Good day, ladies and gentlemen, and welcome to the CAE Second Quarter Conference Call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Mr. Andrew Arnovitz. You may now proceed, Mr.
Arnovitz.
Good afternoon, everyone, and thank you for joining us. Before we begin, I'd like to remind you that today's remarks outlook for fiscal year 2021 and answers to questions, contain forward looking statements. These forward looking statements represent our expectations as of today, November 10, 2020, and accordingly, are subject to change. Such statements are based on assumptions that may not materialize and are subject to risks and uncertainties. Actual results may differ materially, and listeners are cautioned not to place undue reliance on these forward looking statements.
A description of the risks, factors and assumptions that may affect future results is contained in today's annual MD and A available on our corporate website and in our filings with the Canadian Securities Administrators on SEDAR at www.sedar.com and the U. S. Securities and Exchange Commission on EDGAR. On the call with me this afternoon are Mark Caron, CEO, President and Chief Executive Officer and Sonia Brenco, our Chief Financial Officer. After remarks from Mark and Sonia, we'll take questions from financial analysts and institutional investors.
And following the conclusion of that Q and A period, we'll open the call to questions from members of the media. Let me now turn the call over to Mark.
Thank you, Andrew, and good afternoon to everyone joining us on the call. I'll first discuss some of the highlights of the quarter and then Sonia will provide additional details about our financial performance. I'll come back at the end to talk about our outlook. We began the fiscal year just as the brunt of the pandemic wore down and while we're managing through a still difficult environment 8 months later, we're starting to see the results of our cost and cash actions and our initiatives to strengthen our market position. We drove solid sequential improvements in our Q2, which is testimony to these efforts and to the resiliency of our business, which is largely recurring and driven by regulations.
We delivered $0.13 of earnings per share and we generated $45,000,000 of free cash flow, which is a good reflection of the cash generative nature of CAE's business. We also booked $668,000,000 in new orders for 0.95 times book to sales ratio. We saw sequential improvements across all business segments in the quarter, most notably in Civil, where revenue increased 47% compared with the Q1. This was driven by 49% average training center utilization and the delivery of 10 full flight simulators. Demand improved in both commercial and business aviation training, with the latter recovering more rapidly driven by the relatively higher level of activity involving the global installed fleet of business aircraft.
Civil enjoys a high degree of operating leverage in training and the higher volume helped drive its operating margin back to the double digits coming in at 14.2%. We also continued to book new orders with Civil signing training solutions contract valued at $353,000,000 These included 3 full flight simulator sales, a 5 year business aviation training agreement with a charter company in the United States, a 5 year exclusive training extension with Virgin Atlantic, a 2 year business aviation training agreement with Exojet Aviation and a 2 year business aviation training extension with Vistajet. In defense, we also began to see a more positive picture than the Q1 with some movement on programs impacted by COVID related restrictions and a resumption of certain training operations. Defense revenue grew 8% over the last quarter and operating margins improved to 8%. Notwithstanding a still challenging environment, defense booked orders were $278,000,000 including contracts to continue providing fixed wing flight training and support services to the U.
S. Army at the Sea Dozen Training Center and to support Leonardo with AW139 and AW169 full flight simulators. Other notable contracts including providing the United States Air Force with upgrades and enhancements to both the KC-one hundred and thirty five and C-130H aircrew training system programs. Defense also received orders for maintenance and logistics support services for the German Air Force's URF fighter training devices and to support the development of a single synthetic environment for the UK Strategic Command. In addition, we were awarded a prototyping contract to support the U.
S. Special Operations Command's Global Situational Awareness Program, which will leverage synthetic environments to fuse data into a common operational picture for improved planning and decision support. And in healthcare, revenue grew by 66% compared to last quarter and was 22% higher than last year. With the benefit of additional volume and the commencement of CA AIR1 ventilator deliveries, healthcare's margin reached 8.6%. I'm very proud to say that we're continuing to support healthcare workers in the fighting of COVID-nineteen with complementary webinars and learning modules for clinicians.
We recently developed a pathogens of high consequence learning module to help prepare clinicians for infectious disease outbreaks. Not only is this the right thing to do, being there for customers and frontline workers in this difficult time. I also believe it cements CAE as a leader in developing training content in the healthcare space. With that, I'll now turn the call over to Sonia, who will provide additional details about our financial performance. I'll return at the end of the call to comment on our outlook.
Suhjan?
Thank you, Mark, and good afternoon, everyone. Consolidated revenue of $704,700,000 was up 28% compared to the Q1 and is 21% lower compared to the Q2 last year. Segment operating income was $79,300,000 compared to a loss of $2,100,000 before specific items in Q1 and an income of $126,000,000 before specific items last year. Quarterly net income before specific items was 34 $2,000,000 or $0.13 per share, which on the same basis compares to a negative $0.11 in Q1 and $0.28 in the Q2 last year. Free cash flow was $44,900,000 in the quarter, which is an improvement over the negative $7,100,000 free cash flow result last year.
