Good day, ladies and gentlemen. Welcome to the CAE fourth 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. Please go ahead.
Good afternoon, or I should say good morning, everyone, and thank you for joining us today. Before we begin, I'd like to remind you that today's remarks, including management's outlook for FY2023 and answers to questions, contain forward-looking statements. These forward-looking statements represent our expectations as of today, June 1, 2022, 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 and the U.S. Securities and Exchange Commission on EDGAR.
On the call with me this morning 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. 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, and good morning again to everyone joining us on the call. Before Sonya and I get into the results, I want to first say how proud I am of our 13,000 CAE employees who exemplified our One CAE culture and delivered a truly outstanding performance in fiscal 2022. We set a number of order intake records this year, culminating in record bookings of CAD 4.1 billion and a record backlog of CAD 9.6 billion. These numbers are especially impressive considering that our industry is still in the early days of a cyclical recovery. We're winning market share by innovating and delighting our customers, and this is because of the great dedication of our people.
Testament to their passion and commitment is that employee engagement has never been higher, even with the added complexities of managing through a pandemic. I'll talk more about the way forward at the end of the call, but these are some of the most important factors that underscore my enthusiasm and outlook for a bigger, stronger, and more profitable CAE in the period ahead. Turning now to our results. On a consolidated basis, we grew fourth quarter revenue by 25% and annual revenue by 23% before the contribution of our ventilator humanitarian initiative last year. We delivered 32% higher Adjusted Earnings Per Share in the quarter, and for the year, it was up 79%.
Testament to the quality of these results, we generated a healthy CAD 188 million of free cash flow for the quarter and CAD 342 million for the year. In civil, we had strong performance with double-digit growth in revenue and adjusted segment operating income, and we generated margins north of 20% for the second quarter in a row. Despite Omicron disruptions during the fall and winter and continued market weakness in Asia, fourth quarter average training center utilization reached 69%, which is up from 55% last year. Training demand in the Americas continues to be the strongest in the quarter, easily absorbing the capacity we've deployed recently into the region to meet our customers' increased needs. We also had strong demand for new pilot training with record monthly hours flown at our flight school in Phoenix, Arizona.
Training utilization in Europe improved in the quarter, with airlines having become more confident about the summer travel period. Asia-Pacific was a bit better, with some easing of travel restrictions in Singapore and Malaysia, but remained at a much lower level compared to 2019. In business aviation, training demand was robust and reflects the high level of business aircraft flight activity, which is well above 2019 levels. We overcame market and logistical challenges to deliver seven civil full flight simulators in a quarter and 30 for the year. We had strong order activity in civil overall in a quarter, booking training solutions contracts valued at CAD 517 million for a book-to-sales ratio of 1.19 x, including 15 full flight simulator sales.
Annual orders reached CAD 2 billion for a book-to-sales ratio of 1.25 x, including comprehensive long-term training agreements with airlines and business jet operators worldwide and a total of 48 full-flight simulator sales for the year, which is testament to the increased demand for pilot training. This is a big step up compared to only 11 orders for all of the previous fiscal year. Civil concluded the year with a healthy order backlog of CAD 4.9 billion.
We also expanded our horizons during the year by partnering with four of the leading electric vertical takeoff and landing developers to provide a range of solutions, including simulators, pilot and maintenance training programs, and aircraft systems engineering support. Additionally, we concluded the acquisition of Sabre AirCentre's airline operations portfolio during the quarter, giving us a valuable suite of flight and crew management and optimization solutions, and a highly talented workforce who we welcome warmly to CAE. The acquisition is part of a strategy to extend civil beyond training and access an even larger portion of the civil aviation market that we already address. We continuously innovate to earn the right to be our customers' training partner of choice, and now we're expanding our aperture to also become their technology partner of choice.
I'm very encouraged by the positive customer response we've had already with airlines and business jet operators greeting CAE as a highly logical partner for these solutions. In defense, we also had double-digit growth in the quarter with the contribution of L3Harris Military Training, and I'm especially pleased with the acceleration in order intake, with bookings totaling a record CAD 751 million in the quarter for a 1.6x book-to-sales ratio. Notable wins in the quarter include a contract with the Government of Canada to extend and expand the NATO Flying Training in Canada program through 2027. Defense also broadened its customer access with a $250 million ceiling, U.S. Naval Air Systems Command contract for rapid acquisition, prototyping, integration, and development, which is an IDIQ win.
Defense concluded the year with a record CAD 1.9 billion in orders, including competitive prime awards across all five domains, that being air, land, sea, space, and cyber. This higher level of activity contributed to a CAD 4.7 billion defense backlog, representing 1.2 x book-to-sales for the year. Notably, this is the first time our annual defense book-to-sales ratio has been above one in the last four fiscal years and is key to driving higher performance in the years ahead. We also concluded the year with a record CAD 8.6 billion of defense bids pending customer decisions. Turning now to healthcare. We delivered our fifth consecutive quarter of double-digit year-over-year revenue growth, excluding ventilators, and we generated sequentially higher profitability in the fourth quarter.
