Welcome to CAE's FY 2027 second quarter financial results and conference call. As a reminder, all participants are in a listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity for analysts to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star then zero. I would now like to turn the conference over to Mr. Andrew Arnovitz. Please go ahead, Mr. Arnovitz.
Good morning, everyone, and thanks for joining us. Today's remarks, including management's outlook and answers to questions, contain forward-looking statements, which represent our expectations as of today, November 12, 2026, 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 risk factors and assumptions that may affect future results is contained in CAE's annual MD&A and MD&A for the three months ended September 30, 2026, as well as in CAE's press release dated May 21, 2026, disclosing transformation plan targets to fiscal 2030, all of which are 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 from CAE are Calin Rovinescu, Executive Chairman, Matthew Bromberg, the company's President and Chief Executive Officer, and Ryan McLeod, our Chief Financial Officer. After formal remarks, we'll open the call to questions from financial analysts. Let me now turn the call over to Calin.
Good morning, everyone. Before Matt and Ryan take you through the quarter in detail, I'd like to briefly share a few observations. When we first introduced CAE's transformation plan, we emphasized that this was about much more than just reducing costs. Our objective is to build a more focused, higher-performing, and higher-return CAE with stronger execution, increased financial flexibility, and a greater capacity to invest in growth and return capital to shareholders, and to do this in a fashion that is sustainable over the long term. At the halfway point of fiscal 2027, we are already seeing tangible progress against that strategy. The transformation is advancing with discipline and speed, and the actions underway across the company are increasingly translating into improved financial and operational performance. In the second quarter, CAE delivered higher adjusted segment operating income and margin and strong free cash flow.
This progress, combined with our outlook for the second half, gives us increased confidence in the earnings potential of the business and is reflected in the higher fiscal 2027 outlook announced today. We also reached an important milestone with our recently announced agreement to sell Flightscape to SITA for $500 million. The transaction demonstrates our commitment to concentrating resources on areas where we have the strongest strategic positions, differentiated capabilities, and attractive opportunities to generate growth and strong financial returns. Subject to closing, the proceeds from Flightscape will further increase our financial flexibility. Combined with improved cash generation and a stronger balance sheet, this gives us greater capacity to make disciplined investments in strategic opportunities in our core businesses and continue returning capital to shareholders. We demonstrated that commitment through increased share repurchase activity in the second quarter.
Overall, the board is encouraged by both the pace of the transformation and the progress we are seeing in the underlying business. CAE has leading positions in two attractive growth markets, and we are becoming a more focused organization with stronger operating discipline, higher cash generation, an improved cost structure, and greater flexibility to allocate capital towards the highest return opportunities. Taken together, the progress through the first half increases our confidence that CAE is well-positioned to deliver attractive long-term growth and create value for shareholders. The board and I look forward to continuing to support Matt and the leadership team on the execution of the next phase of CAE's strategy. With that, I will unfortunately have to leave you before the call is over to catch a flight. I look forward to following the discussion and speaking with many of you soon. Matt, over to you.
Thanks, Calin. Good morning, everyone. Before we get started, I want to take a minute to recognize that yesterday was Remembrance Day in Canada and Veterans Day in the U.S. As a former naval officer, I want to take a moment to thank all those who have served, and that includes many of the veterans across CAE who continue to contribute to our mission every day. As you all know, we operate in over 40 countries around the world and with almost every allied service. Today, 45% of our revenue is associated with supporting the war fighter. A day like this is especially important to take a pause and remember those who have served and those who support. Now let's turn to second quarter. We delivered a solid quarter.
We expanded margins in defense, we improved civil training utilization year-over-year, and we generated higher free cash flow. We increased share repurchases and made meaningful progress on our transformation plan. Our first half performance, together with increased confidence in our ability to execute our second half plan, supports our decision to increase our fiscal 2027 outlook. We now expect adjusted earnings per share of CAD 1.28-CAD 1.35, and adjusted segment operating income margin of 14.9%-15.4%. Our civil business performed as expected in our second quarter, which is seasonally a bit soft. Overall, training utilization improved year-over-year across both commercial and business aviation. Our Middle East mitigation actions continue to work, and our market share of full-flight simulator sales remains at about 80%.
Looking ahead, our bookings for the second half of the year give us good confidence for our second half performance. Defense had another strong quarter. Adjusted segment operating income and margin were meaningfully higher year-over-year. The timing of investment tax credits provided a couple hundred basis points of tailwind, bringing second quarter Defense margin to 13.6%. Excluding that benefit, margin was 11.6%. The underlying improvement reflects our enhanced bid discipline, the benefit of structural cost reduction, and our focus on strong program management. Turning to our transformation plan, we are now more than 50% complete across key milestones, which is ahead of our original forecast. I will walk you through the three pillars. First, as we focus our portfolio, you have seen that last month we announced an agreement to sell Flightscape to SITA for $500 million .
We expect the transaction to close in the first half of calendar year 2027. This is an important step in our transformation plan. It sharpens our focus on the businesses where we see the strongest strategic fit and the best financial returns. Make no mistake, Flightscape is an excellent business, and we are very proud of what the team has built. However, we believe that SITA is the right owner to support its customers, employees, and continued growth. The other divestiture processes, while less material than Flightscape, remain on track. Subject to closing, we intend to put the proceeds to work with discipline.