The increase results mainly from a lower investment in non cash working capital, the suspension of the dividend and lower maintenance capital expenditures, partially offset by a decrease in cash provided by operating activity. We expect to be free cash flow positive for the year based on our expectation for continued positive operating cash flow and the expected timing of reversals in our non cash working capital accounts. Return on capital employed for specific items was 7.2% this quarter compared to 8% last quarter and 11.5% last year. Growth and maintenance capital expenditures totaled $15,200,000 this quarter and for the first half of fiscal year totaled $33,200,000 relative to our outlook of approximately $50,000,000 We expect total CapEx of approximately $100,000,000 for the year, commensurate where our opportunities to invest incremental capital with accretive returns and free cash flow. Income tax recovery this quarter was $1,000,000 representing an effective tax rate of 14% compared to 17% for the Q2 last year.
The tax rate was lower due to the impact of restructuring costs, partially offset by the change in the mix of income and losses from various jurisdictions. Excluding the effect of the restructuring, the income tax rate would have been 25% quarter. Our net debt position at the end of the quarter was $2,400,000,000 for a net debt to capital ratio of 50.1 percent and net debt to EBITDA before specific items was 3.16 times at the end of the quarter. All told, between cash and available credits, we continue to have approximately $2,000,000,000 of liquidity. We are making good progress with our recently announced restructuring program intended to enable CAE to best serve the market by optimizing our global asset base and footprint, adapting our global workforce and adjusting our business to correspond with the expected levels of VAN and ensuring structural efficiencies that we will drive.
These measures include the introduction and the acceleration of new digitally enhanced processes such as remote installations and certifications and work from home practices. We continue to expect to record the restructuring expenses of approximately $100,000,000 for the entire program, which will be carried out for fiscal 2021 into fiscal 2022, consisting mainly of real estate costs, asset relocations and other direct costs related to the optimization of our footprint and employee termination benefits. Actions include the consolidation of some facilities so that we gain efficiencies of our operating from operating from larger centers and we'll also be relocating several training assets to optimize utilization. Taken together, these measures are expected to enable CAE to emerge from current periods from a position of strength, and we expect to fully realize our annual recurring cost savings of approximately $50,000,000 starting in our fiscal 2022. We began executing our restructuring program this quarter, and as of the end of September, we had incurred $51,100,000 of restructuring expenses.
With that, I will ask Mark to discuss the way forward.
Thanks, Sonya. The COVID-nineteen pandemic continues to be a day to day global reality, and we're encouraged to have learned yesterday on the progress being made to discover a vaccine to this terrible affliction that has so deeply affected the lives of so many. As we consider the step change improvement in quarterly performance that we just delivered, we recognize that the continued pace of CE's recovery from this point forward will be highly correlated to the rate at which travel restrictions and quarantines can be safely lifted and market activities resume. Short term visibility in that context remains limited. However, I take confidence in the fact that we're in a better position now than we were at the start of the fiscal year, and we continue to expect a stronger second half.
Looking beyond the current period, we remain encouraged by CAE's long term prospects. We're seizing opportunities to strengthen CAE internally during this period. And as you've heard from Sonya, our restructuring program currently underway is on track. We're also well positioned to bolster our standing as the global market leader in our field through the application of advanced technologies and by expanding the aperture of our market reach. We're continuing to invest in CE's capabilities to revolutionize our customers' training and critical operations with digitally immersive solutions and to increase our market share.
And we remain confident that CE will emerge from the current period as an even stronger company. Looking at each of our business segments, in Civil, as the global fleet gradually recovers and daily flights resume service, we expect to continue to expand our market share and secure new customer partnerships with our innovative training and operational solutions. We continue to have discussions with airlines about potential outsourcings and partnerships. And while we don't control the timeline of those agreements, we expect some of our pipeline to come to fruition in the period ahead. At a steady state, business aviation training represents about a third of our civil business.
And based on global aircraft fleet activity levels, we expect this segment to continue recovering faster than commercial aviation. Demand for civil full flight simulators is driven by new aircraft deliveries. And while the total market is currently much smaller, we expect to maintain our leading share of available Full Flight Simulator sales. We benefit from a large backlog of customer funded Full Flight Simulator orders, and we expect to substantially deliver this backlog over the next couple of years, including 35 to 40 this fiscal year. In defense, we're managing through a transition year as we work our way through the short term challenges brought by the pandemic and as we ramp up new leadership.
The long term outlook for defense continues to be for growth, supported by a large addressable market for our innovative solutions and the realization of the benefits of our bolstered team and how that will bring to bear. I'm very encouraged by our recent competitive wins at large pipeline, which bode well for Defense in the long term. Despite near term headwinds, we're maintaining our leading position as a training and mission support partner, thanks to our leading edge capabilities in translating the physical world into the synthetic world. We're expanding beyond training to become a leader in digital immersion and the application of its synthetic environments to support analysis, planning and operational decision making. With our expertise in the integration of live, virtual and constructive training, along with capabilities to address mission and operations support, we believe we'll make inroads into the broader defense market in the period ahead.
