Good day, ladies and gentlemen. Welcome to the CAE First 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 today. Before we begin, I'd like to remind you that today's remarks, including management's outlook for fiscal year 2022 and answers to questions contain forward looking statements. These forward looking statements represent our expectations as of today, August 11, 2021, 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 Sea's annual MD and A available on our corporate website and I'm 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 afternoon are Mark Parran, CEE's President and Chief Executive Officer and Sonia Brenco, our Chief Financial Officer. After the remarks from Mark and Sonia, we'll take questions from financial analysts and institutional investors.
And following the conclusion of that Q and A period, we'll open the call to questions from members of the media. Let me now turn the call over to Mark.
Thank you, Andrew, and good afternoon to everyone joining us on the call. Our positive momentum continued into the new fiscal year, and I'm pleased With our strong first quarter performance,
even in
the midst of a pandemic, we've been able to drive results By being adaptive and agile through some of the most rapidly changing circumstances, we reported top and bottom line growth Across all three business units during the quarter and on a consolidated basis, we generated 37% year over year growth and $0.19 of adjusted earnings per share. In Civil, 1st quarter average training center utilization was 56%, which is 1% higher than last quarter and much higher than the 33% in the Q1 last year. We also delivered 11 full flight simulators to customers around the world. On the orders front, we signed training solutions Track valued at $338,000,000 including 5 full flight simulator sales, New 4 year business aviation training agreements with Journey Aviation and Gamma Aviation and a 3 year business aviation training agreement with APCON Jet. We also succeeded to penetrate more share of the traditionally in sourced airline training market with 2 New 10 year exclusive aviation training agreements with Scandinavian Airlines SAS and WestJet.
We are also selected as partner of choice to aircraft OEMs in the emergent advanced air mobility market. We're leading the design and development of the Jaunt Aircraft Systems Integration Lab for the company's new all electric vertical takeoff and landing or eVTOL aircraft, the Journey aircraft. And just at the end of the quarter, we announced a strategic partnership with Volocopter On the M and A front, we expanded our position in civil maintenance training with the acquisition of Global Jet Services, A proven leader in aviation maintenance training. This tuck in acquisition expands our capabilities with increased addressability of business aircrafts and helicopter platforms for maintenance training to world class regulatory approved training programs. By leveraging our experience in pilot training, We expect this to enable rapid growth for CAE in the maintenance training market.
In defense, we booked orders for $162,000,000 Including newly awarded contracts to United States Army to provide a new and upgraded maritime integrated training system and the Sosec consortium to design and develop the initial prototype HH-60W Virtual reality, mixed reality aircrew trainer for the United States Air Force. Other notable contracts include Continuing to provide upgrades and updates on C-one hundred and thirty J training systems for the U. S. Air Force as well as KC-one hundred and thirty J training systems for the U. S.
Marine Corps. Continuing as well, continuing to provide in a range of in service support solutions for the Royal Canadian Air Force's CF-eighteen aircraft and continuing to provide management and support of Royal Australian Air Force Aerospace Simulators. Defense also received an order to provide a new part test trainer, a range of updates and additional train support services for the PC-twenty 1 ground based training system supporting pilot training for the French Air Force. I'm especially pleased with the speed at which the team concluded right after the end of the quarter, our acquisition of L3 Harris Military Training, Having obtained all regulatory approvals and meeting all other closing conditions, we're excited to welcome some 1600 members of the L3 Harris military training team and to leverage our combined expertise to support the mission of our defense and security customers. Our combined teams are now squarely focused on integration efforts and seizing on our expanded market opportunities.
As testimony to how our position has already been substantially augmented by L3 Harris military training, Since the end of the quarter, Defense won key positions on 3 major IDIQs and 2 noteworthy prime contracts That together significantly expand CAE's customer base and market reach. Specifically, we won the largest IDI2 contract With our prime position on the U. S. General Services Administration or GSA Astro IDIQ vehicle for data operations, aircraft development and systems integration, support and training pools. We gained access to 4 of the 5 pools Because of the 3 L3 Harris Military Training acquisition, which in total represents a budget of several 1,000,000,000 of dollars over a 10 year period.
We also won a prime contract on the Multiple Award Task Order contract or METOC IDIQ to provide mission support services for the United States Army Futures Command. Defense also won a position in an important growth domain As a key partner to small business on the National Cyber Range Complex IDIQ. Furthermore, Defense won a competitive prime contract With expected life cycle value of US90 $1,000,000 over 8 years to develop simulators and training for the U. S. Air Force Joint Terminal Attack Controllers.
And in another first for CAE, Defense won a 3 letter agency I'm contract with the GSA, expanding our market penetration into synthetic environment, enhanced multi domain operational support and training. In Healthcare, I'm encouraged by the double digit year over year growth that we had in the quarter, which is driven by our core Healthcare Simulation and Training business. We continue to bring highly innovative solutions to market with the release of CAE Vimix 3.2, At Advanced Software Technology that makes our platform the industry's 1st ultrasound simulator with 3d4d ultrasonography and multiplanar reconstruction for improved fidelity and realism. We also launched CAE iCCU, which is a digital portfolio of learning solutions targeting critical care clinicians for ultrasound education. With that, I'll now turn the call over to Sonia, who will provide additional details about our financial performance, and I'll return at the end of the call to comment on our outlook.
