CAE Inc

TSX:CAE

Earnings Call Analysis

Strong demand drives CAE's growth as margins and backlog increase.

CAE's second-quarter performance reflects robust demand in civil and defense sectors, with revenue rising 8% to $1.14 billion. Civil revenue grew 12%, bolstered by a 13% year-over-year backlog increase, now at $6.7 billion. Defense orders surged, achieving a record $11.4 billion backlog, driven by a $1.7 billion contract. The company anticipates approximately 10% annual growth in civil operating income for fiscal 2025, targeting margins between 22-23%. Additionally, defense segment margins are expected to rise to 6-7%. CAE remains confident in long-term demand despite near-term challenges in aircraft supply.

Quarterly Overview: Solid Performance Amid Challenges

In the second quarter of fiscal 2025, CAE reported consolidated revenue of $1.14 billion, reflecting an 8% increase from last year. The adjusted segmented operating income grew to $149 million from $135.6 million, while the quarterly adjusted EPS was $0.24, slightly down from $0.26 in the same quarter last year. Despite challenges stemming from OEM aircraft supply disruptions and low pilot hiring in the U.S., the company experienced strong demand for both civil and defense training solutions, driven by a robust backlog and strong execution.

Restructuring Success: Cost Management and Future Savings

CAE incurred restructuring costs of $30.9 million this quarter, including $5.1 million for the completed integration of AirCentre and $25.8 million related to a restructuring program. This restructuring is now complete, and the company anticipates achieving annual cost savings of approximately $20 million by the end of the next fiscal year, which will positively impact free cash flow moving forward.

Civil Aviation Training Sector: Growth and Book-to-Bill Ratio

In the Civil sector, CAE achieved second-quarter revenue of $640.7 million, a 12% increase from last year. The business booked $693 million in orders, resulting in a book-to-bill ratio of 1.08. CAE's total civil adjusted backlog reached a record $6.7 billion, up 13% year-over-year. The average training center utilization was 70%, down just 1 percentage point from the prior year, indicating strong operational effectiveness despite temporary pressures from low pilot hiring and initial training churn.

Defense Sector: Strong Backlog and Margin Improvement

The Defense segment delivered revenue of $495.9 million, marking a 4% increase compared to the same quarter last year. The adjusted segment operating income surged by 55% to $33.1 million, achieving a margin of 6.7%. CAE recorded $2.3 billion in orders, resulting in a remarkable book-to-bill ratio of 4.6, and an adjusted backlog grew to $11.4 billion, up nearly 94% year-over-year. These results underscore robust demand and effective contract execution.

Future Expectations: Guidance on Revenue and Operational Efficiency

CAE remains optimistic about upcoming quarters, expecting stronger performance in both segments during the second half of the fiscal year. The company maintains a target for approximately 10% annual growth in Civil adjusted segment operating income, with expected margins to fall between 22% and 23%. For Defense, CAE expects adjusted operating income margins to reach 6% to 7%. Continued improvements in operational efficiency and the potential for contract wins signal a positive outlook.

Macro Environment: Opportunities and Risks Ahead

The outlook for CAE remains strong due to the increasing demand for pilot training solutions driven by the anticipated doubling of the global commercial jet fleet in the next two decades. While there are temporary challenges due to pilot hiring slowdowns and OEM supply disruptions, CAE's substantial backlog positions it well for future growth. Additionally, the resolution of recent labor disputes affecting suppliers is expected to improve aircraft delivery rates, providing further support for CAE's business.

Strategic Initiatives: Investments in Growth and Technology

CAE's acquisition of a majority stake in its SIMCOM joint venture highlights its commitment to expanding its business aviation training market. This strategic investment is expected to boost recurring revenue and enhance CAE's ability to provide top-tier training solutions in the fast-growing fractional and charter aviation markets. The financial benefits of this acquisition are projected to positively impact earnings and free cash flow in the upcoming fiscal year.

Conclusion: A Resilient Future Amid Change

In conclusion, CAE's second-quarter performance reflects a resilient business model amidst ongoing challenges in the aviation sector. The company's strategies, particularly in restructuring and enhancing operational efficiencies, are set to yield long-term benefits. With significant backlogs in both the Civil and Defense segments and strong order flows, CAE is well-positioned for sustained growth and profitability in the coming years.

Earnings Call Transcript 2025-Q2

[Operator]

Good day, ladies and gentlemen. Welcome to the CAE Second Quarter Financial Results for Fiscal Year 2025 Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions]

I would now like to turn the conference over to Mr. Andrew Arnovitz. Please go ahead, Mr. Arnovitz.

[Andrew Arnovitz, executive]

Good morning, everyone, and thank you for joining us. 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 13, 2024, and accordingly, are subject to change.

Such statements are based on assumptions that may not materialize and are subject to risks and uncertainties. Actual results may differ materially, and listeners are cautioned not to place undue reliance on these forward-looking statements. A description of the risks, factors and assumptions that may affect future results is contained in CAE's annual MD&A available on our corporate website and in our filings with the Canadian Securities Administrators on SEDAR+ and the U.S. Securities and Exchange Commission on EDGAR.

