CAE Inc. Aktie

Good day, ladies and gentlemen. Welcome to CAE's First Quarter and Full Year FY 2027 Financial Results and Conference Call. [Operator Instructions]

I would now like to turn the conference over to Mr. Andrew Arnovitz. Please go ahead, Mr. Arnovitz.

Good morning, everyone, and thank you for joining us today. Today's remarks, including management's outlook and answers to questions, contain forward-looking statements, which represent our expectations as of today, August 13, 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 risks, factors and assumptions that may affect future results is contained in CAE's annual MD&A and MD&A for the 3 months ended June 30, 2026, as well as 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 on 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 us through the Q1 results and discuss progress against the transformation plan, I'd like to briefly share a few observations. CAE's transformation plan is continuing at pace. As we announced with the year-end results, the work is centered on sharpening our portfolio, strengthening capital discipline and enhancing operational and financial performance with several clear objectives, increase long-term resilience, improve execution against plan and support sustainable cash generation, profitability and returns.

We wanted to start some of the heavy lifting required by the transformation plan right away, so we chose not to wait for an Investor Day to launch it. The Board receives regular updates on the plan, and we're encouraged by the progress being made across its multiple work streams. Fundamentally, I believe CAE's long-term growth prospects remain strong. Our Civil business continues to benefit from durable long-term aviation demand growth as expanding air travel and higher aircraft deliveries will continue to require more of CAE's training services and simulation products.

In Defense, CAE is benefiting from the generational upturn in Defense spending happening around the world, especially in NATO countries, including, of course, here in Canada. Across the expanding Defense ecosystem, we continue to see CAE's heritage, strategy, technology and broad set of capabilities drive increased interest from governments and global OEMs, resulting in an expanded opportunity set. Overall, CAE has strong positions in 2 secular growth markets and an attractive long-term outlook supported by the idiosyncratic benefits of the transformation plan, improved free cash flow generation, higher returns on invested capital and significant opportunities to invest accretively across the business and provide better returns to shareholders.

To support the execution of the company's long-term strategy, we are implementing a revised executive compensation framework that ensures incentives are aligned with transformation goals, growth aspirations and outcomes that matter most to shareholders. Our short-term incentive program is now focused on free cash flow and adjusted segment operating income margin.

Our long-term incentive program will center around adjusted return on invested capital and adjusted earnings per share to emphasize efficiency, profitability, growth and long-term value creation. Additionally, as disclosed in the proxy circular, I announced my intention to transition to the role of Non-Executive Chairman of the Board effective January 1, 2027. This reflects our confidence in Matt and the rest of the leadership team and their ability to drive CAE's next chapter of growth and value creation as well as the significant progress that the company has made in developing and beginning to execute the transformation plan and long-term strategy.

I look forward to continuing to support Matt and the leadership team in this evolution while remaining involved in engagements with key stakeholder groups involving government partners, customers and shareholders.

Matt, over to you.

Thanks, Calin, and good morning, everyone. Overall, Q1 was a strong start to the year with good progress across the transformation plan, continued improvement in our Defense segment and Civil performance in line with expectations. While only 1 quarter into the year, we feel very good about our initial progress, the full year and how the transformation plan will strengthen CAE.

By segment, Defense delivered a strong quarter of revenue growth and adjusted segment operating income margin expansion while growing our long-term pipeline of training and mission rehearsal opportunities. Civil performance was slightly down year-over-year, but the team is doing an excellent job managing a challenging macroeconomic backdrop while rationalizing the network. This morning, I'll provide an update on the progress we're making against our transformation plan and an update on key business developments across Civil and Defense.

As I said before, fiscal 2027 is both an execution year and a reset year. The transformation plan focused on improving our internal cost structure and focus is necessary to improve our performance, to streamline our portfolio and focus on where we can differentiate and win. It will strengthen our capital discipline by rightsizing our training network and footprint and allow us to make key investments in internal systems in our factory and ERP, which are required to drive operational performance.

As we do this, we are pivoting the culture to one centered on operations, continuous improvement, disciplined investment and strong cash flow generation. This will allow CAE to profitably grow for years to come. The transformation plan is progressing well. The projects are progressing to plan, and we will see returns start to mature in fiscal 2028 and beyond. We are committed to deliver the $125 million to $150 million of structural cost reduction by fiscal 2030.

In terms of the $150 million savings, roughly 50% of our savings will come from improved labor productivity as we optimize our organizational and operating model, outsource noncore processes, leverage automation, improve systems and tools and consolidate our global footprint. Approximately 30% of the savings will come from reduced square footage. Including the portfolio actions, we are expecting square footage to decrease by almost 1.7 million square feet, which represents approximately 17% down from the end of fiscal year 2025.

And finally, approximately 20% will come from early efforts at driving operational improvements, including our digital factory project, which will drive lean manufacturing to lower waste, improve quality and streamline and automate processes. Another example is on our ERP landscape. We're moving from 5 ERP systems to 2, which will reduce our technical debt and reduce expenses. As these work streams advance, we will continue to provide updates on our progress against the plans.

Let me update you on some of the key projects and where we are. First, in focusing our portfolio, it consists of a strategic review of 3 businesses. The largest of the 3, Flightscape, which represents about 5% of our revenues, is a high-quality business with a world-class platform. The review process is well underway with strong buyer interest. We remain confident that the strategic review process will result in a positive outcome for both Flightscape and CAE, and we'll update you at the appropriate time. The other reviews are also progressing well.

In our Civil training network, the capacity rationalization is also progressing well. We remain committed to retire the 25 commercial simulators. We now have more visibility and confidence as to the benefits of this project. There have been many questions about customer retention. And as I've said before, maintaining our customer intimacy is job one.

Based on customer discussions to date, we expect to retain almost all of our customer contracts as we transition them to other CAE facilities. As of today, customer attrition will be less than 1% of our Civil revenue. This is a testament to our customer-facing teams. Not only will we retain the majority of our contracts as we retire the 25 commercial simulators, we are also able to close between 4 and 6 of our Civil training centers and remove the support and infrastructure costs associated with those facilities.

All in, we expect this work stream to lead to the removal of approximately 500,000 square feet, which is roughly 10% of our Civil network capacity. This will not only improve the utilization rate of our network, it will also improve our Civil margins, and these savings are included in our $150 million target. Going forward, we will be more disciplined about incremental capacity and ensure that we consider regional options before adding square feet and devices.

Overall, I continue to be very pleased with the progress we are making across all key transformation work streams. And while there is significant work ahead, the actions we are taking are in real time, reshaping how CAE operates, how we allocate capital and how we position ourselves to create long-term sustainable shareholder value. We continue to raise the bar across capital allocation decisions, commercial proposals and investment evaluations, ensuring that we establish the underlying discipline required to drive accelerated growth and ensure we drive higher returns and higher free cash flow over time.

In addition to the advancements we're making across our transformation, what I'm increasingly bullish about is the evolving set of growth opportunities we are developing. As we transform how the business operates, we are remaining focused on driving growth across our end markets. Now let's look at some of the key business developments in the quarter. We recently attended the Farnborough Air Show, where we had meaningful engagements with customers, partners, governments and suppliers. The show is indicative of the strong demand outlook across our Civil and Defense markets.

On the Civil side, Boeing and Airbus released their 20-year commercial market outlooks, which called for air traffic growth of approximately 4% annually and the delivery of more than 40,000 new aircraft and a near doubling of the global installed service fleet. These long-term secular trends drive stability, visibility and confidence in the long-term demand outlook for train pilots and by extension, CAE's training and simulation products and services for many, many years to come.

As an example of CAE's ability to position ourselves to grow in commercial aviation markets and alongside partners that are seeing meaningful expansion is our 15-year training agreement with WestJet, which was finalized in the quarter. With nearly 200 aircraft in service and an order book of more than 100 aircraft for delivery into the 2030s, WestJet is positioned to realize continued growth in their capacity and network in Western Canada and beyond.

Slated to open in 2028, the Alberta Training Center of Excellence for Aviation and Aerospace will house 8 full-flight simulators with capacity for expansion and means that aspiring pilots and aviation professionals will no longer need to leave the province for advanced aviation training. The agreement meaningfully expands our relationship with WestJet and with Alberta, which is becoming increasingly important as we think about future strategic opportunities across Canada.

Additionally, we announced a multiyear contract with Turkish Airlines to deliver 5 full-flight simulators and 2 flight training devices with options for 2 additional full-flight simulators. Turkey is one of Europe's most attractive aviation growth markets with capacity expanding at high single-digit compound annual growth rate over the last 15 years. It's led by a rapidly expanding international passenger volume and a growing backlog of aircraft deliveries.

Turkish Airlines is the largest airline in Turkey and is expecting to continue to grow significantly. The airline is targeting a fleet of over 800 aircraft in the 2030s, up from more than 500 today. And our agreement builds on a long-standing partnership of more than 20 years and supports Turkish Airlines' fleet and network expansion plans across Airbus and Boeing fleets.

Shifting to the Defense side. We've had several busy months of business development activity and have made a number of significant announcements that expand our long-term opportunity pipeline and enable us to capture growth opportunities in Canada, expand internationally across NATO and other partners and meaningfully grow our addressable market by solidifying our position in large growing domains such as naval and maritime activities.

Here in Canada, there's a clear shift towards bolstering sovereign capability, advancing collaboration with industry and fostering innovation to strengthen Defense readiness. Canada's Defense strategy as related Defense industrial strategy is rapidly advancing and the country plans to spend approximately $500 billion on Defense investment over the next decade. We believe that the country's Defense modernization priorities represent a multi-decade opportunity for CAE as our capabilities and priorities align directly with the Defense industrial strategy and where spending is going.

We are continuing to work closely with the government of Canada to expand and create new Canadian franchise programs. We believe that we can successfully utilize our Canadian heritage and our expertise in training, mission readiness and operations to support and deepen relationships with OEMs and platform providers, which embed mission-enabling synthetic environments and simulation at the earlier stages of OEM procurement and throughout the program life cycle.

Over time, this will enable CAE to expand our business in Canada, but also around the world with key international partners, including NATO, in particular, NATO countries, where European Defense spending will reach approximately EUR 800 billion annually by 2030. I'm extremely pleased with the progress we have made on this front since the start of the fiscal year. I'm excited to share some of the important developments for our business that occurred. These include the M-346 partnership with Leonardo, the partnership with Saab on GlobalEye and Gripen and the partnership with TKMS on the Canadian patrol submarine program and broader maritime opportunities. All in all, over the long term, these opportunities enable international and domain expansion, establish new franchise programs for CAE and represent more than $5 billion of potential pipeline value. It's a subset of our overall Defense pipeline.

For reference, our Defense pipeline represents the collection of Defense opportunities and potential future adjusted order intake that we're actively pursuing across customers, programs and geographies. This pipeline, to be clear, spans from early proposals, qualification and early submittals, and there's time for it to evolve for bids and final contract. The conversion rates and timing can vary depending on the specific opportunity in the country involved. But our total Defense pipeline is growing meaningfully.

And as our current Defense adjusted backlog is $10.7 billion, this new pipeline represents a significant opportunity to grow that further in the years to come. And strategically, these new platforms are new franchises and new domains and new countries that can span decades for CAE.

Let me go into a little bit more detail. First, we announced the expansion of our collaboration with Leonardo around the next-generation M-346 Block 20 training ecosystem. The M-346 is one of the most advanced jet fighter training platforms in the world. And while the timing of future opportunities for this platform is dependent on different decisions by customers such as Canada, this agreement should open significant opportunities over the coming years as it further expands our role in military pilot training and reinforces CAE's position as a trusted training and simulation partner to major Defense OEMs.

This includes developing training architectures to prepare pilots for increasingly networked, data-driven and autonomous operational environments, including those associated with fifth and sixth generation air operations. The partnership builds on the proven successes of the International Flight Training School in Sardinia, Italy, a joint venture between us and Leonardo, and the Italian Air Force that brings together live flying advanced simulation and mission rehearsal capabilities and expands the scope of collaboration into future integrated training capabilities across global campaigns.

