CAE Inc

TSX:CAE

Earnings Call Transcript 2022-Q2

[Operator]

Good day, ladies and gentlemen. Welcome to the CAE Second Quarter Conference Call. Please be advised that the call is being recorded. I would now like to turn the meeting over to Andrew Arnovitz. You may now proceed.

[Andrew Arnovitz]

Good afternoon, everyone, and thank you for joining us today. Before we begin, I'd like to remind you that today's remarks, including management's outlook and answers to questions, contain forward-looking statements. These forward-looking statements represent our expectations as of today, November 11, 2021, 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 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.

[Marc Parent, President, CEO & Director]

Thank you, Andrew, and good afternoon to everyone joining us on the call. Let me just start by reminding all of us that today's November 11, Veterans Day in the United States, Remembrance Day in Canada. So let me just start by saying thank you for all veterans for their service. On this November 11, we honor members of military, both past and present, veterans of all conflicts, those who made the ultimate sacrifice for our freedom and those who serve our countries today. At CAE, we're privileged to work with -- every day with many veterans. We have over 2,000 in employees in CAE. And I could tell you, I'm honored to work and be in the company of heroes. They bring a unique point of view and skill set to our company and a pride that allows us to achieve new heights.Now on to the quarter. In an environment where we continue to experience an uneven recovery in the various markets and geographies where we operate. CAE delivered year-over-year growth in the second quarter. On a consolidated basis, we drove 16% year-over-year revenue growth and $0.17 of adjusted earnings per share. These results came mainly from the strengthening of our civil training business, the continued progress of our structural cost savings program and the integration of L3Harris Military Training into our defense results. We also built continued momentum with $871 million in orders for a positive book to sales ratio of 1.07x and an $8.8 billion backlog.In civil, second quarter average training center utilization was 53%, up from 49% last year and 3% lower than last quarter, reflecting usual seasonality, but also the varying global realities with respect to the COVID-19 Delta variant and the measures taken to contain its spread. For example, in the Americas, with the benefit of high vaccination rates and easing travel restrictions, we saw near pre-pandemic demand during this period in both commercial and business aviation trading. While at the same time, Asia Pacific took a step back, it remained at low levels of countries, including Malaysia, Thailand and Vietnam, renewed lockdowns.On the orders front, we signed civil train solutions contract valued at $409 million or a 1.1x book to sales ratio, including 9 full-flight simulator sales and a 5-year aircraft maintenance training partnership with Air Canada, a 3-year exclusive agreement with Brussels Airlines, a 5-year agreement with Envoy Air, a 4-year agreement with PGA Portugalia and finally, a 5-year agreement with Alaska Airlines.We also announced new partnerships and relationships, including a strategic partnership with beta technologies to design and develop a best-in-class pilot and maintenance technician program for the ALIAS eVTOL aircraft as well as a relationship with Star insurance companies for a first of its kind program that combines a rigorous training regimen and insurance for single pilot jet owners. Additionally, Innotech-Execaire Aviation Group has become the launch partner for CAE's innovative suite of digital services specific to the business aviation market.On the expansion front, we deployed a Boeing 737 MAX full-flight simulator in Europe at our Amsterdam training center, and we announced a new flight training location in Las Vegas, Nevada, in order to meet higher demand and expand our business aviation footprint, which is expected to open next summer in Las Vases.In defense, we closed the acquisition of L3Harris Military training on July 2, and it delivered solid revenue with double-digit margins in the quarter, in line with what we expected. I had the pleasure to visit our new employees and facilities in Texas and Colorado in August to inaugurate the closing. And I can tell you I'm highly impressed by the technologies we've acquired and the potential for even greater differentiation of our defense training and machine support solutions.I'm also extremely pleased by the great cultural fit with CAE. We live and breathe simulation and training in support of our customers' most critical missions. The energy and excitement of our combined teams that they have for the future is really palpable. And since the acquisition, we retain and I think this is a fantastic feat. All 67 members of the senior leadership team, which is a very strong statement in and of itself about strength of our shared vision and a mutual passion for what we do.The organic defense business was negatively impacted this quarter by delays in orders and program execution, particularly international, which have been largely due to the pandemic. And notwithstanding those headwinds, we've booked defense orders for $428 million in the quarter, representing a book to sales ratio of 1.02x. Those orders included our recently announced first ever prime contract award from the U.S. intelligence community with the beyond 3D prototype for the National Geospatial Intelligence Agency.We'll be integrating our capabilities across digital technologies, big data architectures, machine learning and artificial intelligence, making this a prime example of CAE at the forefront of modeling and simulation expertise for mission and operational support across the multi-domain environment. Other notable defense orders during the quarter involve a range of contracts for support services, similar upgrades and modifications in support of customers, including the U.S. Army, Navy, Air Force and Air National Guard and internationally for the German Air Force.In health care, we also experienced COVID-related headwinds during the quarter, particularly in Florida, where our business is based. In light of the added challenges, I continue to be very encouraged by the dedication and the achievements of our team to deliver double-digit year-over-year top line growth in the quarter, excluding the ventilator contract from last year. Notably, this marks the third quarter of year-over-year revenue growth for health care as it ramps up and expanded and reenergized organization.With that, I'll now turn the call over to Sonya, who will provide additional details about our financial performance, and I'll return to the call -- at the end of the call to comment on our outlook. Sonya?