And in healthcare, we've also bolstered our leadership to enable CAE to fully capitalize on the greater market appreciation of the benefits of healthcare simulation and training to improve safety and to help save lives. The pandemic is serving as a catalyst to accelerate digital transformation across the enterprise. And in healthcare, we see an emerging growth vector with the ramp up of business learning this fall. And while still early, I'm encouraged by our progress in including new tools we just recently introduced on how to deliver training using our platforms, Maestro and CA Learning Space, which offer remote and distance learning capabilities for virtual clinical examination and telehealth training. In closing, I'd like to thank all of the employees at CAE who are collectively responsible for these solid results against the macro backdrop that has been complex and of course it goes without saying under higher than usual uncertainty.
Our employees have conducted themselves through this challenging last 8 months with true professionalism and teamwork, retaining an impressive and singular focus on serving our customers as their partner of choice. I'm truly inspired and humbled to lead this great team of people here at CAE, and I couldn't be prouder of how we rose up against an incredible macro event that's almost been like a wartime effort and are arising from it stronger and even more aligned together. With that, I thank you for your attention and we're now ready to answer
Our first question comes from the line of Steve Arthur with RBC Capital Markets. Please go ahead.
Great. Thank you very much. Just a couple of questions. First, on the training center utilization. The 49%, I realize is an aggregate of many different training centers, different simulator types.
But just wondering if you can expand a little bit more on the dynamics within there. For example, the utilization at business jet training versus commercial or in addition to the recurrent training, any signs of more transition training as pilots move around for different aircraft types?
Okay. Steve, I think that maybe a little slightly higher in Business Aircraft. It's been doing somewhat better based on the fact that there's been this aircraft has been less affected overall in terms of the flight activity, which is the driver for us. Commercial, I think it's kind of plateaued. As we said last quarter, it's pretty much in line with the activity on the aircraft, the commercial aircraft that are being utilized right now.
If you look at the market right now, there's been it's been overall for commercial aviation, there's been an approximate 50% recovery in daily flight activity, which is obviously well off the lows back in April, which explains part of the explanation for our sequential performance here. But it's more or less plateaued in recent months as we went into the fall with the second wave and everything. Business aviation, as I mentioned, has been recovering faster than commercial. And I continue to be bullish on that because and it is it does represent about a third of our civil business. And if you just look put some numbers around it, business jet cycles in the United States and Europe are within about 10% or 15% of pre pandemic levels, which is pretty impressive when you think about it.
And anecdotally, I put and I provided a little color last quarter on this, our charter customers are seeing significant volume in business aircraft from customers who are new to private jet travel. And in my experience, again, from nearly 35 years in this industry, once people experience private jet travel, there tends to be a high retention rate. So that's the kind of color I would give you right now with regard to utilization.
Okay. And it's still the same dynamic within the 2 more and more wet training with business jet training and a lower but growing amount in commercial?
Yes, that's about right. Yes.
I guess just related to that, just any updates at all on the nature of the potential outsourcing agreements with airlines? Of course, you can't get into any customer specifics, but are those kind of conversations still advancing? And what's the reception with the airline customers?
No, absolutely. There are several discussions underway. That hasn't changed. The dynamic continues. The airlines are more amenable to partnering with us.
It's become more resilient and flexibility in their training operations by turning a fixed cost into a variable cost. You can well imagine that airlines are pretty busy these days in terms of managing our operations. But I do believe that some of these deals will come to fruition. And it's just a natural for us. But we'll keep you informed as we don't control the timeline certainly and we're patient.
Okay. And I guess just the final one for me, just on the Healthcare segment. Any color you can provide on the contribution from the ventilators in the revenue in the past quarter or a sense of the scale of that 10,000 unit order?
Well, in the quarter, we had approximately $7,000,000 of revenue that came from the healthcare sector that came from the ventilators. It's modestly profitable. That's what we expect. We've been deliberate not to create expectations on a profitability of those vent layers because although I do expect them to be profitable and cash generative, I mean, you could well imagine that what we're doing here is reacting primarily to what really is a biological wartime effort here to do our fight against COVID-nineteen. And I'm extremely proud of what we've been able to do.
But our top priorities on the contract are really making sure of the quality of those devices and the speed to market because obviously we want to put it in the hands of the public health authorities as quick as we possibly can. Does that answer your question, Steve?
Yes. No, I think it does. I understand that and appreciate it. Okay. Thank you.
Thank you for your question. Our next question comes from the line of Konark Gupta with Scotiabank. Please proceed.