With the divestiture of CAE Healthcare business in fiscal 2024, all comparative figures discussed here and our financial results have been reclassified to reflect discontinued operations. On the call with me this morning are Marc Parent, CAE's President and Chief Executive Officer; and Constantino Malatesta, our Interim Chief Financial Officer. Nick Leontidis, CAE's Chief Operating Officer is on hand for the question period with financial analysts.

I'm sure you've all seen by now the news release we issued yesterday afternoon that accompanied our Q2 results that after 20 years at CAE, including the last 15 as President and Chief Executive Officer. And after spearheading, the making of CAE is a global leader in training for simulation for civil aviation and defense and security forces. Marc Parent will be leading the company at next year's Annual General Meeting in August 2025 as part of an ongoing succession plan.

Until this time, Marc will continue to lead CAE in his role as CEO. The Board of Directors has retained a leading executive search firm to conduct a comprehensive global search, which will include evaluating internal and external candidates to identify a new CEO to lead the company into the future.

The Human Resources Committee of the Board will oversee the search process and support and assistance for Marc. On behalf of all of us at CAE, I'd like to say that we're incredibly grateful for Marc's exemplary leadership with lasting impact on CAE and on the aerospace industry are unanimously recognized, and we look forward to continuing the benefit from his leadership, so next year's AGM.

With that, I will turn the call over to Marc.

[Marc Parent, executive]

Thank you, Andrew, for those kind words, and good morning to everyone joining us on the call. As Andrew said, today is business as usual. And I do want to stay focused on the quarterly results, but this is a big moment from CAE and for me personally.

So I'll just take a moment to say that it's been really the privilege of a lifetime to lead this company. I can't tell you how proud I am of what our team has accomplished, and I'm very thankful for all the support that I've received throughout the years.

Thanks to our extraordinary people at CAE. We can proudly say that over the last couple of decades, we've absolutely reshaped the aerospace industry by creating something that's truly unique. CAE trains more pilots than anyone else in the world by far. And by leveraging technology, we prepare countless people for the moments that matter and fulfilled our mission to make the world safer. This is the right time for a transition process. And as our financial performance shows, which we'll get to in just a moment, we're in a solid financial position.

Our markets are on a long-term growth trajectory and our competitive position in each of those markets is strong. Our innovative technology and our outstanding people now set the standard for safety and training worldwide, and I'm confident that he has a very bright future ahead.

Now, turning to the business at hand in the second quarter. Our performance in the second quarter reflects strong demand for Civil and Defense market solutions and despite some of the challenges we faced in commercial aviation from OEM aircraft supply disruptions, we've achieved solid results. Additionally, we extended our positive trend in defense this quarter with growth and margin enhancements that are largely attributable to our dedication to focus, customer centricity and operational excellence across all of CAE's P&L, highlighting our strong position in growth markets. We secured nearly $3 billion in total orders this quarter, bringing our adjusted backlog to a record $18 billion, which is up over 50% compared to just over a year ago.

In Civil, we delivered 18 full flight simulators to customers during the quarter, and our average training center utilization was 70%, a decrease of 1 percentage point compared to the previous year. This quarter, we experienced year-over-year growth in business aviation training, commercial training in Asia Pacific and similar products. However, mainly due to OEM aircraft supply disruptions, U.S. pilot hiring remained low during the quarter, impacting the incremental pilot train demand, we would have expected under more normal conditions.

Overall, commercial aviation training utilization was approximately 3 percentage points lower than last year on average, which is still very good. it would have been even stronger, if not for the temporary pressures on initial training and pilot churn in the Americas. We continue to deliver strong order flow in the quarter in a large secular growth market, which sees highly differentiated training and flight operations software solutions.

We booked $693 million in orders with civil customers worldwide for a 1.08 book-to-sales ratio. On revenue that's 12% higher than Q2 of last year. We ended the quarter with a record $6.7 billion total Civil adjusted backlog, which is up 13% year-over-year.

We received orders for 16 full-flight simulators in the quarter, including 4 based on the COMAC C919 airliner, and we signed long-term training services and flight operation solution contracts with commercial and business jet operators worldwide. In Defense, performance continued to track our expectations driven by strong execution, risk retirement, significant backlog growth and improving backlog quality. We made excellent progress during the quarter to renew growth and increase margins including successfully concluding one of the legacy contracts from the backlog and securing a $1.7 billion transformative award under Canada's future aircrew training program.

For the quarter, we recorded orders worth $2.3 billion, resulting in a 4.6x book-to-sales ratio, leading to a record $11.4 billion in defense adjusted backlog. This is up approximately 94% year-over-year. Over the past 12 months, the Defence book-to-sales ratio was 2.04x.

With that, I will now turn the call over to Dino, who will provide additional details about our financial performance. Dino?

[Sonya Branco, executive]

Thank you, Marc, and good morning, everyone. Consolidated revenue was $1.14 billion, 8% higher compared to the second quarter last year while adjusted segmented operating income was $149.0 million compared to $135.6 million in the second quarter last year.