We will fund the remaining transformation activities, we will invest in attractive growth opportunities in our core businesses, and we will continue returning capital to shareholders. In our second pillar, it is improving our capital discipline, and in particular, accelerating our network consolidation in the Civil training network.
We now expect to retire 16 to 18 simulators by the end of this fiscal year, up from our previous expectation of 13 to 15. As of the quarter end, we had already retired 13. Over time, we remain committed to closing between four and six of our Civil training centers and reducing our Civil network footprint by approximately 500,000 sq ft, or roughly 10%. At the same time, we expect to retain more than 99% of our Civil revenue. This activity, one simulator at a time, one site at a time, will allow us to meet our customer demand, protect our strong customer relationships, and significantly reduce operating infrastructure and real estate costs. Out of the CAD 150 million transformation savings, approximately 20% is directly attributable to this activity. It is a lot of hard work, and I am very proud of what the team has accomplished.
Now let us look at some of the key business developments in the quarter. On the Civil side, 2027 is unfolding in line with our expectations, and the long-term fundamentals across both commercial and business aviation markets remain incredibly strong. We are seeing already positive indications for 2028. New aircraft platforms are an important driver of long-term demand for training and simulation, and the recently certified 737 MAX 10 is a clear example. The MAX 10 accounts for approximately 1,500 orders, representing more than 30% of the 737 MAX's current order book. Another example is United Airlines, an important MAX 10 customer. It has been a key CAE partner for more than four decades, and I recently traveled to Denver to celebrate the completion of the largest simulator program in Civil aviation history. From 2022 to 2026, CAE delivered 40 training devices to United.
Every device was delivered on schedule and to the highest standards of quality and reliability. Our relationship with United Airlines demonstrates what CAE can do at scale. As United continues to expand its training footprint, we committed to support their growth. On the business aviation side, the market continues to be extremely attractive, both near and long term. Industry forecasts published at NBAA point to continued growth in the business aviation fleet, supported by increased flight activity and record OEM backlogs. The global fleet of business aircraft is expected to grow to approximately 51,000 by 2035. That's nearly 30% above today's level. More aircraft means more flying, more flying means more pilots, and the regulatory requirements continue to drive not only type training, but recurring training, which increases our demand. I continue to be amazed at the civil market.
Across our businesses, our retention in training, recurring training, is north of 90%, and that demonstrates the scale and scope of our network and the strength of our customer relationships and the recurring nature of the business. On the defense side, the second quarter order intake was very solid. The book-to-sales ratio was 1.06, and our adjusted backlog and pipeline support additional opportunities for long-term growth. In the U.S., we won a nine-year, CAD 300 million competitive recompete to support the U.S. Air Force C-130H aircrew training system through December 2035. CAE has supported C-130 training for more than 20 years, and today, that footprint includes nine full-flight simulators and more than 45 additional crew training devices across five U.S. locations. This win reinforces CAE's standing as the United States Air Force C-130 training partner and extends a long-established core franchise well into the future.
It's also a testament to our long-standing relationship and partnership with Lockheed Martin. Beyond our core franchises, we're expanding our capabilities into two attractive growth areas: mission readiness and autonomy. During and following the quarter, we announced strategic cooperation agreements with msg systems ag in Germany and WB Electronics in Poland. These build on the Shield AI relationships discussed last quarter. Our planned cooperation with msg systems expands our capabilities in mission readiness. To gether, we intend to explore opportunities to better prepare customers for increasingly complex missions and operational environments. This partnership builds on CAE's long-standing presence in Germany, where we've operated since 1961. In Poland, our planned cooperation with WB Electronics advances our capabilities in autonomy. By combining CAE's training and simulation expertise with WB's unmanned systems and command and control capabilities, we intend to explore new ways to prepare our customers to operate effectively in contested environments.
We are building on our strong core training and simulation franchises and extending CAE beyond traditional platform training into higher growth areas of the defense market. These opportunities and others feed a defense pipeline that is meaningfully larger than our current adjusted backlog and support our expectations for continued growth and higher profitability. With that, I'll turn the call over to Ryan to discuss the second quarter financials and our fiscal 2027 outlook in more depth. After his remarks, I'll share some closing thoughts.
Thank you, Matt, and good morning, everyone. As Matt noted, our second quarter results reflect continued progress across our operational and transformation plans. Based on our first half results and increased confidence in our ability to execute our second half plan across civil and defense, we are raising our adjusted segment operating income margin outlook for FY 2027. Combined with the benefits from a lower effective tax rate and lower finance costs, this also supports an increase to our adjusted EPS outlook for FY 2027. in Q2, as part of our transformation plan, we incurred CAD 42.6 million of restructuring expenses, of which CAD 16.3 million were non-cash charges. This brings total costs incurred under the transformation plan to CAD 175 million, of which CAD 87 million is non-cash.