Sonia?
Thank you, Mark, and good afternoon, everyone. Our results continue to reflect the success of the measures we've taken to strengthen the company both Consolidated revenue of $752,700,000 was 37% higher compared to the Q1 last year. Adjusted segment operating income was $98,400,000 compared to a loss of $2,100,000 last year. Quarterly adjusted net income was $5,600,000 or $0.19 per share compared to negative $0.11 in the Q1 last year. Cash used in operating activities this quarter was down 40 Free cash flow was negative $147,600,000 compared to $92,700,000 last year.
We usually see a higher investment in non cash working capital accounts in the first half of the fiscal year. And as in previous years, we expect portion of the non cash working capital investment to reverse in the second half. We continue to target 100% conversion of net income to free cash flow for the year. Growth and maintenance capital expenditures totaled $73,900,000 this quarter, mainly for growth and specifically to add capacity to our global training network To deliver on the long term exclusive training contracts in our backlog, our growth CapEx is directly linked to our opportunities to invest incremental capital with attractive returns on free cash flows. With several attractive market led expansion investment opportunities on the horizon, We are in good position to deploy more organic capital, and so we are raising our expectations for total capital expenditures to more than $250,000,000 in the fiscal year 2022.
Income taxes this quarter were $10,300,000 representing an effective tax rate of 18% compared to 24 For the Q1 last year, income tax was impacted by restructuring costs this quarter, excluding which the rates would have been 19%. On this basis, the decrease in the tax rate was mainly attributable to beneficial impact of certain tax assets, partially offset by the change in the mix of income from various jurisdictions. Our net debt position at the end of the quarter was $1,600,000,000 for a net debt to capital ratio of 33.9 percent. And net debt to adjusted EBITDA was 2.43x at the end of the quarter. All told, between cash and available credit, we have approximately 2 point Our global asset base and footprint and adjusting our business to correspond with the expected level of demand and the structural efficiencies that we'll be enduring.
We continue to expect significant annual recurring cost savings to a ramp up of a run rate of approximately $65,000,000 to $7,000,000 by the end of the current fiscal year. We began executing our restructuring program in the Q2 last year. And as at the end of June 2021, we had incurred a total of $136,200,000 of restructuring expenses for the entire program, including $12,200,000 this quarter. We expect to incur total restructuring expenses related to this program of $50,000,000 in fiscal 2022. Now turning to our segmented performance.
In Civil, 1st quarter revenue was up 75% over last year to $432,900,000 and adjusted segment operating income was up to 85 It was up $85,900,000 over the Q1 last year to $69,700,000 for a margin of 16.1%. The Civil book to sales ratio for the quarter was 0.78 times and for the rolling 12 month period, it was 0.88 times. In defense, 4th quarter revenue was $288,200,000 was up 3% over Q1 last year. And adjusted segment operating income was up 37% over last $23,700,000 for a margin of 8.2%. The defense to book to sales ratio for the quarter was 0.5 3 times and 0.7 times for the last 12 months.
And in Healthcare, 4th quarter revenue was $31,600,000 up 42 percent from $22,300,000 in Q1 last year. Adjusted segment operating income was $5,000,000 in the quarter compared to a loss of $3,200,000 in Q1 of last year. With that, I will ask Mark to discuss the way forward.
Thanks, Sonia. As we look to the period ahead, I expect our positive momentum to extend throughout the fiscal year and beyond. 18 months ago, we're just beginning to confront the most severe shock our And yet despite the many uncertainties at that time, we were resolute in our determination not to not only recover from the pandemic, DoD emerged from it as an even stronger company. We're still in the pandemic and despite that reality, we've gotten stronger. I'm really encouraged by everything that we've done to reinforce CAE's base over the last year and a year and a half actually to expand our horizons for long term The slope of our recovery to pre pandemic levels and beyond continues to depend on the timing and rate at which Border restrictions can be safely lifted and normal activities resume in our end markets and in the geographies where we and our customers have Significant operation, but notwithstanding the really disparate global vaccination rates And the volatility of border restrictions, which continues to obscure usual market visibility, we still expect Strong growth in our core markets this fiscal year, coming mainly in the second half.
We draw confidence from several important moves that we've made To expand and solidify our leadership position, including the pursuit of a growth opportunities pipeline That has so far netted 5 acquisitions in Civil to consolidate our position and expand into growth adjacencies and our largest ever acquisition, namely L3 Harris Militant Training and Defense, which doubles our presence in the U. S. Defense market and accelerates our defense and security strategy. At the same time, as expanding CAE's reach externally, We embarked on enterprise level projects to substantially lower our cost structure and achieve even greater levels of operational excellence. You heard Sonia reiterate our expectations that we'll reach an exit rate this fiscal year of $65,000,000 to $70,000,000 for annual recurring cost savings from those initiatives.