We also strengthened and solidified our partnership with Saab, announcing a teaming agreement to support Canada's Airborne Early Warning and Control program based on Saab's GlobalEye platform and an MOU to collaborate on advanced training, simulation and mission support for the Gripen Fighter. The GlobalEye agreement builds on our worldwide cooperation agreement established in November of 2025, which positions CAE as Saab's preferred partner for training and simulation solutions across its airborne early warning and control platforms, and this is a global partnership.

In addition to the Canada program, CAE sees significant international pipeline for GlobalEye opportunities with multiple countries and geographies interested in the program overlapping where both Saab and CAE have capability and expertise in simulation, flight and mission reversal. For the Gripen, which is targeting an annual production of between 25 and 30 aircraft, a level that will almost certainly double current capacity, our agreement enables CAE to support potential future fighter capability, including training, mission support and sustainment in Canada and other international markets.

Another example that I'm particularly proud of is our partnership activity with TKMS to support the largest Defense procurement program in Canada's history, the Canadian Petrol Submarine Project, or CPSP. This program is expected to reach approximately $100 billion over its life cycle, and Canada has announced that TKMS and their 212CD submarine has been selected as a preferred supplier. As part of this program, CAE is positioned to deliver training operation, advanced simulation systems, digital and physical training infrastructure and facility management, including long-term sustainment support.

Beyond the domestic Canadian submarine program, our partnership with TKMS also opens avenues for CAE to support international naval customers with advanced naval training, simulation and mission readiness solutions for TKMS submarine and surface ship programs around the globe. This further expands our pipeline, solidifies our position in the naval domain and represents a potential long-term opportunity set that is in excess of the individual Canadian patrol submarine project opportunity.

And as we look to the future and add domains, we're excited with the recently announced partnership with Shield AI to support their development of the CCA, or collaborative combat aircraft. Companies like Shield AI and their Defense tech rely on the capability that CAE has to bring training, simulation, mission rehearsal capability to their advanced platforms. We're excited by this and other developments to come. Overall, the specific exciting opportunities represent a subset of our current Defense pipeline, and we believe they align directly with CAE's core competencies and support our long-term growth strategy.

As you can see, many exciting announcements across both the Civil and Defense landscape are painting a future growth for years to come. With that, I'll turn the call over to Ryan to discuss Q1 2027 financials and our fiscal 2027 outlook in more depth.

When Ryan concludes his remarks, I'll provide some closing thoughts. Ryan?

Thank you, Matt, and good morning, everyone. As Matt noted, our first quarter results were consistent with our expectations and our full year outlook. Overall, execution was solid, free cash flow performance was strong and our transformation activities progressed as planned.

Consistent with our fiscal 2027 outlook and the fiscal 2030 targets we outlined in May, we remain focused on successfully executing the transformation to reshape the business and improve its long-term performance while simultaneously building growth momentum in the core business.

In Q1, as part of our transformation plan, we incurred $48 million of expenses, of which $12 million were noncash charges. This brings total spending on the transformation program to $133 million, of which $71 million is noncash. The overall program is tracking to plan, and we are still expecting total cost of $200 million to $250 million with approximately $100 million in noncash charges. Since our last update, we advanced across several of our key work streams in Q1, including retiring an additional simulator from our network, bringing the total to 6.

We are tracking to our plan of having 13 to 15 simulators removed by the end of fiscal 2027 and remain on pace to retire approximately 10% of the commercial full-flight simulator fleet. All in, the completion of these actions will enable CAE to close between 4 and 6 of our training centers. We anticipate closing additional Civil training center by the end of this calendar year, which will bring the total to 2.

As Matt discussed, we remain firmly on track for our fiscal 2030 target of $125 million to $150 million of transformation run rate savings. Turning to our results. In the first quarter, consolidated revenues of $1.2 billion increased 6.8% year-over-year. Adjusted segment operating income was $156.6 million, down 7.5% from $169.3 million in the first quarter last year, and adjusted EPS was $0.26 compared to $0.26 a year ago.

Our adjusted segment operating income reflected strong performance in our business aviation training and Defense businesses. which was offset by higher costs related to credit charges, higher bid proposal activities in our Defense business, higher spend related to specific transformation initiatives and lower contributions from government R&D funding programs. Free cash flow was strong in the first quarter.

We generated $104 million of free cash flow in Q1 under our updated definition that includes all capital and intangible investments, whether for maintenance or growth with no exclusions. This compares to negative free cash flow of $135 million in the first quarter of last year. The improvement in free cash flow generation and conversion reflects some timing benefits and our ongoing actions aimed at sharpening capital discipline, allocation and performance.

Additionally, we continue to make cash investments in our transformation program and growing the business. We ended the quarter with net debt of $2.6 billion and a net debt to adjusted EBITDA ratio of 2.27x, in line with our long-term leverage target. In Q1, we repurchased 1.1 million shares for $39 million under our NCIB program. With our improved cash and leverage performance, we have increased optionality to deploy cash towards incremental organic growth opportunities or in their absence, return cash to shareholders.

Our capital allocation commitment is to remain measured, disciplined and transparent while ensuring that we maximize shareholder value and deliver on our plans. Turning to the segment results. In Civil, first quarter revenues increased 5.6% year-over-year to $641.6 million. Adjusted segment operating income decreased 13.7% to $106.1 million, resulting in a margin of 16.5%, down from 20.2% in Q1 of last year.

The decrease in Civil adjusted segment operating income was as expected and was due to higher selling, general and administrative expenses, driven in part by impacts from the conflict in the Middle East. Specific costs included credit-related charges on financial assets, a lower contribution from simulator sales and lower profitability in our joint ventures in the Middle East.

The decrease was partially offset by a higher contribution from business aviation training services. Civil training center utilization was 72.2%, up from 68.8% in the prior year period and reflected improvements in both commercial and business aviation training. As a reminder, we have updated and standardized the definition of utilization across our network. This resulted in an approximate 200 basis point decline in the comparative period percentage.

On the commercial side, we saw increased utilization in India, Europe and the Americas, partially offset by weaker performance in the Middle East. Notably, in business aviation training, we were able to successfully offset some of the headwinds in our Middle Eastern operations by transferring the volume to other areas of our network and are working through other mitigation activities aimed at limiting the impact on our financial performance.

In Civil, we booked new orders worth $838 million in the quarter, representing a book-to-sales ratio of 1.31x, including the finalization of the WestJet order that Matt discussed. In Defense, revenues increased 8.3% year-over-year to $531.8 million and adjusted segment operating income increased 9.1% to $50.5 million and a 9.5% margin.

This performance was driven by higher profitability and activity on our contracts in U.S. and Canada as well as the realization of program efficiencies resulting in the completion of key program milestones, partially offset by higher selling, general and administrative expenses related to increased bid and proposal activity as we pursue growth opportunities. Our Defense adjusted backlog sits at $10.7 billion with a pipeline of global opportunities meaningfully larger than our current adjusted order backlog.

As we indicated when we introduced our fiscal 2027 outlook, we do not expect quarterly performance to progress in a perfectly linear fashion. The second quarter will reflect the impacts of seasonality, notably in our Civil business. Overall, we're encouraged by our start to fiscal 2027 and remain focused on delivering on our plans for the year. The transformation program is progressing as expected.

Our businesses are executing well against their plans, and we have made no changes to the fiscal 2027 outlook or fiscal 2030 targets that we issued in May. We remain well positioned to achieve our goals. The work is well underway towards positioning CAE for stronger earnings growth, improved levels of profitability, higher free cash flow conversion and better returns on invested capital.

With that, I'll turn the call back to Matt.

Thanks, Ryan. 2027 is a transformational year, and we are making rapid progress. We are building on CAE's iconic franchise and strong customer relationships. While we are simplifying our portfolio around core businesses, while we are rationalizing our network capacity to improve utilization and margins and while we align a worldwide team on performance and cash flow generation.

As we progress, we are pivoting to growth in our core areas and future opportunities across the Defense tech ecosystem, which is increasingly exciting, including prospects in synthetic environments, autonomy and multi-domain. We remain committed to our fiscal 2027 outlook and to our fiscal 2030 targets of reducing $125 million to $150 million of structural cost while driving CAE to $950 million to $1 billion of adjusted segment operating income. We are seeing early indications of growth.

The Alberta Training Center is an example where we will invest in regions that are expanding and need capacity. Our partnerships with Leonardo, Saab, TKMS, Airbus, Boeing, Bombardier, Embraer and Shield AI continue to indicate the strength and value that CAE brings to the table with some of the world's leading platform companies and emerging Defense tech start-ups. Our worldwide footprint gives us the opportunity to invest centrally but grow locally to support sovereign Defense needs in over 40 countries.

As we transform, we are evolving the culture from one that focused mostly on top line growth at the expense of our balance sheet, margins and returns to a team that is acting with discipline, focus and leveraging balanced scorecards to deliver what shareholders expect. We have the right strategy and the right team, and we are aligned around a clear plan motivated by updated incentives to act with speed and purpose.

We have great businesses in attractive end markets, a rich heritage, exceptional people, differentiated technologies and trusted customer relationships. As we deliver on our transformation commitments, CAE's next phase will be defined by accelerating our growth. Thank you for your continued support, and we look forward to updating you on our progress next quarter.

With that, we'd be happy to take your questions.

Thank you, Matt. Operator, we'll now open the lines to financial analysts.

[Operator Instructions] Your first question comes from Konark Gupta with Scotiabank.

My first question is on the Civil margins. I understand that they met expectations you had. But can you just explain some of the transitory costs during the quarter, especially the credit-related charges and the transformation-related inefficiencies you saw in Civil and how sustainable these are during the quarters coming up?

Yes. Let me start and then turn it over to Ryan. In the Civil business, it's really driven 2/3 by what's going on in the Middle East. So we said we're happy that we're able to work with a lot of our airlines to reroute their training to put them in other facilities. But that has the cost as we move their training centers and sometimes instructors to other facilities.

And so while we capture the revenue, the cost is a little higher. That's temporary. And then yes, the Middle East is causing disruption in fuel prices around the world, and that's affecting some of our customers. So 2/3 of the impact is Middle East driven, and we're mitigating it, and we view it as temporary. The other 1/3 is related to some heightened costs that I'll turn to Ryan now to give you a little detail on.

Yes. Thanks, Matt. So the other items, we talked about this leading into the quarter. So with the transformation, there's some discrete investments that we're making in the business that are going to serve the business long term and be margin accretive over time. And we had also talked about lower government funding in our R&D program. So that's really the other 1/3. But as we said in the prepared remarks, really pleased with the performance in the Civil business. Business Aviation had good growth in the quarter. Utilization has trended in the right direction. So overall, we're very pleased.

It is good to see, I guess, with Calin at the helm as a Direct Chair, new executive compensation structure in place. I'm particularly interested in the ROIC. I think you guys have pivoted from ROCE to ROIC now. Any guideposts you guys are looking at for the next few years in terms of how ROIC should be and what's the right ROIC level for CAE?

Yes, Konark, so I'll start. So we haven't put out targets on this. And a couple of comments. First, this has primarily been an internal driver of how we look at investment and projects. When we look at the -- if you look at the calculation based on our external numbers, you won't see a lot of difference. It's really how we're measuring and driving projects internally.

And so it was important to have that alignment. And it really is focused more on cash-on-cash returns. The other comments I'll make is we're going to get towards the high single digits. We'll approach low double digits, but it's really going to be the pace of change as we start to see the benefits from the transformation program where you're going to see the benefit in our ROIC.

Konark, it's Calin here. Yes. Thanks for that comment. Look, I think, as you know, I spoke with a lot of investors and with all the analysts in the earlier days of my appointment. And this is one of the recurring themes that we have been hearing is that a greater focus on ROIC and how we compare ourselves to organizations that are best-in-class or better-in-class than CAE was.