The overall program is tracking to plan, and we still expect total costs of between CAD 200 million and CAD 250 million, with approximately CAD 100 million of non-cash charges. The majority of the remaining costs are expected to be incurred in FY 2027. We remain on track for our FY 2030 targets of CAD 125 million-CAD 150 million of annual transformation run rate savings. Turning to our results, in the second quarter, consolidated revenues of CAD 1.2 billion decreased 2.6% year-over-year. Adjusted segment operating income was CAD 179.3 million, up 1.5% from CAD 176.7 million in the second quarter last year. Adjusted segment operating income margin increased to 14.9% compared to 14.3% last year. Adjusted EPS was CAD 0.33 compared to CAD 0.28 a year ago.
The improvement in adjusted segment operating income and margin reflects stronger performance in defense and business aviation training, partially offset by a softer civil product business. Adjusted EPS also benefited from lower finance expenses and a lower effective tax rate. Free cash flow was strong again in Q2 at CAD 179.9 million compared to CAD 109.8 million in the second quarter last year. Year-to-date free cash flow of CAD 283.9 million compares to a use of cash of CAD 24.9 million through the first half of last year. This year-over-year increase reflects strong execution as well as working capital and capital expenditure timing. With the strong performance through the first half, we have not made any changes to our FY 2027 cash conversion rate guidance of 85%-95%.
We ended the quarter with net debt of CAD 2.5 billion and a net debt to adjusted EBITDA ratio of 2.16x , in line with our long-term leverage target. in Q2, we were active with our share buyback program and repurchased 1.9 million shares for CAD 67.1 million under the NCIB program. As of the end of our second quarter, our share repurchases totaled 3 million shares and CAD 106.1 million of cash outflow. Our cash performance and current leverage ratio provide flexibility as we execute the transformation and evaluate future capital deployment opportunities. As Matt described, the expected proceeds from Flightscape will further enhance that flexibility, allowing us to fund the transformation, invest in our core businesses, and continue to return capital to shareholders. We will remain measured, disciplined, and transparent in our approach to capital allocation, with a focus on long-term shareholder value. Turning to the segment results.
In Civil, second quarter revenues decreased 2.6% year-over-year to CAD 652.3 million. Adjusted segment operating income was CAD 103.9 million, compared with CAD 124.1 million last year. Adjusted segment operating income margin was 15.9%, compared with 18.5% in the prior year. The year-over-year decreases in Civil revenue and adjusted segment operating income were in line with our expectations and primarily reflected lower simulator product revenues, partially offset by higher activity across our business aviation training network. Year-over-year margin headwinds also reflect temporary inefficiencies associated with repositioning our network and consolidating selected facilities, as well as the elevated investments in tools, systems, and our factory. Civil training center utilization was 65%, up from 62% in the prior year period, with improvement in both commercial and business aviation training. We continue to successfully mitigate impacts on our Middle East operations by transferring the volume to other parts of our global network.
Across Civil, we saw increased utilization year-over-year in our core markets in the Americas and Europe. In Civil, we booked new orders worth CAD 580.6 million in the quarter, representing a book-to-sales ratio of 0.89. Our book-to-sales ratio in Civil over the last 12 months was 1.07x . In Defense, revenue was CAD 552.4 million, compared with CAD 566.6 million in the prior year quarter, a decrease of 2.5%. Adjusted segment operating income increased to CAD 75.4 million from CAD 52.6 million last year, an increase of 43.3% year-over-year. Adjusted segment operating income margin increased to 13.6% from 9.3% last year. The increase reflected higher profitability from product sales, partially due to timing, strong execution on our contracts in North America, and the recognition of CAD 11 million in investment tax credits related to prior years.
Defense adjusted order intake of CAD 586 million resulted in a book-to-sales ratio of 1.06 and brings our adjusted order backlog to CAD 11.3 billion. Moving to our fiscal 2027 outlook. Based on our first half results and the increased confidence in the performance of both segments, we are raising our fiscal 2027 adjusted segment operating income margin to a range between 14.9% and 15.4%, up from 14.6%- 15.1% previously. We are also raising our adjusted EPS outlook for the year to between CAD 1.28 and CAD 1.35, up from CAD 1.21-CAD 1.28 previously, reflecting the stronger operating outlook, as well as lower finance expense and a lower effective tax rate. On Defense, for the year, we continue to expect mid-single-digit growth and improved profitability year-over-year, supported by the robust demand backdrop, adjusted backlog conversion, and strong execution.
Quarterly results will vary based on program milestones, product deliveries, and mix. The second quarter margin should not be treated as a new quarterly run rate due to the discrete tax benefit and product delivery timing. That said, the direction of the underlying business remains very positive. In Civil, we expect second half to be stronger than the first half, consistent with our normal seasonal pattern and supported by training activity and product delivery timing, with a higher number of full-flight simulator deliveries expected in Q4. In the second half, year-over-year margin headwinds will be smaller than they were during the first half of the year. For the full year, profitability is still expected to remain below the prior year levels as a result of lower revenues, friction from our network optimization actions, and investments being made to support long-term performance.