In Civil, we're in an excellent position to benefit from a broader market recovery, which so far has been more narrowly led by domestic air travel, specifically in regions with relatively high vaccination rates and Cargo Operations. The rebounding domestic operations demonstrates the pent up demand for air travel And the potential for rapid ramp up when restrictions ease. Cross border and transcontinental operations have continued to lag As they're much more tied to the easing of border restrictions, but we believe considerable pent up demand exists there too. Our market share and securing new customer partnerships drawn from a large pipeline of airline prospects. We're also succeeding to expand our civil addressable market by over $1,000,000,000 to over 6,000,000,000 By extending beyond pilot training solutions into the rapidly growing market for digitally enabled crew optimization services and Aircraft Maintenance Training Services.
In Business Aviation, demand has rebounded at a very rapid pace with current flight activity In the U. S, now exceeding 2019 levels and approaching the prior levels in Europe. This bodes very well for pilot hiring and business aviation training demand in this highly important segment of the civil training market. Much of the current demand is coming from first time consumers of private aviation, and we believe the market has structurally expanded as a result. Civil full flight simulator sales are driven by new aircraft deliveries, which are so many signs of improvement.
The total market for simulator products remains small at present, but we expect to remain our maintain our leading share of available full flight simulator sales, we still expect to deliver upwards of 30 in fiscal year 2022, driven mainly from backlog. We're also expecting to build on our initial successes in emerging advanced air mobility market, which we see as a new potential Secular driver for pilot training and Xi's expertise in modeling simulation. Already with selections by OEMs including John Air Mobility and Volocopter, we see an important leadership role for CAE, helping to shape the training standard For an estimated 60,000 new pilots by 2028 in support of this entirely new modality of air transportation. In defense, the rapid closing of the L3 Harris Military Training acquisition provides greater definition to the remainder of fiscal 2022 and beyond. And our focus will be on successful integration of this acquisition.
International opportunities are somewhat slower to materialize in the current environment, but we see this headwind as temporary. And we have a strong pipeline with some $5,800,000 of bids and proposals pending customer decisions. From a balance standpoint, having now substantially augmented our presence in the defense segment and in the United States in particular, We expect defense to benefit from the greater government budgetary stability that this provides. CAE's Defense business has become the world's leading Platform agnostic, global training and simulation pure play. And we're very excited about the increased potential That brings to captured business around the world accelerated with the expanded capability and customer set that we now possess.
Our new prime positions on major IDIQs and our contract to develop simulators of training for United States Air Force Joint Terminal Attack Controllers All perfect examples of what we mean by synergies and how L3Harris military training expands our Our defense priorities are focused on the long term and investing in our leading position as a training and mission support partner with leading its capabilities in digital immersion. We're also enhancing our position By laying the groundwork to strategically team with major OEMs on next generation platforms. With our expertise in the integration of live, virtual and Along with our newly expanded capabilities to address mission and operational support, we believe we'll make significant inroads in And lastly, in healthcare, I believe we have the right team in place, including a reinvigorated front end to fully leverage the greater market appreciation of the benefits of healthcare simulation and training To improve safety and help save lives, we're making deliberate moves to increase our addressable market and access the larger pools We're the largest pools of value in healthcare training like nursing and in the military. Here too, we expect good momentum and I look forward to gaining Sustainable scale with our innovative solutions to make healthcare safer.
In summary, CAE is poised to benefit from how the world is Changing the post COVID-nineteen environment and we adapted our growth strategy to seize on the opportunities presented by these new realities. We've made several important moves over the last year and a half to expand and strengthen our position and the investment thesis for CAE is more compelling than ever. We look forward to strong growth in the year ahead and superior and sustainable growth and strong free cash flows over the long term. With that, I thank you for your attention. And we're now ready to answer questions.
Operator, we'll now be pleased to take questions from analysts and institutional investors.
Thank Our first question comes from Connor Gupta with Scotiabank. Please proceed.
Thanks and good afternoon everyone. So maybe the first question on the order activity. The book to sales ratio was a bit low in the Q1 for both Civil and Defense segments. Did you see any delays and or any cancellations that may have impacted the orders?
No, specifically No cancellations for sure, Conor. Continued headwinds on timing of international orders in defense, I mentioned that on the call. There's still some COVID impacts there. Things are not back to normal, not only in civil, but in defense overall, because Again, the travel restrictions and basically just things just not being back to normal. So we're seeing that internationally.
That's affecting things, but if you look defense in particular, I've never been fan and I said this many times before to not look at Orders on the defense side on a quarterly basis, I will look at our 12 month runway And even on that base, you would come to the conclusion as below 1. But I would point to the recent orders that we've had and the Really very, very encouraging awards on not only on orders, but on IDIQs that we've gotten Since the quarter, specifically since we've done the completed the acquisition of L3 Harris Mills and Train, that is Of course, that doesn't materialize into order intake. It's kind of a license to play. But the fact that you selected Prime on those IDIQs is a very strong indication because that gives you access Literally 1,000,000,000 of dollars over the next few years. So I'm very encouraged by that.
So I'm not overly concerned on a sustained basis. On the civil side, I think what I point there are a couple of things. If you look at we made those secret that simulator orders are going to be slow In the quarter, so we don't we didn't expect to have a book to bill anywhere near 1 for on the product standpoint at this time. And on sale, if I look at training itself, training if you were to take training itself, book to bill is higher than 1. And I think that important thing to note there as well as if you look at our business jet business, The book to bill business is largely transactional business.