Thank you and good afternoon. So maybe just wanted to follow-up on the utilization trends. You spoke about commercial versus business aviation. Within commercial, obviously, there are multiple silos there as well, like narrow body, wide body as well as cargo. I wanted to understand, given obviously wide body fleet still remains pretty much grounded by 50% or so, Narrow body might be doing better.
So any sense you can provide on utilization rates for you guys on narrow body side as well as cargo given a lot of airlines and operators are accelerating passenger to freighter conversions these days? So how are you leveraging those opportunities? Thanks.
Well, we don't I wouldn't break it down to that level, but I can tell you that as we've said before, about 2 thirds of our training footprint is narrow. Actually, it's about 75% actually of our fleet is narrow body. So we're well exposed to that. And actually a lot of aircraft, those that we do have on wide body, some of them are being used for cargo and we're actually seeing actually a lot of narrow body airplanes being used for cargo and being converted to that end.
Great. But are you seeing any significant increase in cargo training, Mark?
Well, definitely, there's more I'm not saying that you don't know. There's a lot more cargo activity. And to the extent that we train cargo, yes, we have seen improvement in that in the cargo in the train that's related to training of cargo aircraft crews for sure. I just wouldn't break out the number for you.
Okay. No problem. That's good color. Then moving on the commercial side on MAX. Obviously MAX is getting quite close to 3 certification, I guess.
A couple of airlines in the North American market have spoken about ungrounding them pretty shortly. And Boeing has disclosed the backlog. It's sitting around about 3,300 aircraft. So my question is really on, if you can help us understand the size of the potential opportunity for CAE from MAX in terms of what is the incremental demand potential for simulators as well as training as MAXX comes back? Or do you see maybe a pent up demand after they have delivered maybe a couple 100 or so aircraft?
Well, I don't think look, obviously, there's a short term dynamic that's occurring here. But I think on an aggregate, when you look at all of the whole order book that you mentioned that that's Boeing, I mean, it's got a very solid order book as we know, very large. And when you look at the basically excluding lessors, there's about 73 operators at the moment who account for about 1300 of those orders on MAX that we know they don't currently have a MAX train solution. So that gives you an idea, I mean, of the opportunity for us over time. And I think that the dynamic will be similar to at a steady state to other narrow body delivers that we've had.
So in the past, we've given you the market driver statistic that we use that every about 30 narrow body deliveries necessitates a simulator in the market. And now that it's clear that the MAX will require simulation based training, you would expect that airlines that previously were going to be able to let's say they had a MAX, an NG fleet and we're going to transition to a MAX. Well, maybe then they're going to be well, most likely, they're going to be less using their NG simulators because it will be more advantageous to them to move to a permanent solution using MAX simulators or outsourcing their training to providers like ourselves, which offer Max training. So that gives you some of the I guess, at a steady state, I expect this to be just like another narrow body type.
Right. And I think Boeing was recently mentioning about some updated pilot training requirements that the regulators from the U. S, Canada, Europe have mapped out. Have you been involved in those discussions at all? Or do you expect discussion going forward?
Well, I wouldn't break it down. I'll leave it Boeing answer the overall questions that are asked. But I could tell you though that we have high level meaning. I personally am on a call every month with senior leadership of return to service at Boeing. We're a partner to them to get the fleet back in the air and to support the authorities and our customers because we have the great majority of sales of simulators for 737 MAX we have.
So you can well imagine that we're involved, but in terms of the decision making is coming out of the authorities.
Okay. Thank you for that. That's all my questions.
Thank you. Our next question comes from the line of Fadi Chamoun with BMO. Please proceed with your question.
Yes. Good afternoon. Thank you. Sonya, we're getting a lot of question about this Canada wage program, I guess. And I think you've collected year to date somewhere around $80,000,000 and I think in this quarter around $35,000,000 Should we consider these as income that would have otherwise basically subsidizing or offsetting what could have been wage reduction or headcount reduction or things like that?
Or is there a bottom line impact from these wage subsidy program on the first half results? And if you can if you have visibility, if you can give us an idea, what do you expect from those kind of programs in the second half of the year?
No. So you should absolutely look at it as ultimately an offset as you mentioned. So as part of the mitigation measures we sought out different government programs globally and we've got about, I think, 20 different countries. The lion's share is really in the Canadian program. So the other countries, sometimes it's literally just a flow through that the governments use used to subsidize the employees.
The Canadian program is slightly different. So in total, as we mentioned, dollars 35,000,000 in the quarter. But as you'll remember, some of the measures that we took quite early on was highly impactful, 2,400 people furloughed or reduced work weeks and so on. And so what this program essentially allowed us to do is to call back those furloughs and employees and worked weeks. So essentially neutralizing the impact.
So it's relatively neutral. As for the future, the program is continually being changed. It's still there until June and a lot of moving parts to really kind of be able to answer that question.
Okay. Okay, that's great. The other question I had is on the cadet training program. I think you have a number of cadet training program with various airlines. Have these programs been kind of scaled back?