And this cash-on-cash return dynamic that Ryan just indicated was a big driver of that. And so we're sort of looking to upscale, I would say, the way we are dealing with these long -- with these sort of LTIP, these long-term incentive programs. And we think that these are much better indicators and will drive better behavior as well.

Your next question comes from Daryl Young from Stifel.

I wanted to ask on the Defense business and the $5 billion pipeline is obviously very impressive. But I'm just wondering if the mix of training versus product development coming down the pipeline is -- if there's any skew there? And I guess, how we should think about the product development risk for some of these new mega project opportunities and I'm thinking specifically things like the Canadian submarine opportunity with TKMS. Just I don't think you've worked with that partner before. So how should we think about the product development risk, I guess?

Yes. Thanks for the question. Two parts. Really, the first is how do we think about the pipeline going forward? And what's the mix? So -- we feel good about these partnerships. If you've been tracking, we selected a partnership with Leonardo M-346, and that's the platform chosen by Canada to be its next training platform. We have a partnership with Saab on GlobalEye. That's also the platform that Canada and NATO has selected to support their upcoming needs.

And then obviously, the partnership with TKMS leverages a decision on Canada for that platform as well. What's special about these arrangements is we will do the NRE once. We will do it with the OEM in collaboration, and then we will use that to develop training centers. That's very different than many of the activities that occurred over the past decade where it was done at a sovereign level and the development costs were unique to each particular country. There'll be configuration and customization, but these NATO programs will have a lot of commonality.

And that's part of the strategy to an upfront engineering and development program, which has inherent development risks, but it's one that we're well suited to manage and then use that as a basis and then we reproduce the training centers where they're needed around the world. So that's why we view the NRE as acceptable. It's going to be a far less percentage of the overall program than in other programs in the past. And then if you ask me about the mix, it's going to be depending on the installation, it is going to be more services, training services and product because we'll develop these training centers and then put them in place and operate them.

Got it. That's great color. And then one other around capital allocation that's a 2 part. So the Flightscape, the commentary you gave around the strategic review progressing well. It sounds like you're seeing bids that are acceptable valuation to you. But the proceeds of a potential transaction there, would that be something you could immediately turn around and buy back on the NCIB? Or will the NCIB be more programmatic or opportunistic, I guess?

Yes. No, thanks for the question. First, it's early in the process. We've seen strong buyer interest, and that makes us excited about where we are in the strategic review. And that process is underway, and we'll inform everyone about the results at the appropriate time in the future. In terms of the proceeds, it's too early to predict exactly what they'll be. But in large part, we think the proceeds will fund the transformation at a minimum, and that is a great return on capital.

Anything we do to fund the transformation is going to increase immediately shareholder value. As we've said, our average return is 2 to 3 years. After that, we'll pursue other capital allocation decisions in the same disciplined approach that we've been talking about.

Yes. It's Calin here. And as you know as we've said previously, people have asked about the reinstating of the dividend and this sort of thing. We haven't made any announcement on that. We're not -- we haven't made any decision on that.

But obviously, once we get into a healthier dynamic, the leverage ratio is at the level we've said, we've got additional proceeds coming in. We will assess all of these capital allocation decisions then and look to deploy it in the best fashion. But as Matt says, the transformation is the first order of business here.

Your next question comes from Cameron Doerksen with National Bank.

I guess a question on the optimization in the network. I mean it's very good to see that the attrition on revenue from moving customers' contracts is going to be very minimal. So that's good to see. I guess the question I have is around pricing.

I know this is one of the things you've been also focused on is maybe upgrading the quality of revenue with some of the customer contracts that you have. Can you update us, I guess, on any progress you're making there? And I guess, the reception from customers on future contract renewals on perhaps having to pay a little higher price than what they've been paying.

Yes. Look, I appreciate the question. It's early to be fair. And airlines are sophisticated buyers and airlines around the world are struggling with fuel prices and traffic disruptions, and these are our key partners. So we're going to work cautiously through this. But the counter side of that is we want to get the right economic value for our products and services around the world. The approach has been disciplined.

We're starting with our aftermarket products and services, which is a small portion of our Civil business and putting in the discipline, the vocabulary, the tools to price that effectively. And we'll start to see the potential benefits of that as we close out the year. We then move to our product side for the same evaluation and improvement and then obviously, from there to our business and commercial training network. So it's still early to look at how we price and how we go to market and ensure we're getting the right economic value.

We have 600, 700 different contracts out there with airlines of various time spans and then we go to market transactionally with many of our business pilots. So it's a fairly complex landscape and layer on top of that joint ventures and pricing agreements that are already in place and they have to burn off. So we're working it diligently. It's a key strategic focus of it. And when we get more mature about it, we'll be able to articulate what we see as a benefit, but we do see it as an opportunity.

Your next question comes from Sheila Kahyaoglu with Jefferies.

Maybe I wanted to ask 2 questions on Civil, if possible. On just the revenue outlook, strong start to the year, but the guidance suggests flat to slightly down. I guess even with some of the headwinds like the product business, Middle East and, of course, the transformation, I guess, how do we think about the remainder of that business from a Civil and business aviation market perspective for the rest of the year?

Yes. Thanks, Sheila, for the question. If you look at the Civil market through 1 quarter or 1 month, it often appears discombobulating. It can be difficult to understand what's going on. If we step back from it, we still see a long-term growth trajectory of 4%, which we think is a very attractive market, and we are the market leader in there. We started this year, as you know, with a very light order intake last year.

So the number of full-flight SIMs that we had orders last year that will deliver this year is down. Layer on top of it the Middle East impact, which wasn't anticipated a year ago, and we're mitigating. And now we're going into our summer seasonality. So we're being cautious on the outlook here given all those moving pieces. But again, if you step away from this quarter or the next couple of quarters, the long-term outlook of the industry is strong. It's incredibly resilient, and we're well positioned with our product sales and our training network to continue to grow.

That's super helpful. And I guess if I could ask on the margins as a follow-up, the color was super helpful on Middle East being 2/3 of the impact on reallocation. But I guess, how do we think about pricing with your Civil customers? How is that going? Because the airlines are seeing big pricing benefits. Is there some of that, especially given less than 1% attrition as you move simulators around?

Yes. I think in terms of -- Sheila, there's probably 2 answers to your question. In terms of moving customers and maintaining them as we go through the network rationalization, each time we assess the decision, it's going to be incrementally beneficial to us. That's why we're going through the rationalization exercise.

And so each contract, each customer is approached with a unique solution, but we have to make sure it's incrementally better. This is about driving improved productivity and improved margin, and that's why we're going through this exercise. And it's hundreds of customers across the 4 to 6 sites and all the training centers. So the intent is to make incremental margin as well as drive utilization.

And I think the other part of your question would go back to the earlier comment about we're approaching pricing diligently across portfolio, recognizing airlines are in a challenging year, and we work with them on a one-off basis there as well.

Your next question comes from Tim James with TD.

Just want to return to the Middle East and the impact the conflict there is having on the business. Obviously, it sounds like it's created some unexpected headwinds or at least some that may be carrying on further in the fiscal year. Has there been some unexpected positives in other parts of the business that offset that Middle East impact and that allows you to kind of maintain your full year guidance? Or is the Middle East conflict impact just not material enough to kind of bump you off your expected guidance range?

Yes, I appreciate the question. We anticipated at least a half year of impact in the Middle East, and we're seeing it. It's difficult to predict exactly when the Middle East issue will fully subside. And then there will be a tail of activity as fuel prices and other things manage their way through the system. It's a long-cycle business. So we are seeing training reroute to other parts of the network. It's one of the advantages of having a worldwide network.

We can support our customers anywhere. Initially, that's having some incremental costs associated with the movement, but we have mitigation procedures in place, and it's working. So I don't see incremental headwind in the year. I do see us being cautious as we go through the seasonality of the Middle East effects, which will take another quarter or 2 to subside. But we don't see incremental risk in the year. We're mitigating it appropriately.

Okay. Great. And then just one follow-up question. I want to tie it back into an earlier question about your backlog and your pipeline in Defense. Correct me if I'm wrong, Matt, but I think you suggested training is the real powerhouse behind that backlog strength. Can you provide any insight as we think about longer-term margins and the difference between products, business and equipment and Defense versus training opportunities? Just what the differences are at a high level between the margin profile in those 2 revenue streams?

Yes, it's a great question. So a healthy Defense business will operate, as I've said many times before, in that low teens margin, and that's what we're driving. If you peel the layers back on why we weren't there, and we've talked about it, we are undertaking contracts that were lower margin, staffing contracts that we're no longer pursuing. And we're going to have a nice solid mix of product and service contracts going forward.

And so the additional conservative approach is that we're going to try and leverage the development cost, which is where the risk occurs for any Defense company. Development programs are inherently risky, that we're going to minimize incremental development costs and focus on developing large service revenue base going forward. So that's the mix that we're looking at. That's why I feel good about the contract trajectory that we have. And these pipeline of opportunities are definitely consistent with our long-term plan. So it's a really good position to be in, and we're going to continue to drive these things to contract.

Next question comes from Kristine Liwag from Morgan Stanley.

I want to dive in a little bit on Civil as you go through this transitory period. I was wondering, can you provide more detail regarding your expectations for customer retention during this transition? Also for your customers, what are the key factors that could cause them to switch? Are there a significant number of alternatives that they could go to? And how are those initial conversations going?

Look, I appreciate the question. Thank you. So as I mentioned before, as we take out 10% of our capacity, we're going to retain more than 99% of our contracts. The attrition is less than 1% at the Civil level. We feel very, very good about that. But it is an airline-by-airline discussion involving where they operate, the regional capacity we have this near and what arrangement we make to work with them. There are alternatives out there.

There is no other provider with a network as capable, as widespread and as professional as ours, and we're going to leverage that to ensure we provide the right solution. But it's a competitive industry, and there are small players out there that provide training on a one-off basis. And so we're being very diligent about handling our customer relationship. That intimacy is job one. So the conversations are going well. That's why we're able to characterize attrition to be less than 1% of our overall revenue base, but we've got to continue to work to earn their trust every day.

Great. Super helpful. And for that 99% confidence, is that now backed with long-term agreements signed with these customers? How should we think about the risks related to that?

Most of our contracts with customers, it's a mix of joint ventures with some airlines, term agreements, master service agreements, others and long terms. So it varies significantly. And that's why from a company perspective, our job is to maintain and earn that trust every single day and continue to provide the best full-flight simulators with the best technical devices and the best instructors and the best courseware. So we never take a contract for granted. Every day, we're there to earn and reearn our customer trust.

Next question comes from Krista Friesen with CIBC.

Just one on the Defense side. You talked about higher bid proposal costs in the quarter. Just wondering how we should think about that for the remainder of 2027 and when you think that could subside?

Yes. Krista, this is Ryan. So I think we're going to continue to see some of that throughout the balance of the year. There's -- as Matt talked about in his remarks, there's a very healthy pipeline of opportunities, and this is a key growth area for the business. So we do expect to see that spend continue throughout most of the balance of the year.

And then maybe if you can just speak to -- obviously, you've announced a lot of partnerships on the Defense side recently. Are there a lot of other large partnerships that you're targeting at this point? Or are you pretty happy with where you sit right now?

Yes. Thanks for the question. The answer is yes. We're targeting many other partnerships. We're really feeling to be in a unique position. We're the largest independent Defense training company in the world. We have strong relationships in 40 countries and in particular, NATO.

Clearly, we're going to operate with haste here in Canada, where we have a fantastic position as a sovereign training provider, and we're going to try and leverage all these decisions that Canada makes to provide incremental capability for Canada and Canada's allies. But we have conversations underway with virtually every OEM around the world and many countries for sovereign solutions. So we're just getting started.

[Operator Instructions] Your next question comes from Andrew Steinhardt with Bank of America, Canada.

This is Andrew on for Ron. Just piggybacking off the last question on the Shield AI partnership. Obviously, it's early, but I was wondering if you could just talk a little bit about what that work has looked like so far? And how will that build as PCA actually progresses here?