So the book to bill is always around 1. Just because of the way we run that we book that business. So if we're above 1, Substantially, it means that we're quite a bit above 1 in the commercial aviation training business. So That's the way I would look at things, if that gives you a bit more color.
That's very helpful, Mark. Thank you. And you mentioned the 3 IDIQ Two contracts. So congrats on that and the 2 prime contracts as well. Just to clarify, do these five contracts Belong to the acquired L3Harris business or is it for the existing business, independent?
Well, they don't belong to us Because we own L3 Harris Milljet Training Business and it was bid by L3 Harris Link And Link is now owned by us, so there are contracts there are RDAQs.
No, I'm sorry. Just to be clear, I wanted to understand, is it related to the L3 Harris asset that you acquired or is it outside?
Okay. Well, yes, part of it is like, I'll give you the IDIQs for example. On those IDIQs there's various pools, one of them is training. Okay. So there was 5 pools, I won't go through the details of all the pools, but L3 Harris Link bid on 5 of those pools And they were actually, I'm not sure it was 5, but they were selected as prime on 5 out of the 10 pools.
We We're selected on one of those CAE legacy, let's call it legacy for a moment. We were selected on one of the pools, which was training as prime contractors. So as a result of this and what we get from the acquisition is obviously a prime position on those other pools, which directly Come about as a result of the acquisition. The other order that I would point to is a $90,000,000 Order for the train system for the JTACS, U. S.
Air Force JTACS that comes from the LINQ acquisition as well.
That's great color. Thanks. And last one for me before I turn it over, maybe for Sonja. So, You raised the CapEx guidance slightly and you are still expecting 100% free cash flow conversion. Should we interpret that as you're expecting higher net income versus your prior expectations this year?
Or is it the better working capital performance that you're expecting? Thanks.
So free cash flow has been negative in the quarter and really driven by non cash working capital here. And really what we see there is the usual seasonality. There's usually a larger amount of kind of Annual payments in the first quarter and the first half And also maybe a bit of volume shift from Q4 to Q1. Now, so really the variation here is that we expect this to reverse in part in the second half as we've done before Because we keep a continued laser focus on working capital metrics and optimizing that And really still guiding to the 100 percent net income, the free cash flow conversion. Now I just kind of highlight that the Free cash flow, I thought we've defined it, does not include the growth CapEx, right?
So the CapEx increased to over $250,000,000 is not included in that free cash flow. And if I may on the CapEx, one of the reasons that we We have raised our view on that. It's really, I think, a positive development. And to tag on to what Mark was saying, we are seeing some good orders on the training side, on the commercial side as airlines need and request more So they're not only asking for more capacity, but some of these airlines that we're working with, actually we're seeing some change behaviors, whereas they would have Purchased the simulator in prior to COVID, we're entering into long term training agreements and that's one of the reasons that we've increased our view on the CapEx. And I'll remind you that the organic CapEx is really the most accretive capital and Growth Investment that we have delivering 20% to 30% incremental returns in the 1st 2 to 3 years and The best example of growth compounding that we have.
If I can clarify, Sonia, why would you need to invest into Incremental capacity when your utilization levels are still below 60%, let's say. I mean like should you not have excess capacity in your training just already, I'm like where is the demand coming from?
Well, it's because I'll answer that one, Conor. It goes directly to the question of Different behaviors being exhibited by airlines, which we've pointed to that airlines are basically looking Change from a traditional in source kind of model to looking more at an outsource model. We keep on commenting on that, that we have more conversations today just to Under that results, so we announced like 2 outsourcings this quarter where we got 2 10 year contracts with 2 separate airlines On those type of deals. So what you see is airlines investing in new capacity, mainly for new aircraft And rather than going through the model of basically investing in the simulators, they're turning over and signing long term contracts with us. So that's what you're seeing here.
So a lot of that incremental CapEx is exactly for that kind of behavior. And as we're saying that as we said many times that we've demonstrated investing in that type of CapEx It's the best example of growth compounding that we have. So we won't invest in it unless we see the type of return accretion That, Edido, basically we've presented the street, which is very quite nice. Thank you. So that's the kind of that's what we're seeing.
And To your question, we're still operating at say 0.56 percent capacity. Well, this Once the market is back to normal and we fully expect to return, let's say apples to apples On the same level, let's say, the same level of capacity, well, what we're talking of this CapEx investing is incremental to that.
Yes. And I just add that the demand is linked to either new platforms or platforms where we don't have excess capacity. Of course, if we have simulators that are underutilized and that's part of the restructuring program, we move them around to match up with demand. And so these contracts are for platform leaders that are under or already all utilized or new.
I appreciate the time. Thank you.
Our next question comes from Kevin Chiang with CIBC. Please proceed.
Thanks for taking my question. Maybe just 2 for me. It does seem like, I guess, during this pandemic, you've invested in some of these adjacent services. You talked about the maintenance Training acquisition, you've been growing the crew management. Just wondering how you think about the adjacent service opportunities you can bolt on Into Civil, I guess, over the medium to longer term, are there areas you still want to focus on that you don't offer now?