One noteworthy order during the quarter included a collaboration between healthcare and defense to win a contract to support the German Armed Forces by providing patient simulators, user training, and maintenance support. This collaboration is a great example of CAE's cross-business synergies and is testament to our unique One CAE culture. Our good progress in healthcare during the year reflects a clear focus on achieving greater scale and the ramp-up of our re-energized organization. We began worldwide deliveries of our newest pediatric patient simulator, CAE Aria, and we launched updates to expand the feature set and functionality of some of our main product solutions, including CAE Vimedix, our ultrasound education platform, CAE CathLabVR, and CAE LearningSpace.
With that, I'll now turn the call over to Sonya, who'll provide a more detailed look at our financial performance, and I'll return at the end of the call to comment on our outlook. Sonya?
Thank you, Marc, and good morning, everyone. I first want to thank our stakeholders for their patience in the delay in getting the results out to you. Our auditors required more time than anticipated to complete the technical tasks involved in the normal course audit. Turning now to results. We delivered a strong performance in the fourth quarter and for the year, having worked diligently to overcome the ongoing COVID-related challenges and delivered double-digit revenue and adjusted segment operating income growth and higher margins. We also generated excellent free cash flow and helped to secure future growth with record order bookings and backlogs. We have effectively deployed growth capital, seizing on opportunities to expand our market reach, and we achieved our targets on restructuring programs to lower our cost structure by approximately CAD 70 million annually.
We also continue to be on track with the integration of our acquisitions and the realization of planned cost synergies within the expected timeframe. Looking at our results on a consolidated basis, revenue of CAD 955 million was up 25% compared to the fourth quarter last year, excluding CAD 130 million of revenue for ventilators. Adjusted segment operating income was CAD 142.7 million compared to CAD 106.2 million last year. Quarterly adjusted net income was CAD 92 million or CAD 0.29 per share, compared to CAD 0.22 in the fourth quarter last year. For the year, consolidated revenue was up 13% to CAD 3.4 billion and was 23% higher, excluding CAD 230.6 million of revenue last year from the ventilator contract.
Adjusted segment operating income was up 58% to CAD 444.5 million, and annual adjusted net income was CAD 261 million or CAD 0.84 per share, which is up 79% compared to CAD 0.47 last year. We incurred restructuring, integration, and acquisition costs of CAD 36 million during the quarter related to the L3Harris Military Training and AirCentre acquisitions and our enterprise-wide restructuring program. Net cash provided by operating activities was CAD 206.8 million for the quarter, compared to CAD 174.6 million in the fourth quarter last year.
For the year, we generated CAD 418.2 million from operating activities, compared to CAD 366.6 million last year. We had a strong free cash flow in the quarter of CAD 187.6 million and CAD 341.5 million for the year, for an annual cash conversion rate of 131%. Uses of cash involve funding capital expenditures for CAD 74.7 million in the fourth quarter and CAD 272.2 million for the year, which is in line with our outlook of total CapEx of more than CAD 250 million.
This growth CapEx is mainly driven by the expansion of our civil aviation training network and typically generates 20%-30% range of incremental return on capital employed within the first few years of deployment. These opportunities translate to some of the best examples of growth compounding at CAE. Looking at fiscal 2023, we continue to expect CapEx of approximately CAD 250 million, reflecting a large pipeline of attractive market-led expansion investment opportunities on the horizon. Our net debt position at the end of the quarter was approximately CAD 2.7 billion for a net debt to Adjusted EBITDA of 3.6 x. This compares to net debt of CAD 2.3 billion and 3.2 x net debt to Adjusted EBITDA at the end of the preceding quarter.
During the last two fiscal years, we made several growth investments to expand our capabilities and reach, including nine acquisitions totaling CAD 2.1 billion and capital expenditures for some CAD 380 million. We're continuing to focus on attractive growth opportunities, and at the same time, we expect to reduce leverage with net debt to Adjusted EBITDA decreasing to below 3x within the next 18 months. Income tax expense this quarter was CAD 3.7 million, representing an effective tax rate of 6% compared to a negative effective tax rate of 21% for the fourth quarter of fiscal 2021. The tax rate was mainly impacted by restructuring, integration, and acquisition costs. Excluding the effect of these elements, the income tax rate would have been 15% this quarter and 14% for the year.
Reflecting some of the recent changes we have seen to global tax regimes, we expect effective income tax rates to be approximately 22% going forward. Also below the line, non-controlling interest was CAD 2 million for the quarter and CAD 8.3 million for the year. We expect NCI to continue to increase commensurate with the growth rates of CAE's adjusted segment operating income. Now to briefly recap our segment performance. In Civil, fourth quarter revenue was up 11% year-over-year to CAD 432.7 million, and adjusted segment operating income was up 45% year-over-year to CAD 96.3 million, for a margin of 22.3%.
For the year, Civil revenue was up 15% to CAD 1.6 billion, and adjusted segment operating income was up 92% to CAD 314.7 million for an annual margin of 19.5%. In Defense, fourth quarter revenue of CAD 469.5 million was up 40% over Q4 last year, which includes CAD 146.9 million from the integration of L3Harris Military Training in our financials. Adjusted segment operating income was up 59% over last year to CAD 36.8 million for an operating margin of 7.8%.
For the year, Defense revenue was up 32% to CAD 1.6 billion, including CAD 409.9 million from the integration of L3Harris Military Training, and adjusted segment operating income was up 37% to CAD 119.2 million, representing a margin of 7.4%. In Healthcare, fourth quarter revenues was CAD 52.8 million, up 20%, 7%, excluding the ventilator contract last year. Adjusted segment operating income was CAD 9.6 million in the quarter compared to CAD 16.4 million in Q4 last year. For the year, Healthcare revenue was CAD 151.4 million, up 25%, excluding the ventilator contract last year, and adjusted segment operating income was CAD 10.6 million for a margin of 7%. With that, I will ask Marc to discuss the way forward.
