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CAE Inc
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Good day, ladies and gentlemen, and welcome to the CAE second quarter conference call. Please be advised that this call is being recorded.I would now like to turn the meeting over to Mr. Andrew Arnovitz. You may now proceed, Mr. Arnovitz.
Good afternoon, 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 year '21 and answers to questions, contain forward-looking statements. These forward-looking statements represent our expectations as of today, November 10, 2020, 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 today's annual MD&A available on our corporate website and in our filings with the Canadian Securities Administrators on SEDAR at www.sedar.com and the U.S. Securities and Exchange Commission on EDGAR.On the call with me this afternoon are Marc Parent, CAE's President and Chief Executive Officer; and Sonya Branco, our Chief Financial Officer. After remarks from Marc and Sonya, we'll take questions from financial analysts and institutional investors. And following the conclusion of that Q&A period, we'll open the call to questions from members of the media.Let me now turn the call over to Marc.
Thank you, Andrew, and good afternoon to everyone joining us on the call. I'll first discuss some of the highlights of the quarter, and then Sonya will provide additional details about our financial performance. I'll come back again to talk about our outlook.We began the fiscal year just as the brunt of the pandemic bore down, and while we're managing through a still difficult environment 8 months later, we're starting to see the results of our cost and cash actions and our initiatives to strengthen our market position. We drove a solid sequential improvement in our second quarter, which is testimony to these efforts and to the resiliency of our business, which is largely recurring and driven by regulations.We delivered $0.13 of earnings per share, and we generated $45 million of free cash flow, which is a good reflection of the cash-generative nature of CAE's business. We also booked $668 million in new orders or 0.95x book-to-sales ratio.We saw sequential improvements across all business segments in the quarter, most notably in Civil, where revenue increased 47% compared with the first quarter. This was driven by 49% average training center utilization and the delivery of 10 full-flight simulators. Demand improved in both commercial and business aviation training, with the latter recovering more rapidly driven by a relatively higher level of activity involving the global installed fleet of business aircraft. Civil enjoys a high degree of operating leverage in training, and the higher volume helped drive its operating margin back to the double digits, coming in at 14.2%. We also continued to book new orders, with Civil signing training solutions contracts valued at $353 million. These included 3 full-flight simulator sales, a 5-year business aviation training agreement with a charter company in the United States, a 5-year exclusive training extension with Virgin Atlantic, a 2-year business aviation training agreement with XOJET Aviation and a 2-year business aviation training extension with VistaJet.In Defence, we also began to see a more positive picture than the first quarter with some movement on programs impacted by COVID-related restrictions and a resumption of certain training operations. Defence revenue grew 8% over the last quarter, and operating margins improved to 8%. Notwithstanding a still challenging environment, Defence booked orders for $278 million, including contracts to continue providing fixed-wing flight training and support services to the U.S. Army at the CAE Dothan Training Centre and to support Leonardo with AW139 and AW169 full-flight simulators.Other notable contracts include providing the United States Air Force with upgrades and enhancements to both the KC-135 and C-130H aircrew training system programs. Defence also received orders for maintenance and logistics support services for the German Air Force's Eurofighter training devices and to support the development of a Single Synthetic Environment for the U.K. Strategic Command. In addition, we were awarded a prototyping contract to support the U.S. Special Operations Command Global Situational Awareness program, which will leverage synthetic environments to fuse data into a common operational picture for improved planning and decision support.And in Healthcare, revenue grew by 66% compared to last quarter and was 22% higher than last year. With the benefit of additional volume and the commencement of CAE Air1 ventilator deliveries, Healthcare's margin reached 8.6%. I'm very proud to say that we're continuing to support health care workers in the fight against COVID-19 with complementary webinars and learning modules for clinicians. We recently developed a Pathogens of High Consequence learning module to help prepare clinicians for infectious disease outbreaks. Not only is this the right thing to do, being there for our customer and frontline workers in this difficult time, I also believe it cements CAE as a leader in developing training content in the health care space.With that, I'll now turn the call over to Sonya who will provide additional details about our financial performance. I'll return at the end of the call to comment on our outlook. Sonya?
