Before we begin, I'd like to remind you that today's comments, including management's outlook and answers to questions, contain forward-looking statements. These forward-looking statements represent the company's expectations as of today, March 23rd, 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 its corporate website and in its filings with the Canadian Securities Administrators on SEDAR at www.sedar.com, and the U.S. Securities and Exchange Commission on EDGAR at www.sec.gov. Now I will turn the call over to Steve Arthur.
Great. Thank you, Chris, good morning, everyone. It's Steve Arthur. I'm an equity analyst here with RBC. Very pleased this morning to be joined by the leadership team of CAE. Extremely challenging and busy times, we very much appreciate your time to update investors on the situation and how it's being navigated at CAE. We're joined today by Marc Parent, CEO, Sonya Branco, Chief Financial Officer, and Andrew Arnovitz, VP of Strategy and Investor Relations. We've got about half an hour, I will focus the questions on three areas. Current operations of the business, balance sheet resilience, the long-term resilience of CAE's business model. To begin, I think I'll turn the call over to Marc for a brief opening comment.
Thanks, Steve. First, let me state the obvious. This is a crisis of unprecedented speed and magnitude that's caused a pretty dramatic disruption to the global air transportation system. Obviously, the downturn was led by a biological event, and while obviously very grave, we definitely believe it will be temporary. For the moment, the question on everyone's minds and ours is how long will it last and how deep will it be? No matter what the precise answers to those questions are, CAE has been designed for durability, and we're taking the appropriate actions to protect our company and all our stakeholders. We come into this crisis from a position of strength with a sound balance sheet and good liquidity.
At the same time, we're assuming a very tough period ahead, and we're taking immediate steps to preserve cash by cutting capital expenditures to minimal levels and reducing operating expenses, including measures that we've announced today, such as temporary layoffs and salary cuts across the board. In fact, a lot of the layoff notices have already been given to people. Now, to manage through the crisis, we formed a crisis committee in January, and together with our executive management committee, my team, we've been meeting seven days a week to guide the efforts to prepare for, and indeed manage CAE through the COVID-19 crisis. We have over 10,000 employees worldwide and operations in 35 countries at CAE. With government regulations and restrictions evolving in real time, you can imagine that we're managing a lot of complexity, and we've assembled an incredible team to provide vital decision support.
Our actions in this context are focused on three main priorities. Safety, continuity, and strength. If I detail those three, safety. Obviously, safety is our number one priority for our employees, our customers, and their families. We've invested in our IT systems and infrastructure over the past few years to enable remote working for employees who are not directly involved in the delivery of critical customer services. Already two weeks ago, under the advice of government agencies, we advised all of our employees around the world who can work from the safety of their homes to take advantage of the systems that we put into place, and to do so. That indeed is the way we're operating.
If I talk about continuity in terms of business continuity, we have a responsibility at CAE, which we take obviously very seriously, to provide essential services to our customers that are highly critical to the continuity of their operations. Whether maintaining pilot certifications to support the global air transportation system, maintaining the readiness of defense forces, or supporting our healthcare customers who are on the front lines of this pandemic. We've put in place strict hygiene protocols in all of our facilities, and we've implemented risk mitigation strategies through shift work of critical resource teams and other measures to ensure that we'll never let our customers down in the time of their greatest need by providing them the essential services that they need to continue operating. If I talk about strength.
Maintaining a strong and durable CAE is rooted in our training strategy, and its principal characteristic is offering a high level of recurring income from regulated certification. In fact, over 60% of CAE's revenues come from training services that are highly critical and recurring. In civil aviation, for pilots to remain active and to continue to hold their certifications, they need to train on a regular frequency, usually every six to nine months. In defense, our work is considered mission-critical, and our employees at CAE are deployed worldwide to actively support defense projects through all conditions. We have a large backlog of several full-size simulator orders, which has been funded by customer deposits and progress payments, and we're diversified with an approximate CAD 4 billion backlog in defense. We've always prioritized being an investment-grade profile, which has guided our capital strategy.
I'm confident that with the critical nature of the services we are continuing to provide to our customers, the strength of our financial position, and the measures we're taking to adjust our cost base, reduce capital investment, and otherwise preserve cash, we'll see our way through this episode before too long. Sir, how are you, Steve?
Great. Thank you. Thank you very much, Marc. We did have a little bit of difficulty with your line there, so we will continue to unpack a lot of those comments, but it did clear at the end. I guess just digging right into it, just in terms of operations, what's going on with your training facilities right now? How many of those centers have been forced to be closed? Can the pilots still get to those centers? What difficulties are you facing in providing the training in this environment?
