Good day, ladies and gentlemen. 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, including management's 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 CAE's annual MD&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 Marc Parent, CAE's President and Chief Executive Officer, and Sonya Branco, our Chief Financial Officer. After remarks from Marc and Sonya, we'll take questions from financial analysts and institutional investors, and following the conclusion of that Q&A period, we'll open the call to questions from members of the media. Let me now turn the call over to Marc.
Thank you, Andrew. Good afternoon to everyone joining us on the call. I'll first discuss some of the highlights of the quarter, and then Sonya 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 eight 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 second quarter, which is testimony to these efforts and to the resiliency of our business, which is largely recurring and driven by regulations. We delivered CAD 0.13 of earnings per share, and we generated CAD 45 million of free cash flow, which is a good reflection of the cash-generative nature of CAE's business.
We also booked CAD 668 million in new orders for a 0.95x 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 first quarter. 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, the higher volume helped drive this operating margin back to the double digits, coming in at 14.2%. We also continued to book new orders, with civil signing training solutions contracts valued at CAD 353 million.
These included three full-flight simulator sales, a five-year business aviation training agreement with a charter company in the U.S., a five-year exclusive training extension with Virgin Atlantic, a two-year business aviation training agreement with XOJET Aviation, and a two-year business aviation training extension with VistaJet. In defense, we also began to see a more positive picture than the first quarter, 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 for CAD 278 million, including contracts to continue providing fixed-wing flight training and support services to the U.S. Army at the CAE Dothan 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-135 and C-130H aircraft training system programs. Defense also received orders for maintenance and logistics support services for the German Air Force's Eurofighter 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. 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 CAE 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 against COVID-19 with complimentary 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 Sonya, who will provide additional details about our financial performance. I'll return at the end of the call to comment on our outlook. Sonya?
Thank you, Marc, and good afternoon, everyone. Consolidated revenue of CAD 704.7 million was up 28% compared to the first quarter, and is 21% lower compared to the second quarter last year. Segment operating income was CAD 79.3 million, compared to a loss of CAD 2.1 million before specific items in Q1, and an income of CAD 126 million before specific items last year. Quarterly net income before specific items was CAD 34.2 million or CAD 0.13 per share, which on the same basis compares to negative CAD 0.11 in Q1 and CAD 0.28 in the second quarter last year. Free cash flow was CAD 44.9 million in the quarter, which is an improvement over the -CAD 7.1 million 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 before specific items was 7.2% this quarter, compared to 8% last quarter and 11.5% last year. Growth maintenance capital expenditures totaled CAD 15.2 million this quarter, and for the first half of fiscal year, totaled CAD 33.2 million relative to our outlook of approximately CAD 50 million. We expect total CapEx of approximately CAD 100 million for the year, commensurate with our opportunities to invest incremental capital with accretive returns and free cash flow.
Income tax recovery this quarter was CAD 1 million, representing an effective tax rate of 14%, compared to 17% for the second quarter 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% this quarter. Our net debt position at the end of the quarter was CAD 2.4 billion for a net debt to capital ratio of 50.1%, and net debt to EBITDA before specific items was 3.16x at the end of the quarter. All told, between cash and available credits, we continue to have approximately CAD 2 billion 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 level of demand 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 certification and work from home practices. We continue to expect to record the restructuring expenses of approximately CAD 100 million for the entire program, which will be carried out through fiscal 2021 and 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 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 CAD 50 million starting in our fiscal 2022. We began executing a restructuring program this quarter, and as at the end of September, we had incurred CAD 51.1 million of restructuring expenses. With that, I will ask Marc to discuss the way forward.
Thanks, Sonya. The COVID-19 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 CAE'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 resumed. 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 CAE's capabilities to revolutionize our customers' training and critical operations with digitally immersive solutions and to increase our market share. We remain confident that CAE will reemerge 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 35-40 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 bolster team and how that will bring to bear. I'm very encouraged by our recent competitive wins and 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 operation support, we believe we'll make inroads into the broader defense market in the period ahead. 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. In Healthcare, we've seen emerging growth vector with the ramp-up of distance learning this fall. While still early, I'm encouraged by our progressing, including new tools we just recently introduced on how to deliver training using our platforms, Maestro and CAE LearningSpace, 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 a macro backdrop that has been complex, and of course, it goes without saying, under higher than usual uncertainty. Our employees have conducted themselves through these challenging last eight 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 rising from it stronger and even more aligned together. With that, I thank you for your attention, and we're now ready to answer questions.