[Sonya Branco, Executive VP of Finance & CFO]

Thank you, Marc, and good afternoon, everyone. We delivered year-over-year growth during the second quarter and our results continue to reflect the success of the measures that we have taken to strengthen the company, both externally in terms of expanding our reach and adapting to dynamic market conditions and internally by lowering our cost structure. Consolidated revenue of $814.9 million was 16% higher compared to the second quarter last year. Adjusted segment operating income was $90.7 million compared to $79.3 million last year.Quarterly adjusted net income was $53.2 million or $0.17 per share compared to $0.13 in the second quarter last year. Cash provided by operating activities this quarter was down 32% to $30.9 million compared to $45.6 million in the second quarter of fiscal 2021. Free cash flow was $19.4 million compared to $44.9 million last year. The decrease was mainly due to the decrease in cash provided by operating activities due, in part, to cash costs for restructuring, integration and acquisition costs this quarter, which amounted to approximately $52 million. We usually see a higher investment in non-cash working capital account in the first of the fiscal year as in previous years. We expect a portion of that noncash working capital investment to reverse in the second half. Also, we continue to target 100% conversion of net income to free cash flow for the year.Growth and maintenance capital expenditures totaled $46.7 million this quarter, mainly for growth and specifically to add capacity to our global training network to deliver on the long-term exclusive training contracts in our backlog. Our growth CapEx is directly linked to our opportunities to invest incremental capital with attractive returns and free cash flows. With several attractive market life expansion investments on the horizon, we continue to expect total capital expenditures to be more than $250 million for fiscal year 2022.The income tax recovery this quarter amounted to $13 million, which normalized the restructuring, integration and acquisition costs, represents a rate of negative 1% compared to an effective tax rate of 14% for the second quarter of last year. On this basis, the decrease in the tax rate was due to impacts of changes in tax loss on tax assets, positive impact of audit and the mix of income from various jurisdictions.Our net debt position at the end of the quarter was $2.48 billion for a net debt-to-capital ratio of 38.2%, and net debt to adjusted EBITDA was 3.55x at the end of the quarter. Also between cash and available credit, we have approximately $2.2 billion of available liquidity. The increase in net debt this quarter was mainly attributed to the closing of the L3Harris Military Training acquisition and the execution of the related finance package. We see this increase flowing through to interest expense should continue at about this $35 million quarterly run rate going forward.Now turning to our segmented performance. In Civil, second quarter revenue was stable compared to Q2 last year at $362.1 million and adjusted segment operating income was up $13.4 million over the second quarter last year to $65.3 million for a margin of 18%. This was the result of higher training utilization in the Americas, offset by lower product revenues with the delivery of only 5 simulators this quarter compared with 10 last year and 11 last quarter. The lower simulator delivery number this quarter was on plan, and we continue to expect to deliver north of 30 simulators for the year.Our ability to drive an 18% margin on just 53% training utilization shows the benefits of the higher mix and training and the solid progress we're making to ramp up our recurring cost savings initiatives. In Defense, second quarter revenue of $417.9 million was up 38% over Q2 last year. This includes $135.1 million from the integration of the L3Harris military training in our financials. Adjusted segment operating income was $26.7 million, including $16.2 million from the acquisition for a margin of 6.4%.On an organic basis, our defense business decreased this quarter, mostly in terms of adjusted segment operating income. And as Marc pointed out, this was mainly driven by delays in product-related orders and program interruptions and delays, particularly internationally as COVID attacks persisted in several regions. Underlying the quarterly defense book to sales ratio of 1.02x were international orders, which continue to lag at 0.75x book to sales and orders from the U.S., which were higher at 1.15x.We closed the acquisition early and synergies realized in the quarter were nominal. We are progressing well with integration efforts and are on track for the $35 million to $45 million of cost -- total cost synergies by the end of year 2 following our closing of the transaction.And in Healthcare, second quarter revenue was $34.9 million, up 17%, excluding the ventilator contract last year. Adjusted segment operating loss was $1.3 million in the quarter compared to an income of $3.2 million in Q2 of last year. Segment operating income reflects growth in SG&A expenses in preparation for higher revenue growth and the impact of the quarter related to the severe COVID conditions in Florida, which affected supply chain and limited the team's ability to execute on orders.With that, I will ask Marc to discuss the way forward.

[Marc Parent, President, CEO & Director]