As of this morning, we have 50 centers operational, Steve. We have three that are temporarily closed. [audio distortion]
Hold on. I'm having difficulty hearing.
Steve, I think that perhaps maybe Marc should hang up and try calling back in again. It seems like a bad line. In the meanwhile, as he does that, perhaps I could provide a bit of an update on the facilities question.
Yeah, please do, Andrew.
Yeah.
Okay. I will do that.
Okay. I think as our team gets a twice-daily briefing in terms of the network status, you can imagine it's very fluid. As of this morning, we had 50 of our training centers operational. Three of them have been temporarily closed and owing to lockdowns and mandatory school closures and border closures around the world, it's making things certainly more challenging. We look around the world, Asia is generally opening up somewhat, although we do have to be watchful of any sort of risks of second waves. We're seeing that Japan and Korea are actually doing well at the moment. Singapore is open, and we're training the anchor customer there. There's a more recent 14-day quarantine restriction there that makes third-party training much more difficult, but it is operating. Our center in the Philippines with Cebu, that's closed temporarily under the directives there.
Our center in Kuala Lumpur was closed for a few days under a public directive for school closures, but it since reopened, with the authorities determining that we are indeed providing an essential service. I think that that's a particularly important point to underscore here as we think about training around the world.
We're still training business and commercial aviation pilots in Dubai for the moment. I think there we're also facing temporary closure. The pilots who are in the centers now will complete their training, but we do see that there are recent government directives there as well. In South America, things are holding up reasonably well, apart from Peru, where we've had to close our center there. As you might imagine, given the geographic evolution of the virus, the biggest challenges we're facing at the moment are in Europe. So far, centers in Europe that have temporarily closed include Brussels and Milan, and that's due to the lockdowns there. In North America, we've had no closures at the moment, but this is also quite a fluid situation that we're watching in real time.
Okay. I think Marc touched on this in his opening comment earlier, just around the regulations around pilot training. Can you maybe talk a little bit about or explain why the airlines are continuing and need to continue training pilots over the next while, even if their flights are grounded for the time being?
I'm back on, Steve, so perhaps I can take that.
That's great. It's a much better line, Marc. Thank you.
Okay, good. Sorry about that. I think the bottom line is it's a regulated business that if airlines are flying at all, obviously they're flying at reduced levels. Is the business aircraft to a lesser extent, probably that was mentioned by Andrew. If you're flying, you have to train. As I mentioned, depending on the country, every six to nine months. We are seeing in this period of crisis right now that we're seeing some governments, like for example, in Europe, they're providing some leeway to airlines to be able to postpone their checkouts, I think going out at three months out. That's a temporary measure. We don't see it across the world. They're not doing it for purposes of cost. The only dispensation is that it's literally, airlines just physically can't get to their training centers, so it's very difficult for them to train.
If you think of examples about this, think about the whole 737 MAX episode. Even though the airplane has been grounded well over a year, airlines, by and large, have continued to train their crews in order to be able to be ready when the airplane resumes the flight. If they don't do that, and we saw that, I'll give you an example of one airline, Southwest Airlines, which basically, when they found out that they needed simulator-based training on 737 MAX, they had to scramble to train all their crews, and that became the long pole in the tent to getting the airplanes back in the air.
We were thanked literally by Gary Kelly, their CEO, on the call, on his investor call, because we literally pulled a rabbit out of a hat by providing them extra simulators that they needed at their greatest time of need. I fully expect, and we're seeing that airlines are going to continue to train because they have to, and they have to be ready for the times that they go back to increased capacity.
Okay. Great points. Just in terms of prioritizing our time, I think I'll jump to some balance sheet and liquidity topics now, which has obviously been very topical with investors. You ended last quarter with debt-to-EBITDA of around 2.7, debt to cap just above your target range. How should we be thinking about CAE's leverage right now, your debt maturities coming up and any covenants on that debt?
Thanks, Steve. I'll take on that one. As you know, our capital allocation priorities have always included the constant to maintain a solid financial position. For us, that's meant maintaining an investment-grade profile. We're going into this with a sound balance sheet. Our debt consists mainly of private placement notes, staggered over 15 years, with no major maturities coming due before our fiscal FY 2025. In addition, we have term loans, some banking revolver, and operating leases. We don't have any peaks on our debt maturity profile and only about CAD 250 million of debt and lease repayments this year, most of which are towards the end of the next calendar year, 2021. On the covenants, we're well below our covenants threshold.
