite a while. Obviously, we have tiger teams on every one of those programs for obvious reasons about focus on execution of those contracts. But what I talked about in the previous quarter, when I said that we're going to take every effort to be able to accelerate the recognition of risks on those programs. So really scope out the remaining work here. And I had talked about the time that, look, we're going to have to have tough negotiations here. And it could lead to, in some cases, basically having to accept penalties, for example, because we're late on contracts as just one example. But the one is we have to do that, we haven't had to do that in any one of these cases. So, we are going to do with CAE always does. We are going to execute on those contracts. And the customers, every one of them on these 8 contracts are very happy with the outlook that we now have on those programs as we will deliver what we committed on those contracts. And the timeline and the scope of what we'll do is in line with the expectations of kind of have it. So, our reputation that CAE has always delivering is intact. And in some cases, actually, in some of those programs, that's really why I talk about it as particularly successful. In some cases, we have negotiated additional scope on those contracts, so follow-on contract as a result of negotiations. So long answer, but this to a, if anything, just enhances our reputation.

[Konark Gupta, analyst]

Perfect. No, that's great. And if I can follow up quickly with Nick. Nick, you talked about, obviously, some of the low-hanging fruit there from a synergy standpoint, from technology, et cetera, duplication, all that. Any specifics you can share? I know it's early, but anything you can tell about what best practices can you bring to the Defense segment to drive or support some of the synergies?

[Nick Leontidis, executive]

Well, I think I can give you a lot of examples, but I don't prefer not to right now. But I can say that in the L3 acquisition, for example, and the legacy CAE business, there's a lot of overlapping technologies. Best example I can give you is the contract you want [ contrast ]. Both teams have products. So, these things have to be rationalized. They don't have to be done. I mean we're supporting customers who are supporting, but we need to build up the synergies and develop a strategy where the whole company has one product in some of these areas. Same on the Civil side, there are opportunities for the Defense guys to offer solutions like Gulfstreams and Globals because, as you know, these aircraft are used for mission from missionized missions, if I can use this word. So right now, they don't know what the Civil guys do, and we don't know what those Defense requirements are. But for sure, the customer is interested in having these solutions. And as we know, especially on some of these programs, like the Globals and the Gulfstream, these are very good programs for us. And I mean, basically, we lift and shift the training program, we lift and shift a simulator and instructor training and you can have a gusting program anywhere you want.So, I think that's the kind of stuff that I think we're going to pursue more of because obviously, we will always have these programs that are a little bit more complicated. And yes, we'll protect for all the obvious stuff. But we need a base of business, which is a little bit less volatile. And I think these are a couple of examples of things that I think we can do to make ourselves more successful.

[Operator]

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

[Cameron Doerksen, analyst]

Maybe just a couple of balance sheet cash flow questions from me for Sonya. Can you just talk about what your expectation is for debt reduction this fiscal year? And maybe you can just update on what the target leverage for the company is over the next few years?

[Sonya Branco, executive]

Yes. So, thanks, Cameron. So as part of our continued balanced capital allocation, we're going to continue to focus on deleveraging. We had always said that the 3x was really just a way point on the way to a lower leverage. So that's a continued focus. We haven't necessarily set a target. It's going to be a balance, but something in line in with our investment grade. So, I'd say 2 to 2.5x is a usual for an investment grade. It gives us flexibility and it gives us flexibility to bring back current returns and support our organic investments in CapEx. So longer term, that's what I'd be targeting. But ultimately, over the next year, it's really continuing on the deleveraging profile while we continue to invest in accretive organic investments and bringing back some shareholder returns.

[Cameron Doerksen, analyst]

Okay. And on the working capital, I mean, you had a pretty big, I guess, cash tailwind in fiscal '24 and that followed a significant investment in fiscal '23. I'm just wondering if you could maybe talk about what your expectation is for fiscal '25 as far as the working capital investment and maybe talk about how it changes through the year quarter-to-quarter.

[Sonya Branco, executive]

Sure. I'm really pleased with the purpose on the noncash looking cap for the year. So, it's really the result of continued focus on efficiency of our key metrics, whether it's DSO, inventory management, deposits and unbilled sales. So, it resulted in a strong reversal and an overall reduction in noncash working capital on the balance sheet. So, the focus is continuing. For the year, I'd expect the historical trends to continue, both on a seasonality, H1, H2, that trend continues, although more abated. And for the year, training is still the bulk of our business, and that's generally build after execution. So, as it grows, it's slightly noncash working capital investment, but we continue to focus on the metrics on the efficiency of those metrics. And overall, we target 100% conversion of net income to free cash flow.

[Operator]

The next question is from Tim James from TD Securities.

[Tim James, analyst]

Just one question here. So, you mentioned that expansion of the training network will be in lockstep with customer demand. And then you mentioned you signed long-term contracts for recurring revenue at customers. Is it possible to outline hurdle rates that accompany that approach? And what I'm trying to get at is just a sense or a comfort level for an CAE and how do you manage that? And how are you insured against changes in their own activity levels that they want to put through a specific full flight simulator in the future?

[Sonya Branco, executive]

I'll hand it off to Nick to give a bit of color, but the hurdle rates are high. The capital investment, ultimately, as I said, we never deploy speculative. And so, these are all backed by at least one, if not several customer contracts. And ultimately, the proof is on our results, right? So, driving 20% plus margin on the Civil network and the ramp-up of these incremental return on capital is of 20% to 30% within 2 to 3 years. So, you can see not only what we expect or what we deliver on the CapEx. And on the outsourcing profile, Nick.