Thank you, Marc, and good afternoon, everyone. Consolidated revenue of $704.7 million was up 28% compared to the first quarter and is 21% lower compared to the second quarter last year. Segment operating income was $79.3 million compared to a loss of $2.1 million before specific items in Q1, and an income of $126 million before specific items last year. Quarterly net income before specific items was $34.2 million or $0.13 per share, which on the same basis compares to negative $0.11 in Q1 and $0.28 in the second quarter last year.Free cash flow was $44.9 million in the quarter, which is an improvement over the negative $7.1 million free cash flow result last year. The increase results mainly from a lower investment in noncash working capital, the suspension of the dividend and lower maintenance capital expenditures, partially offset by a decrease in cash provided by operating activity. We expect to be free cash flow positive for the year based on our expectation for continued positive operating cash flow and the expected timing of reversals in our noncash working capital accounts.Return on capital employed before specific items was 7.2% this quarter compared to 8% last quarter and 11.5% last year. Growth and maintenance capital expenditures totaled $15.2 million this quarter and for the first half of fiscal year totaled $33.2 million relative to our outlook of approximately $50 million. We expect total CapEx of approximately $100 million for the year, commensurate with our opportunities to invest incremental capital with accretive returns and free cash flow.Income tax recovery this quarter was $1 million, representing an effective tax rate of 14% compared to 17% for the second quarter last year. The tax rate was lower due to the impacts of restructuring costs, partially offset by the change in the mix of income and losses from various jurisdictions. Excluding the effect of the restructuring, the income tax rate would have been 25% this quarter.Our net debt position at the end of the quarter was $2.4 billion for a net debt-to-capital ratio of 50.1%, and net debt to EBITDA before specific items was 3.16x at the end of the quarter. All told, between cash and available credit, we continue to have approximately $2 billion of liquidity.We are making good progress with our recently announced restructuring program intended to enable CAE to best serve the market by optimizing our global asset base and footprint, adapting our global workforce and adjusting our business to correspond with the expected level of demand and the enduring structural efficiencies that we will drive. These measures include the introduction and the acceleration of new digitally enhanced processes such as remote installations and certifications and work-from-home practices.We continue to expect to record restructuring expenses of approximately $100 million for the entire program, which will be carried out through fiscal '21 and into fiscal '22, consisting mainly of real estate costs, asset relocations and other direct costs related to the optimization of our footprint and employee termination benefits. Actions include the consolidation of some facilities so that we gain efficiencies of our -- from operating from larger centers, and we'll also be relocating several training assets to optimize utilization. Taken together, these measures are expected to enable CAE to emerge from current period from a position of strength, and we expect to fully realize our annual recurring cost savings of approximately $50 million starting in our fiscal 2022. We began executing a restructuring program this quarter. And as of the end of September, we had incurred $51.1 million of restructuring expenses.With that, I will ask Marc to discuss the way forward.
Thanks, Sonya. The COVID-19 pandemic continues to be a day-to-day global reality, and we're encouraged to have learned yesterday on the progress being made to discover a vaccine to this terrible affliction that has so deeply affected the lives of so many.As we consider the step-change improvement in quarterly performance that we just delivered, we recognize that the continued pace of CAE's recovery from this point forward will be highly correlated to the rate at which travel restrictions and quarantines can be safely lifted and market activities resume. Short-term visibility in that context remains limited. However, I take confidence in the fact that we're in a better position now than we were at the start of the fiscal year, and continue to expect a stronger second half.Looking beyond the current period, we remain encouraged by CAE's long-term prospects. We're seizing opportunities to strengthen CAE internally during this period. And as you've heard from Sonya, our restructuring program currently underway is on track. We're also well positioned to bolster our standing as the global market leader in our field through the application of advanced technologies and by expanding the aperture of our market reach. We're continuing to invest in CAE's capabilities to revolutionize our customers' training and critical operations with digitally immersive solutions and to increase our market share. And we remain confident that CAE will emerge from the current period as an even stronger company.Looking at each of our business segments. In Civil, as the global fleet gradually recovers and daily flights resume service, we expect to continue to expand our market share and secure new customer partnerships with our innovative training and operational solutions. We continue to have discussions with airlines about potential outsourcings and partnerships. And while we don't control the time line of those agreements, we expect some of our pipeline to come to fruition in the period ahead.At a steady state, business aviation training represents about 1/3 of our Civil business. And based on global aircraft fleet activity levels, we expect this segment to continue recovering faster than commercial aviation. Demand for Civil full-flight simulators is driven by new aircraft deliveries, and while the total market is currently much smaller, we expect to maintain our leading share of available full-flight simulator sales. We benefit from a large backlog of customer-funded full-flight simulator orders, and we expect to substantially deliver this backlog over the next couple of years, including 35 to 40 this fiscal year.In Defence, we're managing through a transition year as we work our way through the short-term challenges brought by the pandemic and as we ramp up new leadership. The long-term outlook for Defence continues to be for growth, supported by a large addressable market for our innovative solutions and the realization of the benefits of our bolstered team will bring to bear. I'm very encouraged by our recent competitive wins and large pipeline, which bode well for Defence in the long term.Despite near-term headwinds, we're maintaining our leading position as a training and mission support partner, thanks to our leading-edge capabilities in translating the physical world into the synthetic world. We're expanding beyond training to become a leader in digital immersion and the application of its synthetic environments to support analysis, planning and operational decision-making. With our expertise in the integration of live, virtual and constructive training, along with capabilities to address mission and operations support, we believe we'll make inroads into the broader defense market in the period ahead.And in Healthcare, we've also bolstered our leadership to enable CAE to fully capitalize on the greater market appreciation or the benefits of health care simulation and training to improve safety and to help save lives. The pandemic is serving as a catalyst to accelerate digital transformation across the enterprise. And in Healthcare, we see an emerging growth vector with the ramp-up of distance learning this fall. While still early, I'm encouraged by our progress, including new tools we just recently introduced on how to deliver training using our platforms, Maestro and CAE Learning Space, which offer remote and distance learning capabilities for virtual clinical examination and telehealth training.In closing, I'd like to thank all of the employees at CAE who are collectively responsible for these solid results against a macro backdrop that has been complex and, of course, it goes without saying, under higher-than-usual uncertainty. Our employees have conducted themselves through this challenging last 8 months with true professionalism and teamwork, retaining an impressive and singular focus on serving our customers as their partner of choice. I'm truly inspired and humbled to lead this great team of people here at CAE, and I couldn't be prouder of how we rose up against an incredible macro event that's almost been like a wartime effort and are arising it -- from it stronger and even more aligned together.With that, I thank you for your attention, and we're now ready to answer questions.