Lastly, as announced yesterday, we are evaluating a potential transition to U.S. GAAP reporting. We have heard from several investors on this topic over the last year, and we are taking a closer look. If we proceed, this change would become effective as of the fourth quarter in fiscal year ending March 31, 2027. Consistent with the enhancements we have already implemented to multiple financial metrics, we believe a transition to U.S. GAAP could further improve the clarity of our financial reporting and enhance comparability with aerospace and defense peers. We expect to provide additional details in the coming quarters, including at our Analyst and Investor Day in February 2027. Overall, Defense continues to deliver improved profitability.
Civil is positioned for improved results in the second half, and our cash generation and leverage provide flexibility to deploy capital in support of our growth strategy and long-term shareholder value. Our plans remain on track, and we remain committed to our fiscal 2030 targets, including adjusted segment operating income of CAD 950 million-CAD 1 billion. With that, I will turn the call back over to Matt.
Thanks, Ryan. Let me close with two thoughts. First, we are doing what we said we would do. We said fiscal year 2027 would be an execution year, and we are executing. Halfway through the year, we have improved Defense profitability, we are generating stronger free cash flow, we are quickly advancing our transformation, and we have taken a significant step in streamlining our portfolio with the announced sale of Flightscape. Given all that, and the strong visibility we have to the second half of the year, we have also raised our fiscal 2027 outlook for adjusted EPS and adjusted segment operating income margin. There is a lot more work to do, but the progress is real. Secondly, we are positioning both businesses, Civil and Defense, for stronger long-term profitable growth and cash generation.
In Civil, we are optimizing our training network to remove a significant amount of cost while continuing to invest to capture long-term growth in aviation training, and we are starting to see the signs of underlying improvement in that business. In Defense, we are executing well and delivering strong profitability. We are strengthening our core and expanding our capabilities in growth areas, including mission readiness and autonomy. Across both businesses, the objective is clear: focus our resources where CAE has the strongest competitive positions and the best opportunities to generate attractive growth and returns.
18 months into the role, I am often asked if I can see the change occurring in the organization, and the answer is yes, I can feel it. We are inflecting. We are becoming more focused on our end markets, we are becoming more focused on profitable growth, and more focused on cash flow generation, and the results are starting to be clear.
Recently, I participated in the Canada Investment Summit in Toronto, where I met with and answered questions from some of the world's largest investors. The discussions around CAE and Canada were excellent and centered on why CAE is well-positioned to win and grow from its Canadian base. My message was simple: CAE is an international leader with a world-class team that competes every day against the best in the industry. We benefit from calling Montréal, which is one of the world's leading aerospace hubs, home, and Canada is increasingly focused on creating the conditions for investment and growth. Most importantly, when you invest in CAE, you are investing in a global company. We operate in over 40 countries and serve two end markets with attractive long-term growth fundamentals. We'll go much deeper on the path ahead at CAE's Analyst and Investor Day in New York in February.
We'll lay out our strategy and the growth opportunities we see across both civil and defense. We'll talk about our key technology investments, and we'll give you more detail to the financial and operational milestones we'll use to measure our progress. We see significant potential to drive higher margins, improve cash generation, attractive long-term growth, and greater value creation. We have a clear plan. We're making good progress. We have great businesses and a fantastic team that is aligned around building a higher growth and higher returning CAE. Thank you.
Thanks, Matt. Operator, we would now be pleased to take questions from financial analysts.
We will now begin the question-and-answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then the number two. First question comes from Konark Gupta with Scotiabank.
Thanks. Good morning, Matt and team. Maybe just on the margins first. Defense margins were pretty strong in the quarter, even if we strip out the one-time ITC benefit there. It seems like the margins were north of 11%. I think this is probably one of the best margins you have seen in a long time in defense. I am just curious, you mentioned there is some product mix timing in there, but how sustainable do you think these low double-digit margins are in defense now on a quarterly basis?
Konark, thank you for the question. As I stated when I came in here a year ago, that we had to earn our right in the defense business, and I thought low double digits was where we needed to be. That is where we are, and that is where we will stay. Now, underlying the quarters you indicated, we do have some unique items, the tax benefit, which won't reoccur. We have a mix benefit as well. But it really comes down to more fundamentals. This starts with bid discipline. I have shared with many of our investors there is certain businesses that we are not going to bid for because the margins and returns are unattractive.
Secondly, where we do bid, we have increased our focus on raising our margins in line with what our products and technology should earn, and ensuring that we have a robust process to understand cost and risk and change management, everything that goes into a strong, robust bid and estimating process. That is part of how military contracts are bid and then won. Secondly, our program management structure. We have over 500 programs around the world, so ensuring we have a very strong, robust central program management office that has strong processes and strong metrics so that we can overview, see, monitor, and react to programs around the world is key. The third item is structural cost reduction.
The transformation that we have talked about, if you look at the three buckets, corporate, civil, and defense, each one of those organizations is looking at taking structural cost out, and that will further drive margins. So we intend to stay here. Thanks for the question, Konark.
Yeah, thanks. If I can quickly follow up, Matt, you seem a little bit more positive on the second half today than before, perhaps. You are not seeing anything materially changing in the civil market from a macro perspective. Fuel still is high. I mean, obviously, it is volatile. Middle East tensions are still continuing. What is driving this optimism? I mean, are you hearing the demand coming from your customers because they are preparing for the next year, or is it they are catching up on something else?