Yes. Thanks for the question. So Shield AI has positioned itself as a very interesting provider of AI or autonomy solutions in the Defense ecosystem, trying to work across a variety of platforms. And that autonomy solution, that algorithm needs to be trained and it needs to be able to work in a synthetic environment, and it needs to work side-by-side with humans. And that's where we come in. So they have the algorithm, but we come in to help them provide that training ecosystem that surrounds it so that not only does the algorithm operate the way Shield AI intends, but we can get humans that will inevitably work with it to operate as well.

So it is because of the CCA platform that we're working on, but we're excited with the partnership with Shield that could expand beyond that. These systems that are going -- that are being built in the Defense ecosystem are increasingly complex. And for operators to understand how to work with them, whether they're side-by-side as a CCA or remote as remote pilot vehicle or a drone is where the future lies. And it's something we've been doing for the past 15 years.

We have fantastic relationships with companies like General Atomics, and we provide that training ecosystem today, and we're excited with the partnership of Shield as they continue to drive their algorithm, we'll provide the training ecosystem with them.

Got you. I appreciate that color. And I guess just a follow-up, what portion of that $5 billion pipeline is related to CCA or other types of drones, I guess?

A very small portion of the $5 billion. The $5 billion that I articulated is driven mostly by the Leonardo, the Saab GlobalEye and the TKMS Maritime submarine pipeline. As we get more granular on other partnership opportunities or sovereign, then we'll start to articulate more fidelity around the pipeline. But the $5 billion is a conservative pipeline estimate around primarily those programs.

We have no further questions. Mr. Arnovitz.

Operator, thank you very much. I want to thank all of the participants on the call this morning and remind you that a transcript of the call and the Q&A can be found later on CAE's website. The team and I are, of course, at your disposal. Should you have any follow-up questions, please do reach out. Thanks very much. Have a great day.

This brings to a close today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.

Okay. Good afternoon, everyone, and welcome to CAE's 2026 Annual Meeting of Shareholders. I'm accompanied today by Matthew Bromberg, President and Chief Executive Officer; Mark Hounsell, Chief Legal Officer, who will act as Secretary of the meeting; Ryan McLeod, Chief Financial Officer; and Samantha Golinski, Senior Vice President, Communications.

Today's meeting will be conducted in both French and English. Shareholders participating online may listen to the webcast and view the presentation slides in either language. To change languages, please select the language icon shown on the top right of your screen. As was the case last year, the meeting is being held in a hybrid format. Shareholders and duly appointed proxy holders regardless of their geographic location, may attend and participate in real time and cast their vote. [Interpreted] CAE's assembly happens at an important moment of CAE as our company continues its transformation and remains focused on creating value for the long term.

Now let's move on to the agenda. I'd like to now ask Mr. Mark Hounsell, our corporate secretary to present [indiscernible]

[Foreign Language] [Audio Gap]

[Foreign Language] [Audio Gap] at a meeting of shareholders if 2 or more persons holding not less than 25% of the shares entitled to vote at the meeting are present or represented by proxy. The scrutineer has advised that we have the necessary quorum present here today. I therefore now declare this meeting is regularly called and properly constituted for the transaction of business.

I'd now like to ask the secretary of the meeting to explain the basic features of our meeting platform and how you can vote.

Thank you, Mr. Chairman. [Foreign Language] While listening to our webcast, simply click on the icon or on the arrows. If you'd like to ask a question, please select the message icon and then answer your question in the box at the bottom of the screen. Click on the send button and you should receive an acknowledgment of your [ receipt ] yes, then you might ask questions, both in French or in English.

Please note that only registered shareholders or that be appointed proxies are authorized to ask questions. Ms. Samantha Golinski will be monitoring all of the questions that will be sent. And we'll share that with the Chair of the Board and with the appropriate member of management. If there are many similar questions on 1 same topic, Samantha may select 1 or summarize the nature of the questions.

I would like to remind you that questions must be of interest to all shareholders but they should not be of a personal nature. Shareholders attending the meeting in person will be invited to approach one of the microphones to ask their questions during the Q&A. If we are not able to answer your questions during this meeting or if your question is of a personal nature, a CAE representative will contact you after this meeting.

Resolutions will be conducted both online and in person. Only registered shareholders or validly appointed proxy holders may vote. If you are attending the meeting in person and have not already voted by proxy, you have received today a tablet, allowing you to cast your votes with the same ease as shareholders attending online. At the appropriate time, I will ask you to record your votes or Mr. Chair will ask you to record your votes using your tablet.

Following consideration of the last item of business, the scrutineers will tabulate the results of the votes. If you are attending the meeting online or using a tablet in person, you will see a voting icon on your screen and the resolution wording will be displayed. To vote, select one of the voting options. Your response will be highlighted. A confirmation message will appear to show that your vote has been received. To change your vote, simply select the other option. If you do not select either for or withhold or against as applicable when voting is open, your vote will not be recorded and he will be regarded as having abstained from voting.

In order for you to be -- for your vote to be properly recorded, it is important that you remain connected to the Internet at all times. If you are not connected, your vote will not be recorded. The online polls are now open on all items of business. This will give you ample time to vote while we introduce each resolution. The Chair will remind you of your choices for each item. After the last item of business, the Chair will provide a reminder to input your vote before the polls are closed, if you have not already done so. You should know that while each of the votes cast today in person and online will be accounted for in the final results, proxies lodged with our registrar and transfer agent before this meeting allow the Chair as proxy holder to determine the outcome of each of the motions that will go to a vote today.

When each item of business is completed as a result of the proxies received in advance of the meeting, the Chair intends to declare the motion carried or defeated even though all the votes may not have been counted or a final report may not yet be available. In order to facilitate the flow of the meeting, the Chair has asked me as a registered shareholder, to move all motions. The Chair will call on meet at the appropriate time. Mr. Chair?

Thank you, Mark. So now we file the minutes of the annual and special meeting of shareholders held on August [ 15 ], 2025. These minutes will be entered into the company's minutes registered. Copies of the minutes will be available upon request. The next item on the agenda is the presentation of the financial statements and the auditor's report for fiscal year ending March 31, 2026. Copies of which were distributed to shareholders in May. I will take questions regarding the company's financial statements during the Q&A session.

We will now turn to the first item of business, which shareholders are asked to vote, the election of directors. Management proxy circular contains a list and biographical profile of the 13 nominees recommended for election as directors. Each nominee was elected at our 2025 Annual Shareholders Meeting, except for Mr. Bruce Ross, who is a first-time nominee.

In addition to Matthew Bromberg and myself, the other director nominees are the following: Sophie Brochu, Patrick Decostre, Elise Eberwein, Ian L. Edwards, Marianne Harrison, Peter Lee, Katherine Lehman, Mary Lou Maher, Bruce Ross, the honorable, Patrick M. Shanahan and finally, Louis Tetu, and many of our Board members are still here today with us. Pursuant to resolution adopted by the Board of Directors, the number of directors has been set at 13 and 13 eligible candidates have been nominated.

Mark may ask you to move to elect each of the 13 nominees as directors.

I so move.

For the election of directors, you'll see the names of the 13 nominees please scroll down to make sure you voted on all 13 nominees if you have not already done so. To cast your vote for a nominee, please select for or against.

[Voting]

The next item on the agenda is the appointment of the auditor. Again, I will ask Mark Hounsell to introduce a motion to appoint PricewaterhouseCoopers as the auditor of the corporation to hold office until the close of the next Annual Meeting of Shareholders and for authorization for the directors to fix the auditor's remuneration.

I so move.

For the appointment of the auditor, to cast your vote in favor, please select for and to withhold your vote, please select withhold.

[Voting]

The next motion is to approve on an advisory basis our approach to executive compensation. CAE's executive compensation is fully disclosed in the proxy circular made available to all shareholders in advance of this meeting. The Board believes that the corporation's approach to executive compensation remains appropriate and aligned with the interests of our shareholders. We value your direct feedback on our executive compensation approach, and the Board will consider the results of this vote when evaluating future compensation decisions. We will now vote on the following resolution. Resolved that the shareholders accept the approach to executive compensation disclosed in the management proxy circular. Again, Mark, may I ask you to please move this resolution.

I so move.

To cast your vote in favor of this resolution, please select for; and to vote against this resolution, please select against. And we will now proceed with the vote. If you have not already done so, please vote on the 3 items in the agenda. I will give you a few seconds more to cast your vote. If you have already voted or submitted a proxy, you don't need to do anything unless you wish to change your vote.

[Voting]

I declare the polls now closed on all items of business.

Thank you. Mr. Chair, the scrutineer's preliminary report indicates that 80.11% of the eligible shares have been voted at this meeting. The results with respect to the election of directors are as follows: a substantial majority of the votes cast at the meeting were voted in favor of all 13 nominees named in the management proxy circular. The result with respect to the appointment of the auditor is 92.74% voted in favor of PricewaterhouseCoopers.

The result with respect to the advisory vote on the approach to executive compensation is 94.35% in favor of the resolution. Final detailed results will be publicly available on sedar.ca in the coming days. I will now turn the meeting back over to our Chairman for his remarks to shareholders.

Thank you very much, Mark. Now that the formal business of the meeting has been completed, I'd like to offer a few remarks on behalf of CAE's Board of Directors before inviting Matthew Bromberg to address shareholders.

Let me begin with the Board's perspective on fiscal 2026 and the opportunities we see for CAE as we look ahead. Fiscal 2026 demanded discipline clarity of purpose and steady governance. CAE operated through evolving markets, geopolitical pressures and rapid technological change. Performance was solid despite softer conditions in civil aviation, while Defense & Security delivered improved performance, which further underscored its strategic importance at a time of sustained defense investment across key geographies. This reinforced the value of CAE's balanced portfolio and the advantages of operating in markets with compelling long-term fundamentals.

Against this backdrop, the Board remained focused on its responsibility to oversee CAE with rigor sound judgment and a clear view to long-term value creation. We also continue to engage with shareholders whose perspectives help inform the Board's oversight and priorities. [Foreign Language] During this exercise, we have started the transformation plan, which has been announced after vote in favor. Now this work is both relevant and necessary. For the Board, the priority is to ensure that this transformation is guided by rigor by accountability and with a clear objective of value creation the long term, something sustainable for the shareholders while acting quickly and decisively to improve the use of capital and profitability.

So 2026 fiscal has also shown the first year of Matt as CEO of CAE. Matt has brought to this organization determination some rigor and also decisive decisions. Key has shown a good understanding of CAE of its operational background and business opportunities that arise. So the Board has determined that his experience and leadership do correspond to the current needs of a strategic, clear strategic and rigorous execution of CAE taking into account the competitiveness of CAE.

So why we're looking towards the future. The influence of shale is based on both sectors of activity. First of all, defense and safety with strong perspectives of growth then the civil aviation sector as we are a leader in today's market with the durable relations with our clients -- pillar of CAE and represents a meaningful long-term opportunity for growth. CAE is positioned to play an important role alongside its partners in supporting defense investment, accelerating innovation and strengthening capabilities for Canada and its allies.

At the same time, Civil Aviation remains a core strength for CAE with durable long-term demand supported by its strong market position, deep customer relationships and enduring role in aviation safety and training. In fiscal 2027, the Board is fully aligned with management on accelerating execution with a continued focus on efficiency, discipline and returns. As CAE enters this next phase, Board renewal and governance effectiveness remains central to our oversight. The board continues to take a thoughtful and orderly approach to renewal, balancing continuity with the addition of skills and perspectives that will support CAE's future.

In that spirit, I'd like to recognize Ayman Antoun as he concludes his service on the Board and thank him for his contributions, including his leadership as Chair of our recently constituted Technology Committee, Ayman brought thoughtful judgment, relevant experience and a strong commitment to CAE, and we're grateful for his contribution.

As part of that same renewal process, I'm pleased to welcome Mr. Bruce Ross, Group Head, AI at RBC to the Board. Bruce brings deep expertise in technology, cybersecurity, strategic leadership and risk management, all of which are highly relevant to CAE's future and will further strengthen the Board's oversight as the company continues to evolve.