And then are you seeing benefits from cross selling? I presume that's the end goal here where someone comes to you for pilot training, maybe maintenance training and to manage their crews as well. Is that kind of the best case scenario as you bring this all together?
Well, absolutely. I mean, that's definitely a big part of it, Kevin. It's traditional basic Enlarging the traditional share of wallet, we like to in all of our transactions with our customers And that's been our model all along. It's always to try to make ourselves more relevant, more important to our partners and being Training partner choice, but moving into more of, we call it, Mission Operations and Defense. In Civil, it's capturing more of their needs around The pilots around the technician around our operations.
So maintenance training is a natural one. We've done it. We have a very nice franchise of doing that in This is Erica. In Commercial Aircraft, we basically embarked on that in a relatively good way with Telesis, for example, When we acquired that and we're expanding upon it here with this acquisition that we're doing in this bolt on in the United States, I feel very good about the growth of that market. The Technician market is one that is poised to grow for the same reason that the pilot the need for pilots is going to grow.
It's a tenured on an average basis. Well, it's a very tenured workforce. It's a regulated market In terms of especially the Miracle unique technicians with certification, so it's a natural market for us. Beyond that, again, we're moving into a more software enabled solutions that was what we did with Merlot, with Roster Buster and RB Group. Again, we're making ourselves more essential to our customers and they already outsource these solutions or They are open to outsources solutions because we're able to address hot buttons that basically are not core to them.
And maybe just a couple. Have you seen I guess, like have you been able to cross sell some of these newly acquired services within your core customer base. And when you think about the addressable market now, I think earlier this year, you talked about Civil being 1,000,000,000 addressable market, now with the maintenance training capabilities,
do you
have a sense of how big that pie is today?
Well, at the moment, when I talk about $6,000,000,000 it's about the market that we see, including those adjacencies.
Okay, Okay. And then just second one for me. Just turning to Healthcare. In your outlook in your press release, you highlighted the growing nurse shortage and your outlook as I think it's a long term tailwind for healthcare and the services you provide. I'm just wondering, when you talk to healthcare customers, are you seeing, I guess, a similar realization like you see in Civil and Defense, whereby they recognize that This labor shortage issue in terms of revenue recognition opportunity for you over at CAE.
Well, for sure, look at a macro level, and I was saying in my comments, we definitely see the nursing shortage that exists and is Poised to increase as a catalyst for our business. It's catalyst for business because if you're talking about you need more nurses, you need more Courses for nurses, you need more slots in nursing schools, who do we sell our products and solution to nursing schools, training hospitals, those kind of things. So Just as a first order response to that, beyond that is the fact that you can By using simulation based training, you can make them more effective. You can provide value To those schools where by using their product, they can then make themselves more relevant in a lot of cases, for example, United States is over there more for profit operations. So if they can have a nursing program that is steeped in modern Technology using medical mannequins and digital solutions, that is more appealing for example, students We're looking to get a degree in that particular market.
So all of it contributes to how we see The market in healthcare, but that's just one of the components. It's a good one. It's important one. But if I look at all of The catalyst in basically for our business, they're just coming out of the pandemic. I mean healthcare I mean, there's never been a time where healthcare is more on everybody's mind.
And we're reinvigorating the whole organization. We're Basically concentrating on the core business, which as you commented in nursing, for example, but we see opportunities, Big opportunities, for example, in the military, on government or para government organizations like, For example, the FEMA in the United States, for example, Federal Emergency Management Agency, where we can bring Simulation based training solutions to the full. So we are ramping up in healthcare and I'm Very confident of a nice growth profile that will be good for our business.
That's great color. Thank you very much for taking my questions.
Our next question comes from Tim James with TD Securities. Please proceed.
Thanks very much. Mark, I'm just wondering if you could talk for a minute about type certification versus ab initio versus Current training activity that you're seeing throughout the network. And maybe just commenting on how each is faring relative to, to if we use, say, fiscal 2020 as kind of a baseline. I'm just trying to understand how the relative strength of their rebounds have been?
I would say that well, first of all, type rating basically our business in commercial aviation training, It's pretty much operating in lockstep with the flying activity. And that's the comment around that's the first order catalyst. So when you think about the utilization in our overall training centers, I would say that business aircraft is doing pretty darn well because of the level of activity there. In the U. S, we're doing very well, that's Training centers and high levels of operation.
Rest of the world in commercial aviation, not so much Because of still border restrictions and very uneven levels of vaccination. So Europe, If you take average 56%, it would be significantly lower than that. Asia, I would tell you, is still Quite a bit behind because of again that the level of very low level of vaccination. So Just in the past few weeks, we've had closures of centers in Vietnam and Kuala Lumpur and Australia even. So still so the fact that and I see that as Perversely, I'd say very positive because we're able to make the amount of return that we're making on 56% utilization with those dynamics.
I feel pretty darn good as the rest of the world recovers like the United States does, which will happen, that's not a question. And having traveled internationally myself recently and I know if you have, but the level of hoops that you have to go through to fly internationally, You really don't want to. So when that starts getting reduced, I think we'll see a lot of pent up demand. In terms of avenue show activity, it's very it's actually very strong. We haven't really reduced the level of flying activity.
