CAE (NYSE:CAE) reported fourth-quarter financial results on Friday. The transcript from the company's fourth-quarter earnings call has been provided below.

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Summary

CAE Inc has undergone significant leadership changes, including a new CEO and Executive Chairman, and has outlined a five-year strategic and transformation plan with detailed financial targets for 2030.

The company is experiencing strong demand in its defense segment, driven by increased defense budgets across NATO and allied nations, while the civil segment faces challenges due to a soft market and disruptions in the Middle East.

CAE Inc plans to generate structural cost reductions of $125 to $150 million by 2030 through various transformation initiatives, including streamlining operations and optimizing its training network.

The company reported a 4% increase in consolidated revenue to $1.3 billion for Q4 2026, with adjusted EPS at $0.42 per share, but faced lower adjusted segment operating income due to civil segment challenges.

Management emphasized a focus on execution, operational excellence, and capital discipline to drive long-term growth, improve margins, free cash flow, and returns on invested capital.

The company has announced a more disciplined executive incentive structure and changes to the definitions of adjusted financial measures to better align with performance evaluation.

CAE Inc is exploring strategic alternatives for its Flightscape business and aims to focus on core operations and high-return opportunities.

Full Transcript

OPERATOR

Good morning 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 for fiscal year 2027, our long term fiscal 2030 financial targets and answers to questions contain forward looking statements. These forward looking statements represent our expectations as of today, May 22, 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. The fiscal 2030 targets in particular are subject to greater degree of uncertainty given the longer time horizon. These targets represent management's current view of the company's long term trajectory and are meant to assist analysts and shareholders informing their respective views on our strategy and in measuring progress toward our transformation objectives. They are based on the assumptions set out in our press release issued yesterday and are subject to the risks described therein. A description of the material risks, factors and assumptions that may affect future results is contained in our press release issued Yesterday and in CA's annual MDNA, both available on our corporate website and on our filings with the Canadian securities administrators on SEDAR Plus and the US Securities and Exchange Commission on EDGAR. On the call with me this morning are Kaylan Rovenescu, Executive Chairman Matthew Bromberg, SEAS President and Chief Executive Officer and Ryan McLeod, 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 Kaylan.

Kaylan Rovenescu (Executive Chairman)

Good morning everyone. Before turning it over to Matt, I would like to briefly share a few observations. As all of you know, we have just finished the first fiscal year following Matt's appointment as CEO and mine as Executive Chairman. It has been a very busy year full of change and renewal for this organization. In addition to a new chair and new CEO, we also have new heads in each of our civil and defense businesses. A new head of operations. We've also simplified reporting structures for greater accountability. The Board recently met with Matt and the leadership team for a detailed review of the Company's five year Strategic Plan and Transformation Plan targets. We carefully assessed CAE's strengths and opportunities for the future and have now set specific plans and detailed financial targets for the longer term as we promised the market we would, which were announced today and which Matt will review with you shortly. I would characterize this work as rigorous and ambitious, yet grounded in a high level of operational and financial detail. More importantly, it's also actionable with clearly defined initiatives, accountabilities and timelines. CAE's long term growth prospects remain strong despite some challenges, our civil business continues to benefit from durable fundamentals with aviation training solutions representing an essential component of a secular growth market. Commercial aircraft and business jet OEMs have backlogs that extend beyond several years of deliveries. As we previously stated. This segment is also underpinned by global regulatory requirements mandating recurrent training on each aircraft type providing a recurring demand base. Additional growth is driven by the ongoing need to train pilots due to fleet expansion and retirements as well as transition training for pilots moving between platforms now the ongoing conflict in the Middle east and its impact on fuel supply and prices has created disruptions for our business as well as for the broader aviation business. Of course, we are monitoring developments closely and will continue to make short term adjustments to help mitigate this impact as required. As Ryan will outline, this has had an impact on our fiscal 2026 results and will continue to affect the first half of fiscal 2027. Our D&S business is at the front end of an upcycle driven by rising defence budgets across NATO and allied nations, many of which are now targeting spending levels approaching 5% of GDP. In Canada, the government had articulated an ambition to reach that level by 2035, representing a generational investment opportunity. This environment creates a significant opportunity for CAE to continue evolving as an international defence leader, leveraging our technology, domain expertise and global network. Heightened geopolitical tensions, modernization imperatives and a global shortage of uniformed personnel are driving sustained demand for training, simulation and mission rehearsal solutions, all core competencies of CAE. As Canada's largest publicly traded defence contractor, CAE is well positioned to play a meaningful role alongside domestic and international partners in the defence area. Overall, we expect fiscal 2027 to be a year of execution and delivery of the various components of our detailed transformation plan, prioritizing core assets and competencies, operational excellence, capital allocation and improved investment outcomes. The focus now is all about execution, balancing growth with improved efficiency, discipline and returns as we position the company for stronger performance, higher margins, improved free cash flow and sustained value creation over our outlook period. Matt, over to you.