Thanks, Sonya. As we look forward, we continue to see a clear path to emerge from the pandemic, a bigger, stronger, and more profitable CAE in the years ahead. We're adeptly playing offense in a disrupted market by seizing on highly strategic growth opportunities to expand our capabilities and market reach. In parallel, we've significantly lowered our cost base and continue to innovate ways to revolutionize our customers' training and critical operations with digitally immersive solutions to elevate safety, efficiency, and readiness. Despite a still challenging environment, there's no doubt our strategy is bearing fruit with several record milestones already reached in the early stages of a cyclical industry recovery.
Our recent results and the expanded set of opportunities before us add to my conviction that CAE is poised to experience new heights as we recover from the cyclical downturn and ultimately benefit from secular growth in our end market. In Civil, we see pent-up demand for air travel as an important driver in the near term, and the rate of Civil's recovery to pre-pandemic levels and beyond is expected to continue to be driven in large part by the easing of travel restrictions, particularly in our key Asian markets. We also expect more demand from airline customers wanting CAE's support as partner of choice to secure and train new pilots. They have acute needs arising from the challenges associated with restoring and growing flight capacity in a competitive market for pilots and flight crews.
This dynamic, the strength of Civil's training recovery in the Americas, and a sharply higher full-flight simulator order activity this past year provide a compelling blueprint for the potential for a broader global recovery. In business aviation, we remain bullish on the long term, and we believe the market is experiencing a structural expansion as evidenced by the record 3.3 million flights worldwide last year. In fiscal 2023, in addition to continuing to grow our share of the aviation training market and expanding our position in aviation digital solutions, we expect to maintain our leading share of full-flight simulator sales and to deliver upwards of 40 full-flight simulators to customers worldwide. From a profiling standpoint, we're planning a higher proportion of deliveries in the H2 of the fiscal year.
Overall, we expect continued recovery and growth in civil in the year ahead. In defense, we're on a multiyear journey to becoming bigger and more profitable, and the first and most critical link in that chain involves winning orders. Our record order intake this past year makes it clear that we're indeed on the right path to growth. Furthermore, our record level of defense bids and proposals is a result of bidding more and bidding larger. With our increased capabilities across all five domains and a critical mass that our transformed defense business now possesses, there's no program in our addressable market that's too large or too complex for CAE to bid on with a high probability of success. Our defense business is now closely aligned with our customers' utmost priorities, which at their foundation are about defending freedom in the face of near-peer threats.
While we could not have known how or when such geopolitical threats would manifest, they have. We're extremely proud of CAE's role in helping prepare NATO and allied nations to defend freedom. We're also very proud of our noble purpose to help make the world safer. In the last two years, defense has enabled that purpose by establishing its position as the world's leading platform-agnostic global training and simulation pure-play defense business. Russia's invasion of Ukraine over the last three months has galvanized national defense priorities, and we expect increased spending, and specifically the prioritization on defense readiness to translate into additional opportunities for CAE in the years ahead. We also expect continued strong momentum with the integration of L3Harris Military Training in the year ahead and to fully realize $35 million-$45 million of cost synergies by fiscal year 2024.
We look forward to continued growth in the year ahead. A few headwinds still exist for the international defense business in terms of travel restrictions, but we view them as temporary. We're also continuing to work our way through some of the lagging effects of a historically less than one book-to-sales ratio, beyond which we expect higher growth from integration synergies and the translation of our recent record order intake and bid activity into revenue. Lastly, in healthcare, the long-term potential is increasingly evident for this business to become a more material and profitable part of CAE as we gain share in the healthcare simulation and training market and continue to build on the great momentum created by the re-energized team over the last 18 months.
CAE overall, based on everything we see at present, we're targeting consolidated adjusted segment operating income growth in the mid-30% range in fiscal 2023, weighted more heavily in the H2 of the year. In summary, our opportunity set for CAE is highly attractive, and I continue to be very excited about our future. We expect to continue making excellent progress in the year ahead and beyond, and we look forward to sharing more about this with you at our Investor Day on June 7th in New York. The CAE management team and I will be on hand to present why we believe CAE is so well positioned for superior growth and higher profitability. We'll also showcase some of the latest technological solutions and provide a view on CAE's multiyear growth potential.
CAE is a highly unique company whose cutting-edge training and critical operational solutions empower pilots, crew members, defense forces, and healthcare practitioners to perform at their best every day and when the stakes are the highest. We equip those in critical roles with the skills and expertise needed to move our world forward safely. We also enable our customers to perform their complex tasks more efficiently and with a lower carbon footprint. At the very core, CAE's mission is to make the world safer. In addition to sharing a compelling financial picture, we hope investors will come away from our Investor Day with an even greater appreciation of CAE's noble purpose, a major driver for all of us. With that, I thank you for your attention. We're now ready to answer your questions.
Thank you.
Thank you, Marc. Operator, we'll now be ready to take questions from analysts and institutional investors.
Thank you. If you would like to register a question or comment, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. One moment, please. The first question comes from Kevin Chiang of CIBC. Please go ahead.