No, great. It is really about execution. To back up, the market is performing as we expected this year, and the mitigation plans we put in for the Middle East are holding. Given the way the market is unfolding in line with our expectations and the success of our mitigation, we feel good about the underlying market. More importantly, internally, we are executing better than we expected, so that gives us confidence in the second half of the year. Let me just talk a little bit about execution. We laid out a strategy, and with that strategy, we put a team and organized around it, and we are developing better tools, better processes, whether they be digital or not, so that we can execute.
We put in a very, very strong business cadence. This is not easy, whether it is a transformation or running the training network or running our programs. Having that battle rhythm, that cadence, it is a grind. It requires a metronome. We have to work day in and day out to ensure that we keep focused on every customer, every delivery, every training hour, and the team is doing really well.
Great. Thanks for the time.
Next question comes from Benoit Poirier with Desjardins. Please go ahead.
Yeah, thank you very much, and good morning, everyone, and congrats on the solid execution. Just related to United, they have slightly over, I believe, 600 firm orders for delivery through 2034, and some articles mention that the new facility in Denver could bring 6,000 jobs and close to 60 full-flight simulators in the longer term. So how much is in your backlog, and does it give you confidence that the overall civil product deliveries this year could be the trough and go increase thereafter?
Yeah, thanks for the question. I certainly don't want to get ahead of Scott and United, but being out there in Denver, let me tell you first, it's a marquee facility. It's the largest commercial training facility in the world. It has 40 full-flight simulators, another 40, 45 other devices, and 95% of those are CAE, and we intend to grow that share. Standing on the stage with Scott talking about the successful partnership between the United training team, United pilots, and CAE is a testament to the 40-year history. As United looks to grow, we intend to grow with them. It's a marquee facility. If you're in Denver, I encourage you to try and visit it. It tells you what we can do when we partner with an airline like United.
That's great. With the transformation plan on track and the divestiture of Flightscape, when I look at civil margin, obviously, good execution in the quarter, but still far from some long-term target. How much of a lift could we see in civil margins going into FY 2028?
Hi, Benoit. It's Ryan. First of all, year-over-year, we do expect improvements in civil margins in the second half, and that's really embedded in our guidance update that we provided today, and that reflects a lot of the things Matt talked about. There's operational improvements. We're seeing costs come out related to the transformation. There's efficiency being built into or resulting from the actions we're taking. I'm not going to get into FY 2028 guidance yet, but we're certainly pleased with the progress of the business and the underlying operational improvements we're seeing.
Perfect. Maybe just a quick one on defense. Defense spending remains pretty solid. However, when we look at the federal government, they've reduced the scale of defense spending in the 2026 budget versus was unveiled back in 2025. Do you expect some programs pushed to the right, or does it change something for your defense outlook?
No, we're confident about the defense outlook, but let me back up a second. Defense contracting is a slow, methodical process. When contracts are awarded, it can take years for them to mature into actual spend. That's universal. Contract monies move around year-over-year. In the U.S., I'd fully expect a continuing resolution and other changes in other countries. What's unique about CAE is that we operate in 40 countries, and so what happens in one country with one budget is not critical or impactful to our overall portfolio. Secondly, a lot of our contracts are multi-year, so we're already contracted, we'll continue, and that's very, very important for visibility, recurring visibility. Then finally, if you think about the growth across NATO countries, today, NATO countries spend about CAD 1.5 trillion, U.S. being roughly CAD 1 trillion, the other countries making up the rest.
If they all go to 5%, that's almost CAD 3 trillion of spend in 10 years. If they miss that, it's still a huge, huge improvement, a massive amount of growth. If you think about training and simulation, it's roughly CAD 0.10 on the dollar of every dollar spent, and we operate in every country. In addition, across NATO countries today, there are about 6 million people in uniform, men and women, and by 2030, it's going to be close to 8 million people. If you factor in attrition, we're going to hire 300,000 people a year into the services, and so that's a huge training and opportunity.
Independent of all that, there is a massive investment around the world in autonomy and mission readiness, and we are excited to be playing in that space as we can leverage our technology, our OEM partner relationships, and our geographic spread to drive that market as well. So, it does not change anything.
That is perfect. Thanks for the color. Congrats.
Next question comes from Fadi Chamoun with BMO.
Thanks. Good morning. Congrats on the progress that you are making. So, I wanted to talk about the kind of the investment you are making in transformation. I think you are about 78% of the investment you wanted to make kind of through, and you are suggesting you could be done by the end of fiscal 2027. I am hoping you can give us an idea of the cadence of the return on that investment in 2028 to 2029, 2030. I think you have highlighted from CAD 125 million-CAD 150 million , but is there a cadence that you can share with us in terms of how we should think about the return on that investment as we go into next year?
Adjacent to that, the question on transformation, are you finding other opportunities as transformation runway you have been on, it seems like you have gone pretty well, pretty fast. Are you finding other opportunities that you can tackle as we go forward? Thank you.