Our quarterly adjusted EPS was $0.24, that compares to $0.26 in the second quarter last year. We incurred restructuring, integration and acquisition costs of $30.9 million during the quarter, which is comprised of $5.1 million for the now completed integration of AirCentre and $25.8 million in connection with the restructuring program to streamline CAE's operating model and portfolio, optimize our cost structure and create efficiencies.

This restructuring program was also completed in the second quarter, and no further restructuring expenses are expected. The conclusion of these programs is beneficial to the company's free cash flow profile going forward. Also, we continue to expect to fully achieve annual run rate cost savings of approximately $20 million by the end of next fiscal year.

Net finance expense this quarter amounted to $52.9 million, which is up from $49.5 million in the preceding quarter and $47.1 million in the second quarter last year. This is mainly the result of higher finance expense on lease liabilities in support of training network expansions, partially offset by lower finance expense on long-term debt due to a decreased level of borrowings during the period.

Income tax expense this quarter was $10.4 million, for an effective tax rate of 16%. The adjusted effective income tax rate was 18%, which is the basis for the adjusted EPS calculation. Net cash from operating activities this quarter was $162.1 million compared to $180.2 million in the second quarter of fiscal 2024. Free cash flow was $140 million compared to $147.4 million in the second quarter last year. The decrease was mainly due to a lower contribution in noncash working capital. As in previous years, we usually expect the portion of our noncash working capital in the first half to reverse in the second half.

We also continue to target an average 100% conversion of adjusted net income to free cash flow for the year. Capital expenditures totaled $57.0 million this quarter, with approximately 65% invested in growth, mainly to add capacity to our global training network to deliver on the long-term training contracts in our backlog.

We are now expecting total CapEx for fiscal 2025 to be slightly below our previously estimated range, which is indicated at $50 million to $100 million higher than the $330 million we invested in fiscal 2024. This change reflects the agility of our investment process and our ability to move in lockstep with the market.

Our net debt position at the end of the quarter was approximately $3.1 billion for a net debt to adjusted EBITDA of 3.25x at the end of the quarter. Before the impact of our legacy contracts, net debt to adjusted EBITDA was 2.97x. Our increased investment in [indiscernible] does not change our leverage expectations. We continue to expect to be below 3x net debt to adjusted EBITDA by the end of the fiscal year, and our deleveraging focus remains the same.

During the quarter, CAE repurchased and canceled a total of 392,730 common shares under its normal course issuer bid, NCIB, which began on May 30, 2024, and at weighted average price of $24.43 per common share for a total consideration of $9.6 million.

Now turning to our segmented performance. In Civil, second quarter revenue grew 12% year-over-year to $640.7 million, while adjusted segmented operating income rose 100% [indiscernible] to $115.9 million, resulting in an 18.1% margin. With 18 full-flight simulators delivered this quarter, we saw a notable shift in revenue mix with a higher proportion from products compared to last year when we delivered 11.

Defense revenue rose 4% to $495.9 million while adjusted segment and operating income rose 55% to $33.1 million, delivering a 6.7% margin right on target, thanks to strong execution from the team.

Legacy contracts remain on track with cost and schedules well managed. As planned, we concluded one legacy contract this quarter and on track to finalize another one next quarter with yet another following in the quarter after. This quarter, legacy contracts contributed around 30 basis points of margin dilution. Without this impact, the adjusted segment operating income for margin for defense would have been 7%.

With that, I will ask Marc to discuss the way forward.

[Marc Parent, executive]

Thanks, Dino. For CAE overall, a key factor driving long-term demand in both our Civil and Defence segments is the high level of demand for pilot training demands growth and replace those that are retiring.

The outlook for Aviation Training solutions in Civil is as strong as ever, driven by growth in air travel, the need for more pilots and a requirement for continuous training to keep up with evolving aviation technologies as well as regulations.

Our business is largely supported by the regulator train pilots and crews needs to maintain certification for the global fleet of commercial and business aircraft, and this will only compound as the in-service commercial jet fleet roughly doubles within the next 2 decades. Factors like the aging pilot workforce, mandatory retirements and sustained growth for air travel solidify our long-term confidence in CAE's future.

OEM aircraft supply disruptions at testified with recent labor disputes. But with that now positively resolved, we believe that the airline industry can now begin to gradually recover from the narrow-body supply challenges with some relief expected in the coming period as grounded aircraft return service and new aircraft delivery rates eventually rise. Underscoring the temporary nature of these supply, Boeing and Airbus have a combined order backlog of nearly 15,000 aircraft amounting to about a decade's worth of deliveries.

With regards to business aviation specifically, I'm thrilled about the agreement announced lastly to purchase a majority stake in our SIMCOM joint venture. This strategic organic investment strengthens our position in the core business aviation training market, boost recurring revenue and deepens our commitment to deliver top-tier training solutions or a vital customer segment.

Under this agreement, both CAE and SIMCOM have also extended our exclusive business aviation training partnerships with FlexJet and its affiliates by an additional 5 years during a 15-year exclusivity period. This long-term agreement functions like an outsourcing agreement with one of the world's premier luxury private jet companies, giving CAE increased exposure to the rapidly growing fractional jet and charter aviation markets.