The only Areas where we have to reduce is, for example, in Australia because a very strict lockdown for us to close our schools back up now, but that's the kind of activity. In fact, what you see is airlines that are anticipating a renewed pilot shortage and increasing. So we're Orders from major airlines increasing their number of cadets in our flight schools in a significant manner. So That's a positive for sure. I don't think it's you.
Products, it's what I said. Whenever this is historical, whenever there is a price, Even though the products or so simulator deliveries Our tie highly to deliveries, there's always a lag when you have a shock and of course, it's the mother of all shocks. There's always a lag Before airlines start to buy simulators in earnest, so we're seeing that. That's why we anticipated that we're not going to get back to level of orders that we had pre pandemic for some time. But we're starting to see recovery.
We had 5 in the quarter, Which I wouldn't call it a run rate, but I'm encouraged by that and I'm encouraged by the level of activity. I think airlines are seeing it come back. Airbus is increasing deliveries next year. We see the big 4 U. S.
Airlines, recall 3,500 pilots, 1,000 flight attendants. We saw United Airlines ordered 200 MAXs and 70 A321s. And of course, again, TSA passenger throughput in the USA has Continued to reach very high levels. We're back at 80% pre COVID. So it's all pretty positive signs.
I don't know if that gives you a good answer, Tim.
That's very helpful, Mark. Thank you. Very helpful. Just on the 7 37 MAX, I know When the issues were kind of working their way through, I guess, we got
to go back more than
a year ago now, CAE was building Some simulators, some MAX simulators in anticipation of demand and maybe not based on contracts in hand. How does the how do those simulators and your If you're carrying any of those or have all those MAX simulators more or less been spoken for? And are we kind of back to a normal trend in terms of MAX simulators that would be being produced in CAE facilities.
Yes. No, we have nothing we have no backlog of the 737 MAX. They're all delivered. And I anticipate good demand for 737 MAX.
Okay, great. And then my last question, And there's great color on sort of where defense orders are coming from. I'm just wondering specifically that there was a very nice increase, as you've talked about, in the bid pipeline, I guess, over $1,000,000,000 relative to the end of fiscal 2021. This is
Are there any platforms or
Trends you're seeing or areas where that account for that big step up in the bid pipelines? Any warfare types, any kind of markets you could point to? Or is it really across the board?
Well, it's across the board. But obviously, The U. S. Is the largest business market in the world, so you expect that's a high level. But having said that, the contract that we go after internationally Our large contracts that basically establish turnkey training centers for fighters that kind of thing.
We have a number of countries that we're looking to do that, specifically some of those Talks are going slow because of pandemic, but that's where we're seeing some of that order activity is a bit protracted. But If your question is, I mean is that order pipeline, if you like, Is it sensitive to 1 or 2 major bids? I would tell you no. That's across the board.
Okay. Thank you very much.
Our next question comes from Fadi Chamot with BMO. Please proceed.
You're talking, Fadi. We can't hear you.
Hi. I was on mute. Apologies. Good afternoon. So I was wondering on the SAS and WestJet, were there asset Commitment on your part towards these outsourcing deals or is it purely kind of service side?
It's asset commitments, but asset that we put in the asset and it's part of the increased CapEx that we're talking about on both airlines. So, it's basically they don't invest in simulator, but we get In these two cases, 10 year exclusive contracts to for training on those platforms for those airlines. That's essentially it.
Okay. My second question is, as you look at this year, Can you give us kind of an idea about kind of what is the contribution that you're expecting In terms of maybe revenues or operating income from the acquisitions that you've made? And also If you can give us an idea about how much contribution you expect to realize on a full year basis from that $65,000,000 $70,000,000 restructuring program.
Well, I'll let Sonia talk this more specifically. The biggest one obviously This is Alfrey Harris. Well, we're very, very happy to have the case to close this after giving us really, I guess, Pretty much 3 full quarters. So what we said in the past, that's probably $500,000,000,000 business. So we get 9 months of it.
So A quick math that tells me what we should be able to get. But having said that, you can well imagine that Having closed it early brings its own share of complexities. And we're going through putting this 2 sets of numbers The teams together, so we're solely focused on the integration right now. So the heavy lifting before we can be very definitive, But I think that's what we just on that big one, which is, of course, the big dog in this we would get. And Sonia, maybe you'll comment on the others.
Yes. So Mark, as Mark mentioned, completely focused on the integration. We had said it would be immediately EBITDA accretive, Double digit EPS accretive in the 1st full year of operations, so that's FY 'twenty three and working up to a run rate of Synergies of $35,000,000 to $45,000,000 also in that EPS accretion in the 1st full year after closing. So I'd go with those metrics. On the restructuring program, Eddie, for full year, what we Given our guidance is $65,000,000 to $70,000,000 of recurring structural savings and we're building up to that run rate over this year.
So this quarter alone, we've kind of flowed through about 15% of that annual target And that's already kind of, I think, good progress and we continue to advance on that progress as we optimize locations And continue relocations of simulators. So we'll see that wrapping up throughout the year and a little bit more in the second half as well.