Matthew Bromberg (President and Chief Executive Officer)

Thank you Kalyn and good morning everyone. We delivered solid performance in fiscal 2026. Overall, strong defense revenue and profit was tempered by a soft civil market. In particular, events in the Middle east were challenging in Q4, but stepping back after nine months as CEO, I am further resolved by the opportunities CAE presents. The company operates in two markets, both with strong secular tailwinds. We have industry leading technologies and an entrepreneurial customer centric team. At the same time, through the Transformation Plan, we are starting to unlock higher performance with internally driven actions that will focus our portfolio on opportunities where we can differentiate and win, sharpen our capital allocation to drive higher returns and drive a performance culture to improve margins and free cash flow. Today I'll provide an update on the civil and defense segments as well as on our Transformation Plan and new long term financial targets. We continue to make meaningful progress aligning our organization around end markets, operationalizing the Transformation Plan and positioning the company to capture long term growth. We are working through many demanding transformation actions organized along eight key work streams that support our objectives. These work streams will generate 125 to 150 million of structural cost reduction by 2030. This is hard work, but the team is energized with the prospects of a stronger CAE this year. 2027 is a reset year. First, given the soft market of last year, we enter 2027 with a lighter order backlog of civil full flight simulators. Secondly, the Middle east conflict is having a month by month impact on our bookings and sales. Additionally, the network rationalization that we launched last quarter is proceeding and while we are working closely with customers to retain their business, we expect some stranded costs and attrition as we consolidate sites and rationalize capacity. Finally, we are increasing investments on key internal systems, including simplifying our ERP from five separate systems to two and modernizing our factory. These investments will have long term benefit for CAE and at the same time, we are not assuming any benefit from government RD programs. Our latest federal funding program recently came to an end and we decided to pause future programs while we work with the government to align a structure that will advance Canada's defence industrial strategy, further elevate civil aviation and enhance CAE's capital discipline and flexibility. Looking past this reset year, both businesses remain strong and we'll work to mitigate some of the recent disruptions. We know the actions being taken are necessary to reposition CAE for balanced, profitable growth. Shifting to the Team during the quarter, we announced several important leadership appointments that strengthened the team responsible for executing the transformation and advancing our strategy. Ryan McLeod joins CAE as Chief Financial Officer. Ryan brings significant external experience to CAE's financial organization and is rapidly coming up to speed. Pascal Grenier was appointed President, Defense and Security. Pascal's role centralizes three defense strategies and efforts into a single team that will leverage our unique local presence and our strong technology core and finally, our transformation Program Management Office is fully staffed and operating at a rigorous cadence to drive alignment, accountability and progress over the past year. With these final leadership changes, we have simplified CAE, reducing the previous seven president positions, staffs and organizations to two. This aligns our talent and organizations around our two customer segments. Additionally, we have continued to streamline the company and reduce spans and layers. This will further drive performance as we execute our transformation and grow. Now let's look at the business developments during the quarter starting with Civil Demand in the civil segment is supported by structural growth in global air travel, fleet expansion and training demand. Civil is a fantastic business and we are the market leader across commercial business aviation product and training services. We know that air travel has consistently grown faster than GDP and one of the core initiatives of our transformation is to streamline our operations to drive structural improvements and returns in civil for fiscal 2026 we delivered modest revenue growth helped by the successful integration of our SIMCOM acquisition. Our full year book to sales ratio was 0.96 with lower product order intake weighing on our expectations for fiscal 2027. Civil profitability was negatively impacted by a number of factors including training market headwinds and volatility in the Middle East. Ryan will provide additional details around the Items influencing our Q4 results and fiscal year 2027 outlook. This year we marked an important milestone with the FAA and YA qualification of the world's first Boeing 777.9 full flight simulator. This represents yet another example of CAE innovation and more importantly, trust in collaboration with the Boeing company and it reinforces CAE's position at the forefront