Thanks, Sonya. As we look to the period ahead, we're confident that we'll emerge from the pandemic, a larger, more resilient and more profitable CAE than ever before. I'm very confident of that. Until then, we must manage in an environment with this threat, rates of recovery in our markets and the geographies where we operate. Something that would likely to be the factor for several more quarters until a more uniform global recovery takes hold. We have additional reason for optimism with the reopening of the U.S. border this week to vaccinated international travelers and the latest use about the potential of antivirals to mitigate the effects of COVID-19. Ultimately, the slope of our recovery to pre-pandemic levels and beyond rests on the timing and rate at which border restrictions and quarantine measures around the world can safely be lifted.We certainly have been standing still waiting for the recovery to happen. And we've been focused on the things that we can control. Specifically, we'll be gaining stronger by playing offense in a downturn, and I'm very encouraged by everything that we've done to reinforce CAE's base over the last 1.5 years to expand our horizons for long-term sustainable growth. The pursuit of an expanded growth opportunities pipeline has so far netted CAE 9 accretive acquisitions, including the most recent announcement of our agreement to acquire Sabre AirCentre Airlines operations portfolio, a highly valuable suite of flight and crew management and optimization software solutions designed to enable airlines to operate their businesses with efficiency and precision.And we've continued to secure highly attractive opportunities to deploy organic growth capital, including our recent expansion of business aviation training in Las Vegas, Nevada. And at the same time, as expanding CAE's reach externally, we substantially -- we're substantially lowering our cost structure and achieving even greater levels of operational excellence. In fact, we're on track to reach a run rate of $65 million to $70 million of annual recurring cost savings by the start of the next fiscal year in April 2022.In civil, a greater desire by airlines to instruct CAE with their critical training and digital operational support and crew management needs, higher expected pilot demand and strong growth in business jet travel are enduring positive underpinning a secular gross [ margin ]. There's considerable pent-up demand for commercial passenger air travel and once at least, drives higher flight activity and training demand. We're seeing this chain of events manifest itself already in the Americas, where we're experiencing a near total recovery in training utilization and a strengthening pipeline of full -light simulator order activity.We believe that this provides a blueprint for what a broader global recovery in air travel should look like. And since the end of the quarter, the market has improved, with average training center utilization trending to upwards of 60% globally. Again, with the highest utilization rates currently in the Americas, combined with still relatively depressed levels in Asia and the Middle East. In business aviation, we're single. We're seeing strong demand for training across the network, propelled by flying activity in the United States and Europe that is now well above 2019 levels.The uneven nature of the global recovery is likely to persist for a while. But we're ultimately in an excellent position to benefit from the multiyear cyclical market recovery that's currently under way. And for the current fiscal year, we expect continued strong growth in civil, weighted more heavily to the second half.In defense, the paradigm shift from asymmetric to near peer threat and a recognition of the sharply increased need for digital emergent based synthetic solutions and national defense are tailwinds that favor CAE's business. Given the increasing relevancy of training and simulation, our defense unit is also on a multiyear path to become a larger and more profitable business.We're currently focused on the successful integration of L3Harris' military training business and expect to fully realize the $35 million to $45 million of cost synergies that we laid out by FY 2024. Defense is now more closely aligned with our defense customers utmost priorities and this established as the world's leading platform agnostic, global training and simulation defense pure-play business. This is expected to bring increased potential to capture business around the world, accelerated, we expanded capability and customer set that we now possess.The pandemic has made international opportunities slower to materialize in the current environment. But this headwind is temporary, and we have a strong pipeline with some $6.5 billion of bids and proposals pending customer decisions. We continue to expect to deliver strong annual growth for fiscal year 2022, with sequentially -- sequential quarterly improvements in revenue and adjusted segment operating income expected in the second half. Supporting our view is our expectation for a reacceleration in order intake, especially from bid involving international programs as pandemic related disruptions ease. And with that, we also expect the defense book-to-sales ratio for the fiscal year to exceed 1 for the first time in the last 4 years.Other drivers in the second half and beyond include higher levels of execution on programs, specifically those involving higher-margin products as well as the progressive realization of synergies as we integrate L3Harris military training.And lastly, our outlook for health care is continued totally year-over-year growth as we ramp up our expanded and reenergized organization. Over the long term, we believe health care is on track to become a sustainably material and profitable business. And for the current fiscal year, we project double-digit growth compared to last year, excluding the ventilator contract.In summary, while there's no doubt that COVID-related impacts continue to affect all of our business units, we increasingly see a clearer path to recovery and a larger, more resilient and more profitable CAE in the future. Specifically, we're currently targeting to reach a consolidated adjusted segment operating margin of approximately 17% by the time our markets are generally recovered, with steady room for further improvement after. We expect to reach this level of profitability on a significantly larger base of business with a post-pandemic capital structure that will allow us to sustain ample flexibility to further invest in our future.We continue to play offense during this period of disruption, as evidenced by our 9 accretive acquisitions and continued growth capital deployment since the pandemic began. As business conditions continue to improve further, we look to extend this posture as it relates to both organic and inorganic growth investment. Our opportunity set continues to look very attractive. And personally, I've never been as excited about CAE's future as I am today.So with that, I thank you for your attention. We're now ready to take your questions.

[Andrew Arnovitz]

Thank you, Marc. Operator, I'd ask that you please open the line to your members of the financial community.

[Operator]

[Operator Instructions] Our first question is from Fadi Chamoun from BMO.

[Fadi Chamoun, MD & Analyst]

My first question on the kind of legacy defense business. It seems like we've been in this 7%, 8% EBIT margin for the past several quarters. This quarter, we dropped to 3.7%. I know you offered up some explanations towards what's going on there. I'm not sure if you can maybe elaborate a little bit, give us a couple of examples of what's really kind of happening in that business. And what do you expect in the second half of this year? Do we see a step back to where we were in past quarters? Or is this more of a gradual recovery that we should expect from this, I guess, organic defense business?