Thank you.
Operators, can I now take questions from analysts and institutional investors?
Absolutely. Thank you. We'll now begin the question-and-answer session for our analysts. Please note, if you would like to register for a question, press the one followed by the four on your touchtone phone. You'll hear a three-tone prompt to acknowledge your request. If your question has been answered and you'd like to withdraw your registration, press the one followed by the three. One moment please for our first question. 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. 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 business aircraft has been less affected overall in terms of the flight activity, which is a driver for us. Commercial, I think it's kind of plateaued, and as we said last quarter, it's pretty much in line with the activity of the commercial aircraft that are being utilized right now. If you look at The market right now, overall for commercial aviation, there's been 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. 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. It does represent about a third of our civil business. If you just 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. Anecdotally, and I provided a little color last quarter on this, is our charter operator customers are seeing significant volume in business aircraft from customers who are new to private jet travel. 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. That's the kind of color I would give you right now with regard to utilization.
Okay, it's still the same dynamic within the two, more and more wet training with business jet training and a lower but growing amount in commercial?
Yeah, 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, are those kind of conversations still advancing? What's the reception with the airline customers?
No, absolutely. There's several discussions underway. That hasn't changed yet. The dynamic continues that airlines are more amenable to partnering with us. It's become more resilient and have 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. I do believe that some of these deals will come to fruition, and it's just natural for us. We'll keep you informed. We don't control the timeline, certainly, and we're patient.
Okay. 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 the sense of the scale of that 10,000 unit order?
Well, in the quarter, we had approximately CAD 7 million 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 the profitability of those ventilators because although I do expect them to be profitable and cash generative, you can 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-19. I'm extremely proud of what we've been able to do. Our top priorities on the contract are really making sure on 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?
Yeah, 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. Good afternoon. 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. 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. How are you leveraging those opportunities? Thanks.
Well, I wouldn't break it down right down to that level, but I could tell you that, as we've said before, about two-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. Actually, a lot of aircraft, those that we do have on wide body, some are being used for cargo, and we're actually seeing a lot of narrow body airplanes being used for cargo and being converted to that end.
Great. Are you seeing any significant increase in cargo training, Marc?
Well, definitely there's more. I'm not saying anything you don't know. There's a lot more cargo activity. To the extent that we train cargo, yes, we have seen improvement in the training as 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. Moving on the commercial side on MAX. Obviously, MAX is getting quite close to its recertification, I guess. A couple of airlines in the North American market have spoken about ungrounding them pretty shortly. Boeing has closed, the backlog is sitting around about 3,300 aircraft. 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 MAX comes back, or do you see maybe a pent-up demand after they have delivered maybe a couple hundred or so aircraft?
Well, I don't think. Look, obviously, there's a short-term dynamic that's occurring here. I think, and I would get, when you look at all of the whole order book that you mentioned that's Boeing, it's got a very solid order book, as we know, very large. When you look at the, basically excluding lessors, there's about 73 operators at the moment who account for about 1,300 of those orders on MAX, that we know they don't currently have a MAX training solution. That gives you an idea of the opportunity for us over time. I think that the dynamic will be similar to at a steady state to other narrow body deliveries that we've had. 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.
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, a 737NG fleet, and were going to transition to a MAX. Most likely they're going to be less using their 737NG simulators because it'll 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. That gives you some of the, like I said, on a steady state, I expect this to be just like another narrow body type.
Right. I think Boeing was recently mentioning about some updated pilot training requirements that the regulators from the U.S., Canada, and Europe have mapped out. Have you been involved in those discussions at all, or do you expect discussions going forward?