Following the CEO selection process last year and Board renewal, I assume the expanded role of Executive Chairman to support the transition, engage with shareholders, government and other stakeholders and help evolve CAE's transformation plan and long-term strategy. With that work now well advanced and with our Board's full confidence in Matt, the leadership team and CAE's direction, I will revert to the role of Nonexecutive Chairman of the Board effective January 1, 2027. [Foreign Language]

CAE now has a clear strategy, a strong leadership and a fully new Board of Directors focused on creating long-term value. To our shareholders thank you for your trust and continued support to all CAE employees around the world. I thank you for your dedication and commitment to our mission, our values and our strategy. Your work is essential to CAE's success and to trust our customers place on us every day.

I have my pleasure to invite Matthew Bromberg, CAE's President and CEO, to address the meeting. The floor is yours.

Good afternoon, and thank you for joining us. Today, marks nearly 1 year since I stepped into the role of CAE's President and Chief Executive Officer. I took on this responsibility knowing the company had an exceptional foundation. And after a year, traveling, listening to our people, meeting our customers and visiting our operations around the world, this conviction has only been reinforced. CAE has 2 fantastic franchises and iconic civil aviation business and a defense and security business that the world needs now. And underpinning all of that is an exceptional team that continues to deliver through a period of significant change.

[Interpreted] So I am proud to lead a company that was founded here in Montreal, built in Quebec and is now recognized around the world. This is a major strength for CAE. There are deep roots, a global reach and emission that matters. And it is on this foundation that we will build the next chapters of this company.

Over the past year, we have laid the groundwork for CAE's future with the objective of making the company more focused, more disciplined and better positioned to grow. This future stems from 3 transformation priorities. First, our portfolio. We will invest where CAE is best positioned to differentiate, compete and win. To that end, we are simplifying the parts of our portfolio that no longer fit in our future. That involves reviewing 3 businesses, including Flightscape. The result will be a cleaner sharper CAE with our capital invested around businesses where we can lead.

Second, our capital discipline. We are raising the bar on how we allocate capital across the company. This means being more rigorous about where we invest about how we evaluate returns about how we use our assets. In civil aviation for example, we are optimizing our training footprint by rationalizing capacity, improving utilization and concentrating activity where customer demand is the strongest. And third, performance. We are tightening execution across the business. We are building better systems. We are driving clear accountability, and we are implementing robust operational processes. We are investing in ourselves in areas like our Factory of the Future and in our ERP simplification project, our vision.

Our vision is to make the most modern training devices in the most modern factory leveraging the most modern tools and the most modern processes. We are doing this because of the opportunity ahead. The transformation is expected to generate $125 million to $150 million in annual run rate savings by fiscal 2030. This will support our ambition to reach $950 million to $1 billion in adjusted segment operating income and performing at this level will give us the financial freedom to further invest in our people, our technology and in our customers. And this work is already well underway. Our teams are mobilized and engaged, and I am confident they are moving in the right direction.

This confidence starts with our businesses. Our Civil Aviation business is the world-leading training organization, and we are making it stronger. The long-term fundamentals are compelling. 80% of the world's population has never flown in an aircraft. Airbus and Boeing are expected to deliver 40,000 new and replacement aircraft over the next decade. The world needs more safe, qualified aviation professionals and that is where CAE comes in. We have the global network, the customer trust and the technical depth to serve this demand.

Over the past 60 days, I've spoken with roughly 50 airline leaders through industry events. The message was consistent. They say they see -- excuse me, the same future we do, and they are not changing course. Aviation is inherently resilient. The industry is strong, and this matters. That means we need to execute with discipline, stay close to our customers and keep building for the long term. CAE works in almost every country with almost every airline in the world, we understand their operations, we solve their problems. That trust is hard to replicate. It is unique, and we are not standing still. We continue to invest in the products and capabilities that will keep CAE ahead and position it for the future.

Over the course of this year, we qualified the world's first Boeing 777-9 full-flight simulator and delivered simulators for [indiscernible] advanced air mobility platform. In addition, we opened a pilot training center in Mumbai and secured a new teaming agreement -- sorry, a new agreement with Turkish Airlines. And we announced here in Canada, the Alberta Training Center of Excellence in Calgary with WestJet as our partner. It is a cutting-edge aviation training facility. So you can see we continue to invest and this is why CAE leads. We are in today's fleets and on tomorrow's aircraft, and we are everywhere where the future of aviation is being built.

In Defense and Security, our role is readiness. A platform only matters if people can operate it, maintain it and use it under pressure. CAE connects advanced systems with the people who must perform when the stakes are highest. The upside in defense is significant. Canada and Allied NATO countries are entering a new cycle of defense investment. That investment will require people to be ready. Over the next decade, NATO forces are expected to grow from roughly 6 million to almost 7.5 million men and women in uniform. When you factor in attrition, roughly 3 million people will need to be recruited, equipped and trained. And CAE is that training company.

The defense market is moving at a scale we have not seen in decades. Canada has committed approximately $80 billion over 5 years to defense modernization. NATO allies are also moving towards a much higher level of investment. CAE enters this cycle with a substantial defense order book and a growing pipeline of opportunities across Canada, NATO and Allied markets, the potential is clear. Capturing this growth requires technology, scale and reach. CAE has all 3.

As a training system integrator, we take complex platforms and help people learn how to use them safely and effectively. And as a defense platforms -- excuse me, and as defense platforms become more advanced and harder to operate, that role becomes more important. For example, a modern fighter aircraft can be 100x more complex than its commercial equivalent and repairing a fire pilot can cost as much as $25 million. Buying the platform is only the beginning. People and systems must be able to train, rehearse and operate together and that is what CAE enables.

Across Defense & Security, our strategy is to partner early on new programs. It allows us to shape the training architecture and build relationships that can last for decades. That is why our partnerships with leading global defense OEMs matter. They give CAE the framework to connect devices, systems, software, courseware, synthetic environments and mission rehearsal into an integrated training solution that helps our forces prepare for increasingly complex missions. This is already taking place across air and maritime domains. In advanced pilot training, airborne surveillance, fighter platforms and naval programs, CAE is positioning itself where Allied forces will need deeper, more integrated readiness capability.

Our goal is not only to provide the devices is to help the customers build the training ecosystems that supports operational readiness over the full life cycle. We see this in our expanding relationships with partners such as SAP Leonardo, TMS and Shield AI. These partnerships create franchise opportunities to build a defense pipeline that will drive long-term growth for decades to come. Stepping back, our 2 businesses reinforce each other. That is the real advantage.

Across civil aviation and defense and security, we bring together commercial scale, recurring training expertise advanced technologies, mission readiness capability and deep customer relationships. These strengths help us innovate faster, improve efficiency and compete more effectively across the markets we serve.

Looking forward, fiscal 2027 year is a year of execution and transformation. We know what we need to do. We need to strengthen the core. We need to be ready for opportunities ahead, and we need to bring more discipline, more speed and measurable progress across CAE. We will draw on what makes CAE exceptional, our customer trust, our technical depth our entrepreneurial drive and our team's shared commitment. Delivering starts with people, to our employees, thank you. You are carrying this transformation forward while delivering for your customers every day. That takes focus, resilience and commitment, and I do not take that for granted.

To our customers and partners, thank you for your confidence, your trust matters and we will keep earning it every day through performance, reliability and delivery. And to our shareholders, thank you for your continued support as we build a stronger, higher-performing CAE. CAE prepares people to perform when it matters most. We help the world move safely. We prepare the men and women in uniform to protect it. That mission has never been more relevant. The future is bright. We have the world's leading civil aviation business, and it will continue to grow. In defense, our business is becoming more relevant every day in both we have what the world needs. Our time is now. [Foreign Language] In the world of action, CAE equals action.

Thank you so much for your attention. Great. Thank you very much, Matt, for that to address. It's an exciting time indeed. We'll now open the floor to questions from shareholders of record and proxy holders. For those attending in person, before asking your question, please proceed to a microphone, identify yourself as a shareholder or a proxy holder and state your name for the record. In the interest of time and to allow as many shareholders as possible to participate, we respectfully ask that all questions be kept brief.

For those attending the meeting online, please submit your questions online, if not already done so. As noted earlier, you can select the messaging icon on the bottom of your screen and type your question or comment in English or in French in the chat box at the bottom left of your screen. And I think we'll start with a question in the room. I see there is one already online as well. So please go ahead.

My name is Anna Cristoforo and I am a shareholder. As the transformation progresses, how are employees responding to the changes. And secondly, what steps is management taking to maintain employee engagement and morale.

Excellent question. Thank you very much for that question. Matt?

Yes. Thank you for the question. As you said, transformation has changed and change is hard. And we have almost 12,000 employees and 250 sites in 40 countries around the world, and every 1 of them matters. So we are working around the clock to overcommunicate to be transparent and collaborative about where the projects are, what our time lines are, what the expected results are and what the challenges are and working through those one by one. And every time an employee has a question or issue or a concern, we're going to take it very seriously.

Every employee is involved in this transformation, and it's about making the company stronger for the future. And we're already seeing to the second part of your question, the fruits of our labor. Our factory is starting to modernize. Our tools are being improved, and that's improving the day-to-day life of our employees. We're also starting to invest in our programs and products of the future, and that's going to set CAE up for decades to come. So the transformation is hard. The employees are engaged, and they see a bright future in front of us. Thank you.

Thank you. Samantha, are there any questions online?

Yes, I do see Mr. Chairman, that we have a question online from shareholder, James William Evans. And the question reads as follows: could you provide a few words of optimism for shareholders who have been waiting 6 years for the reinstatement of the dividend policy and dividend reinvestment plan.

That's a great question, and I appreciate it because it's an extremely important area that the Board has newly constituted is focusing on. Capital allocation is critical right now. And that's one of the reasons we've made as many changes as we have both at the Board level, at the executive level and why we put in place this transformation plan. Right now, we're in the environment where we control what we can control, and we build this transfer [indiscernible] returning cash to shareholders between the share buybacks, which, of course, we continue to do. And we'll continue to assess the appropriate time to consider reinstating a dividend. But of course, share buybacks are another form of returning capital to investors.

And so I appreciate the question, and I hope you will read our communications in terms of the share buybacks that we are undertaking. And we're very, very mindful of both the need, the desire and how healthy it is for companies to return cash to their shareholders on a regular basis.

Thank you, Mr. Chairman. I do not see any other questions in the platform, and I'm looking around the room to see if there is another question for today.

Come on, guys, must have somewhat more questions.

[Foreign Language] No other questions on the platform.

[indiscernible] to see if there are any others online and anyone else in the room. If not, there will be an opportunity to speak with Matt and the members of the leadership team in a more informal basis in the time that follows this meeting.

[Foreign Language] I don't see any other questions.

I declare that the question period has ended. And this officially will, therefore, conclude the meeting. On behalf of CAE, thank you to everyone who participated, both online and in person. And until next year, we wish you, your families and your communities good health. The meeting is now terminated. Thank you.

Good day, ladies and gentlemen, and welcome to the CAE's Fourth Quarter and Full Year 2026 Financial Results and Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Andrew Arnovitz. Please go ahead, Mr. Arnovitz.

Good morning, everyone, and thank you for joining us today. Before we begin, I'd like to remind you that today's remarks, including management's outlook for fiscal year 2027, our long-term fiscal 2030 financial targets and answers to questions contain forward-looking statements. These forward-looking statements represent our expectations as of today, May 22, 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.

The fiscal 2030 targets, in particular, are subject to a greater degree of uncertainty given the longer time horizon. These targets represent management's current view of the company's long-term trajectory and are meant to assist analysts and shareholders in forming their respective views on our strategy and in measuring progress toward our transformation objectives. They are based on the assumptions set out in our press release issued yesterday and are subject to the risks described therein. A description of the material risks, factors and assumptions that may affect future results is contained in our press release issued yesterday and in CAE's annual MD&A, both available on our corporate website and on our filings with the Canadian Securities Administrators on SEDAR+ and the U.S. Securities and Exchange Commission on EDGAR.