Thanks, Fadi. Thanks for, I think, three or four very good questions. First, I am going to give you a broad view. When we launch a transformation program, we have a very strict hurdle to invest, and all the projects on average are two to three-year paybacks. So you think about when the return comes, it is two to three year. Secondly, you talked about progress. There are various ways we measure progress. We are meeting on a weekly basis and every other week with the leadership team. If you think about spend, by the end of the year, it will be 75%. If you think about our physical milestones, we track every project, we are about 50%. If you think about square footage reduction, actually that is much lower because that is the last part of any one of these projects is to close down a facility.
For that reason, the timing will go into 2028 in terms of executing the projects, but the returns will start. On top of that, we are building a pipeline of additional projects because as you peel the layers back, you continue to sharpen your focus on where there is opportunity. So hopefully that gives you a little bit of color as to how the program has been set up. It is eight work streams, but underneath that there are many, many projects. We talked about each simulator is a project, each site is a project. So two to three-year paybacks on average, some less, some higher, 50% on average progress, ahead of where we thought we would be.
The bulk of the heavy lifting will be done this fiscal year, and then there will be some additional work, especially site closures that will drift into 2028. We are looking across the portfolio and finding new opportunities and building the pipeline. I am going to turn to Ryan to give you a little bit more fidelity.
Well, I will just add on to that, and it was noted in our prepared remarks, but in terms of return on investment and capital deployment, this is a high-value opportunity that we are pursuing right now with the transformation. As Matt said, as other opportunities in the pipeline come up and get evaluated, we are continuing to look at and improve those to go forward. Certainly very pleased with the progress.
Thank you.
Next question comes from Daryl Young with Stifel.
Hey, good morning, everyone. Congrats on getting the Flightscape sale across the line. You have obviously given us good color on the revenue and the margin side, but I was wondering if there is any color you can give around CapEx savings, including investment in intangibles. I think in the past, Flightscape has consumed a disproportionate amount of capital.
Yeah, let me start and then turn it to Ryan. First, again, I want to commend the entire Flightscape team who maintained focus on running the business and serving their customers. I do want to commend David Lavorel and the SITA team. They were fantastic counterparties. I think it's the perfect home, and I've had many reach-outs from airlines because of that choice, as well as David has. One of the primary reasons why the process was successful is we had a team that focused on doing their job inside SITA and in the overall transaction team. We feel very good about where it's going. Obviously, as we've already indicated, the capital we raise is going to be allocated in accordance with our current program, focusing first on any additional transformation projects, secondly on growth.
You saw we put the shovel in the ground for the WestJet Training Center. That's an attractive item. There'll be other projects like that. Obviously, returning capital to shareholders is a key priority. I'll let Ryan go into a little bit of detail on what it means to the rest of us.
Yeah. Good morning, Daryl. The Flightscape business, it has typically been a higher percentage of spend that gets allocated towards investment capital, intangibles, R&D, and so forth. It does help reduce our overall capital intensity. But given the size of the business, it's not a material amount. I think we have other opportunities that I would call more self-help within the rest of the business that we're pursuing in order to drive down capital intensity.
Got it. Okay, that's helpful. Thanks. One quick follow-up on Ben Watts question around the Denver facility with United. Are you able to remind us what your exposure is to the large North American airlines as a percent of revenue, and then maybe what opportunities or what changes you're seeing in your ability to take market share there and sort of grow with the larger network carriers?
Yeah, I did not hear the second question, but let me answer the first. We are equally exposed to all major carriers around the world. We have 80% full-flight simulator market share up and down on a given quarter. We work in North America, South America, Europe, Asia, Middle East. A given region is not a major concern of mine. In fact, the U.S. and North America is one of the slower-growing regions right now from a traffic perspective, given where fuel prices and things are, but it is also one of the larger regions. We feel really good about all of our regions, and that balances out our portfolio.
The U.S. airlines are fantastic customers. They are some of our more significant product customers, but we also have a very large training network in the United States. We feel well-diversified across the globe, and that is one of the advantages of our scale. What was the second question? I apologize.
Just any shifts or changes in your ability to grow a greater percentage of share with those customers going forward?
Well, if you go to a United or a Southwest, American facility, you will walk in and see the CAE logo from top to bottom, from wall to wall. As I indicated, with Scott and his leadership team in United, yes, there are a few other logos in that facility, but we hope to take them out over the next few years, and that is what we try to do with our customers. But we compete every day. We have to earn our customers' trust. We have to earn our right to put our logo into any facility. But you will go to one of these facilities and you will see our logo, our team, our technology, our pride, our customer support everywhere.
Got it. That's helpful. Thanks very much.
Next question comes from Tim James with TD Cowen.
Thanks very much for the time. Good morning. I just have one question, Matt. The 99% retention of your civil customers while you go through this transformation plan, it seems like quite an accomplishment. Correct me if I'm wrong, but I think that might be stronger than maybe you had kind of thought going into this. Could you just describe what you think the key is to that, why you've been so successful at retaining customers through this process?
Yeah. So, you're talking about 99% civil retention as we go through the rationalization, right? It's of revenue.