Operator, we would now be pleased to take questions from analysts and institutional investors.
[Operator Instructions] Our first question comes from the line of Steve Arthur with RBC Capital Markets.
Just a couple of questions, first, on the training center utilization. The 49%, I realize, is an aggregate of many different training centers, different simulator types. But just wondering if you can expand a little bit more on the dynamics within there, for example, the utilization at business jet training versus commercial or, in addition to the recurring training, any signs of more transition training as pilots move around for different aircraft types.
Okay, Steve. I think that maybe a little slightly higher in business aircraft. It's been doing somewhat better based on the fact that there's been -- business aircraft has been less affected overall in terms of the flight activity, which is the driver for us. And commercial, I think it's kind of plateaued as we said last quarter. It's pretty much in line with the activity on the aircraft. The commercial aircraft that are being utilized right now, if you look at the market right now, there's been -- overall, for commercial aviation, there's been an approximate 50% recovery in daily flight activity, which is obviously well off the lows back in April, which explains -- part of the explanation for our sequential performance here. But it's had more or less plateaued in recent months as we went into the fall with the second wave and everything. Business aviation, as I mentioned, has been recovering faster than commercial, and I continue to be bullish on that because -- and it is -- it does represent about 1/3 of our Civil business.And if you just look to put some numbers around, the business jet cycles in the United States and Europe are within about 10% or 15% of pre-pandemic levels, which is pretty impressive when you think about it. And anecdotally, and I provided a little color last quarter on this, is our charter operator customers are seeing significant volume in business aircraft from customers who are new to private jet travel. And in my experience, again, from nearly 35 years in this industry, once people experience private jet travel, there tends to be a high retention rate. So that's the kind of color I would give you right now with regard to utilization.
Okay. And it's still the same dynamic within the two, more and more wet training with business jet training and a lower, but growing, amount in commercial?
Yes. That's about right, yes.
I guess just related to that, just any updates at all on the nature of the potential outsourcing agreements with airlines. Of course, you can't get into any customer specifics, but are those kind of conversations still advancing? And what's the reception with the airline customers?
No, absolutely. There are several discussions underway. That hasn't changed. The dynamic continues that airlines are more amenable to partnering with us. It's become more resilient and have flexibility in their training operations by turning a fixed cost into a variable cost. You can well imagine that airlines are pretty busy these days in terms of managing their operations. But I do believe that some of these deals will come to fruition, and it's just a natural for us. So -- but we'll keep you informed as they -- we don't control the time line, certainly, and we're patient.
Okay. And I guess just a final one for me, just on the Healthcare segment. Any color you can provide on the contribution from the ventilators in the revenue in the past quarter or a sense of the scale of that 10,000-unit order.
Well, in the quarter, we had approximately $7 million of revenue that came -- from the health care sector that came from the ventilators. It's modestly profitable. That's what we expect. We've been deliberate not to create expectations on the profitability of those ventilators because, although I do expect them to be profitable and cash generative, I mean you can well imagine that what we're doing here is reacting primarily to what's really a biological wartime effort here into our fight against COVID-19, and I'm extremely proud of what we've been able to do. But our top priorities on the contract are really making sure on the quality of those devices and the speed to market because, obviously, we want to put it in the hands of the public health authorities as quick as we possibly can. Does that answer your question, Steve?
Yes. No, I think it does. I understand that and appreciate it.
Our next question comes from the line of Konark Gupta with Scotiabank.
So maybe just I wanted to follow up on the utilization trends. You spoke about commercial versus business aviation. Within commercial, obviously, there are multiple silos there as well like narrow-body, wide-body as well as cargo. I wanted to understand, given obviously wide-body fleet still remains pretty much grounded by 50% or so, narrow-body might be doing better. So any sense you can provide on utilization rates for you guys on narrow-body side as well as cargo given a lot of airlines and operators are accelerating passenger to freighter conversions these days. So how are you leveraging those opportunities?