Good morning. Thanks for taking my question. Let me just have two for me. The first one on your, I guess your recovered SOI margin target, you stuck to the 17%, which gives us a North Star as your revenues recovered here. You know, that number hasn't changed, I think, over the past few quarters here. Obviously, the inflationary environment has. I'm just wondering, you know, how do you see those margins progressing here given the current inflation environment? Does the composition of the 17%, has that changed or do you feel like your restructuring efforts more than offset the inflationary pressures or maybe pricing power helps with another lever? Just wondering how that 17% comes about in a higher inflationary environment here.
It hasn't changed much, Kevin. No, it's you know, although we're certainly not unaffected like anyone else with the inflationary environment, but, you know, we've taken steps to protect ourselves from that through various mechanisms, some of which you mentioned, which is being able to pass on some of the costs onto price increases to offset. We relentlessly reduce our costs. That helps as well. We have built-in, you know, measures in our contracts to be able to cater for that as well and in a kind of normalized fashion. I think in terms of the composition, it hasn't really changed. We're expecting, you know, higher peak margins in civil. You know, we expect certainly to get within our planning horizon to low double-digit margins defense. I think that composition hasn't really changed. That's still our North Star.
That's super helpful. Maybe just a second one for me. You know, a lot of headlines around the pilot shortage, especially in the U.S. One of your partners, JetBlue, recently noted that, you know, one way they're combating this is leveraging, I guess, Gateway Select, which I believe you have a partnership with them. Really they felt that, you know, focusing on onboarding cadets early was helping them get in front of the labor bottleneck.
I'm wondering, you know, as other airlines face this pilot shortage issue, are you seeing, you know, increasing conversations around setting up gateway programs with other U.S. airlines or global airlines with the idea if you can kind of get the cadet in early, that might help alleviate the pilot shortage, you know, as you kind of look down the supply chain?
Well, I think first off, we're very proud of the relationship we have with JetBlue as well as other airlines in the United States and, you know, around the world with, you know, programs like the gateway program that we have with JetBlue. Yeah, we're seeing strong demand, as I mentioned in my notes. The enrollments in our flight schools, particularly the one that we have in Phoenix that caters for JetBlue, among others, American, for example, seeing record order intake in terms of cadets. Look, we are basically seeing airlines being impacted by pilots, certainly in the United States strongly right now, and we're doing everything that we can to be able to support them with, you know, providing pilots through our Parc Aviation business, for example, which we do.
We supply Parc pilots, and that's seeing some strong demand. We're also you know, seeing, as I mentioned, the enrollment in our pilot schools. Look, I think this is something that will continue to be a factor. The fact that airlines are in great need of pilots is to me it means long-term business for CAE as the largest, you know, provider of pilot training in the world. We're gonna continue to help our airline customers and expand those programs.
Our own focus, actually forecast on that is, I think we said it before, is that we estimate that over 200, you know, or 264,000 new pilots are gonna have to be created over the next seven-eight years to accommodate, you know, the retirement that we've seen, the attrition that we've seen, as well as the new growth that's gonna come across, just assuming kind of the growth that IATA is anticipating. Look, I think we're gonna have a lot of business going forward on this.
Excellent. Thank you for taking my question.
Thank you. The next question comes from Konark Gupta, Scotiabank. Please go ahead.
Good morning, thanks everyone. Just wanted to get a follow-up on Kevin's question on pilot shortage. Is there a way, Marc, to quantify the population or the current population of pilots going through training at this time versus what it was prior to the pandemic? Just trying to get a sense on, you know, like, if the pilot shortage is it hurting the airlines from growing above and beyond the pandemic? Is it a hurdle for them to get back to the full pre-pandemic recovery?
I think it's definitely a headwind right now, and I think they're very better positioned to be able to answer that question than I am. It really depends on the airline. You're really seeing that materialize itself mainly at feeders to the main lines, because largely the main lines have been able to, you know, cater it. Although they're seeing some of that hit as well in some of our major partners in the United States. Don't forget, I think we're seeing extraordinary level of demand right now in the United States specifically. We've talked about that before, which is benefiting our, you know, our market quite substantially. That's why you're seeing very high levels of utilization in the United States specifically. That's a factor we've been talking about it.
There's a lot of, you know, delta training being caused by the fact that you're bringing on more pilots. Look, I think it's something that I don't think structurally is going to affect the recovery overall of the market in a sustained fashion. But there's no doubt that it's having an effect right now. As I think I've said many times before, I think it's a great time to start a pilot career. I think we'll have growth for the years to come, and I think that's going to be a strong driver for, you know, our business at CAE. We're the largest trainer of pilots in the world.
Right. No, makes sense. Thanks for that.
You see that, by the way, in the, just in the, as I was mentioning in my notes, the strong demand that we've seen for full-flight simulators. I mean, all of last year, we had 11 full-flight simulator sales. In the past year that we just closed, we had 45. That's for the year. I mean, that is a huge ramp-up. Actually 48 for the full year. That's a huge ramp-up, something that we've never seen in terms of going from a downturn. Usually, it's a two or three years lag. We've had no lag. This has been a huge V-shaped recovery. Again, that is testimony to the airline stocking up on simulators, so they could train, provide type ratings to new pilots.