Okay. And maybe follow-up on this question, specifically on the Aviation side. Now that you've kind of overlapped the Hardest quarter last year, your run rate EBIT in that business is about $250,000,000 for the last four quarters. Based on what you're seeing in both delivery of full flight simulators and Opportunities on the services side, like would you kind of maybe give us maybe An overall range of what do you think organic growth will look like as we go into the next 9 months year?
So what we didn't give specific financial guidance really because the visibility is still quite opaque On, I think, the level of the border restrictions, the volatility on travel restrictions, And that's the main driver to drive a lot of the recovery there. Now so but what we've said is that we expect Very strong year over year growth. So on recovery, on the flow through of those cost savings, We're we got about we delivered about $20,000,000 of SOI this quarter at a 16% margin and that's at 56 Percent utilization and 11 deliveries in the quarter. And Mark went into some detail on kind of the volatility that we So as that recovery ramps up and the rest of the cost savings ramp up, we'll see The SOI follow and the margins as well.
Yes. If you take a break it down, Patty, a little bit, you think about just as you say, you're looking civil along. I should break it down, if you take revenue and earnings from simulators, well, I mean, we said we'll We expect to deliver about 30 for backlog, okay. So you make your mind up what that looks like. Then you look at we talked about our Level of training activity in our flight training, our STOs and I talked about that.
That's pretty even because you don't see big swings about that because That's kind of a you basically book your revenue as you're flying. So you don't need huge swings, but I would tell you saw an increase. And when you look at the rest, business aviation training is doing very well because business aircraft training It's on a high. We're in our Q2 that seasonably below quarter, so you would expect it to go in Q3, Q4. And then you have commercial.
Commercial is the one that is the wildcard because that's the one as Sunny was saying that is really exposed The variability in the vaccination rates and border restrictions, that's the one that caused the most headache in predictability. U. S. Doing great, doing really good. So Europe, that's still low, but we're seeing signs of promise there.
In Asia, well, I think it's tied to the vaccination rates. So I guess that's the best crystal ball I can give you.
Okay, great. The SAS and WestJet go into effect now basically?
Well, no, we have to
Well, the agreements are signed and we're going to build the simulators to deploy.
Okay. Okay. Thank you.
Our next question comes from Cameron Doerksen with National Bank Financial. Please proceed.
Yes, thanks very much. Good afternoon. Just one question for me. I'm just wondering if you can And a little bit more on the latest R and D program that you've announced. I know you've kind of highlighted the advanced to air mobility and AI and some other things in there.
But just wondering if you can provide any more specifics. And just wondering what kind of new capabilities Are you looking to develop at CAE that maybe didn't have before or maybe that you're underrepresented in before?
Well, a lot of it is to do with furthering the core competencies that we have. I mean, some of the new areas specifically like Development of capabilities among urban air vehicles, we're talking about electric, hybrid aircraft, green technologies, that's another one. Others are continuing the path we're on, on everything digital in our business, Basically using data, using the data that we get from our business to basically You know technologies allow us to be more important to our customer and yet data enabled revenue streams from that. And a lot of it has to do with furthering our expertise around the experts in the world In creating these synthetic environments that are so important to warfare specifically, That's what I talked about specifically, one of the great outcomes coming out of the acquisition of L3 Harris is we are now we now have capabilities, strong capabilities in all 5 domains. And Because the military is now focused on basically preparing for a Near peer fight is again, what does the military do when they're not in operations, well they train for operation, they train for war.
So what they train for? They train for what they call the near peer fight. And the near peer fight is one that you can only really do virtually and that in order to be able to do that you have to create an environment, Which is a synthetic environment, which the military can exercise in. We are world class at that. But Again, nothing stands still in life and we basically continue to invest in R and D to make sure that we continue to hone those skills That makes us the best in the world and more relevant to our customers.
Those are some of the things that I was talking about.
Okay. That's helpful. Thanks very much.
Our next question comes from Benoit Poirier with Desjardins Capital Markets. Please proceed.
Yes. Good morning good afternoon, everyone. During the quarter, we've seen some big aircraft orders. Could those initial steps could lead could they lead to some sizable training opportunities?
Well, for sure, Benoit. As we said before, to the extent that they're going to translate into incremental deliveries And you see as I was mentioning Airbus increasing air production rates, then that's going to inevitably result in more simulators Needed in the market and we fully expect to maintain our market lead. Specifically, we've gotten even more A lead in that market with the acquisitions are true, so I think that will be good for us as well and training market as well. They're going to need incremental capacity whether that gets deployed In terms of simulators or basically outsourced training.
Okay. And Sonja, with respect to your increased CapEx guidance this year, could you maybe provide some color on how it will flow to Return on capital employed metrics over time and whether the ramp up in Accretive contribution is over a few years.
Absolutely. And so as we were talking and great examples These are all market led contract secured opportunities. And so that means the ramp up is much faster. Now There's some commercial, of course, as we talked about in some of the contracts that we signed, but also a good amount of investment in business jet side And deploying Sensor Network in line with that strong demand and that market that's recovering nicely. So the growth CapEx Organic growth CapEx is the most accretive capital that we deploy.