Well, we don't -- I wouldn't break it down to that level, but I can tell you, as we've said before, about 2/3 of our training footprint is narrow -- actually, it's about 75% actually, of our fleet is narrow-body. So we're well exposed to that. And actually, a lot of aircraft, those that we do have on wide-body, some of them are being used for cargo. And we're actually seeing actually a lot of narrow-body airplanes being used for cargo and being converted to that end.
Right. But are you seeing any significant increase in cargo training, Marc?
Well, definitely, there's more -- I'm not saying that you don't know. There's a lot more cargo activity. And to the extent that we train cargo, yes, we have seen an improvement in the training as it related to training of cargo aircraft crews for sure. I just wouldn't break out the number for you.
Okay. No problem. That's good color. On -- then moving on, on the commercial side on MAX. Obviously, MAX is getting quite close to its recertification. I guess a couple of airlines in the North American market have spoken about ungrounding them pretty shortly. And Boeing has disclosed the backlog, it's sitting around about 3,300 aircraft. So my question is really on if you can help us understand the size of the potential opportunity for CAE from MAX in terms of what is the incremental demand potential for simulators as well as training as MAX comes back? Or do you do see maybe a pent-up demand after they have delivered maybe a couple hundred or so aircraft?
Well, I don't think -- look, obviously, there's a short-term dynamic that's occurring here. But I think in the aggregate, when you look at all of the whole order book that you mentioned that's Boeing, I mean it's got a very solid order book, as we know, very large. And when you look at the -- basically, excluding lessors, there's about 73 operators at the moment who account for about 1,300 of those orders of MAX that we know they don't currently have a MAX training solution. So that gives you an idea, I mean, of the opportunity for us over time. And I think that the dynamics will be similar to -- the steady state to other narrow-body deliveries that we have had.So in the past, we've given you the market driver statistic that we use that -- every about 30 narrow-body deliveries necessitates a simulator in the market. And now that it's clear that the MAX will require simulation-based training, you'll expect that airlines that previously were going to be able to -- let's say, they have a MAX and an NG fleet and were going to transition to a MAX, well, maybe then they're going to be -- well, most likely, they're going to be less using their NG simulators because it would be more advantageous to them to move to a permanent solution using MAX simulators or outsourcing their training to providers like ourselves, which offer MAX training. So that gives you some of the -- I guess, on a steady state, I expect this to be just like another narrow-body type.
Right. And I think Boeing was recently mentioning about some updated pilot training requirements that the regulators from the U.S., Canada and Europe have mapped out. Have you been involved in those discussions at all? Or do you expect a discussion going forward?
Well, I wouldn't break it down. I'll leave that to Boeing to answer the overall questions that have been asked. But I could tell you, though, that we have high-level meetings. I'm personally in a lot of calls every month with senior leadership of return to service at Boeing. We're a partner to them to get the fleet back in the air and to support the authorities and our customers because we have -- the great majority of sales of simulators for 737 MAX we have, so you can well imagine that we're involved. But in terms of the decision-making, it's coming out of the authorities.
Our next question comes from the line of Fadi Chamoun with BMO.
Sonya, we're getting a lot of question about this Canada wage program, I guess. And I think you've collected year-to-date somewhere around $80 million and I think, in this quarter, around $35 million. Should we consider these as income that would have otherwise basically subsidizing or offsetting what could have been wage reduction or head count reduction or things like that? Or is there a bottom line impact from these wage subsidy program on the first half results? And if you can -- if you have visibility, if you can give us an idea, what do you expect from those kind of programs in the second half of the year?
No, so you should absolutely look at it as ultimately an offset, as you mentioned. So part of the mitigation measure is we sought out different government programs globally. And we've got about, I think, 20 different countries. The lion's share is really in the Canadian program. So the other countries, sometimes it's literally just a flow-through that the government used to subsidize the employees. The Canadian program is slightly different. So in total, as you mentioned, $35 million in the quarter. But as you'll remember, some of the measures that we took quite early on was highly impactful, 2,400 people furloughed or reduced work weeks and so on. And so what this program essentially allowed us to do is to call back those furloughs and employees and work week, so essentially neutralizing the impact. So it's relatively neutral. As for the future, the program is continually being changed. It's still there until June and a lot of moving parts to really kind of be able to answer that question.
Okay, okay. That's great. The other question I had is on the cadet training program. I think you have a number of cadet training program with various airlines. Have these programs been kind of scaled back? I'm just trying to understand how kind of airlines are looking at some of their initial training requirement going forward if they're scaling back? Or are you seeing them kind of remain with their original plan despite the pandemic?