We anticipate that this investment will be accretive to both earnings and free cash flow in our first full year going forward. Regarding our civil outlook, disruptions in aircraft supply have indeed impacted an incremental portion of the band that we normally see in our commercial aviation training division. Consequently, we implemented measures to enhance operational efficiency and mitigate the decrease in training demand despite a persistently low pilot hiring levels in the United States. Training bookings for our third and fourth quarters are higher, reinforcing our expectation for a stronger performance in the latter half of the fiscal year.

Additional factors that underlying our expectations for a stronger second half includes the seasonal improvements in commercial and business aviation. Accretion for our increased investment in SIMCOM and an uptick in volume and profitability from full flight simulator deliveries. On balance, we're maintaining our target of approximately 10% annual growth in Civil adjusted segment operating income for fiscal 2025 and we continue to expect an annual Civil adjusted segment operating income margin between -- to be between 22% and 23%, with ample room to grow beyond that on volume efficiencies and mix.

In Defense, we're well positioned in a growth market as the sector moves into a prolonged up cycle with increased budgets across NATO and allied nations. Rising geopolitical tensions are driving a focus on near peer threats, defense modernization and readiness, fueling demand for the training and simulation solutions that we offer. Our expertise spanning Civil aviation and Defence uniquely equips us to meet these needs. Demand for our training solutions remains strong, driven by a global shortage of uniform personnel, prompting militaries to partner with CAE to support readiness.

By leveraging our position on programs like the Canadians back, we aim to advance multi-domain training and secure synthetic environments across our global network. The foundation is solidly set for renewed growth and margin expansion in our defense business in the coming periods. We've strengthened our processes, sharpened our strategy and enhanced our talent to improve efficiency and execution. Meanwhile, we've achieved transformative growth in our backlog of high-quality programs.

Our fiscal 2025 defense outlook reflects the business' rebaseline, risk baselining and improved visibility that it provides. We anticipate annual revenue growth in the low to mid-single digits and expect Defence adjusted segment operating income margin to increase to the 6% to 7% range with performance like civil weighted more towards the second half of the year.

With that, I thank you for your attention, and we're now ready to answer your questions.

[Andrew Arnovitz, executive]

Thank you, Marc. Operator, we'd now like to open the line to members of the [indiscernible] Community.

[Operator]

[Operator Instructions] Our first question is from Kevin Chiang with CIBC.

[Kevin Chiang, analyst]

Congrats, Marc, on your pending retirement here. Maybe just on Defence, you called out 7% SOI margins excluding the legacy contracts, you have a target of eventually getting to double digits here over time. Just how you think about bridging that gap? Is that 10% of the backlog today? Or does this require continued restructuring and how you're bidding and what you're winning in order to ultimately get to that double-digit EBIT margin.

[Marc Parent, executive]

Look, I think the factors that's going to drive the growth of the same ones that we've talked before. It's really -- and thanks for your comment, Kevin, by the way, about me. I appreciate it.

It really comes back to the retirement of the legacy contract risk, and we're right on track on that one and really replacing contracts in our backlog that are -- that we've won over the last few years and that are lesser margin than the 10% or so that we target and replacing them with a contract at higher margin. And that's really what's happening here. And I think you can see with the growth in the backlog that we're having quite amount of good success on that front. I don't know Dino or [indiscernible] have to add anything to that.

[Unknown Executive]

There are no things, Marc [indiscernible]. So absolutely, I think what Marc said is absolutely bang on there. We -- it's really based on continuing strong execution, right? And the team has planned and securing growth for those more transformative backlog. As an example of that $1.7 billion subcontracted [indiscernible] in Q2. The defence pipeline is still strong at $7.2 billion. We'll see the gradual increase over time in the next second half year. Q2 probably be very similar to -- sorry, Q3 probably similar to Q2 with some improvement and then a higher improvement in the fourth quarter.

[Kevin Chiang, analyst]

Okay. That's helpful. And maybe just my second one here, you're holding the margin guide for Civil. I'm sure SIMCOM helps here in the back half of your fiscal year, but you also [indiscernible]

[Andrew Arnovitz, executive]

Operator, are you still there?

[Kevin Chiang, analyst]

Can you hear me?

[Operator]

Yes, the operator is here, and I can hear Mr. Chiang. Certainly, apologies Mr. Chiang.

Our next question is from Sheila Kahyaoglu with Jefferies.

[Sheila Kahyaoglu, analyst]

And congratulations, Marc, on an accomplishment over the last 2 decades or so. I'm going to steal the last question. So maybe let's if we could talk about the civil inflection that's underwritten for the second half, how do we think about that? What's driving some of that SIMCOM white operations, software profitability and cost out -- maybe if you could comment on some of the drivers into the second half? And then my follow-up would be on just the GTF grounding, has that shifted over the last 3 months?

[Marc Parent, executive]

Thanks, Sheila. And again, thanks for your comments as well. Look, when we look at things -- let's think about all the factors that are affecting us here, I think in commercial aviation [indiscernible], you highlighted the issues that are affecting us is still affecting us.

The lower deliveries at [indiscernible] exacerbated by the strike. Of course, that's resolved now. The impacts from all the grounded aircraft -- the Airbus aircraft because of the GTF, and that's come off the peak itself. We are cooling off this last summer, really was very hot pilot hiring trend in the United States. So look, I mean, as we look at the period ahead and what underlies our forecast is that -- as I mentioned, the impact from [indiscernible] impact of the GTF on Airbus grounding is improving.