Okay, thank you. Just switching gears to defense, actually. So like the last quarter and the quarter before, like, you've seen a pretty significant acceleration, I think, in defense order intake. Obviously now you have L3Harris as well, so that kind of plays into the mix too. The bid pipeline here, what you're kind of suggesting is north of CAD 8 billion. I don't think we have seen those kind of numbers before. Historically, it's probably more than twice what we used to see prior to the pandemic. I'm just trying to figure out if there's any, you know, momentum in defense order intake or bid pipeline because of the recent announcements by global defense forces to increase defense spending, or that has still to play out. Like, where are we in terms of that cycle for global defense spending ramping up?
I mean, to your question, that has still to play out. What you're seeing in a much larger backlog of bids is us, you know, bidding more and bidding larger with our combined capabilities of, you know, what is called, we call it CAE Legacy and our business combined with L3Harris Military Training. That's what you're seeing here. We're seeing much more opportunities to bid. As I said in my notes, there is no contract that's, you know, that's too large or too complex in our addressable market for us to bid. I think it's very positive. Again, as I said, you're seeing a much larger level of bidding activity, and you're seeing the fruits of that through every.
If you look every quarter last year, we started the year with less than book-to-bill. Then you had, I think, Q2, you had pretty much one to one, then you have over one in Q3 and much higher than Q1 in Q4. I think that's a nice trend. As I said, it doesn't turn into revenue immediately, but it definitely shows that we're on the right path. Over the next few quarters, definitely that will start to make an impact to our results as it translates into revenue.
That's it for me. Thank you so much.
Operator, just to make sure that everybody has a chance to ask a question, maybe we'd ask participants to stick with a single part question, and we're happy to take more if time permits and just reenter the queue. Thanks.
Thank you. Noted. The next question comes from Cameron Doerksen with National Bank Financial. Please go ahead.
Yeah, thanks. Good morning. I had a question on, I guess the AirCentre acquisition when you closed that during the fourth quarter. Just wonder if you can comment on kind of your early thoughts on the business and how it's integrating into the existing CAE business. Can you also maybe talk a little bit about, you know, sort of the recovery pace for that AirCentre business? How does that compare, I guess, with kind of the airline pilot training demand to just sort of, you know, compare and contrast those two?
Well, what I'd say, Cameron, is the integration is progressing very well since we closed the acquisition on March 1. We see no surprises. I'm very excited about the potential as we move, as I was saying in my notes, from really being a training partner to the world's airlines to a technology partner. I've been very, very happy about the reception of our customers. You know, as we said when we talked about the acquisition, it's almost 100% overlap between those customers that we serve from a training or a simulator standpoint to those that use any one of Sabre AirCentres, what we used to call Sabre AirCentre, now it's CAE Flight Services, you know, software tools. Very, very pleased with how that's going.
I've got one of my top CAE executives running that business, Pascal Grenier, and we're very excited about what we see. In terms of its growth, I think no surprises there. Look, there is very highly correlated, the amount of planes flying, the amount of crews flying, and it's basically our performance being lockstep with those numbers. We're very happy at what we're seeing before. I think more to come. I think the fact to me is, like, what's extremely positive about that is we're adding, you know, $2 billion of total addressable market now in civil. In a market where really we're talking about just growing the level of business that we do with our existing customers. More to come, but so far, great start.
Okay, great to hear. Thanks very much.
Thank you. The next question comes from Fadi Chamoun, BMO. Please go ahead.
Good morning. Thanks for taking the question, and congrats on strong orders. Civil aviation. Sonya, can you quantify for us, like, how much these remeasurement of royalty and reversal of few of the earnouts contributed to the aviation in the fourth quarter?
Sure, Fadi. You're right. There was a higher level of gains this quarter, and this came from the remeasurement of royalties and contingent considerations. The royalties themselves are pretty much a recurring item every year. If you go back to Q4, we had some last year as well. It's really kind of based on 20-year + horizon estimates. It flew through all three segments, but the larger proportion was in civil. The accounting presents that on the, you know, other gains and losses line. What it doesn't consider is that we did have a host of other higher than usual costs that are not necessarily kind of singled out in that separate line, but are in cost of goods sold and SG&A.
For example, with the Omicron and the BA.2 wave, there was a significant ramp-up in our COVID protocol and security costs, including, like, higher costs and productivity from impact from absenteeism, and also some unusual supply chain logistic costs that we see as temporary, but that increased in the quarter. On a whole, it was not overly material to see, and it's civil as a whole, right? Really not a major impact on dollar or margin. While we're speaking about that, I just highlight that, you know, these gains are relatively non-cash. Despite that, we delivered a pretty strong cash conversion of 131%.
It kind of speaks to the operational performance and the quality of earnings in the quarter and the year.
Maybe I could add that.
Okay. Yeah.
Can I add as well, Fadi, that you know, another confidence you might gain is the number that we have is the baseline for the growth forecast that we have at 30%. That's the number we start with. We don't try to normalize it.
The growth outlook that we give for next year in the mid-30% range is off the adjusted SOI of CAD 445 million, and that includes all of these items.
Okay. That growth number for next year is applied the same kind of to defense and aviation?
Yeah.
30% growth.
Both of those.
Is there an organic growth number within the aviation that you're assuming? Because I know you bought L3Harris will have a full contribution next year, and you've had some, you know, cost restructuring initiatives and all that. Like, what would be the organic growth you're assuming?