Well, that's exactly the case, Fadi. People have maintained their original plans. Don't forget it takes at least nearly about 2 years to create a pilot. And actually, we came out with our CAE pilot forecast just yesterday, if you have a look at it, I still think it's a good career to become a pilot. And because we were at a pilot shortage situation, as you will recall, in the not-so-distant past and -- although obviously, the pilot profession business is affected significantly in the shorter term because of COVID, the wave of retirements as well as basically movements in the workforce will recover, and we will need quite a number of pilots going forward.So going back to your question, the -- all of our programs have been maintained. In fact, we've won more business. We won, for example, with Boeing, we announced that last quarter, a contract to deliver pilots for them. So I haven't seen any impact. In fact, our flight hours are basically the same. If -- and the only effect that we've had is where we've had to close centers temporarily in, for example, in Australia, in Melbourne because of COVID, and that's affected our flight operators. But in the end of the day, going back to our pilot demand forecast, well, we forecasted demand for 27,000 new pilots by the end of 2021. And if you think about it, it takes 2 years to make a pilot, where you want to make sure that you maintain it, that's what our airline partners are doing.
Okay. That's great color. And maybe one last question. You said 35 to 40 deliveries of full-flight simulators this year. If you have enough visibility, can you give us an idea of what kind of orders run rate do you expect this year?
What kind of runway you meant, sorry?
A run rate on new order sales.
Go ahead, Sonya. I think you can answer the question.
Yes. No, I think what we've said is that we expect order intake or order sales, a number of them to be lower this year, reflecting the environment. But that will...
Okay, the orders.
But we'll keep and expect to keep a market-leading share of that.
Yes, that's exactly right, Fadi.
Next we have a question from the line of Kevin Chiang with CIBC.
Thanks for the color on the mixed-use and how you think about it, Sonya. So if I look at -- in the quarter, you did a mid-teen margin with utilization at 49%. The last time we saw your margins around these levels, a utilization of somewhere in the 60s. And I know mix plays a role, and you've obviously taken a lot of cost-cutting measures here. But do you think you can get back to pre-pandemic Civil margins at a significantly lower utilization rate than you were seeing, I guess, pre-crisis just given where your revenue mix sits today?
I think I'll maybe comment on the quarter first. And this -- we're comparing a highly kind of impacted Q1 versus kind of maybe a little bit, I guess, more stabilized dynamics in Q2. And what I'd highlight is that the model has really good operating leverage, right? So we saw more volume on the -- through the utilization. And also, like you said, mix matters and has an impact. So there's a higher proportion, a faster recovery on [ back ], which is generally higher yield. But also there was a higher volume on the product side. So you'll remember that there was only 2 deliveries last quarter. So revenue is driven on the delivery side, and so 10 in this quarter helped also on the volume and drive the leverage there.Going forward, I think, listen, it's a bit early to kind of give outlook for the future -- for upcoming years. But that's the reason we've engaged in this restructuring program and really kind of focusing on internal processes, the optimization of our asset base footprint, really focusing on digitally enhancing processes and kind of taking the lessons learned with the pandemic and more and becoming even more efficient, right? And so driving $50 million of recurring structural savings for FY '22 and on, and so that will be part of that conversation because the volume doesn't necessarily have to come up at the same level or at the same speed to drive a higher level of profitability.
I appreciate the color there. Maybe just turning to Healthcare. It looks like a little bit of a leadership change there with Heidi Wood just taking over as President -- appointed as President. And I think, Marc, you mentioned some of the opportunities that you see within Healthcare that may have materialized here during the pandemic. Just wondering as you look at those opportunities, do you see those as being complementary to the previous strategy you had within Healthcare? Or should we think about this segment now kind of pivoting towards another direction? And it feels like this division has been a bit of an incubation phase for, I guess, quite a while now. Just wondering when you think it hits an S-curve within its growth trajectory and it kind of breaks out of this kind of $30-some-odd million of quarterly revenue, which it seems to generate pretty consistently right now.
Well, look, I'd tell you I am very bullish on Heidi Wood leading our medical division. We're absolutely sure about that. I think, if anything, it has been -- it's going to be propelled going forward. Post-pandemic, one of them is going to be the propensity for simulation-based training in Healthcare. And I think what -- we're quite happy, and I know I just got -- just had a review with Heidi with regards to the Healthcare division. And they're very -- she's very, very complimentary of the people in the organization, the products and services suite that we have. As I've mentioned before, the products that we have in the Healthcare division are very profitable. And in a lot of cases, more profitable than in our core -- more core divisions. And it's a question of volume. We know that -- we expect that the volume is there. She's been meeting with a lot of customers and came away from it very encouraged. So it's -- I would basically say that we have a pretty good executive in charge here, an executive with a lot of bandwidth, a lot of experience and a lot of business experience, and that is singularly going to propel our products and services and lead the workforce to what I know is the growth that's out there in this business, which is only going to get better in this post-pandemic world.