[indiscernible] AOGs are behind us. We see some modest, I'd say, modest but definitely uptick towards more normal pilot hiring by U.S. airlines. We do expect an improvement at some point in Boeing deliveries. Although I would say like anybody else, that remains probably our biggest question mark, something that we're watching. So -- but we see -- taking all of that into account specifically for airlines, what we see is improvements in the booking in Q3, Q4. So there's clearly some pluses and minus in the outlook, and we've taken control of our own destiny with that in basically managing our costs. And of course, we see the strong position, we have in business aviation training. The contribution of SIMCOM with that. The fact that coming back to airlines as well, I think we tend to look at the U.S. a lot, but I can tell you activity in Asia Pacific is very strong.

So I think all of that is what's contributing to optimism or maybe just Nick, would you like to add anything to do that? -- this question?

[Nick Leontidis, executive]

Yes. I mean, I guess from a utilization, we expect training -- the training business, meaning commercial and business to be much higher in the second half and historically, Q4 is our biggest quarter and looks like it's going to be the same this quarter.

We are going to get contribution from SIMCOM that we didn't -- that comes with the acquisition, and we're also going to see better contribution by flight services. So you put all that together, and these are kind of higher-margin components you put all this together, gives us the confidence that the -- whatever outlook we've given you 22%, we're going to be able to hold it.

[Operator]

Next question is from Fadi Chamoun with BMO Capital Markets.

[Fadi Chamoun, analyst]

Congratulations, Marc, on your retirement. Is the full flight simulator delivery target still in the 50 range this year? Or has that changed? And I wanted to ask also like if you can give us some perspective on kind of the supply chain issues in the aviation, like if the aircraft deliveries from Boeing in particular, but generally Airbus and Boeing, kind of struggle to get off the ground in the next 6 to 12 months because of the supply of initiatives like -- can we potentially start seeing some of these issues that you're experiencing in the U.S. now spread over to other regions?

Is there potential risk for some delivery deferrals? I'm just trying to kind of understand from your conversation with customers. What does this look like? Are they kind of starting to get nervous about potentially aircraft deferrals driving some deferrals on the FFS delivery side or just looking over the next kind of 2 to 4 quarters, if you can provide some perspective on that, that would be great.

[Marc Parent, executive]

Okay. Thanks again, Fadi, for your comments with regard to myself and it was pleasure working with [indiscernible] years, and I look forward to the next 2 to 3 quarters to do that. I think going back to some of your questions. I start with the first one. Yes, we're still aiming for over 50 delivery this year, that hasn't changed. Then, we don't expect that to change either. Look, I think the factors you talked about, look, we're obviously not immune to what may happen in the market, clearly, in terms of delivery of aircraft. But when I look at the situation I talked about with the groundings, we are off the feet because you should -- with regard to engines, the strike at Boeing is resolved. And I'm sure they're doing their utmost to get deliveries restarted safely and then Boeing is a great company. That's going to happen. So -- and we've taken, I think, you're pretty saying with you of how that all would play out.

And in the mean time, what you see is on our side is managing our cost, managing our CapEx to stay in lockstep of demand. With regards to sentiment out there, look, again, we're a global company. So -- when I looked at the situation and utilization in Asia Pacific very hot and -- that's still with a situation that specifically, if I look at geographies like China, there really hasn't been a recovery into international travel, very big on dimension, but not [indiscernible] still play there.

But again, I don't know maybe, Nick, you want to provide more color based on what you see out there?

[Nick Leontidis, executive]

Well, yes. I mean I think the opportunities for us right now are especially in full flight simulator. As Marc said, the deliveries, we don't see any softness. We don't see -- like we don't see people backing off from what they've ordered. I think in terms of the numbers, we'll see by the end of the year, but we are winning business from places like Asia right these days more than we did in the last couple of years where they were kind of coming out of it.

So China, Marc mentioned that we did see some orders out of China. And I think the -- overall, I don't -- I mean, at least for now, we don't see any change. Now, the deliveries that you mentioned, I mean they're low, but they're not that -- they're actually not that different to last year.

So it's on both sides, Airbus and Boeing. So they are lower, for sure, but they're actually very similar to what was delivered last year. So there are still opportunities for us, new simulator drive, capacity needs in that drives, either the training business or the products business to demand. And so we're capturing it wherever it is geographical.

[Marc Parent, executive]

Maybe just to add the last point to [indiscernible] these factors, they're clearly temporary. That's the thing in my remarks, there's a backlog of 15,000 airplanes that Airbus and Boeing has to deliver over the next year. That's a lot of pilot demand across the world. That's -- and compound that with pilot hiring, any thing [indiscernible] want to think about where that growth is going to come from.

I'm just looking at just one factor. If you think about India, we do a lot of business in India, where we're very strong there. And there's about -- in terms of just wide-body aircraft, for a population of what is about 1.3 billion people, there's about 60 wide-body aircraft in the end.