We factor all of those elements, whether it's, you know, as we integrate, really you'll be driving, organic and revenue, and cost synergies, as well as the impact of the structural cost savings and the ramp up, whether on recovery and expansion of our market position with customers.
Okay, great. Thanks. We'll see you next week, I guess. Thank you.
Yep.
Thank you. The next question comes from Benoit Poirier of Desjardins. Please go ahead.
Yes. Hi, this is Michael on behalf of Benoit. Congratulations on the good quarter. I'm just gonna have a little more color on the cloud computing and transition adjustment and for EBIT. Was it just a matter of fact of moving legacy systems and software to the cloud from the previous system? Thank you.
No, not an operational item at all. Frankly, it's just new guidance coming out of IFRS on accounting criteria for cloud computing and SaaS. As you know, companies have growing ERPs that are either kind of housed in-house or on SaaS applications. New or revised guidance on that front. It's really non-recurring in nature, but nothing operational.
Thank you. Appreciate it.
Thank you. The next question comes from Benoit Poirier of Desjardins. Please go ahead.
Yeah. Okay. I was finally able to join. Good morning, everyone, and congrats for the quarter. Marc, looking at the global defense budgets obviously trending upward, could you provide some color about the timing of when we might see the potential implications and whether you see greatest opportunities either on the service or product side? Thank you.
Well, I think I'll always start that question to say that the day that these revenues are a proxy for the growth of the U.S. defense budget or any budget, I'll be very happy. That's not the case. We're still, you know, although we're very big in our space, I think the size of that budget dwarfs any aspiration. The fact that they're going up is a good sign. I think, you know, we can do very well, thank you, and grow beyond the levels of growth of those inherent budgets. That's certainly our growth outlook. I think we do well.
We're very well aligned with the priorities that are inherent in the defense budgets, which as I said is, you know, make sure that the readiness for, you know, the near-peer fight, that's what we do. And that's been made even much stronger now with our combined business with L3Harris military training business. So look, I think it's going to be a combination of both products and services. When I look at the backlog that we see, it's basically a mix of the two. I wouldn't go too much beyond that, except that again, we're forecasting strong growth in defense, and we're well on the path to be able to do that.
You know, I think don't look at, continue to look at defense on a 12-month basis. That's what I would always look. The orders that we've won in the past year, which is very, very encouraging. I expect will continue. Again, look at this on a 12-month basis. It will translate to revenue in the upcoming periods, and we're well on the way to the target that we have to our strong growth and low double-digit margins. It depends.
Okay.
I think that's.
Thank you very much, sir.
That's the way I'll see it, Benoit.
Okay. That's the right caller. Thank you very much.
Thank you. The next question comes from Noah Poponak of Goldman Sachs. Please go ahead.
Hi. Good morning, everybody.
Morning.
Morning.
Lot of questions in the marketplace about the assumptions behind the 2023 framework of segment EBIT up mid-30%. Appreciate that, you know, different companies are providing different versions of guidance and that you've given us some framework. Perhaps you could just put a little more detail behind that in terms of what you're seeing in the segments, you know, what kind of utilization rates you're assuming, what kind of growth you're assuming in the segments maybe. I guess particularly on the margins, you know, the margins changed through the year a lot last year. You know, how the margins compare to the exit rates of 2022. You know, anything that stands out, I guess, would be helpful.
Well, I don't think, you know, when I look at basically your question, I'm not sure too much will stand out, except maybe perceived lumpiness through quarters. You know, I've said many times, and I've said it again in our notes, expect more of a back end of 2022, and there's a reason for that. Reason for it, if I look at civil specifically, first of all, I'll tell you that the higher utilization rates, you know, are a factor. We're seeing sequentially higher utilization rates, and we're gonna continue to see that with very high level of airline-based activity in the U.S. We're seeing much stronger in Europe. We're starting to see, although it's much slower, Asia open up.
It's very good that now we see Shanghai, not Shanghai, but we see Singapore opening up. We see Malaysia opening up. That's very good. Although you can well imagine that, you know, there's a lot of travel that's, you know, China dependent. So that's still pretty low with the, you know, the lockdowns in Shanghai that are just now opening up. So that's gonna have some lag effect for quite a while, I think. For that, I mean, we continue to look at the IATA forecast as the basis for, you know, our forecast, you know, which is, you know, RPK growth and how that's translates into utilization. So if I come out that stronger utilization as a whole, that's we're definitely seeing a leverage effect.
I mean, if you look at the fact that the margins we're making in Civil overall are still much lower than peak utilization, I think you're seeing there both the benefits of the leverage effects that is translating to the bottom line there in Civil. You're also seeing the benefits of our cost savings that we've put through a restructuring program that are definitely panning out. That's very clear. That will continue. I think you'll expect to see higher margins there. What we'll have to look at is that simulator deliveries from the factory also are a big factor in that. I see those being more biased to the second half. That's just a consequence of where they are in the production line.
Typically, in the summer period, we have, for example, we tend to shut the factory for maintenance, that thing, and that's not gonna be any different this year. The other thing is you have to look at that airlines in the second quarter, this very much in the second quarter, they're flying, and therefore, they're not training. That's definitely gonna be a factor this year. We haven't seen that seasonality as much during COVID, you know, for obvious reasons, but we're gonna see it this year. I think that's the color I would give.