On the call with me this morning are Calin Rovinescu, Executive Chairman; Matthew Bromberg, CAE'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 turning it over to Matt, I would like to briefly share a few observations. As all of you know, we have just finished the first fiscal year following Matt's appointment as CEO and mine as Executive Chairman. It has been a very busy year, full of change and renewal for this organization. In addition to a new Chair and new CEO, we also have new heads in each of our Civil and Defense businesses, a new Head of Operations and a new Head of Flightscape. We've also simplified reporting structures for greater accountability.

The Board recently met with Matt and the leadership team for a detailed review of the company's 5-year strategic plan and transformation plan targets. We carefully assessed CAE's strengths and opportunities for the future and have now set specific plans and detailed financial targets for the longer term as we promised the market we would, which were announced today and which Matt will review with you shortly.

I would characterize this work as rigorous and ambitious, yet grounded in a high level of operational and financial detail. More importantly, it's also actionable with clearly defined initiatives, accountabilities and time lines. CAE's long-term growth prospects remain strong despite some challenges. Our Civil business continues to benefit from durable fundamentals with Aviation Training Solutions representing an essential component of a secular growth market. Commercial Aircraft and Business Jet OEMs have backlogs that extend beyond several years of deliveries. As we previously stated, this segment is also underpinned by global regulatory requirements mandating recurrent training on each aircraft type, providing a recurring demand base. Additional growth is driven by the ongoing need to train pilots due to fleet expansion and retirements as well as transition training for pilots moving between platforms.

Now the ongoing conflict in the Middle East and its impact on fuel supply and prices has created disruptions for our business as well as for the broader aviation business. Of course, we are monitoring developments closely, and we'll continue to make short-term adjustments to help mitigate this impact as required. As Ryan will outline, this has had an impact on our fiscal 2026 results and will continue to affect the first half of fiscal 2027.

Our D&S business is at the front end of an up cycle driven by rising defense budgets across NATO and allied nations, many of which are now targeting spending levels approaching 5% of GDP. In Canada, the government has articulated an ambition to reach that level by 2035, representing a generational investment opportunity. This environment creates a significant opportunity for CAE to continue evolving as an international defense leader, leveraging our technology, domain expertise and global network. Heightened geopolitical tensions, modernization imperatives and a global shortage of uniform personnel are driving sustained demand for training, simulation and mission rehearsal solutions, all core competencies of CAE. As Canada's largest publicly traded defense contractor, CAE is well positioned to play a meaningful role alongside domestic and international partners in the defense area.

Overall, we expect fiscal 2027 to be a year of execution and delivery of the various components of our detailed transformation plan, prioritizing core assets and competencies, operational excellence, capital allocation and improved investment outcomes. The focus now is all about execution balancing growth with improved efficiency, discipline and returns as we position the company for stronger performance, higher margins, improved free cash flow and sustained value creation over our outlook period. Matt, over to you.

Thank you, Calin, and good morning, everyone. We delivered solid performance in fiscal 2026. Overall, strong Defense revenue and profit was tempered by a soft Civil market. In particular, events in the Middle East were challenging in Q4. But stepping back, after 9 months as CEO, I'm further resolved by the opportunity CAE presents. The company operates in 2 markets, both with strong secular tailwinds. We have industry-leading technologies and an entrepreneurial customer-centric team. At the same time, through the transformation plan, we are starting to unlock higher performance with internally driven actions that will focus our portfolio on opportunities where we can differentiate and win, sharpen our capital allocation to drive higher returns and drive a performance culture to improve margins and free cash flow.

Today, I'll provide an update on the Civil and Defense segments as well as on our transformation plan and new long-term financial targets. We continue to make meaningful progress aligning our organization around end markets, operationalizing the transformation plan and positioning the company to capture long-term growth. We are working through many demanding transformation actions organized along 8 key work streams that support our objectives. These work streams will generate $125 million to $150 million of structural cost reduction by 2030. This is hard work, but the team is energized with the prospects of a stronger CAE.

This year, 2027 is a reset year. First, given the soft market of last year, we entered 2027 with a lighter order backlog of civil full-flight simulators. Secondly, the Middle East conflict is having a month-by-month impact on our bookings and sales. Additionally, the network rationalization that we launched last quarter is proceeding. And while we are working closely with customers to retain their business, we expect some stranded cost and attrition as we consolidate sites and rationalize capacity.

Finally, we are increasing investments on key internal systems, including simplifying our ERP from 5 separate systems to 2 and modernizing our factory. These investments will have long-term benefit for CAE. And at the same time, we are not assuming any benefit from government R&D programs. Our latest federal funding program recently came to an end, and we decided to pause future programs while we work with the government to align a structure that will advance Canada's defense industrial strategy, further elevate civil aviation and enhance CAE's capital discipline and flexibility.

Looking past this reset year, both businesses remain strong, and we'll work to mitigate some of the referenced disruptions. We know the actions being taken are necessary to reposition CAE for balanced profitable growth. Shifting to the team. During the quarter, we announced several important leadership appointments that strengthen the team responsible for executing the transformation and advancing our strategy. Ryan McLeod joined CAE as Chief Financial Officer. Ryan brings significant external experience to CAE's financial organization and is rapidly coming up to speed.

Pascal Grenier was appointed President, Defense and Security. Pascal's role centralizes 3 defense strategies and efforts into a single team that will leverage our unique local presence and our strong technology core. And finally, our transformation program management office is fully staffed and operating at a rigorous cadence to drive alignment, accountability and progress.

Over the past year, with these final leadership changes, we have simplified CAE, reducing the previous 7 president positions, staffs and organizations to 2. This aligns our talent and organizations around our 2 customer segments. Additionally, efforts continue to streamline the company and reduce spans and layers. This will further drive performance as we execute our transformation and grow.

Now let's look at the business developments during the quarter, starting with Civil. Demand in the Civil segment is supported by structural growth in global air travel, fleet expansion and training demand. Civil is a fantastic business, and we are the market leader across commercial and business aviation product and training services. We know that air travel has consistently grown faster than GDP, and one of the core initiatives of our transformation is to streamline our operations to drive structural improvements in returns. In Civil, for fiscal 2026, we delivered modest revenue growth, helped by the successful integration of our SIMCOM acquisition.

Our full year book-to-sales ratio was 0.96, with lower product order intake weighing on our expectations for fiscal 2027. Civil profitability was negatively impacted by a number of factors, including training market headwinds and volatility in the Middle East. Ryan will provide additional details around the items influencing our Q4 results and fiscal year 2027 outlook. This year, we marked an important milestone with the FAA and EASA qualification of the world's first Boeing 777-9 full flight simulator. This represents yet another example of CAE innovation and more importantly, trust and collaboration with the Boeing Company, and it reinforces CAE's position at the forefront of next-generation simulator development. Based on Boeing's order book for the 777X, this represents a meaningful pipeline of opportunities for civil aviation over the next decade in a market where CAE is the established leader.

We also expanded our partnership with InterGlobe, the parent of Indigo Airlines, to grow our training network in India with the inauguration of our fourth advanced pilot training center located in Mumbai. Our joint venture services multiple airlines in India, which is one of the fastest-growing aviation markets globally and already the third largest domestic market with passenger volumes approaching 240 million annually. Our partnership with InterGlobe positions us well to meet that demand and support the next phase of growth in the Indian market.

In the Business Aviation segment, we signed a long-term training services agreement with BOND, a new private jet fractional operator. This agreement aligns CAE with a high-growth segment of the business aviation market, where training demand is recurring and predictable. BOND's fleet will be comprised of super midsized and ultra-long-range aircraft, which is well suited to CAE's global training network and capabilities.

Despite CAE's world-class platform, our utilization performance and returns have been below expectations. This underscores the need to have a nimble, right-sized training network. As discussed last quarter, we will rationalize the training network, and we've set the following objectives: we're going to remove approximately 10% of our commercial full-flight simulators; we will then relocate and optimize more than a dozen additional full-flight simulators to facilities where they can be better utilized; and finally, we will close between 4 and 6 of our training centers after all this activity is done.

To date, we've already retired 5 devices and closed one training center. Across the remainder of fiscal year 2027, we expect to retire 8 to 10 additional devices, remove over 300,000 square feet from our global footprint and continue to look for opportunities to close additional centers. These actions will better align the civil business with anticipated demand over the long term. These initiatives will drive structural improvements in our profitability, cash flow and returns on invested capital through greater efficiency, stronger asset utilization and a more disciplined operating framework.

Now let's turn to our Defense business. We delivered another strong quarter across the board with revenues growing 6% in Q4 and 9% for fiscal year 2026. A positive demand backdrop drove our book-to-sales north of 1.11 in Q4. Additionally, alongside solid growth metrics, the team realized another quarter of year-over-year adjusted segment operating income expansion to 10.2% as programmatic and operational improvements continue and the business benefits from program timing and mix.

Overall, very solid results from the Defense team in the quarter and for the year with further progress anticipated in fiscal 2027 and beyond. Looking more broadly at the strategic context for Defense. We are seeing sustained increases in defense spending, driven by readiness, modernization and evolving mission requirements, and this is creating a significant opportunity for CAE. We are also seeing a robust pipeline of opportunities that is multiple times our current defense backlog, including several programs with potential contract values in excess of $1 billion in Canada and across NATO.

In Canada, the federal government has committed approximately $82 billion to defense spending over the next 5 years with a long-term ambition to reach roughly 5% of GDP by 2035. Training and mission rehearsal accounts for approximately 10% of this expenditure. And while that includes infrastructure and organic spending that is not addressable, it represents a large market opportunity for CAE. This is reinforced by Canada's defense industrial strategy, which the Prime Minister announced at our Montreal headquarters. There's a clear shift towards bolstering sovereign capabilities, reinforcing Canada's industrial base and fostering long-term partnerships. We are continuing to work closely with the Government of Canada to expand and create new Canadian franchise programs such as the Future Aircrew Training program, the Future Fighter Lead-in Training program and the Future Canadian Submarine program.

As a proud and homegrown Canadian training, mission readiness and simulation leader, we are uniquely positioned to support Canada's defense modernization and mission readiness mandate. Our strategy for defense is focused on scalable, repeatable growth. First, we are deepening our relationship with OEMs and platform providers to embed training and simulation capabilities directly into platform offerings. This positions CAE earlier in the program life cycle and strengthens our role across long-term program execution and sustainment.

We have already begun advancing the strategy through relationships with leading operators and OEMs, including Saab. Additionally, during the quarter, we announced a team agreement with TKMS to pursue the Canadian Patrol Submarine project, reinforcing CAE's role as a trusted partner to both global OEMs and national customers. This partnership brings together 2 world-class companies, TKMS and CAE. Together, we would support a sovereign in-country training and simulation solution for the Royal Canadian Navy. This partnership not only supports Canada's submarine ambitions, but also positions CAE to support TKMS' international customers in both submarine and maritime pursuits. We hope to expand these partnerships over time.

We also have an established track record of successful collaboration with OEMs, including the International Flight Training School, or IFTS in Sardinia, Italy, developed in partnership with Leonardo. IFTS combines advanced simulation technologies with live flight training to deliver world-class pilot instruction and operational readiness. Over the last 4 years, IFTS has delivered over 44,000 flight and synthetic training hours to over 15 nations.

Establishing a leadership position in the market necessitates world-class leadership, and that's why our defense business will be integrated across the globe with a centralized team for business development and engineering solutions. This simplifies our structure, reduces duplication, improves execution, reduces spans and layers and will drive SG&A savings. Additionally, the defense team is also looking to rationalize its footprint where possible and focus on growth franchise, and this is evidenced by our decision to exit our Broken Arrow facility, which is in Oklahoma.