In Singapore alone, is about -- I think about 250, think about that. I mean, clearly, the ratios won't be perfect, but to actually tell you how much growth is remaining in just one country or with one that doesn't have a lot of competing infrastructure that basically competes with airlines. So I'm just -- that gives you an idea where all those airplanes have got to go to, and they've been spoken for. They're going to be delivered. So make no mistake, this is a temporary situation we see here. We're quite convinced of that.

[Operator]

Next question is from James McGarragle with RBC Capital Markets.

[James McGarragle, analyst]

Congrats on a really good quarter. I just had a question on the book-to-bill. It came in above 1 this quarter, but below what we've been seeing from your team in the past few quarters, and then we saw the CapEx guide come down.

So anything to read into there? And anything changed about how you're looking at the longer-term growth opportunity in civil? Or is it just more of the impact of near-term headwinds from OEM delays and pilot hiring in the Americas?

[Marc Parent, executive]

Actually, the way we look at it, the civil book-to-bill ratio is still comfortably above 1, strong growth. And of course, you got to look at it, that growth is on top of quite a rise in revenue. So that tells you the market is still pretty hot. But Nick, do you want to comment on that?

[Nick Leontidis, executive]

Yes. I don't think there's a need to read into it. It's above 1. As Marc said, revenue is $640 million, so it's a high number compared to last year, which is about $68 million lower. So I think we get the opportunities book-to-bill above one. So you should take that as growth -- maybe on the CapEx side.

Effectively, we have changed the guidance to specify that. We expect CapEx in the 2025 to be slightly below the previous guided range of $50 million to $100 million more than FY '24. FY '24 number was $330 million. But again, this is an example of our agility in our investment process and to move lockstep with the market as we don't deploy simulators on speculation. Our highest returns we get are from our organic investments, track record is delivering 20% to 30% range incremental pretax ROCE on organic growth. So we continue to monitor the market situation, but we never want to be ahead of our customers. So discipline is key.

[James McGarragle, analyst]

Appreciate the color. And then on the Defence margin guide, it implies continued improvement, as you mentioned, in Q3 and then into Q4. So can you just provide some more color on what's driving that? Is there a seasonality in the defense business at all? I'm just trying to get a better understanding of the margin exit rate and whether or not that represents a good run rate to use for fiscal 2026.

I'll turn the line over after that.

[Marc Parent, executive]

Well, it's -- I mean we're not going to get into fiscal '26, right, at this point, except to say that it's going to be right in line in the guidance that we've previously given that we were definitely reiterating and feel very confident about the guidance we gave in regards to margins and growth for defence this year.

And, I mean, where that's coming from, where that's going maybe [indiscernible].

[Unknown Executive]

Well, it's coming from both sides, as I think we described at the beginning of the year, the cost savings are definitely running through the earning through the P&L now. And obviously, we expect that to continue to -- some of these cost savings will only be realized by the end of the year.

So it's good so far and also, of course, the execution and the order. So there is new business like FAcT, for example, which is only getting started now. And this new business is going to drive growth in the -- well, not just the backlog, but obviously on the P&L.

So FAcT is a big program. It's going to -- as an example, we've announced a number of other programs recently in Canada, in particular, and we've also announced some programs wins in the U.S. In terms of -- it's just better execution, I think, is the way you should read it. And that comes with cost savings, but also comes with winning good orders.

So I would say, obviously, we don't have -- we've given you this guidance. We have the visibility to get us there, and you should take it to the bank.

[Operator]

Next question is from Matthew Lee with Canaccord.

[Matthew Lee, analyst]

I call the sentiment, Marc. On the SIMCOM stake acquisition, you kind of mentioned in the past that consolidating JV Partners is an important avenue of organic investment for you. Do you see other opportunities or stable of partners to make further transactions of that nature in the medium term? Or is this one a bit more attractive right now just given how well [indiscernible] performing?

[Marc Parent, executive]

Well, look, I'll reiterate what I've said about this transaction. I'm very excited about it. I was very excited about getting into a joint venture with our partner in that business in the first place. But -- to me, when you look at things like this, acquisitions happen when they happen, right? And this one is kind of not really an acquisition or organic investments because we're just consolidating the remaining -- the large part of the remaining ownership of that business.

So look, if there's more -- I've always said it, there's more opportunities to consolidate our joint ventures. I mean those are kinds of transactions. It's like that are most attractive because we know the business, obviously, and we're in a very strong position to be able to execute on them because we know them. And then obviously, they're the wheelhouse. This particular one is a really, really great example of basically getting a partner that is an extremely strong player in fractional and charter market. It really doesn't getting better in the most profitable part of our several business [indiscernible].

[Andrew Arnovitz, executive]

And then maybe if I can add to that, effectively, I think this is considering normal course capital deployment evaluation, right, like we do when we consider deployments of the network, investments in JVs, consolidation opportunities for the network -- so again, very excited about the opportunity with SIMCOM. It is our highest margin subsegment. And it does secure -- sorry, a key customer, it's an extension of 15 years exclusivity for the period with Flexjet. So really excited. After the first year, I think we can expect maybe low single-digit EPS accretion and mid-digit EBITDA and free cash flow accretion. That starts now.