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 meetings. 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. 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. I think you've collected year to date somewhere around CAD 80 million, and I think in this quarter, around CAD 35 million. 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? Is there a bottom-line impact from these wage subsidy program on the first half results? 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. You should absolutely look at it as ultimately an offset as you mentioned. 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. The other countries, sometimes it's literally just a flow-through that the governments use to subsidize the employees. The Canadian program is slightly different. In total, as you mentioned, CAD 35 million in the quarter. As you'll remember, some of the measures that we took quite early on was highly impactful. 2,400 people furloughed or reduced workweeks and so on. What this program essentially allowed us to do is to call back those furloughs and employees and workweeks. Essentially neutralizing the impact. 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. 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 requirements going forward. If 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 the neighborhood of two years to create a pilot. Actually, we came out with our CAE pilot forecast just yesterday. If you have a look at it, I still think it's a good career to become a pilot. Because we were in a pilot shortage situation, as you will recall, in the not-so-distant past. Although obviously, the pilot profession has been 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. Going back to your question, all of our programs have been maintained. In fact, we've won more business.
We won, for example, with Boeing, we announced that last quarter, a contract to deliver pilots for them. I haven't seen any impact. In fact, our flight hours are basically the same. The only effect that we've had is where we've had to close centers temporarily. Like, for example, in Australia, in Melbourne, because of COVID, and that's affected our flight operators. In the end of the day, going back to our pilot demand forecast, well, we forecasted demand for 27,000 new pilots by the end of 2021. If you think about it takes two years to make a pilot, well, you want to make sure that you maintain it, and that's what our airline partners are doing.
Okay. That's great, Marc. Thank you. Maybe one last question. You said 35-40 deliveries for 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 meant? Sorry, I missed that.
A run rate on new order sales.
Go ahead, Sonya. You answer the question. Go ahead.
No, I think what we've said is that we expect order intake or order sales, the number of them, to be lower this year, reflecting the environment.
Okay.
That we'll keep and expect to keep a market leading share of that.
Yeah. That's exactly right, Fadi.
Okay. 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. Thanks for the color on the Q's and how you think about it, Sonya. If I look at in the quarter, you did a mid-teen margin with utilization at 49%. The last time we saw your margins around these levels, you had utilization of somewhere in the 60%s. I know mix plays a role and you've obviously taken a lot of cost-cutting measures here. 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 sits today?
I think I'll maybe comment on the quarter first. We're comparing a highly impacted Q1, versus maybe a little bit, I guess, more stabilized dynamics in Q2. What it highlights is that the model has really good operating leverage, right? We saw more volume through the utilization. Also, like you said, mix matters and has an impact. There's a higher proportion, a faster recovery on that, which is generally higher yield. Also, there was a higher volume on the product side. You'll remember that there was only two deliveries last quarter. 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 give outlooks for upcoming years.
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? Driving CAD 50 million of recurring structural savings for FY 2022 and on. That'll 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. Maybe just turning to healthcare, it looks like a little bit of a leadership change there with Heidi Wood, just taking over as president or being appointed as president. I think, Marc, you mentioned some of the opportunities that you see within healthcare that may have materialized here during the pandemic. 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? It feels like this division's 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 CAD 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. We're absolutely sure about that. I think if anything is going to be propelled going forward, post-pandemic, one of them is going to be the propensity for simulation-based training in healthcare. I think We're quite happy, and I know I just had a review with Heidi with regards to the healthcare division. She's very complimentary of the people in the organization and 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. In a lot of cases, more profitable than in our more core divisions. It's a question of volume. We know that we expect that the volume is there. She's been meeting with a lot of customers and came away from it very encouraged.
I would basically say that we're putting an 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. Maybe just the last one from me. I think you're in the midst 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 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's certainly not a short-term consideration. As I mentioned, when we talked about the restructuring and the asset relocations and some of the training center consolidations that we're having, some of them that we've announced already, is mainly looking at what is going to be the market demand or the demand that we expect to be out there based on the forecast of the industry's recovery. Of course, the conversations that we have with airlines around the world and business jet operators. This is one of, again, crisis favors the leader. 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.
We're able to get a pretty good view of what training activities should be like over the next two to five years. That, plus the IATA forecast, is what we use to basically plan our footprint going forward.