Shifting to the portfolio. On May 11, we announced that we are exploring strategic alternatives for Flightscape. This action reflects early momentum in building a more focused portfolio. While Flightscape is a high-quality business with a world-class platform, it sits outside our core, and we believe it can better realize its full potential outside of CAE. Advisers have been engaged and the process is underway. Flightscape represents 4% to 5% of our revenues and the bulk of the 8% announced in April. Of the 8% announced in April revenue that we identified as noncore, the majority sits within our Civil business.

Looking internally, we are identifying opportunities to insert artificial intelligence and automation to improve efficiency and customer experience. One example recently deployed in our Civil business is leveraging AI to reduce the time it takes to complete technical resolution of certain issues within our full-flight simulator network related to customer simulator issues and integration of software and hardware. We've reduced the execution time from hours to minutes. We'll execute initiatives like this and other key actions over the next 18 months.

Overall, these actions demonstrate clear progress against our strategy. We are aligning leadership to execute the transformation, sharpening the portfolio, expanding in attractive growth markets, deepening OEM and customer partnerships and leveraging our technology leadership and network to drive higher performance and long-term value. Underlying this growth and transformation is a necessary evolution of CAE's culture to reinforce accountability, operational excellence and continuous improvement across the organization.

Looking forward, I will be personally spending a significant amount of my time on embedding a more disciplined performance-oriented operating model across the company because I believe this cultural evolution is critical to the long-term success of our transformation and growth of our franchise. Over the last decade, we have fallen short of investor expectations too often. Going forward, our objective is to build a company that consistently delivers on its commitments and is recognized as a reliable compounder of long-term shareholder value. At its core, this means strengthening CAE's culture as a disciplined steward of shareholder capital with a clear focus on accountability, execution, profitability, cash generation and returns.

Starting in fiscal 2027, we are moving forward to a more disciplined and aligned executive incentive structure, which is centered on free cash flow, operating margin and operating margin expansion, returns on invested capital and EPS growth. This is expected to help align every leader and employee around the priorities driving our transformation and shareholder value. The announced update to our free cash flow definition is an important example of this progression. We believe capital expenditure should be valued with a consistent lens regardless of whether they are categorized as growth or maintenance. Both represent real uses of cash.

By incorporating total CapEx into our free cash flow framework, standardizing how we measure simulator utilization and asset performance and increasing focus on free cash flow conversion and returns on invested capital, we are reinforcing capital discipline and improving visibility into the underlying drivers of performance across the business. As we continue this evolution, we remain committed to preserving the customer focus, entrepreneurial mindset and cultural innovation that have defined CAE for nearly 80 years.

With that, I will turn it over to Ryan to discuss the Q4 2026 financials and our fiscal 2027 outlook in more depth. When Ryan has concluded his remarks, I'll discuss CAE's transformation plan and the new fiscal 2030 financial targets. Ryan, over to you.

Thank you, Matt, and good morning, everyone. Before I get into the results for the quarter and our outlook, I would like to start with some initial observations from my first months at CAE and take a moment to thank Constantino Malatesta for his partnership and support during the transition. This is a business with strong market positions, a high-quality installed base and clear opportunities to improve performance through more disciplined capital allocation and execution. My immediate focus has been on learning the business with a view to driving the transformation priorities, including strengthening capital rigor, improving margins and returns and ensuring we are allocating capital to the highest value opportunities across the portfolio.

In addition, activities are underway to strengthen our financial planning and analysis capabilities to improve visibility, tighten forecasting and support more disciplined execution across the business. In parallel, we're planning and executing systems and process modernization initiatives to drive greater efficiency, integration and scalability across the organization.

From a capital allocation standpoint, our priorities are clear. First, we are committed to maintaining an investment-grade balance sheet. We ended the year with net debt of $2.7 billion and a net debt to adjusted EBITDA ratio of 2.29x. We are well positioned to execute on our transformation plans, support the growth of the business and maintain our investment-grade rating.

Second, we're embedding a more disciplined returns-based framework across the organization. All investment decisions will be evaluated through a return on invested capital lens with a clear focus on prioritizing the highest risk-adjusted returns.

Third, we are funding the transformation plan while maintaining balance sheet strength. The transformation is targeting total onetime costs between $200 million and $250 million, of which approximately $100 million is noncash. We incurred $84 million of expenses in fiscal 2026, of which $59 million was noncash charges. The majority of the remaining expenses are expected to be incurred in fiscal 2027. Importantly, this is an intentional time-bound transformation program designed to improve the structural performance of the business, which we are anticipating will yield $125 million to $150 million of run rate savings by fiscal 2030.

As we execute on our transformation plan, the targeted improvement in earnings and cash generation will provide flexibility to return capital to shareholders while also investing in high-return opportunities to drive growth in the business. As Matt discussed, our transition to a more conventional definition of free cash flow reflects the cash we generate from operations less all capital and intangible investments, whether for maintenance or growth with no exclusions, plus any cash we invest in or receive back from our joint ventures. This will provide greater transparency, both inside CAE and to our stakeholders and is consistent with the increased capital discipline we are implementing across the business.

Additionally, we've also decided to further refine other non-IFRS measures to better align our external reporting with how we measure the performance of the business internally with a focus on underlying value creation and cash earnings. As a result, effective in the first quarter of fiscal 2027, we will update our definition of adjusted segment operating income adjusted net income and adjusted EPS to exclude the impact of amortization of acquisition-related intangible assets, removing a noncash expense that we no longer consider in evaluating our return on invested capital. Taken together, these changes simplify our reporting, reinforce our focus on cash generation, capital discipline and will help drive the right behaviors and focus across the company.

Turning briefly to our results. In the fourth quarter, consolidated revenue was $1.3 billion, up 4% year-over-year. Adjusted segment operating income was $211.8 million compared to $258.8 million last year, and adjusted EPS was $0.42 per share. Lower adjusted segment operating income was driven by softer Civil training performance, which included headwinds from the Middle East conflict that impacted our business in the region. Performance also reflected several discrete items in the quarter, including higher credit-related charges, lower government grant contributions, higher research and development costs and a tougher year-over-year comp, which included a gain on an asset sale a year ago. This was partially offset by improved performance in our Defense business.

For the full year, revenue was $4.9 billion, up 4%. Adjusted segment operating income was $710.7 million, down 3% and adjusted EPS was $1.20. Turning to cash flow. For fiscal 2026, we generated $473.8 million in free cash flow under our updated definition, representing a conversion rate of approximately 123%. This compares to an average conversion rate of less than 50% over the 4-year period from fiscal 2022 to fiscal 2025. The step change in the conversion reflects the early actions taken in fiscal 2026 to sharpen capital allocation and noncash working capital management, with total CapEx down approximately 20% year-over-year, driven by an approximate 30% reduction in civil CapEx.

In Civil, fourth quarter revenue was $746.7 million, up 3% year-over-year, while adjusted segment operating income declined to $152.4 million, primarily reflecting lower utilization and the impact from disruptions in the Middle East, along with the majority of the discrete items I described previously. For the full year, Civil revenue was $2.7 billion and adjusted segment operating income was $510.5 million with a margin of 18.6%.

In Defense, fourth quarter revenue was $580 million, up 6% with adjusted segment operating income of $59.4 million and a margin of 10.2%. For the full year, Defense revenue increased 9% to $2.2 billion with adjusted segment operating income of $200.2 million and a margin of 9.2%, reflecting strong demand and improved execution.

Let me now turn to fiscal 2027. As Matt noted, fiscal 2027 will be focused on transformation, where we are actively implementing the actions required to reshape the business and improve its long-term performance while simultaneously maintaining focus on our core operations. We expect consolidated revenues to grow at a low single-digit rate, with Civil revenue expected to be flat to slightly down and Defense expected to grow at a mid-single-digit rate. Adjusted segment operating income margin under our updated definition is expected to be in the range of 14.6% to 15.1%. Adjusted EPS under our updated definition is expected to be between $1.21 and $1.28, and free cash flow conversion is expected to be between 85% and 95%. Of note, fiscal 2027 cash conversion is embedded in our outlook for 100% cumulative cash conversion over the 4-year period ending in fiscal 2030.

All in, our capitalized investments in growth, maintenance and research and development are expected to be approximately flat year-over-year in fiscal 2027. Over time, while our sharpened focus on capital discipline and free cash flow generation will necessitate a more effective balance between returns and growth, we will not shy away from responsibly and diligently using our capital to invest in growth opportunities that generate attractive returns and create sustainable shareholder value.

With our greater cash optionality over the next several years, there will potentially be additional opportunities to accretively deploy cash towards incremental growth opportunities or in their absence, return excess cash to shareholders. Our commitment is to remain measured, disciplined and transparent while ensuring that we maximize shareholder value and deliver on our promises.

I'd also like to provide some additional details around our expected fiscal 2027 performance. There are 3 key factors driving the year-over-year margin and earnings profile for fiscal year 2027. First, to successfully execute the transformation plan, we're making intentional investments in our systems and processes, including ERP as well as our factory. These investments will not be excluded from adjusted segment operating income or adjusted EPS in fiscal year 2027, and they will enable a more effective operation and the capture of operational synergies over time.

Second, we expect fiscal 2027 to be impacted by inefficiencies associated with several of our transformation actions, including underutilization in parts of the civil network as training centers are wound down and revenues are temporarily negatively impacted by lower utilization as we reposition assets in our network. In addition, we expect some temporary cost dis-synergies as we consolidate our footprint and reshape the business.

Third, in Civil, the training market remains subdued and recent developments in the Middle East are expected to continue to impact our operations and customers. We have seen some volumes move to other parts of our network. However, the impact of the conflict on the aviation industry, including the cost and availability of jet fuel could have a knock-on impact on demand for training.

Lastly, as Matt mentioned, we are not assuming any potential benefits from specific government R&D programs in our outlook. In fiscal 2026 and fiscal 2025, these programs benefited our adjusted segment operating income by approximately $11 million and $34 million, respectively. Importantly, the actions we are taking to drive the transformation plan and position CAE for accelerating performance are discrete, intentional, time-bound and tied to activities within our control. They're expected to enable an attractive payback on the capital we are investing through the transformation.

Fiscal 2027 represents a temporary step back in margins and earnings as we invest to execute the transformation and position the business for improved performance, stronger margins and higher cash generation as we move into fiscal 2028 and beyond. Although the timing of resolution of the Middle East conflict is unknown, we expect that over the mid- to long term, the civil aviation market will remain resilient.

With that, I will turn it back to Matt.

Thanks, Ryan. To summarize, we announced the transformation plan in November, outlined our first steps in February, and now we are operating at pace. At its core, the transformation is about focusing on where we can win, investing where we have higher returns and improving how the business performs and generates cash.

In practical terms, this means we're evaluating areas of our portfolio for strategic alternatives, rationalizing our worldwide network by 10% and driving cost reductions through standardization, automation and better use of data while also strengthening our go-to-market approach and improving asset utilization. This is a significant transformation and a necessary one. This is hard work. We will focus on our core, we will sweat our assets, and we will rethink how we operate. At the same time, we will maintain customer focus and continue driving results.

These actions are intended to create a structurally stronger business with higher margins, stronger free cash flow generation and improved returns over time, with the benefits of the action materializing more meaningful in fiscal 2028 and performance anticipated to build from there through fiscal 2030 and beyond. As we execute, we are targeting mid-single-digit organic revenue growth, and we are targeting $950 million to $1 billion of adjusted segment operating income under our updated definition in fiscal 2030. And this is backstopped by a cash conversion rate of 100% cumulatively over the 4-year period.

As we've said, we are targeting approximately $125 million to $150 million in annual run rate savings from the transformation plan by fiscal 2030. This means that more than half of the anticipated performance improvement is expected to come from internally driven transformation initiatives already identified and underway. And the balance is supported by volume growth and operating leverage. Importantly, our targets do not contemplate any inorganic investments. While we remain focused on rationalizing our portfolio and executing the transformation, we will opportunistically evaluate potential incremental growth investment and shareholder return opportunities through a shareholder value creation and return on capital lens.