[Matthew Lee, analyst]

Okay. That's helpful. And then maybe 1 on the cost side. The restructuring program seems to expect to take about $20 million of the cost base, and that's great. Are there any other low-hanging fruit on the OpEx side where costs come out one of the areas that could perhaps be a little bit more efficient?

[Andrew Arnovitz, executive]

So again, that's our disciplined approach to managing capital and costs. Basically, we're looking at various opportunities. One of the examples is managing CapEx, right, where we reduced the guidance this year -- is to be in lockstep with the market.

We'll do that as well with all the other types of investment opportunities in research and development and in our overall SG&A. You see SG&A actually being a little bit lower this quarter compared to last year and in previous quarters, and that is again a reflection of our cost savings kicking in, always looking for efficiencies and -- it's a part of our disciplined approach in how we spend our money.

[Operator]

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

[Cameron Doerksen, analyst]

Yes, let me echo congratulations to Marc on your retirement. I guess a question around the new U.S. incoming administration. Just wondering if you can maybe discuss some of the risks that you might see and potentially even opportunities with the change in government in the U.S.

I guess one of the things that is top of mind with a lot of investors is around the impact from tariffs. And obviously, aerospace products has historically been exempted for most of those tariffs, but now we've got a incoming President talking about a 10% blanket tariff on anything important into the U.S. I'm just wondering about how you see that risk for CAE and potentially if there's other risks or opportunities that you see?

[Marc Parent, executive]

Well, I'm sure you'll -- pardon me, if I don't speculate on the situation. But obviously, we're going to monitor it. We're certainly not forecasting any kind of significant impact per se. [indiscernible] remember, we have a very strong presence in the United States. Just to give you an idea of that of a statistic, I've talked about in the past, as you look at just pilot training, military pilot training. We train all 43,000 air crew in the U.S. military.

At some point, [indiscernible] all branches, Army, Air Force, Marines, Navy. So -- and 50% of our employees are there. It's our largest market. So look, we play -- just going back to the what I'm saying about the military, we play a vital role in supporting national security. I mean just from that standpoint, in terms of the overall market, I think you've seen a reaction to the market. I think overall market, I think it's good. In some segments that we have, like in business aircraft, I think it's a positive, definitely. So, look, I think we're going to continue monitor situation, but I don't really see any changes near or longer term at the moment.

Of course, we'll keep monitoring the situation.

[Cameron Doerksen, analyst]

Okay. No, that's fair enough. And just very quickly, just on the defense side, I just wanted to ask if you had any I guess, incremental success in accelerating the retirement of some of the legacy contracts. I know that was something that was a goal to maybe get these completed earlier than what's currently scheduled.

[Marc Parent, executive]

Well, look, I'm going to ask the question, and I'm very happy about the progress that we're making there. We retired one where -- well, there's another 1 -- that's a big 1 that we're requiring literally any day now, literally, and we're on pace.

Exactly we want to be, in fact, maybe slightly ahead, and Nick you want to add in more detail.

[Nick Leontidis, executive]

Yes. I was going to say, overall, I think we're on track to where we want to be with these programs. I think we're over the hump in terms of trying to ring-fence them to a scope that is manageable. And we will -- obviously, if there's any change, we'll let everybody know. But right now, the guidance we've given on when these programs are going to retire are good and the budgets that we have to retire them were also good.

So I think we just kind of run through, obviously, if we can retire them early, we will. But, I mean, that's not the plan at the moment.

[Andrew Arnovitz, executive]

Yes. I think the key takeaway there is good progress to retire their legacy contracts as planned as anticipated on this quarter. One expected next quarter and one in Q4. We're aiming to outperform on that if we can retire more risks, but it's not planned as track.

[Operator]

Next question is from Tim James with TD Cohen.

[Tim James, analyst]

Marc, congratulations on the retirement, certainly well deserved. My first question, just in terms of growth in the network SEU growth. Is it -- would it be correct to assume that it really focused in the kind of short to medium term on business jet platforms, just given the dynamics in the commercial market currently?

[Marc Parent, executive]

Maybe I turn it over to Nick.

[Nick Leontidis, executive]

Yes. No, actually, it's both. I mean, we are -- we have demand to deploy capacity on the commercial side and on the business side as well. When you take the CapEx number that we've given you guidance, the number of simulators that we're deploying is roughly the same as what you would have seen last year. And we have customers -- we have customers that continue to grow, and we have new customers. And so between the 2, we are still deploying [indiscernible] commercial side.

[Tim James, analyst]

Okay. And my follow-up question, have challenges facing commercial training just really been creating a volume impact, a throughput impact? Or has there been a pricing impact there as well in that business?

[Marc Parent, executive]

No, it's just volume. I mean most of the customers that we have in terms of pricing, I mean these things are set in the contract. So it's really just some lower volume in some places that drives the pressure.

[Operator]

The next question is from Lauren Epstein with Bank of America.

[Jordan Lyonnais, analyst]

This is Jordan Lyonnais on for Lauren. For the back half of the year for the Civil margins, how much of that should we be expecting to come through from just software sales similar to 4Q of last year?

[Marc Parent, executive]

You're hard to comment, but I think we got the question.