That's it for me. Thank you very much for taking my questions.
Thank you. We now have a question from the line of Cameron Doerksen with National Bank Financial. Please proceed.
Yeah, thanks. Good afternoon. Question on defense. Marc, you had some prepared remarks on the defense business there. I am 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 been lagging for a number of quarters.
Well, look, first and foremost, I always say there's nothing wrong with the Defence business that a few hundred million CAD of orders wouldn't fix. I say that, and I say that to the team all the time. Clearly it's about growth, and you throw more growth. 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. Obviously, Defence is a service or a products contract. First and foremost, get more volume. More volume, of course, that affects your profitability because you lower your overhead rates, 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&A, and that's where we get multi-year service contracts.
That helps because you don't have to eat what you kill every year. We have a project underway, 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. 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. No, that's good. Thanks. 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. I'm just wondering if you can comment on 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 tell you the capital allocation priorities haven't changed. We always take a balanced approach to invest in our first priority, which is accretive and 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, and 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. I think we have to look at things on a case-by-case basis as we go. 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. We now have a question from the line of Benoit Poirier with Desjardins Capital Markets. Please go ahead, sir.
Yeah. Good afternoon, and thank you. Just on Defense, could you provide maybe an update on the large projects contract that were impact 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 from the lease, 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 growth business. I'm quite encouraged with our new defense leader, Daniel Gelston, and the amount of insight he's driving into the 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 it's been the past. Does one of you want to add to?
Yeah, it's still, I think, a higher proportion on the services side than the product side. That's being reflected in the margins also.
At the margin, about two-thirds, I think?
Yeah.
Yeah, two-thirds. Yeah.
Okay. That's great. Maybe could you share any thoughts about your expectation for the new leadership under Daniel Gelston? Maybe, if you could give 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 someone of Dan's caliber on board at CAE. Dan has very positive energy that he brings to the team in Defence. I'm 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. He brings a wealth of knowledge and experience specifically in the kind of business that we have in running an SSA company, and 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 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 high-value areas, like the contract that I mentioned during my remarks from the single synthetic environment or Special Operations Command, just as using that example. Look, we made some structural improvements in defense. Look, I think stay tuned. We're confident that defense is a solid growth business longer term. The latter end of your question, I think the number that we have right now is CAD 4.8 billion.
Okay. That's great. 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 given the growth opportunities you foresee?
Benoit, I think we just came out with guidance for this year. CapEx to date at CAD 33 million was tracking a little under the CAD 50 million that we provided as guidance and planning for CAD 100 million for the year. Beyond that, I think we'll wait until March and May. Some of that CapEx is related to footprint optimization as we consolidate training centers. Of course, we'll pace investments with the level of demand in line with customer contracts. 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 five-year horizon, are driving 20%-30% incremental returns. It's a good proxy for cash. Where we continue to see those opportunities, we'll be acting on them.
Okay. Thank you very much for the time.
Thank you. Now we have a question from the line of Doug Taylor with Canaccord Genuity. Please proceed.
Yeah, thanks. Good afternoon. Thanks for taking my questions. Just a couple for me. Firstly, with respect to the restructuring benefits, the CAD 50 million 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?
We incurred CAD 50 million of costs this quarter, and it'll go into Q1 of next year. The bulk of those charges, we expect this year. There's some longer lead items with asset relocations and facilities optimizations. In terms of the benefits, the guidance and the info is CAD 50 million of recurring structural savings starting FY 2022. We just started the program, and the good part of that program is footprint asset optimization would require some bit of time to consolidate the facilities. Also, Marc was talking about all the digital process enhancements, et cetera, that are underway and ongoing throughout the year. We'll really start seeing the benefits come through next year. Maybe some a little bit this year, but really next year, CAD 50 million of recurring structural savings.
That's a 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. 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 be outsourced to you'd be able to service within your existing portfolio and infrastructure? That'd be helpful. Thank you.