[Marc Parent, President, CEO & Director]

Well, thanks, Patty. Look, as I said in the remarks, we're continuing to expect strong year over growth in this year. So clearly, we're going to have that with a pretty good second half. And that's -- and I talked for defense as a whole, but -- which is obviously combining now the [ iteration ] of L3Harris. I mean the story with the legacy business, or shall I call it, I hate using that term, but we'll use it for the moment here. Organic business is one of continued COVID related to shut both on order intake, and impacting our execution. And I can tell you that there's at least 5 international orders that fully expected. I'm not going to lie to you.I believe expect it to come in this quarter, but did not happen. And because of Delta, for example, inability to access customers in lease in a par, it is 5 at least internationally. Other factors, I could point to you, like, for example, Florida was one of -- during the summer, was one of the hardest hits, if not the hardest hit as well as Texas, which is another big state for CAE in terms of the COVID effects and the variants attacking net. So clearly, that had an effect. And just this morning that I said before, Florida training center, we trained international customers of C-130H. Well, imagine there's no customers coming. And -- but the situation is changing. Borders are opening. International travelers come back.The COVID situation is incredibly much better, not only across the United States, but in Florida specifically. So those are the kind of things that we can see near term, which gives us more confidence in the outlook. And when you look at the business as a whole, for defense, I have talked about organic plus the integration, we're starting -- we're going to be starting rolling out the benefits of our synergies. You see, I mean the -- most of that was started like for example reduction in force that happened at post end of the quarter. So for all these reasons, it really is COVID-related impacts that we see that really drove that because our book-to-bill for the last few quarters, as you know, in the organic defense business has been below 1.And eventually, you run out of backlog that you can execute in an efficient manner. And that's really the situation that we're seeing here. But again, those orders come in. We've been selected on these orders. So I would have -- I've always expected a back half in defense to be the strong order, right? So -- and that's what I said last quarter. I mean, but we've lost because of COVID, we lost some that I would have liked to get in the second quarter, no doubt, but it doesn't change my view of the full year. Maybe I could just -- Sonya, you want to add something?

[Sonya Branco, Executive VP of Finance & CFO]

Yes. Just a quick recap and laying it out. The way we see it on the organic business, we're delivering, as you mentioned, Fadi, kind of in the 7%, 8% range. That's in the 20s on SOI. And then so as Marc explained, as you see those delayed orders ramp back up, as we advance the programs that we do have in backlog that is then disturbed by COVID, either interrupted or fully stopped somewhere in the Middle East. So as those ramp back up as the pandemic related disruptions ease, then you layer on the contribution of the acquisition as well as during the ramp-up of synergies, that will take us to the 30s and 40s in the upcoming quarters.

[Fadi Chamoun, MD & Analyst]

Okay. So that comment, 30s, 40s, you're talking about SOI in dollar terms.

[Sonya Branco, Executive VP of Finance & CFO]

Yes. So why we talked about that.

[Fadi Chamoun, MD & Analyst]

Okay. That's helpful. The other question I wanted to ask is on the leverage, the M&A and the opportunities you're seeing, you're up to 3.55, probably go up a little bit with the Sabre acquisition closing in a couple of quarters. Like how comfortable are you with this type of leverage, given the pipeline of maybe opportunities you're seeing at this point? Is M&A in the backburner now until you kind of get this profitability level back to delever the balance sheet? Or how are you kind of thinking about this leverage level, given the pipeline of acquisition and the opportunities you're seeing?

[Sonya Branco, Executive VP of Finance & CFO]

Well, I'll start out with -- I'm very comfortable. So the quarter closed at 38% net debt to cap, 3.55x net debt to adjusted EBITDA with all the financing related to the L3Harris Military Training acquisition. And with the expected closing of the air center operations, top being in our Q4, we'll be using our existing liquidity, which will drive our net debt-to-cap higher, probably a little above the 40%, but we're expecting quick deleveraging in the next 6 full years with the highly cash-generative business -- organic business and the cash flow accretiveness of this new acquisition.Now you'll remember all the previous cash flow raises that we did in FY '21, and that was exactly to provide the flexibility to support the organic and inorganic growth opportunities that we saw. So we've seen some great opportunities come out of all the disruption -- of disruptions. And it allows us to seize on them creating long-term value and strengthening the company to become bigger and more profitable. We have to [indiscernible] to have a pipeline. But as you've seen, we're patient, we're disciplined. We'll wait for the right opportunities at the right value as we've done with AirCentre, L3Harris and even Bombardier training. So very comfortable. And ultimately, it goes back to our capital allocation priorities, balanced accretive growth, organic, inorganic with a solid financial position.

[Fadi Chamoun, MD & Analyst]

Okay. I appreciate the feedback. The 17% target. Can you offer up what's the mix behind this? Like how much is defense representing, how much of aviation representing? That's it for me.

[Sonya Branco, Executive VP of Finance & CFO]

I think we're providing that guidance on a consolidated basis, really to underpin the messaging that all of these internal, external measures is really to drive a larger business, a more profitable business. So what we're guiding at is that once we do hit that recovery level, that not only will we exceed pre-pandemic measures, but on a much larger scale base of business.