Yeah.
We have some customers that we're losing. It really is a testament, I think, to first, our customer-facing teams. We have the largest customer-facing team in the world, and it's not a Montreal team. It's a team that lives, operates around the world with the customers day-to-day. That intimacy and that relationship is extremely strong. Secondly, we, by nature, are very flexible. We understand that every airline has a different strategy, and we've developed a tool set, a set of offerings that allow us to work around that. Third, most importantly, we have the largest network in the world. When we're looking at other options, the scale of our network, our capability to handle these changes has allowed us to work creatively with them to find solutions. I could walk you through examples, and we could do it offline.
There's not a single solution that's worked in each one of these facilities or each SIM. It's different every time, but each one is developing a creative solution. We work tirelessly to try and retain each customer in every contract. I'm very proud of what the team had done. They've worked diligently to do this, which is why we're taking our time to get through it. To take roughly 10% of our operating costs out of the network and retain 99% of our revenues in a relatively soft market for civil is a fantastic accomplishment on behalf of the team. It really sets us up well to grow in the future.
Okay. That's very helpful insight. Thank you.
Your next question comes from Mark Neville with Canaccord Genuity.
Hey, good morning. Thanks for taking my questions, and again, congrats on the progress. I have two questions. First one, just on the transformation and a bit of a follow-up to one of the earlier questions. When you unveiled this plan, I think you had line of sight on the cost takeout, on the full cost takeout. I guess, as you are working through this, and without maybe giving numbers, but I guess how much larger is the quantum of the opportunity that you are discovering as you work through this program? Then the second question, just on the balance sheet, I appreciate everything you are telling us and how you want to be disciplined and how you want to allocate your capital.
When you think about the business and optimizing things, I assume that includes the balance sheet. So, would there be a leverage ratio, I think it would be around 1.5 with the sale of Flightscape, but would there be a leverage ratio where you would consider maybe too low? I will leave it there, and thanks again.
Oh, thank you for the question. I will take the first one, and I will have Ryan answer the second. First, as indicated by our raise, as we talk about the second half and the transformation plan, I am more confident than ever in our ability to deliver the targeted savings, and we are going to increase that pipeline. Right now, I do not want to get ahead of the team because we have a process that reviews every project to ensure that it meets that two to three-year payback that we have talked about.
But that pipeline is large, and when we get fidelity on it and get confidence, then we will make it clear to you and everyone else on what we intend to do. But I am more confident than ever about what we have stated and excited about the future pipeline and intending to accelerate that as much as possible. Let me turn it to Ryan to talk about leverage.
Yeah. Good morning, Mark. I think we finished the quarter at 2.2. Flightscape, after closing that, it's half a turn, just over half a turn. Pro forma doesn't get us down to one, but in the 1.5 range. I think that we've talked about being disciplined. We've talked about allocating capital to the highest return opportunities, and that's what our commitment is. If that means that we go down to 1.5 range and we stay there for a period because there's not attractive capital deployment opportunities, that's okay. I think we're going to remain patient. We're not going to deploy capital for the sake of deploying capital. We've been active with the NCIB program over the first half of the year. We expect to continue to be active with that.
We've talked about having a long-term leverage target in the 2.5 range, and we're comfortable with that. That allows us to remain investment grade, which is important. But overall, I would just reinforce that our intent is to be disciplined and patient, and really look to allocate capital where we do see the highest value opportunities.
Next question comes from Sheila Kahyaoglu.
Good morning, guys, and thank you so much for the time. Matt, if I could ask, maybe just starting on utilization. There's been a lot of moving pieces that have affected utilization over the past few years, whether it's the Middle East conflict, pilot training, cyclicality, MAX 10. Maybe over time, now that you've been in the seat for over a year, how are you thinking about utilization and the sort of right level of growth for utilization?
Hi, Sheila. Thanks for the question. As I've said before, utilization is a good metric, but it's not a perfect metric. Utilization got too low because we overbuilt the network, and hence rationalizing and taking out about 10% of our square footage and more than 10% of our devices will improve utilization. I think we put out a marker that it would increase utilization, given everything being equal, by 400 basis points or 500 basis points. Sitting here today, we're on track, if not going to exceed that. What really matters is optimizing the profit per sim. So you're going to see utilization go up. You're already seeing it, given where the market is unfolding as we predicted, and I think that you're going to see it continue to go up. I've said that a healthy utilization for our network is going to be in the mid-70s.
That's where we want to be, and we were below that, and everything we're doing is going to support that. Then being disciplined going forward about not adding training centers or devices too quickly so that we don't end up in the same position. So utilization is one marker, but more importantly, over the next few years, you're going to watch us grow revenue and increase margins, and that tells you that we're allocating our capital and putting cost in the right places at the right time, and that's consistent with what Ryan said. We're going to be very disciplined and stringent about where we build training centers and where we allocate our capital. So thanks, Sheila.
Sure. Can I ask another one on just the quarter, in terms of the civil orders, the sequential decline there? Is that just timing, or are you seeing any changes to customer behavior with higher oil and just how they're thinking about capacity next year?