[Andrew Arnovitz, executive]

Yes, I think the question is [indiscernible] percentage of software [indiscernible] the integration of the software business, and that's important on a go-forward basis, we won't be expecting any additional costs there. We are still converting and going through the process to converting those contracts onto our platforms. It's a small percentage going forward in the second half.

[Operator]

The next question is from Noah Poponak with Goldman Sachs.

[Noah Poponak, analyst]

And Marc, I echo the sentiment of others on the call, and thanks for the time that you spent with us over the years.

[Marc Parent, executive]

Thank you.

[Noah Poponak, analyst]

Can you guys talk about this defense backlog growth you've had and how we should think about that flowing through your top line. I mean it's huge growth in the backlog. Are the things going in so long duration that you stay in this low to mid-single-digit organic revenue growth range? Or could we see over the medium term, a pretty significant acceleration in your growth rate that you'd often see with a doubling of a backlog.

[Marc Parent, executive]

Too early to provide longer-term growth that we've given and I wouldn't want to change it at this point, except [indiscernible] it really depends a lot on mix. And I think you -- your question, I think underline that, Noah, because -- if you look at some of the contracts we've won in and I'll invite Nick provide a little bit more detail here.

But, for example, some of the big backlog growth, not all of it, but some of the big backlog growth you see is, for example, from the FAcT contract in Canada. So what that is really reiterating a bit of what I said before is us winning pilot training for Canadian military for the next 25 years. So a lot of that backlog is us deliver training for the Canadian Air Force, to train our pilots and Canadian not just pilots, but electronic warfare officers, that kind of thing, complete outsourcing of that segment for the next 25 years.

And we already do some of that today, by the way. So some of that is income replacement, but it's just a part of it, and I would say a relatively small part of it because the contract itself, it's much larger. So instead of doing is just a part of the trend today, we do like the complete power training and its scope has expanded. So that's the training part. But again, to your question, over the next 3 to 4 years on that contract alone, we're going to -- the government's recapitalizing all of its assets, so which means we will be building a lot of simulators and [indiscernible] in our factories and that has a different profitability mix. We're going to be building new hangers, runways, all kinds of things of bases, which had different [indiscernible].

So, again, I've said a lot here, but too early to provide a different guidance. It's going to be -- but it does give us the confidence in the steady role for this business. I know I've said like too much. Still, Nick, you want to add anything to it?

[Nick Leontidis, executive]

No, that's it. The way to look at that contract -- the first 5 years is product delivery and then the next 20 years of service delivery, unless the government does more. So I think Marc said it well. It's -- that's going to ramp up -- it's going to ramp up the revenue on that contract over the next few years.

[Marc Parent, executive]

Yes. And I think we concentrate a lot on that contract. But there's -- I mean, just we don't stall out in so much detail. But like just in the backlog this quarter, we have some [indiscernible], F-16 contracts in the Asia Pacific, MH-60 helicopter training contract in India. We're starting our [indiscernible] Program for the U.S. Army will express. So look, I'm not going to overpromise anything and we know better in our defense. [indiscernible], like I'm saying that.

[Noah Poponak, analyst]

Okay. And just on the Civil margin for the rest of the year, is there any finer point you'd be willing to or could put on the split between the third and fourth quarter? Just if 3Q looks like last year than 4Q would need to be around 30%. Is the split similar to last year? Or is it more like fiscal '23 when 3Q, 4Q were fairly even?

[Andrew Arnovitz, executive]

Usually, our Q4 is strongest. Our second half is always stronger than the first, absolutely. But this year, Q4 is stronger with more deliveries coming in, in that back half cost savings -- cost savings kicking in as the year progresses, we're expecting the $20 million annual savings at the end of next year and trading performance as well. We see the bookings also -- variability in every quarter, but we expect the Q4 to be stronger, a bit higher than 20% in Q3 and then the rest in Q4 higher.

[Operator]

The next question is from Michael Kypreos with Desjardin Capital Markets.

[Michael Kypreos, analyst]

Congratulations, Marc, on the pending retirement. Maybe just a question on the CEO search. The press release states that you will be supporting the process, Marc. Can you maybe provide some details on what type of characteristics attributes experience you're looking for in a potential candidate? And also, maybe clarify if this process will be combined with the ongoing CFO search process or on a separate basis?

[Marc Parent, executive]

Well, just on that was 2 separate issues that altogether. And for that one, we're concerning internal and external candidates [indiscernible] job here in Indian [indiscernible], which in regards to [indiscernible]. Yes, I have participated with the Board, most supportive. And my focus with them, the Board is to make sure that we select the right person, Men or women that's going to just propel this great company to the next level. And I might want to get into the characteristics of what kind of person that is. The cash is what -- the net is [indiscernible] and we will get the best person. And I think shortly provide any more guidance relative to that, except that the process is well underway, and I've been part of quite a few meetings on that subject.

[Andrew Arnovitz, executive]

Thank you, operator. I think that's all the time we have for the call. We landed at just shy of 9 a.m. I want to thank all participants for joining us this morning and remind you that a transcript of the call will shortly be available on CAE's website. Thank you, and have a good day.