of next generation simulator development. Based on Boeing's order book for the 777X, this represents a meaningful pipeline of opportunities for civil aviation over the next decade in a market where CAE is the established leader. We also expanded our partnership with Interglobe, the parent of Indigo Airlines, to grow our training network in India with the inauguration of our fourth Advanced Pilot Training center located in Mumbai. Our joint venture services multiple airlines in India, which is one of the fastest growing aviation markets globally and already the third largest domestic market with passenger volumes approaching 240 million annually. Our partnership with Interglobe positions us well to meet that demand and support the next phase of growth in the Indian market. In the business aviation segment, we signed a long term Training services agreement with BOND, a new private jet fractional operator. This agreement aligns CAE with a high growth segment of the business aviation market where training demand is recurring and predictable. BOND's fleet will be comprised of super midsize and ultra long range aircraft which is well suited to CAE's global training network and capabilities. Despite CAE's world class platform, our utilization, performance and returns have been below expectations. This underscores the need to have a nimble right sized training network. As discussed last quarter, we will rationalize the training network and we've set the following objectives. We're going to remove approximately 10% of our commercial full flight simulators. We will then relocate and optimize more than a dozen additional full flight simulators to facilities where they can be better utilized. And finally, we will close between 4 and 6 of our training centers after all this activity is done. To date, we've already retired five devices and closed one training center. Across the remainder of fiscal year 2027, we expect to retire eight to 10 additional devices, remove over 300,000 square feet from our global footprint and continue to look for opportunities to close additional centers. These actions will better align the civil business with anticipated demand. Over the long term, these initiatives will drive structural improvements in our profitability, cash flow and returns on invested capital through greater efficiency, stronger asset utilization and a more disciplined operating framework. Now let's turn to our defense business. We delivered another strong quarter across the board with revenues growing 6% in Q4 and 9% for fiscal year 2026. A positive demand backdrop drove our book to sales north of 1.11 in Q4. Additionally, alongside solid growth metrics, the team realized another quarter of year over year adjusted segment operating income expansion to 10.2% as programmatic and operational improvements continue and the business benefits from program timing and mix. Overall, very solid results from the defence team in the quarter and for the year, with further progress anticipated in fiscal 2027 and beyond. Looking more broadly at the strategic context for defence, we are seeing sustained increases in defense spending driven by readiness, modernization and evolving mission requirements and this is creating a significant opportunity for CAE. We are also seeing a robust pipeline of opportunities that is multiple times our current defense backlog, including several programs with potential contract values in excess of $1 billion in Canada and across NATO. In Canada, the federal government has committed approximately 82 billion to defence spending over the next five years, with a long term ambition to reach roughly 5% of GDP by 2035. Training and mission rehearsal accounts for approximately 10% of this expenditure and while that includes infrastructure and organic spending, that is not addressable and it represents a large market opportunity for CAE. This is reinforced by Canada's Defence Industrial Strategy which the Prime Minister announced at our Montreal headquarters. There's a clear shift towards bolstering sovereign capabilities, reinforcing Canada's industrial base and fostering long term partnerships. We are continuing to work closely with the Government of Canada to expand and create new Canadian franchise programs such as the future Aircrew Training Program, the future Fighter Lead in Training Program and the future Canadian Submarine Program. As a proud and homegrown Canadian training mission readiness and simulation leader, we are uniquely positioned to support Canada's defence modernization and mission readiness mandate. Our strategy for defence is focused on scalable, repeatable growth. First, we are deepening our relationship with OEMs and platform providers to embed training and simulation capabilities directly into platform offerings. This positions CAE earlier in the program lifecycle and strengthens our role across long term program execution and sustainment. We have already begun advancing the strategy through relationships with leading operators and OEMs including Saab. Additionally, during the quarter we announced a team agreement with TKMS to pursue the Canadian Patrol submarine project, reinforcing CAE's role as a trusted partner to both global OEMs and national customers. This