That makes sense. And maybe just last one for me. I think you're in the midst of kind of repositioning some of your assets just given all that's happening in the world today, and you did put out your pilot outlook yesterday. I'm just wondering, when you think of repositioning your assets, do you think of positioning them based on kind of decade outlook of where you see pilot demand and where you see the various growth rates across various continents? Or are you taking a more near-term approach and trying to position those assets where you see maybe near-term growth, where Asia Pac might be returning faster to travel and some other markets are little bit more constrained because of travel restrictions?
No, look, just like the rest of our business, we always take a strategic view on it, and it's certainly not a short-term consideration. And as I mentioned, when we talked about the restructuring and the asset relocations and some of the main training center consolidations that we're going -- that we're having, some of them that we've announced already, is mainly looking at the -- what is going to be the market demand or sort of the demand that we expect to be out there based on the forecast of the industry's recovery. And of course, the conversations that we have with airlines around the world and business operators. I mean this is one-off. Again, the crisis favor -- like this one favors the leader. And one of the consequences of that or maybe an artifice of that is the fact that we have conversations with the majority of the world's airlines because they are customers in one way or form. So we're able to get a pretty good view of what training activity should be like over the next 2 to 5 years. And that's what we -- that, plus the IATA forecast, is what we use to basically plan our footprint going forward.
And we now have a question from the line of Cameron Doerksen with National Bank Financial.
Question on Defence. Marc, you had some prepared remarks on the Defence business there. I'm just wondering if you can go into maybe a little more detail on what the game plan is going forward to improve the profitability in Defence because, as you know, it has been lagging for a number of quarters.
Yes. Well, look, first and foremost, I think it's -- I always say there's nothing wrong with the Defence business that a few hundred million dollars of orders wouldn't fix. I say that. And I say that to the team all the time. So clearly, it's about growth, and you throw more growth. And of course, when we bid on projects, we certainly bid to be able to go into the contract with a market that will be accretive to CAE. I mean, obviously, it depends if that's a service or a products contract. So first and foremost, get more volume. And more volume, of course, that affects your profitability because you lower your overhead rates, in which case, that helps you be even better, makes you more profitable and more marketable going forward in terms of winning bids. At the same time, we can absorb more SG&A. And that's -- when we get multiyear service contracts, that helps, because you don't want to have to eat what you kill every year. And we have a project underway with which -- it's part of our overall restructuring and the improvement programs that we've launched and learnings to do things differently with some of the insights that we've gained during the pandemic and before. And we call those internally Project Phoenix, Project Crossroads. And those -- to me, a couple of more growth will be the result -- with better execution, coupled with growth, will result in what I certainly expect to be double-digit margins in Defence.
Okay. No, that's good. And just secondly on, I guess, maybe a capital allocation question. I think the free cash flow is probably trending a little better than what you might have expected earlier in the fiscal year. So I'm just wondering if you can comment on what the -- when the decision will be made to reinstate the dividend, if that's something that we should potentially expect in the next couple of quarters?
Well, I'd tell you the capital allocation priorities haven't changed. We always take a balanced approach to invest in our first priority, which is accretive and sustainable growth opportunities while maintaining a solid financial position. That's what we're going to be doing. The current return to shareholders have been there in the past, obviously, and it's always been a function of level of excess free cash flow, and it's an ongoing discussion that we have with the Board. So I think we have to look at things on a case-by-case basis as we go. But there's a lot of -- we see pretty interesting growth opportunities in front of us right now.
And we now have a question from the line of Benoit Poirier with Desjardins Capital Markets.
Yes. Just on Defence, could you provide maybe an update on the large projects contract that were impacted early in the pandemic and maybe the mix between equipment and services you're seeing these days?
Well, I think, Benoit, as we've said, this year in Defence is a transition year because of some of those issues that we have on large contracts, contracts in the Middle East, which we were literally tools down and, in some cases, still tools down and the level of -- less traffic in some of our training centers because of pandemic-related restrictions. Certainly, beyond this current year, we see a growth business and when -- I'm quite encouraged with our new Defence leader, Dan Gelston, and the amount of insight he's driving to the business, the amount of leadership and energy he's driving there, so I'm quite confident in that. In terms of product/service mix, it's pretty similar to what it's been in the past. Sonya, do you want to add to...
Yes. It's still, I think, a higher proportion on the services side than the product side. And that's being reflected in the margin, Benoit.
At the moment, about 2/3, I think?
Yes.
Yes, 2/3.
Okay. That's great. And maybe could you share any thoughts about your expectation for the new leadership under Daniel Gelston and maybe if you could give an update related to your active bidding proposal, the amount that you tend to disclose every quarter?