In terms of defense, what I would see is those orders that we've seen, okay, they're gonna take time, and we have this, you know, we kind of like to say we have, like, this, you know, big animal that's making its way through the snake right now, those big orders. That's gonna go to translate. That's inevitably gonna drop to the bottom line. I expect that it's not gonna happen overnight, okay, but it definitely is gonna start affecting the year. I think that, again, it's for the back half. That combined all that translates into the outlook that we've given in terms of, you know, SEU, 30% growth.
Okay.
Mid 30%.
Appreciate that detail, Marc. Thank you.
Thank you. The next question comes from Kristine Liwag of Morgan Stanley. Please go ahead.
Hey, good morning, guys.
Good morning, Kris.
Marc, you know, aviation is the same safest form of mass transportation today. When we kind of look at this pilot shortage issue, some are advocating for the reduction of the number of pilots in either some of the long-haul flights or for freight, especially as we're seeing more automation in the cockpit. As we balance out, like, the safety requirement of the industry and the shortage issue, can you comment on how credible you think the reduction of pilots would be in either the cockpit or the requirement in a flight? If we do see this reduction, where you think that could come out first?
First of all, you know, I've been around in the industry for over 35 years. Before CAE, I used to design transport category airplanes. I'm pretty well-versed, as you know, clients call it, an expert in this domain of what's required to certify airplanes to be able to safely transport passengers. I would say it's not the technology that doesn't exist. The technology exists, and the world's defense forces do it every day. In fact, we have high expertise in doing it. You know, for years we've been conducting the training for example, the U.S. Air Force flying Predators, flying Reapers, for example. We have strong capabilities in that, where we deploy, and we bid around the world in defense.
First of all, in civil aviation, you nailed it on the head. The overwhelming primary consideration is the safety of the traveling public. This is, as you said, again, the safest mode of transportation in the world. That the reason for that is because the regulatory framework for the design of aircraft continues to relentlessly advance based on the lessons learned of, you know, incidents that happen, the reports that come out of National Transportation Safety Board recommendation, which translates into changes to aircraft by FAA, by EASA, for example. Therefore, the airplanes get safer and safer all the time. Also inherent in that is the safety of the aircrews themselves. That's where we come in.
As we come in as, you know, obviously the leader in the world, working with the world's regulators to ensure that the training of those pilots is at the utmost standard. Airplanes are not getting less complex. Automation is not getting less complex. The pilots have to be trained effectively. Going straight to your question, I don't see anything within the planning horizon which tells me that we will have single-pilot airplanes or certainly no-pilot aircraft in the foreseeable future. It's a very long time. Don't forget that I think even if you.
Let's say if you were to assume that one pilot, if you have a plane flying with one pilot, then you have to certify the airplane assuming there is no pilot because, well, just to use an easy example, you know, one bad hamburger, and that pilot can be incapacitated, therefore you have no pilot. In the fundamental concept of design of airplanes for flying passengers around the world is that no single failure can result in the loss of the aircraft. Obviously, if you have one pilot flying the aircraft and he or she is incapacitated, then you have violated that rule. If we do see it one day, and I think it's a long way off, I would anticipate that it'll happen on long-haul flights, say involving cargo.
That's where I could see it. Again, I don't see that for a long time.
Thanks, Marc.
Thank you. The next question comes from Tim James, TD Securities. Please go ahead. Mr. James, if you're on mute, we are unable to hear you at this time.
Oh, hi, sorry. It's Tim James here. Sonya, I'm just wondering if you could provide some additional color on the CapEx plans for fiscal 2023, and maybe just talk about a bit of a breakdown or give us a sense for CapEx in defense versus civil, and maybe any specifics on sort of markets or product lines or service lines within each segment. As part of that, is it possible to get a bit of an idea of what expected growth in SEUs is and how CapEx drives that this fiscal year?
Well, I think the split of our projected CapEx is not gonna be overly different than what you've seen historically. The lion's share really goes to civil and expanding our civil aviation network. You know, I said it in my remarks, I'll say it again. This is gross CapEx that is linked to direct market demand, customer order intake, new orders that we see or long-term contracts that we've signed that have accretive returns and cash flow. You know, wherever we can secure long-term, recurring, regulated revenues that can be 20%-30% incremental return accretive within a couple of years, you know, this is some of the highest growth accretive investments that we can make.
In terms of color, you know, the once again, it'll be really focused on deploying that civil or expanding that civil network. You know, a lot of opportunities on the business jet side. With kind of significant activity and structural expansion. We do see a large portion on that CapEx going in business jet, including three new training centers that we're opening up, Savannah and Las Vegas or West Coast one, specifically a larger one. And also a lot of opportunities on commercial side. You know, Mark was speaking to the recovery in that market, which is really a blueprint for what we hope the broader recovery will look like as the other regions kinda catch up.
Those some commercial deployments on, especially on the US side. Where we can, you know, as part of the restructuring program, we are redeploying underutilized assets or assets with lower recovery profiles and moving them over to the U.S., but also deploying new opportunities as we're signing contracts with customers. You know, a focus on that and definitely a high proportion of all of that investment being in the Americas that we see for next year.
Great. Thank you, Sonya. That's very helpful.
Thank you. That was our final question from financial analysts.
Thank you, operator. We'll now open the lines to members of the media.
Thank you. As a reminder, you may press the one followed by the four if you would like to register a question or comment. Once again, that is the one followed by the four. Our first question comes from Julien Arseneau of La Presse. Please go ahead.