I think it depends on the deal, obviously, that we look at. If we look at past airline outsourcing, the way we've done them, there's quite a number of different types. In a lot of cases, will we take over, for example, the partner's existing assets? Think about what we did with Japan Airlines, Singapore Airlines. They basically contribute their existing training assets or simulators. That's one way of doing it. Either way we look at it, our view, it has to be accretive to CAE's go-forward picture, and I would expect that sometimes we're going to be combining assets to be able to do that.
Okay. Is there Go ahead.
Go ahead. Carry on.
I was just going to ask, 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 more?
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, that's the great thing about our business. It's a regulated business. Every six months, typically, pilots have to go back for training. If you're an airline, you have to either have the capacity for all your pilots to be able to train on a regular basis and to take advantage of, or necessitate, initial training as you basically have pilots retire or pilots furloughed. You have movement in your pilot workforce. You need the infrastructure. If you're already an airline, then most likely you have that infrastructure.
Typically, what you bring into the deal is 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 the tune of a million training hours a year. We're very good at extracting maximum utilization by efficient scheduling, efficient delivery of the courses. Typically, what we would do, it has less of a need, and then we're able to offload some of that capacity and sell it for third-party training.
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 really want to understand that, because if they can make their cost structure lower, which you could certainly do, and perhaps even better, make it variable, so you only pay for what you use and when you use it. Typically, for example, in the Western world, in a normal year, which of course, this is not a normal year, but seasonal patterns are you don't train in the summer because you're flying. If you have your training infrastructure, then you're paying for it, our goal being advantage.
The only thing, of course, is that these days, obviously with the pandemic still very much out there, airlines have a lot on their plates 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.
I want to 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. We're going to continue on. This is a question and answer session for the press and media. If you would like to register for a question, press the one followed by the four. Members of the press and media, we welcome you to register your questions. Press the one followed by the four. One moment, please. The first question from the press and media comes from Ross Marowits with The Canadian Press. Please proceed with your question.
Hi, Marc. I have two questions for you. One is, you talk 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 has your view on the timing changed recently?
I have the same view as everybody else to be very frank, and it hasn't changed. 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. I think that way that translates is IATA forecasts about a 66% reduction in passenger traffic this year. 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. Hopefully, it does. That would be great. Our planning hasn't changed from those statistics I just mentioned.
Okay. 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. The reason I would tell you, two reasons. Number one 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 the 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 perceived to be out there under any reasonable scenario going forward. The other thing is that the products and service that we provide, we, by definition, align ourselves to the defense strategy and where the money is going to be spent over the next few years.
The great thing about, for example, governments and specifically, if I was to use the largest defense market in the world, the U.S. Department of Defense, basically, they tell you what they're going to spend on over the next few years. Our investments in research and development and bidding activity are very much aligned to those national defense priorities. I feel very good about our prospects for growth in the next few years. 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. If we can move more of that training to simulation-based training, well, obviously that reduces cost. You're in the spirit of goodness there.
You're not concerned about a new government reducing spending on defense?
No.
Oh, okay. Thank you.
Thank you. Up next, we have Allison Lampert with Reuters. Please proceed.
Hi. When would you expect non-U.S. regulators like Transport Canada and EASA to lift the MAX grounding compared with the FAA? As a follow-up, what kind of timing are you seeing in terms of bookings for the MAX training?
Starting with your first question, Allison. Look, I can't answer for the regulators, but the 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. Again, I can't speak for them. The comments that I've seen from the head of EASA, Patrick Ky, most recently on the recovery, the certification of the 737 MAX have been positive. I would expect that would come sometime behind. 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.
What about bookings for the training centers? When are you seeing those? When are people coming in?
Actually, people are training now. I'll give you an idea. For example, here in Canada, Air Canada has two 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's maintained the training of their pilots. I think they had, if memory serves, about 500 pilots that were trained on the 737 MAX, and they've continued to keep those pilots trained. The training activity has not stopped. It's continued during this whole time because of the time it takes to ramp up pilots. It may take only a day or two to take an airplane out of mothballs, but if you haven't prepared for it could take you literally months to get your pilots back up to speed to be able to fly them. Okay.
Operator, that's all the time we have 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 CAE's website. Thank you and good afternoon.
Thank you. 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.