And generally, I mean, we've seen historically And in what we see ahead, I have a high incremental return on capital. Often Within the 1st couple of years, they're in the 20% to 30% return on capital range. So this is very much in line with those metrics and those expectations.
Thank you. That's
it.
There are no further questions at this time.
Operator, if there are any further questions, what do people need to press?
On your
telephone.
We do have a question from Anoa Poponak with Goldman Sachs. Please proceed.
Hi, thanks for that because I missed the one-four instruction the first time. Good afternoon, everybody.
Thanks, Noah. We got your e mail. Thank you.
Awesome. I had understood your prior comments Suggest that with the quarter under your belt here, Civil, a little firmer, BizJet, a lot firmer, the L3 deal closed that you would maybe be providing more formal guidance and outlook commentary this quarter. And I'm just curious, did I interpret that incorrectly? Or Did Delta variant or the end market keep you from doing that? And when do you think you might have enough visibility to provide a more formal outlook.
No, I think you're right, Noah. That's what we said. We last we were there last quarter at the same time, I fully expected to be able to provide more specifics to that. I mean to what level of specifics, to be honest more than now, but I don't know how much more, but look, the reality is that the I think we're not Basically, not alone in this. To me, we still don't have enough visibility of the recovery and vaccination and It basically resulted reduction in travel restriction out of that market and even Europe is a bit challenging to predict right now.
So I know enough to be able to predict that it's going to be we're going to see strong growth and specifically in the back half. We're in a seasonably low quarter now for flying activity this year. If I talk about commercial aviation, that's no different than the other year, Somewhat affected by COVID, but the traditional patterns that we see where airlines in the summer are flying in the Western Hemisphere And they're not training. We see some of that. So, but that's going to recover in Q3, Q4.
But to provide any Guidance that's going to be to me that I could really hang my head on that it's neither going to be over the top or underwhelming. I need more specifics. We tend to be and that's I think we've always been that way a bit conservative with regards to providing any outlook on that basis.
Has the actual business not evolved quite how you thought it would in terms of Utilization rate or order flow or customer activity? Or is this really that COVID has progressed in a way that just Hasn't become as incrementally visible as you thought it might?
I think the latter, The latter, it's basically that. The business is going the way I would have anticipated.
Okay.
Business Aircraft is doing This is in fact Business Aircraft is doing better, specifically in the United States.
Right. Okay. Okay. That's a good clarification. And Mark, you've mentioned a few times how you're in the seasonally light quarter for Civil, and we can see that in the model going back over time.
That's usually the case, not always the case, but it's usually the case. Are you expecting that to be the case this year because you have the normal seasonality, but then you just have working off the very low base that COVID has created. So are you expecting that to be the case?
No, definitely, if that's going to be the case, I can tell you that's Right now, in Business Aircraft, even though we have a lot of training going on, it's not as much training as we could. And the reason for that is because the level of flying activity is higher than it was prior to COVID. So when pilots are flying, they're not training. And it takes you got it. I'm a business aircraft pilot myself and I can tell you it takes time.
You really got a plan to be able To manage your schedule and book off a week to go and do train, which is what you have to do. So, we see those dynamics and we expect to see it Again, we see it again this year. It's somewhat skewed by as mentioned by COVID, but the seasonal pattern still is there. And as part of the reason why we're basically giving more of the growth towards the back half.
Got it.
You see that the buzz by the way as well I would comment that we see we're going to see the There's no variability with regards to our deliveries as well, because same as last year or every year, we have shutdown in our factory and this year, we really, really And for extended period because of COVID related issues. So that means you're not building simulators. So we talk about Survey simulators for the year, you're going to be more steward to the back half, even though they're coming from backlog.
Makes sense. And I'm just going to sneak in one more. I'm a little surprised by the rate of change in civil EBIT dollars compared to revenue dollars sequentially, just given BizJet is stronger and that's higher margin. And then typically with the utilization rate or we've seen with utilization rate being kind of flattish sequentially that that's The phenomenon of the JVs that you have that flow through EBIT differently than revenue dollars. So can you is there a way to help me square up the variance there?
Maybe Sonia, you want to clarify?
Yes. Well, on the margin front, it's really a question on mix. Q4 had a very strong back contribution or proportion and so back with the highest margin kind of Some volatility in the margins and as we've discussed with the JVs. In terms of the top and the bottom line, so Both top and bottom line growth on both sides and several variables here. You saw growth from utilization and also on the cost side, You saw growth or profitability growth coming from some of the cost savings, right?
So a lot of the restructuring program is across the board on the company, A large proportion goes to the Civil side, but you also saw with that the deliveries were lower quarter over quarter, Right. So where you had some progress on those fronts, you had a bit of lower deliveries in Q1 versus Q4.
Okay. Okay. I'll leave it there. Thanks so much.
Great. Operator, I want to thank Everyone from the financial community for participating and for their questions. And with
the time remaining, we'll open the lines To members of the
media, should there be any additional
questions from members of the media, we're ready to take Okay. Well, if there are no questions remaining, we'll conclude the call. And again, thank everyone for joining us today. A transcript of today's call can be found later this afternoon on
today's on CAE's website. Thank you.
That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day everyone.