partnership brings together two world class companies, TKMS and CAE. Together we would support a sovereign in country training and simulation solution for the Royal Canadian Navy. This partnership not only supports Canada's submarine ambitions but also positions CAE to support TKMS international customers in both submarine and maritime pursuits. We hope to expand these partnerships over time. We also have an established track record of successful collaboration with OEMs including the international Flight Training School or IFTS in Sardinia, Italy. Developed in partnership with Leonardo, IFTS combines advanced simulation technologies with live flight training to deliver world class pilot instruction and operational readiness. Over the last four years, IFTS has delivered over 44,000 flight and synthetic training hours to over 15 nations. Establishing a leadership position in the market necessitates world class leadership and that's why our defense business will be integrated across the globe with a centralized team for business development and engineering solutions. This simplifies our structure, reduces duplication, improves execution, reduces spans and layers and will drive SGA savings. Additionally, the defence team is also looking to rationalize its footprint where possible and focus on growth franchise and this is evidenced by our decision to exit our Broken Arrow facility which is in Oklahoma, shifting to the portfolio on May 11th we announced that we are exploring strategic alternatives for Flightscape. This action reflects early momentum in building a more focused portfolio. While Flightscape is a high quality business with a world class platform, it sits outside our core and we believe it can better realize its full potential outside of CAE. Advisors have been engaged and the process is underway. Flightscape represents 4 to 5% of our revenues and the bulk of the 8% announced in April. Of the 8% announced in April revenue that we identified as non core, the majority sits within our civil business. Looking internally, we are identifying opportunities to insert artificial intelligence and automation to prove efficiency and customer experience. One example recently deployed in our civil business is leveraging AI to reduce the time it takes to complete technical resolution of certain issues within our full flight simulator network. Related to customer simulator issues and integration of software and hardware, we've reduced the execution time from hours to minutes. We'll execute initiatives like this and other key actions over the next 18 months. Overall, these actions demonstrate clear progress against our strategy. We are aligning leadership to execute the transformation, sharpening the portfolio, expanding in attractive growth markets, deepening OEM and customer partnerships, and leveraging our technology, leadership and network to drive higher performance and long term value. Underlying this growth and transformation is a necessary evolution of CAE's culture to reinforce accountability, operational excellence and continuous improvement across the organization. Looking forward, I will be personally spending a significant amount of my time on embedding a more disciplined, performance oriented operating model across the company because I believe this cultural evolution is critical to the long term success of our transformation and growth of our franchise. Over the last decade, we have fallen short of investor expectations too often. Going forward, our objective is to build a company that consistently delivers on its commitments and is recognized as a reliable compounder of long term shareholder value. At its core, this means strengthening CAE's culture as a disciplined steward of shareholder capital with a clear focus on accountability, execution, profitability, cash generation and returns. Starting in fiscal 2027, we are moving forward to more disciplined and aligned executive incentive structure which is centered on free cash flow, operating margin and operating margin expansion, returns on invested capital and EPS growth. This is expected to help align every leader and employee around the priorities driving our transformation and shareholder value. The announced update to our free cash flow definition is an important example of this progression. We believe capital expenditures should be valued with a consistent lens regardless of whether they are categorized as growth or maintenance. Both represent real uses of cash. By incorporating total capex into our free cash flow framework, standardizing how we measure simulator utilization and asset performance, and increasing focus on free cash flow conversion and returns on invested capital, we are reinforcing capital discipline and improving visibility into the underlying drivers of performance across the business. As we continue this evolution, we remain committed to preserving the customer focus, entrepreneurial mindset and cultural innovation that have defined CAE for nearly 80 years. With that, I will turn it over to Ryan to discuss the Q4 2026 financials and our fiscal 2027 outlook in more depth. When Ryan has concluded his remarks, I'll discuss CAE's transformation plan and the new fiscal 2030 financial targets. Ryan, over to you.