Yeah, I'll start and then allow Ryan to get into more detail. The quarter's unfolding as we expected, right? We're seeing utilization go up. We're seeing the industry perform largely in line with last year, and that's a strong outlook. If you think about the margins, it really is a product mix issue. We have the same number of full-flight sims this year as we did last year, roughly, but it's a different mix of them, and they have different margin coming with them. So the quarter, the year's unfolding as we expected, and we feel good about that. Utilization's going up. I'll let Ryan go into a little bit more detail.
Yeah, good morning, Sheila. Specifically on the order bookings, there is some variability, normal course lumpiness in that metric. Matt talked about the product sales. The quarter was 0.89 for the trailing 12-month period, we are 1.07. Very pleased with the trailing 12-month metric. Keep in mind, some of these training agreements cover 10, sometimes 20 years in some cases. It is not a single metric to drive a view on quarter and market activity, because of some of that inherent variability in it.
Okay, great. Thank you.
Next question comes from Ron Epstein with Bank of America.
Hey, guys. Good morning. Question for you, Matt. When we think about the changing Canadian defense fundamentals, right? Canada has, I guess, maybe an upgraded status on GCAP. What potential opportunities do you see flowing from the increased defense spending, A, in Canada, and then B, as the Europeans writ large attempt to grow their defense budgets, what opportunities do you see there being, A, a Canadian company, and B, having services and products that maybe are not available everywhere?
Yeah, thanks for the question. I see a huge opportunity. We're the right company at the right place at the right time. Let me talk about Canada. Canada has had a nascent defense industry for the past 25 years, and we're well aware of that here. But the speed at which the Prime Minister and his team are moving is something I haven't seen with 25 years in the industry.
In roughly a year and a half, he's gone from relatively no spend to a 5% target of GDP, launched a defense industrial strategy in our facility, created the Defence Investment Agency to make the decisions, has made several major source selections, including Leonardo for trainer jets, Saab for the GlobalEye platform, and TKMS for the submarine, of which we're partnered on all of those, and then created the Crown Corp to accelerate further what DIA is capable of doing, and now they're working diligently on getting a contract. Across any country in the world, that's fast. Given the size of the Canadian economy, the aspiration to go to 5% makes it material, and we're thrilled to be the largest publicly traded defense company in Canada, and we have one of the largest franchises in the world for training and simulation. We couldn't be happier to be here.
Now, we have to earn our right to work with the Canadian government. We have to earn our right to work on either of those programs, but we have the team, we have the technology, and we've got the footprint. If you expand that to NATO, we have a presence in 40 countries. I mentioned in Germany, we've been there for 65 years. We've been in the U.K. for decades. I was just out in Germany talking to the air chief and the naval air chief, and our team on the ground is a mix of employees from Canada and Montreal, and many are retired from the German Air Force or the German Naval Force, and they are thrilled to work side by side with us as we bring the most sophisticated technology to help them prepare for their mission readiness.
In fact, the NH90 Sea Lion is one of the most sophisticated simulators on the planet. It's a highly capable multi-simulator device that shows the best of what we do. As these NATO countries are also going to increase their spending, because we're local in these countries on the ground, we work side by side with them to develop solutions for them that leverage our technology and capability. It's a unique company to be geographically located around the world, yet have this strong technology manufacturing development base here in Montreal. I'm very, very excited about what it means.
Earlier this year, you mentioned having a fairly strong pipeline internationally, and some of the opportunities you mentioned were from Leonardo, Saab, some others. How is that proceeding?
It is proceeding well. We have structured great relationships with Saab, with Leonardo, with TKMS. Those were all selected by Canada as the preferred platform, and now they are diligently in the room as we speak, working on going to contract. I cannot get ahead of that, but it is really a match of our capabilities with what the world needs. The fact that we will operate not only here in Canada, but set up training facilities in Europe to support the submarine program or the GlobalEye program is a really exciting place to be. I know, having talked to the teams, that progress is being made at a very rapid clip.
I outlined for you the progress having been made to date, so I think in the near future, we will start to see more progress as those contracts are signed with the providers, and then that will flow to us as we start working on the training solution.
Got you. Then maybe just one quick follow-up to some of the questions that were asked before. When we think about the utilization in the commercial network, is it because there are fewer sims, or is it because there is more demand, or is it because there is both?
It is because there are fewer sims. I mean, the year, the quarter—
Got you.
—is unfolding as we expected. We do have better visibility sitting here today in the second half of the year than when I sat here a year ago. Our bookings are stronger. We are focusing the team on advanced bookings and filling the facilities, but we are actually taking out these devices faster than we thought. Demand is in line with expectation. Visibility is higher, but a lot of the utilization is driven by taking out the devices.
All right, cool. Thank you very much.
Yeah, thank you for the question.
Operator, that's.
This now concludes the Q&A session. I would like to turn the conference back over to Mr. Arnovitz.
Yes, thank you, operator. That's all the time we have this morning. I want to thank all of the participants and for those who asked questions, for their very thoughtful questions. I would remind you that a copy of today's call, a transcript, can be found on CAE's website. Thanks very much. Have a good day.
This brings to a close today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.