Our adjusted debt-to-EBITDA covenants is north of four times, and we've got ample liquidity of over CAD 1 billion with our cash on hand, revolver facility, and AR factoring programs. We have a solid balance sheet, no significant maturities coming due in the short term, and ample liquidity available to be able to weather the storm.
Okay, good. Marc mentioned earlier some steps you're taking on capital spending to conserve liquidity. Can you maybe comment a little more detail on what those measures might be?
Absolutely. In addition to all the cost containment and cash preservation measures, we're taking a real hard look at all the investments. Most of the CapEx that we spend is growth CapEx geared to address market demand and capturing growth in the civil aviation market. Of course, with the current uncertainty and the revised view demand, we have materially reduced all of CapEx to essentially a very minimal spend for the net foreseeable future until the market conditions stabilize and if it warrants future investments. At that time, we'll revisit. In addition to CapEx, another major level investment is on the R&D, and other elements. Really, we're reviewing all levels of investments to preserve liquidity. We'll also be reducing our levels of R&D investment substantially to essentially critical deliverables until conditions stabilize.
Okay. I guess, yeah, moving into that area, the R&D and other operating expenses, obviously extraordinary times, but it sounds like some of the layoff efforts have begun. Can you maybe elaborate on the degree and nature of those things and timelines that you're looking at?
Yeah, I can take that one, Steve. It's Marc. Just repeating something in case you didn't go through at the beginning there. We come into the crisis from a position of strength with a sound balance sheet, good liquidity, as was mentioned by Sonya. At the same time, we're not being Pollyanna here. We're assuming a very tough period ahead, and we're taking immediate steps to preserve cash. You heard the ones that Sonya talked in terms of CapEx and R&D. We're reducing operating expenses, including temporary layoffs that have already been announced and salary cuts across the board. To give you some details, we notified 465 of our unionized manufacturing employees last Friday that they'll be temporarily laid off, effective this Friday. Additional temporary layoffs locally and around the world are inevitable and will follow in short order.
These will include across the board corporate administration-level employees as well. The additional temporary layoffs will be determined, in my mind, and announced in the coming days as we finalize our business review. Obviously, we want to be ready when this comes out, when we come out of this. We expect that this will be temporary, but as I mentioned, we're gearing for a tough road ahead. To minimize the total number of layoffs and to ensure that we adapt to this crisis together, and as we always do at CAE, as one company, as one CAE, my executive team and myself are taking a 50% cut in salary effective immediately. Our vice presidents will have their salaries cut by 30%, managers and directors by 20%, and all other employees by 10%.
In addition to those measures, we've put a portfolio of other measures in place to cut discretionary expenses and adapt operations to reduce levels of demand. We're also taking additional steps to reduce our costs, improve our cash conversion cycle, that's very important, and inventory management. As Sonya said, again, repeating myself, but we expect minimal investment in our training network as we expect fewer orders from airlines. I think nothing's off the table, Steve, as you can imagine.
Yeah, I know. That's some aggressive moves very early, and appreciate what you're doing there. I guess just looking at that a little bit further, you mentioned earlier the magic questions, how deep and how long. When you do stress testing of your model or run different scenarios, what kind of stress tests are you looking at, or what kind of metrics do you look at in the business as you go through this?
I'll take that one. Given the unknowns right now, we're planning for a severe impact that could run for a number of quarters. We need to plan prudently. Of course, cash will be one of the primordial KPIs. Ultimately, our business is resilient because of the regulated and recurrent nature of training and our solid backlog on the simulator product side and defense. Pilot training is an essential activity and supported by regulations, right? The training business, because of its higher non-cash fixed cost basis, can generate positive cash flow, even at lower levels of utilization. We also have a large backlog of civil simulator orders, which has been funded by customer deposits and progress payments, and we'll continue to deliver on our commitments there. We're diversified with a backlog of about CAD 4 billion in defense.
To preserve liquidity and adapt to new market conditions, as Marc mentioned, we're taking significant measures to reduce investments with a turndown on CapEx and other investments and the operating expenses with the temporary layoffs and salary reductions across the board. In addition, we're very tightly managing collections and watching cash management and have ample liquidity and watching our liquidity levels with upwards of CAD 1 billion available to us to support through the period. On this basis, I'm confident that CAE has the tools and the ability to weather the storm and resume growth once the episode is behind us and the markets that we serve.
Certainly taking a lot of measures, it sounds like, to control all the controllables. Your customers, the airlines, facing these and perhaps even more serious situations, and they're all looking for support from the governments, and all those discussions are underway. Is that something that CAE can also pursue with the Canadian or U.S. or other governments to help weather this?