[Nick Leontidis, executive]

I just going to say a lot of our contracts, in particular, our big clients, people like LatAm I mean these are secured capacity. So the exchange there is, okay, you secure me x number of simulators of capacity because I need that just to be able to keep all the pilots current in their aircraft or training on other or whatever. And then in exchange for that, I will pay you a certain amount of money to keep that capacity. Now of course, like COVID a good example, right? We had COVID customers came back and said, "Hey, we need some relief whatever. Okay. But contractually, we have the hammer, I hate to use that word, but we have the hammer and then the question becomes, okay, if an airline wants to change the capacity. Now you got to remember, these are a lot of ways they're like, I don't want to use the word mathematical, but you have so many pilots, you need so many hours of training. You're going to have so much churn, you're going to have so much with that. I mean it's not the [ airlines ] are very good at predicting their demand. So, we contract on that basis. So, then your fluctuations tend to be a little bit less pronounced, especially on the commercial side.

[Tim James, analyst]

Okay. That's helpful, Nick. So, if I could just return. So, you mentioned the 20% to 30% return on capital target within -- correct me if I'm wrong, I think you said 2 to 3 years. Can you just remind us, is that return on capital calculation, mic, what you, I think, published as a consolidated target? Is that how we should think about the numerator and the denominator in that metric when we're thinking about an individual dollar invested in a full flight simulator?

[Sonya Branco, executive]

So that incorporates all of that calculation. So ultimately, we look at it simulator by simulator, and this is the aggregate of all the simulators we've deployed and ultimately track the contribution of that similar over its capital cost. And so that we're measuring the incremental accretive benefit of that growth investment.

[Operator]

The next question is from Jordan Lyonnais from Bank of America.

[Jordan Lyonnais, analyst]

Could you just give some color on what you're seeing for utilization rates going into the summer and is activity at the Vegas facility?

[Marc Parent, executive]

Did you say the Vegas facility?

[Jordan Lyonnais, analyst]

Yes.

[Marc Parent, executive]

Well, maybe I'll turn it over to [indiscernible]. Go ahead.

[Unknown Executive]

Well, the biggest facility is ramping up this year. We'll have pretty close to a steady-state year. We've been working on this train, it has been opened out for a couple of years. In fact, I just did a review with the team and they've got a good plan to bring it up to what we would call a steady state. And more generally, of course, Q2 will always be a little bit quieter, especially in places like Europe because we have some big customers like easyJet, where basically forbidding anybody to train. They just want everybody flying for the summer season. So, we'll see some slowdown there. In the U.S., maybe less because there's still a lot of hiring going on. So that's not as affected by seasonality. But in Europe, definitely, we see a lot of seasonality.

[Operator]

[Operator Instructions]. The next question is from Noah Poponak from Goldman Sachs.

[Noah Poponak, analyst]

In the use of the term re-baselining, I'm trying to better understand how much you have actually reset schedule scope and if you've had any price reset in these 8 legacy contracts versus the charges just reflect the mark-to-market of the reality of the current margins on those contracts?

[Marc Parent, executive]

It's really back, as I was mentioning, Noah, in each one of these 8 contracts, there have been substantial and extensive renegotiation on every part of those contracts, okay? And that's really to define the remaining work that we have to do on those contracts. The time is going to take us and the very specific cost is going to take us. I would tell you on still on top of that, as you would expect, on every one of those contracts on top of those as we put the usual contingencies that are associated with any remaining what I would call, normal risk on those programs because you can never fully eliminate risk. There's always some risk, but we're in contingencies against those. And we have on top of that management reserve on top of the individual program and through our whole Defense backlog as a whole. So, if anything, when I look at those contracts, I would feel good that we should be in a position that where the situation that we haven't been quite a while on certainly on those programs where basically we don't have to use any size part of those entities. And we want to outperform those programs very clearly. That's really what we mean by rebaseline here.I put this overhang behind us. We're not going to -- we still have to execute on those contracts. We're not walk away walking away from anything there. We're still largely going to be executing on those contracts to bring them to a close over the next 6 to 8 quarters. A couple of them probably will go into the next year just because of the time line. But again, we predicted what the cost is going to be on those programs. So feel very good about the execution and the visibility that I have on those projects.

[Noah Poponak, analyst]

Have you actually been given higher prices by your customer on some of them? Or is it sort of the same price and just resetting all of the other inputs?

[Marc Parent, executive]

I was mentioning some of those contracts that we've actually been successfully getting follow-on work. What I mean by that is ECPs or engineering change proposals on a couple of them. And on one in particular in Europe, we actually got a follow-on contract, which is definitely a better pricing in Turks.

[Noah Poponak, analyst]

Okay. And how many of the 8 are unprofitable?

[Marc Parent, executive]

I mean, going forward, all of them are being -- well, not all of -- I think most of them are executed at 0 margin because we're sitting in there because we've taken the charges on them. There's 3 of those that are operating at a very slight profit going forward. So that's the situation.

[Andrew Arnovitz, executive]

Operator, I see we've used the full hour and then some. So, I think we'll close the call here. I want to thank participants for joining us this morning and remind you that a transcript will be available shortly of the call on CAE's website. Thank you, and have a good day.