CAE Inc. Common Shares 2027 Q1 Earnings Call

Good morning, everyone, and thank you for joining us today. Today's remarks, including management's outlook and answers to questions, contain forward-looking statements which represent our expectations as of today, August 13, 2026, 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 and MD&A for the three months ended June 30, 2026, as well as CAE's press release dated May 21, 2026, disclosing transformation plan targets to fiscal 2030, all of which are 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 morning from CAE are Calin Rovinescu, Executive Chairman, Matthew Bromberg, the company's President and Chief Executive Officer, and Ryan MacLeod, our Chief Financial Officer. After formal remarks, we'll open the call to questions from financial analysts. Let me now turn the call over to Calin.

Good morning, everyone. Before Matt and Ryan take us through the Q1 results and discuss progress against the transformation plan, I'd like to briefly share a few observations. CAE's transformation plan is continuing at pace. As we announced with the year-end results, the work is centered on sharpening our portfolio, strengthening capital discipline, and enhancing operational and financial performance with several clear objectives: increased long-term resilience, improved execution against plan, and support sustainable cash generation, profitability, and returns. We wanted to start some of the heavy lifting required by the transformation plan right away, so we chose not to wait for an investor day to launch it. The board receives regular updates on the plan, and we're encouraged by the progress being made across its multiple work streams. Fundamentally, I believe CAE's long-term growth prospects remain strong.

Our Civil business continues to benefit from durable long-term aviation demand growth as expanding air travel and higher aircraft deliveries will continue to require more of CAE's training services and simulation products. In Defense, CAE is benefiting from the generational upturn in defense spending happening around the world, especially in NATO countries, including, of course, here in Canada. Across the expanding defense ecosystem, we continue to see CAE's heritage, strategy, technology, and broad set of capabilities drive increased interest from governments and global OEMs, resulting in an expanded opportunity set. Overall, CAE has strong positions in two secular growth markets and an attractive long-term outlook supported by the idiosyncratic benefits of the transformation plan, improved free cash flow generation, higher returns on invested capital, and significant opportunities to invest accretively across the business and provide better returns to shareholders.

To support the execution of the company's long-term strategy, we are implementing a revised executive compensation framework that ensures incentives are aligned with transformation goals, growth aspirations, and outcomes that matter most to shareholders. Our short-term incentive program is now focused on free cash flow and adjusted segment operating income margin. Our long-term incentive program will center around adjusted return on invested capital and adjusted earnings per share to emphasize efficiency, profitability, growth, and long-term value creation. Additionally, as disclosed in the proxy circular, I announced my intention to transition to the role of non-executive chairman of the board effective January 1, 2027.

This reflects our confidence in Matt and the rest of the leadership team and their ability to drive CAE's next chapter of growth and value creation, as well as the significant progress that the company has made in developing and beginning to execute the transformation plan and long-term strategy. I look forward to continuing to support Matt and the leadership team in this evolution, while remaining involved in engagements with key stakeholder groups involving government partners, customers, and shareholders.

Matt, over to you. Thanks, Calin, and good morning, everyone.

Overall, Q1 was a strong start to the year with good progress across the transformation plan, continued improvement in our Defense segment, and Civil performance in line with expectations. While only one quarter into the year, we feel very good about our initial progress, the full year, and how the transformation plan will strengthen CAE. By segment, Defense delivered a strong quarter of revenue growth and adjusted segment operating income margin expansion while growing our long-term pipeline of training and mission rehearsal opportunities. Civil performance was slightly down year-over-year, but the team is doing an excellent job managing a challenging macroeconomic backdrop while rationalizing the network. This morning, I'll provide an update on the progress we're making against our transformation plan and an update on key business developments across Civil and Defense.

As I've said before, fiscal 2027 is both an execution year and a reset year. The transformation plan focused on improving our internal cost structure and focus is necessary to improve our performance, to streamline our portfolio, and focus on where we can differentiate and win. It will strengthen our capital discipline by right-sizing our training network and footprint, and allow us to make key investments in internal systems in our factory and ERP, which are required to drive operational performance. As we do this, we are pivoting the culture to one centered on operations, continuous improvement, disciplined investment, and strong cash flow generation. This will allow CAE to profitably grow for years to come. The transformation plan is progressing well. The projects are progressing to plan, and we will see returns start to mature in fiscal 2028 and beyond.

We are committed to deliver the CAD 125 million to CAD 150 million of structural cost reduction by fiscal 2030. In terms of the CAD 150 million savings, roughly 50% of our savings will come from improved labor productivity as we optimize our organizational and operating model, outsource non-core processes, leverage automation, improve systems and tools, and consolidate our global footprint. Approximately 30% of the savings will come from reduced square footage, including the portfolio actions, we are expecting square footage to decrease by almost 1.7 million square feet, which represents approximately 17% down from the end of fiscal year 2025. Finally, approximately 20% will come from early efforts at driving operational improvements, including our digital factory project, which will drive lean manufacturing to lower waste, improve quality, and streamline and automate processes. Another example is on our ERP landscape.

We are moving from five ERP systems to two, which will reduce our technical debt and reduce expenses. As these work streams advance, we will continue to provide updates on our progress against the plans. Let me update you on some of the key projects and where we are. First, in focusing our portfolio, it consists of a strategic review of three businesses. The largest of the three, Flightscape, which represents about 5% of our revenues, is a high-quality business with a world-class platform. The review process is well underway with strong buyer interest. We remain confident that the strategic review process will result in a positive outcome for both Flightscape and CAE and we will update you at the appropriate time. The other reviews are also progressing well. In our civil training network, the capacity rationalization is also progressing well. We remain committed to retire the 25 commercial simulators.

We now have more visibility and confidence as to the benefits of this project. There have been many questions about customer retention, and as I've said before, maintaining our customer intimacy is job one. Based on customer discussions to date, we expect to retain almost all of our customer contracts as we transition them to other CAE facilities. As of today, customer attrition will be less than 1% of our civil revenue. This is a testament to our customer-facing teams. Not only will we retain the majority of our contracts as we retire the 25 commercial simulators, we are also able to close between four and six of our civil training centers and remove the support infrastructure costs associated with those facilities. All in, we expect this work stream to lead to the removal of approximately 500,000 square feet, which is roughly 10% of our civil network capacity.

This will not only improve the utilization rate of our network, it will also improve our civil margins, and these savings are included in our CAD 150 million target. Going forward, we will be more disciplined about incremental capacity and ensure that we consider regional options before adding square feet and devices. Overall, I continue to be very pleased with the progress we are making across all key transformation work streams. While there is significant work ahead, the actions we are taking are in real-time reshaping how CAE operates, how we allocate capital, and how we position ourselves to create long-term sustainable shareholder value. We continue to raise the bar across capital allocation decisions, commercial proposals, and investment evaluations, ensuring that we establish the underlying discipline required to drive accelerated growth and ensure we drive higher returns and higher free cash flow over time.