[Marc Parent, President, CEO & Director]

I think maybe I would add, I mean, there's no doubt that that's going to be made of new highs in civil margins, for sure. Some of that -- a lot of that with the leverage, as you said, plus the acquisition that we made and as well as double-digit margins in defense. That's what's going to comprise that mix.

[Operator]

Our next question is from the line of Konark Gupta from Scotiabank.

[Konark Gupta, Analyst]

So I have a few questions just on defense and civil, perhaps maybe sticking to defense now. Like, if I look back when you acquired L3Harris, I think it was $500 million in U.S., I think, revenue business. Or so annually. And what you did in the second quarter, obviously, was below that run rate. So, I'm kind of wondering if there was some sort of a transitionary impact in Q2, where we will see probably more contribution from L3Harris going forward as you integrate them. And then this L3Harris together with the defense organic business, assuming it kind of rebounds to the 8%, 9% margin level. So -- and the synergy, is this 11%, 12% kind of range, kind of an acceptable margin profile for the defense business for you guys?

[Marc Parent, President, CEO & Director]

Yes. We missed some of it, but just the last part of your question, just city in corner?

[Konark Gupta, Analyst]

Yes. I was wondering, Marc, on the margin profile. Defense organic business goes back to 8%, 9% margin. And then as L3Harris plus synergies. Obviously, they are double-digit margins right now. The overall defense business seems like it's going towards 12% EBIT margin with all those.

[Marc Parent, President, CEO & Director]

Oh, yes. No, as I said before, 11%, 12% is a good number to plug in longer term, for sure. I mean, that's where we're headed. No doubt about that.

[Konark Gupta, Analyst]

Right. And on the first part of the question about L3Harris. Is there an ability to ramp up revenue here given it's below their run rate before you acquire them?

[Marc Parent, President, CEO & Director]

Well, certainly days with L3Harris, but I'm quite confident with what I'm saying that we're going to deliver the L3Harris, the old legacy L3Harris business and the synergies that together that we're going to generate, we're going to be achieving the margins that we talked about when we acquired the business. And I definitely see that. I'm quite happy with what we've seen in the first quarter and more of that's coming.

[Konark Gupta, Analyst]

Right. And then on the civil side. So you touched upon the utilization levels. And clearly, Americas are doing better. Asia Pacific are lagging. Where are you in Europe? And what are you seeing there? And then as we head into sort of the seasonally stronger second half with both commercial and business elution. Should utilization levels kind of go to 60% plus, you think? Or we are kind of stuck in the 50s right now?

[Marc Parent, President, CEO & Director]

Well, look, you read what I read in terms of the COVID recovery. Look, the thing I would tell you is, as we said in your remarks that I like what I see in the Americas right now, specifically in the United States. We're seeing utilization rates in the United States back in the levels of COVID -- were prior to COVID-19. We're seeing very high rates of utilization business aircraft. This summer, obviously, we talked about there's seasonal effect and the fact that Europe kind of missed the whole summer because of Delta. But going forward, look, to me, utilization rates are very much correlated by vaccination rates.And if you look at -- if you extrapolate vaccination rates, and of course, that comes with lifting of restrictions on borders that governments have to do and the ability for people to travel, we've seen the pent-up demand and how that's driving business. I can tell you, I was at -- in the early part of the month of October, I was at the IATA General Meeting in Boston, and I can tell you, I met a lot of Airlines CEOs. And I can tell you, there's a palpable optimism out there as vaccination rates are increased, and that's just one U.S. and when we're basically talking to airlines, specifically in those areas like the United States, where we are seeing that increase in activity because the vacation rates are high and the level of vaccination is low, we can see a lot of activity as testimony by the rise in sales activity, which is not only testimony to the orders that we've announced so far.But in terms of the activity that I see, which is quite nice at the moment, head of the 10 level. So really, look, in terms of going back to the really your question, you're predicting, again, I'll go back to what I said, you read what you read. I mean what I read. I mean, we have a situation that seems to be degrading in Germany right now. We still have a very low level of activation in the far east. So I think those have -- but I think on the long-term trend is getting better. So we will get better in utilization in lockstep with the increase in flooding activity driven by vaccination rates.We're not going to get ahead of it because we don't know -- we don't know. I mean, at the end, if you look at -- there's a wide variety of estimates out there. Since the beginning, we said, well, we'll follow the IATA forecast of what that seems to still be a pretty good one. Although I would tell you, I think the U.S. has beat that what sort of vaccination rates pull up. So long answer to your question, but coming back to say all I can say is when we do come across it, when the traffic does come back, which it will. With all the actions that we've taken, I'm extremely confident that we're going to be a much bigger, a much stronger and a much more profitable business for us as a business.

[Operator]

Our next question is from the line of Kevin Chiang from CIBC.

[Kevin Chiang]

If I could ask a utilization question, maybe just focus on the Americas. Marc, you mentioned, it looks like these are basically back to maybe pre-pandemic levels or close to, given the recovery in commercial aviation there. Are you seeing a difference in maybe the split between what was in-source training versus third-party training? Because I guess there's a thesis out there that as we come out of the pandemic, there will be a greater opportunity for you to capture maybe more third-party training as airlines might look to outsource some of this to reduce their costs. Are you seeing that in the U.S. as they bring back training much more aggressively?