I'm just trying to understand how kind of airlines are looking at some of their ab initio training requirement going forward that they're scaling back? Or are you seeing them kind of remain with their original plan despite the pandemic?
Well, that's exactly the case, Fadi. People have maintained their original plans. Don't forget it takes at least a neighborhood of 2 years to create a pilot. And actually, we came out with our CE pilot forecast just yesterday. If you have a look at it, I still think it's a good career to become a pilot.
And because we were in a pilot shortage situation, as you will recall, in the not so distant past. And although, obviously, the pilot profession has affected significantly in the shorter term because of COVID, the wave of retirements as well as basically movements in the workforce will recover and we will need quite a number of pilots going forward. So going back to your question, all of our programs have been maintained. In fact, we've won more business. We won, for with Boeing.
We announced that last quarter, a contract to deliver pads for them. So I haven't seen any impact. In fact, our flight hours are basically the same. If the only effect that we've had is where we've had to close centers temporarily like that for example in Australia, in Melbourne because of COVID and that's affected our flight operators. But in the end of the day, going back to our pilot demand forecast, what we forecast is demand for 27,000 new pilots by the end of 2021.
And if you think about it, it takes 2 years to make a pilot where you want to make sure that you maintain it. That's what our airline partners are doing.
Okay. That's great color. Thank you. And maybe one last question. You said 35 to 40 deliveries full flight simulator this year.
If you have enough visibility, can you give us an idea what kind of orders run rate do we expect this year?
What kind of runway you mentioned? I missed that.
A run rate on new order sales.
Go ahead, Sonia. You answered the question?
Yes. I think what we've said is that we expect order intake or order sales, the number of things to be lower this year, reflecting the environment. But that we'll keep and expect to keep a market share of that.
Yes, that's exactly right, Betty.
Thank you.
Thank you. Next, we have a question from the line of Kevin Chiang with CIBC. Please go
ahead. Hi, good afternoon. Thanks for taking my question here. And thanks for the color on the queues and how you think about it, Sonya. So if I look at in the quarter, you did a mid teen margin with utilization at 49%.
Look, the last time we saw your margins around these levels, utilization of somewhere in the 60s. And I know mix plays a role and you've obviously taken a lot of cost cutting measures here. But do you think you can get back to pre pandemic Civil Margins at a significantly lower utilization rate than you were seeing, I guess, pre crisis, just given where your revenue mix is today?
I think I'll maybe comment on the quarter first. And this we're comparing a highly kind of impacted Q1 versus kind of maybe a little bit, I guess, more stabilized dynamics in Q2. And what it highlights is that the model has really good operating leverage, right? So we saw more volume on the through the utilization. And also like you said, mix matters and has an impact.
So there's a higher proportion, a faster recovery on that, which is generally higher yield. But also there was a higher volume on the product side. So you'll remember that there was only 2 deliveries last quarter. So, we revenue is driven on the delivery side. And so 10% in this quarter helped also on the volume and drive the leverage there.
Going forward, I think, listen, it's a bit early to kind of give outlook for the future for upcoming years. But that's the reason we've engaged in this restructuring program and really kind of focusing on internal processes, the optimization of our asset base footprint, really focusing on digitally enhancing processes and kind of taking the lessons learned with the pandemic and more and becoming even more efficient, right? And so driving $50,000,000 of recurring structural savings for FY 2022 and on. And so that will be part of that conversation because the volume doesn't necessarily have to come up at the same level or at the same speed to drive a higher level of profitability.
I appreciate the color there. In just turning to healthcare, it looks like a little bit of a leadership change there with Hollywood just taking over as President or being appointed as President. And I think, Mark, you mentioned some of the opportunities that you see within healthcare that may have materialized here during the pandemic. I'm just wondering as you look at those opportunities, do you see those as being complementary to the previous strategy you had within healthcare? Or should we think about this segment now kind of pivoting towards another direction?
And it feels like this division has been in a bit of an incubation phase for, I guess, quite a while now. Just wondering when you think it hits an S curve within its growth trajectory and it kind of breaks out of this kind of $30 some odd million of quarterly revenue, which seems to generate pretty consistently right now?
Well, look, I tell you, I am very bullish on Heidi Wood leading our medical division, but absolutely sure about that. I think if anything has been is going to be propelled going forward post pandemic. One of them is going to be the propensity for simulation based training in healthcare. And I think we're quite happy and I know I just kind of had a review with Heidi with regards to the healthcare division. And they're very, very complementary of the people in the organization, the products and services suite that we have.
As I've mentioned before, the products that we have in the healthcare division are very profitable. And in a lot of cases, more profitable than in our core divisions. And it's a question of volume. It's a question of volume. We know that we expected the volume is there.
She's been meeting with a lot of customers and came away from very encouraged. So I would basically say that we're pretty good executive in charge here, an executive with a lot of bandwidth, a lot of experience and a lot of business experience and that is singularly going to propel our products and services and lead the workforce to what I know is the growth that's out there in this business, which is only going to get better in this post pandemic world.