Yeah, absolutely, Steve. In fact, I can tell you I penned a letter to Prime Minister Trudeau in Canada here and members of his cabinet exactly on that subject today, welcoming, obviously, additional source of liquidity. We're also talking in earnest with provincial governments. Not only in Canada, we're active in the United States and around the world, because we operate around the world. Like airlines, they're actually looking for support, and we're essential to their transportation system. We'll go in lockstep, for sure.
Okay. Makes sense. We've had a few questions come in from investors here, and I'll just grab a couple of these. Back on the simulator orders, you touched on this earlier, both Marc and Sonya. How firm are these orders? Should we be looking at airlines? Do they have an ability to cancel these orders in some way? I understand deposits have been made, but how about order deliveries, order cancellations, and new order activity?
I think it's very rare that people cancel simulator orders. Even in the last financial crisis, I can't remember one. I could be wrong, but if there was, it was very small numbers, or I would remember. We haven't had any yet. We don't expect them. As I said, well, actually, you couldn't hear at the outset, but we have a large backlog of simulator orders in place because of all the orders we've won in the last couple of years, and those are funded through customer deposits. We've always worked in such a way that basically the build of the simulators are funded by the company deposit. For a company to cancel, it'd be quite rare because, first of all, they need those simulators. They're going to need them. They might need them later.
I could see definitely some airlines asking us to move some to the right, and we have a few do that already. Not many, I will tell you, but a few do ask us to move them to the right. For them to cancel, you got to think, they got a large investment already in place with us, and that's how we fund our orders. I think the good news, if there is any in all this, or more positive, I should say, is just in the last week, we received two new full-flight orders from a customer in China and another in Singapore. Clearly, when I look at that, they're clearly acting that this is a temporary issue, although very grave. They're basically getting set up to restart growth.
Mm-hmm. Just in terms, another question that came in from the line here as well, that we've talked about, just how variable is your cost structure? Sonya, you mentioned earlier you could run with lower utilization rates and still make money. What kind of utilization would you look at as break-even, for example, or just general comments on the variable versus fixed components of your cost structure?
Yeah. Maybe I could point to the past. During the last global financial crisis, utilization got as low as 64% in our network, and we continued to generate profit and good cash flows. As you know, the training business involves a higher investment of capital up front for the simulators, and it's a high fixed cost business, but a lot of that cost base is non-cash and in depreciation. Even at lower levels of utilization, training continues to generate positive cash flow. Of course, to adapt to the lower volume, we've put in place a number of measures to adjust costs. Commercial training centers usually operate 24/7. We are reducing the operating hours to reduce the OpEx, as well as adjusting the staffing and overheads commensurate with the drop in the volume.
We're readjusting and right-sizing the cost structure to the new level of volume, and the training network, even at a lower, can generate good or positive cash flow.
How about business aviation? It's been a bigger part of CAE for the past year or two, and how has that been affected so far?
I think business activity obviously has gone down. You would expect that. The flying activity, it's been reduced through basically reduced demand in some regions, obviously, and impacted by border restrictions. We're seeing issues mainly with getting customers to the training sites. All of our training centers in business aircraft are operating. I think I wasn't on the call that, but I think probably you, Andrew, went through the level of activity you see, but considering the circumstances, we're seeing a good level of activity in those training sites, whether it be in Dallas, in Burgess Hill. Dubai is a little bit more tough these days because temporary government restrictions that we see there. The main issue is just getting our customers to the training centers sites themselves because of quarantines. The demand has gone down for growth.
What we're seeing mainly now is recurrent training demand, because that's driven by regulation.
As we said, as is our business, pilots initially get trained on a simulator, then they have to go recurrent training every six to nine months. We're seeing that activity continue. I think the thing to look at in terms of the business aviation as it affects CAE, the health of the business aviation market itself is quite different today than during the period before the global financial crisis, and albeit demand is lower today, it's more based on fundamentals than in past downturns. I think it'll be more resilient.
How about the defense business? The large backlog there and presumably pretty steady, but what kind of impact has that seen so far?
Well, in defense, training services programs are service level agreements, so they're not driven by utilization, which is a big difference than civil. We're providing critical services here too, and the U.S. government has just in the past few days recently articulated the absolute necessity of this activity. Some bases have restricted access, such as, for example, that anyone outside 100-mile perimeter must be quarantined for 14 days, and we're seeing that in certain bases. Anything and everything that has to do with the movement and cooperation of people is more challenging in this environment. We've been impacted in terms of getting orders fulfilled just because of that, getting access to the people, meeting face-to-face. That also includes impacts on program execution because that involves collaboration with customers and OEMs, installations and so on.