[Marc Parent, President, CEO & Director]

The answer is yes. Yes, we are seeing it. The fact is a lot of the contracts that we've announced in this quarter, previous quarters are this testimony to that. There's -- for a number of reasons, #1 is that people are seeking capacity and they're looking for [indiscernible] and we can offer that capacity. We've been part of our -- the activity we've been doing is moving simulators into the United States, promoter locations and actually what we increased our forecast on capital deployment this year that we announced at the beginning of the year, some of that was going exactly towards this. So to me, that is a trend. And we predicted that trend that this is an environment where there's going to be a lot more opportunities.For people considering us as they really only viable global third-party option, where, in fact, because pre-COVID, you do 1 million hours plus a year of training, we offer a very, very good alternative. And so to me, it's -- look, we have a lot of discussions. We had a lot of discussions at IATA. We have a lot of discussions ongoing, and we're signing contracts. We're signing contracts for new airlines. We're signing contracts for overflow train agreements where people want excess capacity right now, and in a lot of cases, because they need it like right now or they want to ensure that they will have it as they ramp up operations to be able to seize the opportunity afforded by increased faster traffic. And when we do that, we're signing people to longer-term contracts, so that activity for us will sustain.

[Kevin Chiang]

That makes sense. I'm not sure -- do you have a sense of like maybe what that breakdown is or was maybe pre-pandemic between pilot training that would have been in-sourced versus outsourced versus what it looks today? I suspect is probably pretty fluid and maybe it's tough to pin down at the moment?

[Marc Parent, President, CEO & Director]

Well, I can't give you a hard number right now because it's -- first of all, it's not steady, and it'd be very hard to compare apples-to-apples or number. Maybe it's in future quarters, we can give it. But right now, I couldn't give you uncertainty a number on that, but I can tell you it's more. If you look at the contracts that we have traditional carriers that were ordering simulators and now being say, no, we'll basically just sign up a contract with you -- for you to provide the simulator and position that. We did that with -- recently with SAS. We did with WestJet. We did with Canada. So there's definitely more. Again, I can't give you a precise number right now in terms of breakdown.

[Kevin Chiang]

Okay. And maybe just on the AirCentre transaction you announced maybe a week or 2 ago. Can you just speak to how you feel about your, I guess, your broader crew management, flight management portfolio? Like do you feel like you have all the tools now to kind of capture the higher TAM that you've put out there? Or do you think you need to kind of backfill some of that product line still? And then I guess when we look at the AirCentre client base or the customers that they're dealing with versus the ones that you're dealing with, I guess, I'd be interested in knowing, I guess, where the opportunities to cross-sell are? Do they have a large subset of customers that you don't deal with or vice versa that maybe offers an ability to maybe capture revenue synergies?

[Marc Parent, President, CEO & Director]

Well, all of that. I think -- look to be -- look, I'm extremely excited about this acquisition. As I've said, when we first apart in our press release, recently, look, first and foremost, and we said this at the time we acquired Merlot Roster Buster. The civil edition plant out-purchased software market, it's over $2 billion. Over 50% of that spend is outsourced. And what we're acquiring now, we are acquiring a youth state, a leadership state in that market. So to me, this is a crowning achievement in that strategy. And really what we're doing here.You've seen us over the year move from what was a few years ago, but certainly when I joined CAE, move from being a really a simulator partner to airlines moving in deliberately towards being a treating partner to the airline, leveraging in the past few years, our digital offerings to make ourselves essential to customers, providing them insights on their business that really -- that we could deliver to them using the data that we have on their operations. And now what we're doing is we're moving from being this training partner to becoming a technology partner. And that's really just about growing the amount of work that we could do with this airline. And I can tell you, it's very well received.Again, I was talking about my meetings with CEOs at the IATA meeting. And obviously, we weren't talking about Sabre at that time because we hadn't announced the acquisition at that time. So we were certainly were talking about it. But we did have [ Melo ], a much smaller but differentiated offering in that market. And I can tell you, there was no pushback whatsoever with regards to airline CEOs our customers about CAE bringing our expertise as a partner in resourcing, it's pipeline, in fact, that they would see as a natural extension of what we do with them because it's all about delivering essential services to the airline, just like we do in train.So look, this is a great asset. We have pretty much almost all of Sabres' customers are our customers. There is -- we are getting more customers, that's for sure. But some of that -- to me, there's a lot of opportunities to leverage those relationships to cross-sell. And as well, don't forget, I really believe that this morning by a contract, the first contract we announced this quarter, literally is a contract with Innotech-Execaire. I really believe that there is an opportunity set here for rolling us out across business aircraft, which is an untapped opportunity.So again, I -- and by the way, leading testimony to high confidence in this business. I put one of our most senior executives in the company to lead this business, Pascal Grenier working, and I have very, very confidence that with Pascal, working with the fantastic people that I've seen so far have been met as part of Sabre AirCentre, I think we'll do well in this business.

[Operator]

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

[Cameron Doerksen, Analyst]

I just want to come back to the, I guess, sort of the longer-term margin target that you've got out there, 17%. Obviously, that would imply some nice improvement from where you were pre-pandemic. I am wondering if you could talk a little bit about how you see the returns on capital evolving as your end markets normalize? Because obviously, the capital base has changed here with the acquisition of L3 and also with the pending air center acquisition, which presumably has a lower capital day. So any comments around the return on capital you would expect to see as things normalize?