That makes sense. And maybe just last one for me. I think in the midst of kind of repositioning some of your assets just given all that's happening in the world today and you did put out your pilot outlook yesterday. I'm just wondering when you think of repositioning your assets, do you think of positioning them based on kind of decade outlook of where you see pilot demand and where you see various growth rates across various continents? Or are you taking a more near term approach and trying to position those assets where you see maybe near term growth where Asia Pac might be returning faster to travel and some other markets are a little bit more constrained because of travel restrictions?
No. Look, just like the rest of our business, we always take a strategic view on it. And it's certainly not a short term consideration. And as I mentioned, when we talked about the restructuring and the asset relocations and some of the Bay Trade Center consolidations that we're having, some of them that we've announced already, is mainly looking at the what is going to be the market demand or sort of the demand that we expect to be out there based on the forecast of the industry's recovery. And of course, the conversations that we have with airlines around the world and business jet operators, I mean, this is one of, again, crisis favored like this one favors the leader.
And one of the consequences of that or maybe an artifice of that is the fact that we have conversations with the majority of the world's airlines because they are our customers in one way or form. So we're able to get a pretty good view of what training activities should be like over the next 2 to 5 years. And that's what we that plus the IATA forecast is what we used to basically plan our footprint going forward.
That's it for me. Thank you very much for taking my questions.
Thank you. And we now have a question from the line of Cameron Doerksen with National Bank Financial. Please proceed.
Yes, thanks. Good afternoon. Question on defense. Mark, you had some prepared remarks on the defense business there. I'm just wondering if you can go into maybe a little more detail on what the game plan is going forward to improve the profitability in defense because as you know, it has lagging for a number of quarters?
Yes. Well, look, 1st and foremost, I think it's I always say there's nothing wrong with the defense business that a few $100,000,000 of orders went fixed. I say that and I say that to the team all the time. So clearly, it's about growth and you throw more growth. And of course, when we bid on projects, we certainly bid to be able to go into the contract with a market that will be accretive to CAE.
I mean, obviously, it depends on the service or products contract. So 1st and foremost, get more volume and more volume, of course, that affects your profitability because you lower your overhead rates that in which case that helps you even better makes you more profitable and more marketable going forward in terms of winning bids. At the same time, we can absorb more SG and A and that's where we get multiyear service contracts. That helps because you don't have to eat what you kill every year. And we have a project underway, which call it's part of our overall restructuring and the improvement programs that we've launched and learnings to do things differently with some of the insights that we've gained during the pandemic and before.
And we call those internally Project Phoenix, Project Crossroads. And those, to me, a couple of more growth will be the result in better execution, coupled with growth, will result in what I certainly expect to be double digit margins in defense.
Okay. That's good. Thanks. And just secondly on, I guess, maybe a capital allocation question. I think the free cash flow is probably trending a little better than what you might have expected earlier in the fiscal year.
So I'm just wondering if you can comment on what the when the decision will be made to reinstate the dividend, if that's something that we should potentially expect in the next couple of quarters?
Well, I'd tell you the capital allocation priorities haven't changed. We always take a balanced approach to invest in our first priority, which is accretive to sustainable growth opportunities, while maintaining a solid financial position. That's what we're going to be doing. The current returns to shareholders have been there in our past obviously. It's always been a function of level of excess free cash flow and it's an ongoing discussion that we have with the Board.
So I think we have to look at things on a case by case basis as we go, but there's a lot of we see pretty interesting growth opportunities in front of us right now.
Okay, fair enough. That's all for me. Thanks very much.
Thank you. And we now have a question from the line of Benoit Poirier with Desjardins Capital Markets. Please go ahead, sir.
Yes. Good afternoon and thank you. Just on defense, could you provide maybe an update on the large project contract that were impacted early in the pandemic? And maybe the mix between equipment and services you're seeing these days?
Well, I think, Benoit, as we said, this year in defense is a transition year because of some of those issues that we have on large contracts, contracts in the Middle East, which we were literally tools down and in some cases still tools down and the level of less traffic in some of our training centers because of pandemic related restrictions. Certainly, beyond this current year, we see a growth business. And when I'm quite encouraged with our new defense leader, Dan Galveston, and the amount of insight he's driving to business, the amount of leadership and energy he's driving here. So I'm quite confident in that. In terms of product service mix, it's pretty similar to what has been the best.
That's when you want to add to?
Yes. It's still, I think, a higher proportion on the services side than the product side, and that's being reflected in the margins also.
At the moment, about 2 thirds, I think? Yes. Yes, 2 thirds.
Okay. That's great. And maybe could you share any thoughts about your expectation for the new leadership under Daniel Gilson? And maybe if you could give us an update related to your active bidding proposal, the amount that you tend to disclose every quarter? Thank you.