Well, I think I can -- I said in the previous question, I'm very pleased to have someone of Dan's caliber onboard at CAE. Dan has very positive energy that he brings to the team in Defence. And I'm very, very confident he's going to do great things to bring out the full potential of our business, which, going back to the questions that was previously said, admittedly, it was not the case for last couple of years. So he brings a wealth of knowledge and experience specifically in the kind of business that we have in running an SSA company, special security agreement, where -- any company would be needing that to be able to sell, for example, to all branches of the U.S. military, which we do. He understands the landscape within the current requirements in defense for multi-domain warfare and the real -- going forward, what is going to be training for -- to deal with near-peer threats that are out there, which is different.He understands the technological capabilities of CAE and really how to leverage them into high-value areas like the contract that I mentioned during my remarks from the Single Synthetic Environment for Special Operations Command, just using that example. So look, we made some structural improvements in Defence. And so look, I think stay tuned. We're confident that Defence is a solid growth business longer term. And the latter, on your question, I think the number that we have right now is $4.8 billion.
Okay. Okay. That's great. And last one for me, you talked about the growth opportunities. How should we be thinking about CapEx post-fiscal '21 as you -- there might be some catch-up given the growth opportunities you foresee?
Well, Benoit, I think we just came out with guidance for this year. So CapEx to date at $33 million was tracking a little under the $50 million that we provided as guidance and planning for $100 million for the year. Beyond that, I think we'll wait until March and May. So some of that CapEx is related to footprint optimization as we consolidate training centers. And of course, we'll pace investments with the level of demand, in line with customer contracts. But essentially, where we have and we continue to see some opportunities for some platforms where there's demand, where there's these opportunities, CapEx deployments drive nicely accretive returns and really within the 5-year horizon are driving 20% to 30% incremental returns, and it's a good prospect for cash. So where we have -- we continue to see those opportunities, we'll be acting on them.
And now we have a question from the line of Doug Taylor with Canaccord Genuity.
Just a couple for me. Firstly, with respect to the restructuring benefits, the $50 million that you were targeting, and I'm sorry if I missed it, but can you update us on where you are? What was recognized within the quarter or how you now expect the remaining benefits to ramp over the coming quarters?
So we incurred $50 million of cost this quarter. And we'll -- it will kind of go into Q1 of next year, but the bulk of those charges, we expect this year. But there's some longer lead items with asset relocations and facilities optimizations. Now in terms of the benefits, the guidance and the info is $50 million of recurring structural savings starting fiscal '22. So we just started the program. And a good part of that program is footprint, asset optimization, which require some bit of time to consolidate specificities. And also, Marc was talking about all the digital process enhancements, et cetera, that are underway and so on and on going throughout the year, so we'll really start seeing the benefits come through next year, maybe some or a little bit this year, but really next year, $50 million of recurring structural savings.
That's helpful clarification. My second question is with respect to the types of deals that you're looking to potentially cut with some of your airline customers for outsourcing training, and that's certainly an exciting growth vector during this pandemic. So when and if that happens, can you speak to whether there are incremental investments that would be required on your part? Or will you be taking on additional capacity? Or would all the potential business you would -- be outsourced to you be -- you'd be able to service within your existing portfolio and infrastructure? That would be helpful.
I think it depends on the deal, obviously, that we look at. But if we look at the past airline outsourcings that we've done, there's been quite a number of different types, but in a lot of cases, when we take over, for example, the partner's existing assets, think about what we did with Japan Airlines, Singapore Airlines, so they basically contribute their existing training assets or simulators, so that's one way of doing it. So either way we look at it, our view is it has to be accretive to seize go-forward picture. And I would expect that sometimes we're going to be combining assets to be able to do that.
Okay. So is there any -- go ahead.
Go ahead, carry on.
I was just going to ask, I mean given the pandemic is, obviously, a new phenomenon for the airlines, if that has changed the decision-making with respect to outsourcing to favor a certain type of outsourcing arrangement versus prior cycles.
I don't think so, no. I think, look, in the end, it's usually the same kind of dynamic. If you're an existing airline and you have a training operation, you still have -- don't forget, and that's a great thing about our business, it's a regulated business. Every 6 months, typically pilots have to go back for training. So if you're an airline, you have to have -- you either have the capacity for all your pilots to be able to train on a regular basis and to take advantage or necessitate initial training as you basically have pilots retire or pilots furlough so you have movement in your pilot workforce, so you need the infrastructure. So if you're already an airline, then most likely, you have that infrastructure. So typically, what you bring into the deal is that those assets, and we're very good about -- because that's our business, and we do it for a very large number of airlines to the tune of 1 million flight hours a year -- or 1 million training hours a year, we're very good at extracting maximum utilization by efficient scheduling, efficient delivery of the courses.So typically, what we would do is have less of a need for -- and then we're able to off-load some of that capacity and sell it for third-party training. So I wouldn't expect the dynamic to change very much from that standpoint, except to say that in this kind of environment, we have more discussions, because people want -- they really want to understand that because if they can make their cost structure lower, which you could certainly do, and more -- perhaps even better, make it variables only use -- you only pay for what you use and when you use it because, typically, for example, in the Western world, in a normal year, which, of course, this is not a normal year, but seasonal patterns are you don't train in the summer because you're flying. But if you have your training infrastructure, then you're paying for it, the air goal being advantage. And the only thing, of course, is that these days, obviously, with the pandemic still very, very much out there, pilot -- airlines have a lot on their plates these days, and this is typically the same thing. Hopefully, that gives you a bit of a broader color.