[Sonya Branco, Executive VP of Finance & CFO]

Yes. We expect the return -- those increased margins to flow through as increasing on the return on capital. So you saw a few years ago before the pandemic, we had driven more than 300 basis points improvement in just a few years, and that's optimized -- disciplined deployment of organic and inorganic capital, right? So the CapEx that we're deploying, the organic capital all have significant incremental returns -- driving 20% to 30% incremental returns within just a few years. And as we've seen, we've got very interesting and accretive acquisitions in inorganic. So as those deliver on our expectations, they'll be driving an improved free cash flow. All of these are free cash flow accretive and return on capital.

[Cameron Doerksen, Analyst]

Okay. And I guess maybe a second question for me, just on the restructuring activity. Just wondering if you could update on where we stand there. I'm particularly interested in the status of the kind of the training network reorganization, some of the training centers have been consolidated, things like that. So where are we in that process?

[Sonya Branco, Executive VP of Finance & CFO]

Absolutely. So some great progress in optimizing the footprint. And as Marc mentioned, relocating them. So taking them where there's lesser demand and deploying them in the Americas and so on to serve market demand. So really kind of optimizing that use of capital and matching up demand or capital with the demand. So in this quarter, we incurred about $13 million of costs, $20 million year-to-date on the restructuring program. And ultimately, this quarter, we did finalize some additional U.K. consolidation. So the U.K. is pretty much done. And we've got the bulk done. However, a couple of remaining consolidations in Europe and in South America that we'll see proving out in Q4.And -- but we already are seeing significant amount of savings. You've seen that on -- in the quarter with a really good step-up on the savings on a year-to-date basis and in the quarter, and you see that on the civil margin, right? So what I'll note is that despite the timing of the delivery revenue on the product, because of the lower deliveries, the SOI margin expanded to 18%. So that was the impact of the higher training revenue with utilization of only 53% and really highlights the great progress on the structural cost savings that we delivered in the quarter.

[Cameron Doerksen, Analyst]

Okay. And would -- I guess, the consolidation activity and the moving of simulators into the U.S., as you mentioned, would that have a negative impact on utilization rates in the quarter?

[Sonya Branco, Executive VP of Finance & CFO]

Well, absolutely. When you're moving a simulator, you turn it down, and it takes a few months to bring it down to move it and then to start it back up. So that does have some noise in the utilization metric, yes.

[Marc Parent, President, CEO & Director]

And don't forget seasonality, Cameron. This was -- it was a different effect, but very similar in terms of business or confidence this year as well as commercial aircraft the next.

[Operator]

Our next question is from Noah Poponak from Goldman Sachs.

[Noah Poponak, Equity Analyst]

Marc, I'm struggling a little bit to follow the explanation of the utilization rate and the attribution to the geographic difference. Because if I look at the progression in the utilization rate, it made it to this kind of 50% -- approximate 50% level for the first time in the September 2020 quarter. And since then, global ASMs have nearly doubled. And I understand you have the different geographic exposures with the waiting to Europe, then Asia Pacific than North America, and that North America has been strongest.But seat miles flown in Europe in that period of time have also almost doubled. They've grown a lot in Asia Pacific. I think your simulator network is more exposed to narrow-body than wide-body. So I'm just not following. Like, I understand you have these exposures outside of North America, but there've been decent recoveries there. And if I just take a sort of weighted average of those geographies relative to your exposure, it doesn't really explain that utilization rate being flat. Can you help me square that circle?

[Marc Parent, President, CEO & Director]

Well, I always had to model that was that simple, to be honest. It's really -- you can't take a weighted average here to look at our business just because the number of training centers that we have across the world. I mean, in the end of the day, and don't forget that when -- if you look at Europe, which you're talking about there, when people are flying a lot, they're not training a lot. And so -- and that's why we always have a seasonal dip in the quarter.So really, really, where you get the big training activity is when they're preparing their -- when you have a steady state, it's talk about they're preparing their crews, making sure that they can ramp up. I mean, what we see right now is if we have utilization rates currently in the Americas that are mid-70s range and that some days higher. And we followed by Europe, which has been approaching 6 -- in Asia, Middle East, which is still a pretty depressed level. I mean it's a fact, it's also moving to around 50%. So -- but I can't stop that. The fact that it's really -- except for the United States, which is pretty darn, like I said, recovered to pre-pandemic levels, you just can't take a weighted average as a perfect correlation to ASM, you just can't.

[Noah Poponak, Equity Analyst]

Is there an element where in a very severe downturn like we had, when you're working your way back up, you have airlines that do their own simulation training, those that have outsourced it and then those that do a combination. That you just have airlines that want to use all their own capacity before they then move back to outsourced capacity. Is that an input?