Well, I think I can said in previous question, I'm very pleased to have somewhat of Dan's caliber on board at SK8. Dan has very positive energy that he brings to the team in defense. And I'm very, very confident that he's going to do great things to bring out the full potential of our business, which going back to the question that was previously said, admittedly was not the case for last couple of years. So he brings a wealth of knowledge and experience specifically in the kind of business that we have in running an SSA company and a special security agreement. We're a Canadian company needing that to be able to sell, for example, to all branches of the U.
S. Military, which we do. He understands the landscape within the current requirements in defense for multi domain warfare and the real going forward, what is going to be training for to deal with near peer threats that are out there, which is different. He understands the technological capabilities of CAE and really how to leverage them into the high value areas like the contract that I mentioned during my remarks, the single synthetic environment or special operations command, just as using that example. So look, we made some structural improvements in defense.
And so look, I think stay tuned. We're confident that defense is a solid growth business longer term. And the latter end of your question, I think the number that we have right now is $4,800,000,000
Okay, that's great. And last one for me, you talk about the growth opportunities. How should we be thinking about CapEx post fiscal 2021 as there might be some catch up in it given the growth opportunities you foresee?
Benoit, I think we just came out with guidance for this year. So CapEx to date at $33,000,000 was tracking a little under the $50,000,000 that we provided as guidance and planning for $100,000,000 for the year. Beyond that, I think we'll wait until March May. So some of that CapEx is related to footprint optimization as we consolidate training centers. And of course, we'll pace investments with the level of demand and in line with customer contracts.
But essentially, where we have and we continue to see some opportunities for some platforms where there's demand, where there's these opportunities, CapEx deployments drive nicely accretive returns and really within the 5 year horizon are driving 20% to 30% incremental returns, and it's a good proxy for cash. So where we have we continue to see those opportunities, we'll be acting on.
Okay. Thank you very much for the time.
Thank you. And now we have a question from the line of Doug Taylor with Canaccord Genuity. Please proceed.
Yes, thanks. Good afternoon. Thanks for taking my questions. Just a couple for me. Firstly, with respect to the restructuring benefits, the $50,000,000 that you were targeting, and I'm sorry if I missed it, but can you update us on where you are?
What was recognized within the quarter? Or how you now expect the remaining benefits to ramp over the coming quarters?
So we incurred $50,000,000 of cost this quarter and we'll start to it'll kind of go into Q1 of next year, but the bulk of those charges we expect this year. But there's some longer lead items with asset relocations and facilities optimizations. Now in terms of the benefits, the guidance and the info is $50,000,000 of recurring structural savings starting fiscal 2022. We just started the program, and a good part of that program is footprint asset optimization would require some bit of time to consolidate the facility. And also, Mark was talking about all the digital process enhancements, etcetera, that are underway and so on and ongoing throughout the year.
So we'll really start seeing the benefits come through next year, maybe some a little bit this year, but really next year $50,000,000 of recurring structural savings.
That's helpful clarification. My second question is with respect to the types of deals that you're looking to potentially cut with some of your airline customers for outsourcing training and that's certainly an exciting growth vector during this pandemic. So when and if that happens, can you speak to whether there are incremental investments that would be required on your part or will you be taking on additional capacity or would all the potential business you would be outsourced to you be you'd be able to service within your existing portfolio and infrastructure? That would be helpful. Thank you.
I think it depends on the deal, obviously, that we look at. But if we look at past airline outsourcings, the way we've done them, there's been quite a number of different types. But in a lot of cases, when we take over, for example, the partners' existing assets, assets, think about what we did with Japan Airlines, Singapore Airlines. So they basically contribute their existing training assets or simulators. So that's one way of doing it.
So either way we look at it, our view, it has to be accretive to see go forward picture. And I would expect that sometimes we're going to be combining assets to be able to do that.
Okay. So is there any go ahead.
Go ahead. Carry on.
I was
just going to ask, I mean, given the pandemic is obviously a new phenomenon for the airlines, if that has changed the decision making with respect to outsourcing to favor a certain type of outsourcing arrangement versus prior cycles?
I don't think so. No, I think look in the end it's usually the same kind of dynamic. If you're an existing airline and you have a training operation, you still have don't forget, and that's the great thing of our business, it's a regulated business. Every 6 months, typically, pilots have to go back for training. So if you're an airline, you have to have either have the capacity for all your pilots to be able train on a regular basis and to take advantage of our necessary initial training as you base that pilots retire or pilots furloughs, where you move it in your pilot workforce.
So you need the infrastructure. So if you're already an airline then most likely you have that infrastructure. So typically what you bring into the deal is that those assets and we're very good about because that's our business and we do it for a very large number of airlines to tune of 1,000,000 flight hours a year or 1,000,000 training hours a year. We're very good at extracting maximum utilization by efficient scheduling, efficient delivery of the courses. So typically what we would do is have less of a need for and then we're able to offload some of that capacity and sell it for 3rd party training.