Oui, bonjour, Monsieur Parent. Est-ce que vous m'entendez bien?
Oui, merci.
Parfait. Bonjour. Merci de prendre nos questions. Écoutez, je voulais juste vous demander, Monsieur Parent, concernant ce qui est arrivé avec le délai de la présentation des résultats. Visiblement, il y avait pas de mauvaise surprise pour les investisseurs, mais est-ce que vous pouvez donner un peu de détails sur qu'est-ce qui est arrivé, pourquoi ça a été à la veille de la date qui était initialement prévue? Puis est-ce que c'est parce que CAE a été très active dans la dernière année avec des acquisitions, puis il y avait un gros volume de chiffres à traiter? On aurait aimé ça en savoir un peu plus sur finalement ce qui est arrivé.
Écoutez, ce que je peux vous dire, c'est évidemment inhabituel. Écoutez, ils ont demandé, puis on leur a donné plus de temps pour publier les résultats dans les délais requis. C'est vraiment ça, la seule chose qui se présente à ce moment-là. C'est vrai qu'il y avait plus d'activité, mais définitivement à cause des acquisitions qu'on a faites. Par contre, c'était pas le premier quart où ça, c'était une réalisation. Ça faisait déjà trois quarts. On avait, disons, fait l'acquisition de L3Harris Technologies, qui était évidemment la plus grosse. Donc, ils avaient besoin de plus de temps. Je pense qu'une réponse plus approfondie viendrait d'eux, je crois.
Ouais. Avez-vous étonné ? On parlait, tu sais, qu'il manque de comptables, de vérificateurs. Êtes-vous étonné que ce genre de situation-là arrive ?
Ben, écoutez, ça, je vous dirai, ce que je répéterai, c'est très inhabituel.
OK. Sur, juste sur le secteur de la défense, Monsieur Parent, vous disiez dans vos notes d'ouverture qu'il faut voir ça, puis là je vais vous traduire là, comme une aventure de plusieurs années où. Bon, je présume que quand vous avez décidé de faire, disons, un virage ou de réaliser des grosses acquisitions dans la défense pour vous exposer davantage au secteur, vous aviez sûrement pas prévu un conflit armé comme il se produit actuellement entre la Russie puis l'Ukraine. Mais est-ce que c'est juste de dire que ça va venir jouer un rôle, ça risque de jouer un rôle d'accélérateur sur votre stratégie?
Je veux pas dire que vous profitez de la guerre ou du malheur des autres, mais que ce genre de situation-là, le timing pour vous tombe bien quand même.
Comme vous dites, une situation comme ça tombe jamais bien pour personne. Ça, c'est sûr. Non. La seule chose, écoute, la stratégie des forces armées, certainement des États-Unis et de ses alliés, qui inclut le Canada, était déjà pour se préparer pour éventuellement un conflit qui serait contre des adversaires qui seraient des adversaires de taille égale. Ils appellent ça en anglais near-peer. C'était déjà la stratégie. Donc nous, quand on a fait l'acquisition de L3Harris Military Training, qui était l'acquisition qu'on parle, la plus grosse dans notre histoire, c'était vraiment pour s'aligner ce qu'on fait, nous, CAE, avec cette stratégie-là.
Parce que si on prend un peu de recul, qu'est-ce que les forces armées font quand elles sont pas dans une situation de conflit ? Ils s'entraînent. C'est ce qu'ils font de façon constante. Et ils s'entraînent pour le faire. Donc, on a vu un changement dans les dernières trois, quatre ans dans la stratégie, un virage des forces armées contre ce qui était l'entraînement pour un conflit qui était un conflit asymétrique. Et ce qu'on veut dire par asymétrique, c'était comme celle qu'on a vue au Canada contre l'Afghanistan, qu'on n'avait pas des adversaires qui contrôlaient l'espace aérien, qui contrôlaient l'environnement cybernétique. Ils s'entraînent pour ça. Donc CAE on est en plein dans totalement aligné avec leur stratégie.
Malheureusement, ce qu'on voit avec la guerre en Ukraine, c'est qu'on voit maintenant que cette chose, cette sorte de conflit-là, malheureusement, peut se réaliser. On espère que non, mais ça fait juste monter le niveau, tu sais, de crédibilité, puis il faut être prêt, puis on aide nos forces alliées, c'est ce qu'on fait à CAE.
Quand même, les budgets de défense, on regarde l'Allemagne, des pays comme ça qui ont décidé de vraiment d'ouvrir les vannes du côté des dépenses militaires. À un moment donné, vous êtes le genre d'entreprise à qui ça va profiter à travers le monde. Si les budgets militaires augmentent, ça va vous aider.
Ben c'est clair que si les budgets augmentent, ça va inévitablement être favorable pour CAE, puis les compagnies dans le secteur de la défense. Inévitablement, oui.
OK. Parfait. Eh bien, écoutez, merci beaucoup.
Ça va se traduire sur plusieurs années.
OK. Merci.
De rien.
Merci. That was our final question. I'll turn the call back over to our speakers for any closing remarks.
Thank you very much, operator. I want to thank all our participants for joining us today and remind you that there'll be a transcript of today's call on CAE's website at cae.com. Thanks very much. Have a good day.
Thank you. This does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you and have a good day.