[Marc Parent, President, CEO & Director]

Well, absolutely. Absolutely. People do that. They would do that, but I would -- we tell you, though, that people that have all that capacity in the end of the day, that they still have to drive a lot of pilot demand with those areas, they have to ramp up like United States, they have to ramp up a huge amount of pad in a short amount of time. Now that's been somewhat mitigated in the Americas by the fact that because of the government support, they haven't had, by and large, reduced the level of activity to a depressed level.So they had, if you like, so power that they -- to not get into that situation. But even with that, and as testimony by higher levels of simulator sales so far this year and the activity level, I see on 4-5 simulators makes me pretty darn optimistic. And that as well, I would basically correlate that with all the conversations I have, specifically with CEOs of airlines across the world, which gives me the confidence that what I'm seeing in the United States is a blueprint for what's going to happen elsewhere.

[Noah Poponak, Equity Analyst]

That makes sense. And then just last one. Can you square us up on where your business jet revenues and margins are at this point on a run rate basis compared to pre-pandemic?

[Marc Parent, President, CEO & Director]

They're high.

[Noah Poponak, Equity Analyst]

Are they above pre pandemic?

[Marc Parent, President, CEO & Director]

We're doing well. We're doing well. Look, I think we're -- I'm not being sleeping here, but the activity level that we see is -- we're higher than pre-COVID levels in the Americas, certainly, we are right now. And I think we're doing well in terms of -- no, I don't think I want to get too much ahead of that prediction stuff that it's -- that's factored into the outlook that we gave with regard to our margin going forward. And it's still surprised. You wouldn't be -- it's a question of levers.We're throwing more level of training activity out of us quasi base of business, the major -- your expense and depreciation. I mean, in this setup, it's somewhat the difference because we're not selling dry time, we're selling courses. So we have to ramp up with structures, that kind of thing. And at the end of the day, I think, look, as Sonya was saying, consider the fact that we're making an 18% margin with 53% utilization. And I think when you look at that, that's got to underscore the progress that we're making.

[Operator]

Our next question is from Benoit Poirier with Desjardins Capital Markets.

[Benoit Poirier]

Yes. Given the current utilization rate, do you see further opportunities to reshuffle or redeploy the similar turf fleet around the network?

[Marc Parent, President, CEO & Director]

We've done a lot of that already. I would tell you, Benoit, it's not to say we won't do more. I was doing some. But for the past couple of quarters, we've been moving everything that's not tied down to that space figuratively speaking. But no, there's been a lot of opportunities there. So we've done that. But I think that's -- I don't think that's a huge factor going forward.

[Benoit Poirier]

Okay. And obviously, with Merlo and also Sabre, you're kind of entering a big addressable market for flight and crew management and optimization solution. So it seems that you're running at about $180 million in terms of exposure versus a market that you call in close to $2 billion. So I would be curious to know more about the opportunity to capture market share among the $2 billion market within the next 5 years, whether you see opportunities to increase your market share on the organic basis and maybe through further M&A?

[Marc Parent, President, CEO & Director]

Look, I think it's too early to talk about that in a while. We tell you, I'm very confident in the business, as I said, our first order of business is to transition the business. I mean, as you will well know. This is a business that is extremely critical to the airline day today, just like training is, even perhaps even more. So for us, is make sure that we transition the business very well without skipping a beat with regards to our customers. At the same time, and that's factored into the price that -- our business case on this acquisition, we've factored money to basically solidify and differentiate the business with airlines and that alone, I think, has a lot of potential.And then you're talking about the organic -- organic growth, just testimony by the growth of aviation by itself, which will be double-digit for quite a few years, just recovering from pandemic. Then comes market share gains. And don't forget what I said about, there's opportunities to me on business aircraft which means virgin territory. But it per -- that's directionally. In terms of quantity, I think it's way too early. We haven't even calls as yet.

[Benoit Poirier]

Okay. And last one for me, maybe for Sonya. In terms of net debt-to-EBITDA from the core time post the Sabre acquisition, what about the timing to get back to 2.5x and assuming there are still further M&A opportunities on the horizon, what would be kind of the MAX level you would feel comfortable with.

[Sonya Branco, Executive VP of Finance & CFO]

Listen, we always balance -- a solid balance sheet with these accretive investments. And so the timing of whether it's organic or inorganic investments will drive some of that. So we're at investment-grade profile, and that's where we stay comfortable, which is in the 35% to 45% net debt to cap. So what I'll say is we expect it to go a little higher in Q4 and then to deliver quickly as we generate cash and generate cash out of these new acquisitions. And as our EBITDA ramps up quickly and so it drives an improved or net debt to -EBITDA ratio.

[Marc Parent, President, CEO & Director]

Operator, I see we've run a little longer than usual here. I think we'd like to use the last few minutes if we can to open the line to members of the media should there be any questions from media.

[Operator]

Certainly. [Operator Instructions] Our first question is from [ Andre Ala ] from LaSalle, Quebec.

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[Marc Parent, President, CEO & Director]

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[Marc Parent, President, CEO & Director]

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[Sonya Branco, Executive VP of Finance & CFO]

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[Marc Parent, President, CEO & Director]

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[Marc Parent, President, CEO & Director]

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[Marc Parent, President, CEO & Director]

[Foreign Language] Thank you, operator. So that's all the time we have for the call today. I want to thank all participants [Foreign Language]. And I'd like to remind listeners that a transcript of today's call can be found on CAE's website at cae.com. Thank you.

[Operator]

Thank you. That does conclude the conference call for today. We thank you all for your participation, and we ask that you please disconnect your lines.