The general preoccupation of the crisis clearly has an impact on the speed of procurement processes. Again, similarly to civil, we have an approximately CAD 4 billion backlog in defense, which provides us with a good source of diversification and visibility, albeit we're impacted obviously in delivering that service. Longer term, we don't see an obvious structural impact on defense, I think we can anticipate some short-term friction as we move through this period.
We're running close on the clock, but maybe just stepping back a little bit and bigger picture, CAE and the training business in particular lived through 9/11, the global financial crisis in 2008, 2009, stretching into 2010 and 2011, I guess. How different is CAE positioned today versus then, and what lessons from that era are you carrying forward?
Well, I think just quickly, the biggest difference is that our business is much more tied to maintaining the regulated training of the already in-service fleet of airlines and business jet operators, rather than just selling simulators. Past experience has shown us that regulated training can be reduced, obviously, but it's going to be lower amplitude cyclical than a business that sells only aviation products like our simulator business. With over 60% of our business now coming from training services, we're going to be a much more resilient company than we were during either of those two black swan events. Because in 2001, we only had 15% services, and 2008 was much lower than it is today. We're in a much better position. This crisis is a big one. It's obviously, in my mind, it's worse than those two events themselves.
That's why we're taking the steps that we're taking.
Mm-hmm. Change creates opportunity. Maybe coming out of this, I don't know if it's wise to be optimistic at this stage, but is it reasonable to think that the airlines themselves might re-look at all of their cost structures and businesses? Might there be more opportunities for you with more partnerships or full outsourcing with some of these airlines, as everybody regroups?
Yeah, absolutely. I think people will come out of this generational event looking at life a little bit differently. When you consider the responsibility that we have when our customers entrust or train with CAE, and we now have an opportunity to prove to them that CAE is never going to let them down, even in the worst of times. I think we'll have an opportunity to build on that trust. Among the many benefits and attributes that we bring to the table as training partner of choice, the idea of taking a part of an airline's cost structure and making it variable may become more compelling as the industry stands back from this crisis. We view the market over the long term, with its ups and downs.
This is a heck of a down, admittedly, but we're ready to serve our customers with the most innovative, comprehensive training solutions, and a strong company that's been proven in the worst of times.
We are running up against the clock, but that in itself might be a good way to wrap. Are there any other closing comments or thoughts that you'd like to leave with our investors?
Yeah. I don't know what we missed in the beginning, obviously, I think that, look, clearly, the world's going through a crisis of unprecedented magnitude. This is significantly worse than anything we've ever seen. It's important to recognize that at CAE, we enter into a position of strength. We have the benefit of a highly recurring business involving regulated pilot training. That's very important. We're well-diversified geographically, and I think we can expect the market, if not the world, to come back in line in phases as this biological crisis has passed us from one continent to the other. We're seeing some positive signs from, for example, China. To me, it's too early to tell, as I said, for the fact that we got two simulator orders from them in the past week remains a positive, as well as one from Singapore.
We're well-diversified in civil aviation with exposure to business aviation, commercial aviation, and very importantly, we have a backlog in civil full-flight simulator sales, a war chest that should hold for next year, barring any foreseen cancellations, which so far we haven't seen and don't really expect. We have a large backlog of full-flight simulator orders. Those orders, by the way, again, repeating myself, but the orders we have in civil aircraft are funded by customer deposit progress payments, and we're diversified with approximately CAD 4 billion backlog in defense. The world will return to normal, and to me, all crises come to an end. We still foresee secular growth in air travel. Finally, it'll be over a longer period. We have the staying power and stamina to weather the current storm, but we're not taking anything for granted.
We're assuming, in this black swan event, a tough road ahead for the next few months, and we're adjusting ourselves that way. With those additional measures, reduced CapEx, all the operating costs, salary reductions, layoffs, I think gives us the breathing room to get through the end of the turn, into the downturn, and Sonya, as my CFO, has prepared us for this, and I feel good about our liquidity position. I'll just wrap it up with that, Steve.
Great. Well, thank you. That's terrific color. I very much appreciate that today. It's very busy times, and we do respect and appreciate your time. Thanks, Marc, Sonya, and Andrew, and please stay well.
Thank you. Thank you, Steve. You too, Steve. Take care.
Thanks. Bye now.