So I wouldn't expect the dynamic to change very much from that standpoint, except to say that in this kind of environment, we have more discussions because people want we do want to understand that because if they can make their cost structure lower, which you could certainly do and more and perhaps even better make it variables only use you only pay for what you use and when you use it because typically, for example, the Western world, in a normal year, which of course, this is not a normal year, but seasonal patterns are you don't train the summer because you're flying. But if you have your training infrastructure, then you're paying for it, our goal being an advantage. And the only thing, of course, is that these days, obviously, with the pandemic, still very much out there, airlines have a lot on their place these days and this is typically the same themes. Hopefully, that gives you a bit of a broader color.
That's very helpful. Thank you very much. Thank you. Thank you. Thank you.
Thank all the members of the investment community for their questions. With the time remaining, I'd like to now open the call to members of the media, should there be any questions from members of the media.
Thank you. Now we're going to continue on. This is a question and answer session for the press and media. The first question
Hi, Mark. I have two questions for you. One is, you talked about how the recovery is going to be closely tied to the lifting of travel restrictions. Do you have any sense of timing of that or your view on the timing changed recently?
Well, I have the same view as everybody else. To be very frank, it hasn't changed. I mean, we model our planning based on the IATA forecast at the highest level and that's complemented with discussions that we have with individual airlines because it's no exaggeration that the bulk of the world's airlines are our customers one way or another. So I think that way that translates is IATA forecast about a 66% reduction in passenger traffic this year. So that's what we would use overall and that it also calls for air passenger traffic to recover to 2019 levels in late 2023, early 2024.
Maybe that gets better because of news we had yesterday, maybe, but to hopefully it does, that would be great. But our planning hasn't changed from those statistics I just mentioned.
Okay. And the second thing is, I'm wondering in terms of defense spending, with the new administration in the U. S. Coming in, are your expectations of orders or business going to change?
No, no. And the reason I would tell you two reasons. Number 1 is that, first of all, I would tell you that the day that the orders that we can get at CAE being a proxy to the size of U. S. Defense Department, I would be very happy.
I think we have lots of opportunity to grow within the defense budgets that are out there today and are foreseen to be out there under any reasonable scenario going forward. The other thing is that the products and services that we provide, we by definition align ourselves to the defense strategy and the expected defense where the money is going to be spent over the next few years. And the great thing about, for example, governance and specifically, if I was to use the largest defense market in the world, the U. S. Defense Department, basically, they tell you what they're going to spend on over the next few years.
So our investments in research and development and bidding activity are very much aligned to those national defense priorities. So I feel very good about our prospects for growth in the next few years. And then we and I think one thing that's obvious in there to understand is what we do in simulation based training that actually saves money relative to, for example, training, which you have to do, you have to continue to do. So if we can move more of that training, simulation based training, well, obviously, that reduces costs. You're on the spirit of goodness there.
So you're not concerned about new government reducing spending on defense?
No. Okay. Thank you.
Thank you. And up next, we have Alison Lampert with Reuters. Please proceed.
Hi. So when would you expect non U. S. Regulators like Transport Canada and EASA to LIFIMAX grounding compared with the FAA? And as a follow-up, are you so what kind of timing are you seeing in terms of bookings for the MAX training?
Well, starting with your first question, Allison, look, I can't answer for the regulators, but comments that I've seen, you saw probably news from the FAA literally today, positive comments from the head of the FAA today. I would expect Transport Canada not be far behind typically just because they've been doing their certification testing in lockstep. But again, I can't speak for them. And the comments that I've seen from the Head of EASA, Patrick Key, most recently on the recovery of the certification of the 737 MAX was positive. So I would expect that would come sometime behind.
But again, I'm not the guy that really can answer with any certainty with regards except that it's all looking very positive at this stage. With regards to MAX orders, we're booking them now. We have, again, the lion's share of the simulators for the MAX have been won by CAE, and I would expect that we're going to continue to do well there and we're continuing to deploy MAX simulators for our own training centers in that regard.
And what about bookings for the training centers? When are you seeing those? When are people coming in?
Well, actually the people are trained now. I will give you an idea of what, for example, here in Canada. Air Canada has 2 of our MAX simulators. And I can tell you that even though the fleet has been grounded, as it has been around the world, Air Canada has maintained the training of their pilots. I think they had about, memory serves, about 500 pilots that were trained on the 737 MAX, and they continue to keep those pilots trained.
So training activity has not stopped. It's continued during this whole time because of the time it takes to ramp up pilots. So it may take only a day or 2 to take an airplane out of mothballs, But if you haven't prepared for it, it could take you literally months to get your pilots back up to speed to be able to fly them.
For questions this afternoon. Again, I want
to thank members of the investment
community and the media for their time
listening to us and for their questions and remind you that a
transcript of today's call can
be found on Citi's website. Thank you and good afternoon.
Thank you. And that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect your line. Thank you once again. Have a great day everyone.