Thank you. I want to thank all the members of the investment community for their questions. With the time remaining, I'd like to now open the call to members and the media should there be any questions from members of the media.
[Operator Instructions] The first question from the press media comes from Ross Marowits with the Canadian Press.
Marc, I have 2 questions for you. One is you talked about how the recovery is going to be closely tied to the lifting of travel restrictions. Do you have any sense of timing of that? Or is your view on the timing changed recently?
Well, I have the same view as everybody else. To be very frank, it hasn't changed. I mean we model our planning based on the IATA forecast at the highest level, and that's complemented with discussions that we have with individual airlines because it's no exaggeration that the bulk of the world's airlines are customers one way or another. So I think that way that translates is IATA forecast about a 66% reduction in pass-through traffic this year. So that's what we would use overall and that it also calls for air passenger traffic to recover to 2019 levels and late 2023, early 2024. Maybe that gets better because of news we had yesterday, maybe. But hopefully it does, that would be great. But our planning is -- hasn't changed from those statistics I just mentioned.
Okay. And the second thing is, I'm wondering, in terms of defense spending, with the new administration in the U.S. coming in, are your expectations of orders or business going to change?
No, no. And the reason I would tell you -- 2 reasons. Number one is that, first of all, I would tell you that the day that the orders that we can get at CAE, being a proxy to the size of the U.S. Defense Department, I would be very happy. I think we have lots of opportunity to grow within the defense budgets that are out there today and then are foreseen to be out there under any reasonable scenario going forward. The other thing is that the products and services that we provide, we, by definition, align ourselves to the defense strategy and the expected defense -- where the money is going to be spent over the next few years. And a great thing about, for example, governance and, specifically, if I were to use the largest defense market in the world, the U.S. Defense Department, basically, they tell you what they're going to spend on or what -- over the next few years.So our investments in research and development and bidding activity are very much aligned to those national defense priorities. So I feel very good about our prospects for growth in the next few years. And then we -- and I think one thing that's obvious in there to understand is what we do is simulation-based training. That actually saves money relative to, for example, training, which you have to do, you have to continue to do. So if we could move more of that train to simulation-based training, well, obviously, that reduces cost. You're in the spirit of goodness there.
So you're not concerned about new government reducing spending on defense?
No.
And up next, we have Allison Lampert with Reuters.
So when would you expect non-U.S. regulators, like Transport Canada and EASA, to lift the MAX grounding compared with the FAA? And as a follow-up, are you -- so what kind of timing are you seeing in terms of bookings for the MAX training?
Well, starting with your first question, Allison, look, I can't answer for the regulators, but the comments that I've seen, you saw probably news from the FAA literally today, positive comments from the head of the FAA today. I would expect Transport Canada to not be far behind typically just because they've been doing their certification testing in lockstep. But again, I can't speak for them. And the comments that I've seen from the Head of EASA, Patrick Ky, most recently, on the recovery -- the certification of the 737 MAX but positive. So I would expect that would come sometime behind. But again, I am not the guy that really can answer with any certainty with regards -- except that it's all looking very positive at this stage. With regards to MAX orders, we're booking them now. We have -- again, the lion's share of the simulators for the MAX have been won by CAE. And I would expect that we're going to continue to do well there, and we're continuing to deploy MAX simulators to our own training centers in that regard.
And what about bookings for the training centers? When are you seeing those? When are people coming in?
Well, actually, people are training now. I will give you an idea, well, for example, here in Canada, Air Canada has 2 of our MAX simulators. And I can tell you that even though the fleet has been grounded, as it has been around the world, Air Canada has maintained the training of their pilots. I think they had about, if memory serves me, about 500 pilots that were trained on the 737 MAX and they continue to keep those pilots trained. So training activity has not stopped. It's continued during this whole time because of the time it takes to ramp up pilots. So it may take only a day or 2 to take an airplane out of mothballs. But if you haven't prepared for it, it could take you literally months to get your pilots back up to speed to be able to fly them.
Okay. Operator, that's all the time we have for questions this afternoon. Again, I want to thank members of the investment community and the media for their time listening to us and for their questions and remind you that a transcript of today's call can be found on CAE's website. Thank you, and good afternoon.
Thank you. And that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect your lines. Thank you once again. Have a great day, everyone.