Ryan McLeod (Chief Financial Officer)

Thank you, Matt and good morning everyone. Before I get into the results for the quarter and our outlook, I would like to start with some initial observations from my first month at CAE and take a moment to thank Constantin Malatesta for his partnership and support during the transition. This is a business with strong market positions, a high quality installed base and clear opportunities to improve performance through more disciplined capital allocation and execution. My immediate focus has been on learning the business with a view to driving the transformation priorities including strengthening capital rigor, improving margins and returns, and ensuring we are allocating capital to the highest value opportunities across the portfolio. In addition, activities are underway to strengthen our financial planning and analysis capabilities to improve visibility, tighten forecasting and support more disciplined execution across the business. In parallel, we're planning and executing systems and process modernization initiatives to drive greater efficiency, integration and scalability across the organization. From a capital allocation standpoint, our priorities are clear. First, we're committed to maintaining an investment grade balance sheet. We ended the year with NET debt of $2.7 billion and a net debt to adjusted EBITDA ratio of 2.29 times. We are well positioned to execute on our transformation plans, support the growth of the business and maintain our investment grade rating. Second, we are embedding a more disciplined returns based framework across the organization. All investment decisions will be evaluated through a return on invested capital ends with a clear focus on prioritizing the highest risk adjusted returns. Third, we are funding the Transformation Plan while maintaining balance sheet strength. The transformation is targeting total one time costs between $200 million and $250 million, of which approximately $100 million is non cash. We incurred $84 million of expenses in fiscal 2026, of which $59 million was noncash charges. The majority of the remaining expenses are expected to be incurred in fiscal 2027. Importantly, this is an intentional time bound transformation program designed to improve the structural performance of the business which we are anticipating will yield $125 million to $150 million of run rate savings by fiscal 2030. As we execute on our transformation plan, the targeted improvement in earnings and cash generation will provide flexibility to return capital to shareholders while also investing in high return opportunities to drive growth in the business. As Matt discussed, our transition to a more conventional definition of free cash flow reflects the cash we generate from operations plus all capital and intangible investments, whether for maintenance or growth, with no exclusions, plus any cash we invest in or receive back from our joint ventures. This will provide greater transparency both inside CAE and to our stakeholders and is consistent with the increased capital discipline we're implementing across the business. Additionally, we've also decided to further refine other non-IFRS measures to better align our external reporting with how we measure the performance of the business internally with a focus on underlying value creation and cash earnings. As a result, effective in the first quarter of fiscal 2027, we will update our definition of adjusted segment operating income, adjusted net income and adjusted EPS to exclude the impact of amortization of of acquisition related intangible assets, removing a non cash expense that we no longer consider in evaluating our return on invested capital. Taken together, these changes simplify our reporting, reinforce our focus on cash generation capital discipline, and will help drive the right behaviors and focus across the company. Turning briefly to our Results, in the fourth quarter consolidated revenue was $1.3 billion up 4% year over year. Adjusted segment operating income was $211.8 million compared to 258.8 million last year and adjusted EPS was $0.42 per share. Lower adjusted segment operating income was driven by softer civil training performance which included headwinds from the Middle east conflict that impacted our business in the region. Performance also reflected several discrete items in the quarter including higher credit related charges, lower government grant contributions, higher research and development costs and a tougher year over year comp which included a gain on an asset sale a year ago. This was partially offset by improved performance in our defense business. For the full year revenue was $4.9 billion up 4%. Adjusted segment operating income was $710.7 million down 3% and adjusted EPS was $1.2. Turning to cash flow for fiscal 2026, we generated $473.8 million in free cash flow under our updated definition, representing a conversion rate of approximately 123%. This compares to an average conversion rate of less than 50% over the four year period from fiscal 2022 to fiscal 2025. The step change in the conversion reflects the early actions taken in fiscal 2026 to sharpen capital allocation and non cash working capital management with total capex down approximately 20% year over year driven by an approximate 30% reduction in civil capex. In civil fourth quarter revenue was $746.7 million, up 3% year over year, while adjusted segment operating income declined to $152.4 million, primarily reflecting lower utilization and the impact from disruptions in the Middle east, along with the majority of the discrete items I described previously. For the full year, Civil revenue was $2.7 million and adjusted segment operating income was 510.5 million, with a margin of 18.6%. In defense, fourth quarter revenue was $580 million, up 6% with adjusted segment operating income of $59.4 million and a margin of 10.2%. For the full year, defense revenue increased 9% to $2.2 billion, with adjusted segment operating income of 200.2 million and a margin of 9 9.2%, reflecting strong demand improved execution. Let me now turn to fiscal 2027. As Matt noted, fiscal 2027 will be focused on transformation, where we are actively implementing the actions required to reshape the business and improve its long term performance.

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