As the teams are now mobilized and committed to both business and transformation, my focus will be on supporting them to act with speed. This is my top priority. CAE is an amazing organization with a worldwide team of customer-centric and entrepreneurial individuals who are passionate about the company and what we do. We will maintain that. At the same time, my focus over the next year will be continuing to build a stronger performance culture, one with a team aligned around a clear plan, supported by incentives and metrics that connect execution directly to strong financial performance, free cash flow generation and long-term shareholder value.

We believe CAE's global installed base, our customer relationship, our technology leadership and our long-term positioning in both civil and defense provide a strong foundation for the next phase of CAE's growth and improvement. We are up to the challenge. We are very proud of CAE, and we see a stronger, more profitable and higher-performing company ahead.

Thank you, and I'd be happy to take your questions.

Matt, thank you for that. Operator, I'd now ask that you please open the lines to members of the financial community.

[Operator Instructions] Your first question comes from Konark Gupta with Scotiabank.

I think my first question is, Matt, in light of the current geopolitical environment we are seeing, obviously, this new world where anything can happen, I'm wondering what adjustments are you contemplating if you think might be required in your transformation approach or even execution on noncore assets given the unknowns we are facing today?

I'm sorry, can you repeat the question? It was a little garbled.

Sorry. Yes. Hopefully, you can hear me okay. I was wondering if there would be any adjustments required in your approach to transformation or execution on noncore assets in this new environment where a lot of things are changing dramatically, whether it's geopolitics or something else. So I'm just curious if you have any updates or thoughts on how you're positioning the transformation in this new world.

Yes. No, look, I appreciate the question. Thanks. I understand. Two answers. If you think about the portfolio and Flightscape and the other assets that we're looking for strategic alternatives, clearly, these processes always have some uncertainty. They take time. They have advisers, you have counterparties. We need a solid contract and good value for CAE. Having done this before, we don't know the outcome until we get there, but I'm confident we'll work through that, but there's always a bit of uncertainty.

But we're committed to pursue Flightscape strategic alternatives, which is why we announced it, and we're excited by the prospects of finding the right owner for that asset. So I feel good about the process. I've run processes like this before in my prior companies. We have an excellent team engaged, and we're working with advisers. We also have strong interest in Flightscape now that we're public with its announcement.

On the asset side, we've carefully selected these based on where they sit, the regions in which they operate, the customers that are impacted by it and all the local regulations and laws. One of the challenges we have is we have to work through those, and that's why there's always some uncertainty. There's a little bit of execution risk, which is why we've pushed the team to start executing and why we're committed to do it, but also we recognize it will take time. I don't think geopolitics will impact either one of these, but general execution risk is something we have our eyes on. But I feel very good about both the portfolio exercises and the network rationalization.

I appreciate it. If I can follow up with Ryan actually. On the capital allocation side, I know you guys have not provided a framework today on capital allocation in the next 4 years. But looking at your long-term targets, the $1 billion in adjusted segment operating income and free cash conversion of 100%, I mean, it sounds like you might have access to dry powder over the next 4 years. Do you have any sense of what would be your priorities with that excess cash? I know you have done a lot of M&A in the past, and now you're kind of unwrapping some of that. But would shareholder returns be incrementally focused on this new plan?

So a couple of things. I'll reiterate first. So we are committed to maintaining an investment-grade balance sheet. We're going to fund the transformation. Beyond that, capital allocation, it's really going to be return and opportunity driven. So I do expect there will be incremental opportunity for returning capital to shareholders. We're going to look at incremental organic investments. And as well, there's going to be opportunity for incremental inorganic investments.

So over a 4-year period, it's a little bit difficult to sit here today and give you a lot of clarity on how that's going to look. But what we've tried to do is give clarity over the framework with which we're going to evaluate those alternatives, and that's through a return on invested capital lens, and it's going to depend on the opportunity set that comes up over the next 4 years. So I think given our plan, given the focus on capital discipline, we do anticipate, as we've talked about and as you noted, to generate attractive free cash flow over the period. And then it's going to be a disciplined process on how we allocate and deploy that capital.

Calin, would you like to jump in on this?

Yes. Konark, Calin here. You'll remember when I came on board, capital discipline, capital allocation was one of the main issues of concern, and it's obviously made its way up to the Board level. We like the flexibility that this will give us. We've said we're not going to do acquisitions that don't make sense that are outside the core. We've said that several times. But for sure, there might be some interesting opportunities, especially in and around defense with what's coming up.

And then secondly, we've talked -- people have asked in the past, what about a dividend, what about greater share buybacks, et cetera, et cetera. This is one of those areas that the Board and I are personally involved with. As you know, disciplined capital allocation is a Board level sort of a decision. And so we're excited at the prospect that this strategy will yield additional liquidity that we will have the opportunity to deploy and make it in an attractive way for shareholders.

Your next question comes from Fadi Chamoun with BMO.

I appreciate the detailed presentation this morning. A question on the long-term targets. So just trying to understand the bridge to the 2030 guidance, which at the middle of the range is $975 million of adjusted operating income. You did almost $800 million in fiscal 2026, and you're suggesting a cost saving run rate of $125 million to $150 million. Really, this underscores very limited contribution from this mid-single-digit organic growth rate on revenue. So I just want to understand the bridge. What's kind of built into it? Why isn't there more kind of incremental contribution from the organic growth that you've built into those assumptions? What are the various moving parts?

And related to that, it seems like a lot of the heavy lifting on the transformation plan happens kind of in fiscal '27. I'm just wondering if you can give us some color about when do you expect to achieve that run rate of $125 million, $150 million? Like how -- what's the cadence like of that $125 million to $150 million in the next maybe 24 months?

Yes. Thanks, Fadi. I'll take the first part and give it to Ryan for the second part. I'm not surprised that your question feels like a body check, but let me get to the answer. First, if you think back to 9 months ago when we started, there were many questions facing CAE. Our leverage ratio was high. Our balance sheet was big. Our free cash flow conversion was poor. We didn't understand what to do with CapEx. Utilization was a question mark. Were we focused on the right things? What was the defense strategy and were we hitting our commitments.

This transformation plan is about addressing all of that and more. We have a fantastic environment, both in civil and defense, putting aside the noise in 2027. The transformation plan is going to unlock $125 million to $150 million of value. We are divesting or finding alternatives for 8% of our revenue, rationalizing 10% of our civil network, shutting 5 to 6 training centers and possibly a few other sites and investing in technologies that are overdue to improve our performance. There's a fair amount of execution required to do this. This is heavy lifting. This is hard work. And there is execution risk baked in here, and that is factored into how we're looking at 2030.

And most importantly, we're changing the culture of one that has missed internally and externally, and that's disappointing to all the shareholders, all the analysts and us, and we're going to turn the corner. We're going to clarify our metrics. We have a new incentive compensation system, a new operating cadence, and we're becoming a company that meets its commitments.

And so that's why when we put those 2030 guidance out, think about transformation plan and organic growth, we feel good about what we're telling you, recognizing that we have tremendous free cash flow generation opportunities. We'll have flexibility to pivot if things don't materialize the way we want. We have time to get there and we have the team to deliver. We are the world leader in civil training. We're the world leader in full-flight simulator production and development and the largest defense training company in the world. It's a fantastic platform, and this transformation will unlock incredible value. Ryan, the second question?

Yes. So maybe just a bit of a finer point on the financials. So to be clear, our fiscal '27 outlook guidance includes the full business. The long-term targets assume, as Matt said, the divestiture of 8% of our revenue. So there's earnings tied to that, and that has to be factored into that longer-term bridge.

The other piece is we've benefited from government funding over the last several years. And where we sit today, that's not in our plan. And I'd say we're hopeful that, that will be in the future, but we need to ensure there's alignment with how we -- our priorities and government priorities and making sure there's a fit there. And then as Matt said, and I'll reemphasize, there's a high degree of confidence in achieving what we've laid out today, and that was very important to the team in putting forward these long-term targets.

And on that cadence of $125 million to $150 million, because it seems like a lot of the heavy lifting is in '27. Like is there a big jump into that kind of number in the early years? Or is it kind of more spread out over the 4 years?

Well, so there's a bigger impact in '28 versus the incremental benefit in '29 and '30. But as Matt said, there's a lot of execution to happen between now and then. So I don't want to put too fine a point on a number. But '27, as we've talked about, there's -- it's full on execution this year. We will see that benefit materialize in '28, and then it's a bit more incremental for '29 and '30.

Yes, the only thing I'd add, Fadi, and thanks, Ryan, is that as we look at the investments on transformation, which today is the best use of capital as I think about where I want to spend our money, these are 2- to 3-year payback projects. Some are on the shorter end, some are on the longer end, but that's a way to characterize. We're spending the bulk of the money in 2027 and think about 2- to 3-year paybacks for every project.

Your next question comes from Cameron Doerksen with National Bank.

I guess a question on the segment operating margins within your longer-term targets. I know you're not providing that now, but you have sort of talked about some of the expectations of those in the past between Civil and Defense. Obviously, you've changed your, I guess, definition of segment operating income. But any commentary you could provide on what you think ultimately in 2030, the individual segment margins will look like?

Yes. Let me comment and if Ryan wants to add something. As I've said from my initial day on the job here, I saw there was opportunity to improve Defense margins. I don't subscribe to a mid-single-digit Defense business from an operating income level, and we're on a path to improve that. We're only a couple of years into improving our margins, but we're making good progress. And it's about improving our mix. It's about winding down the legacy programs, which were dragging us down and having better contract performance and bidding going forward. So we're going to take a methodical, gradual approach.

When I look at Defense businesses stepping back, 11% plus or minus is a solid margin, and that's where we're going to march to. And then if you infer from that from operating margins within Civil, they will be higher, and that's what we're targeting. Ryan, do you need to add anything?

No, I think that covered it.

Okay. And just on the -- I guess, the optimization of the pilot training network. Obviously, you kind of mentioned that you expect to be some attrition of customers. Can you discuss, I guess, some of the discussions you're having with customers there as you shift the network around? And I guess, any other discussions that you're having with customers on potential pricing improvements with some contracts that you have that maybe are a little lower than what they should be?

Yes, that's a great question. Thank you. So every site is going to be an interplay of multiple stakeholders. We have a landlord. We have employees, often have work councils and yes, multiple customers, usually one anchor customer, but multiple customers. Those conversations started prior to our April announcement of where we were going, and they're complex, but we're having exactly that dialogue. If the contract structure changes, there may be a reason to keep a site open.

I've said to many of our investors and analysts, don't over-index on utilization. If I have a low utilized full-flight sim, but a very, very highly priced contract, that's a fantastic place to be. So it's a combination of pricing, contract structure and volume. And so we're ongoing with that. We're optimistic that we're going to retain most of our customers, but I'll be honest, there will be some attrition, which is why we factored it into our 2027 long-term guidance. We hope to retain every single one of them. We think we're the best provider for their training services. But ultimately, we have to come to agreement, and it's one customer at a time, and that's ongoing.

Your next question comes from Daryl Young with Stifel.

With respect to the 100% cumulative free cash flow target, you're obviously starting from a low point in 2027. Are you able to share with us what you think the sort of run rate 2030 free cash flow conversion? I'm assuming it's more like 110% plus.

I mean think about it in the range of 100%. I wouldn't want to be more precise than that. Obviously, given what our '27 number is, when you do the math to '30, it's slightly higher than 100%. But that's a good range to think about over the long term.

Yes. Thanks, Ryan. The only thing I would add is some of our investments are large and could be lumpy that affect our free cash flow in a given year. We announced our WestJet training center in the fall. We're finalizing agreements to get started on that project. That's a large investment that may cause a spike in 1 year, and our responsibility as stewards of capital is to make sure that we draw that down. So large investments happen, which can run up and down.

But if you step back, over the past 5 years, we've averaged about 50% free cash flow conversion using our new more simplified definition. Over the next 5 years, we're going to be cumulative around 100%. Some years will be up, some years will be down. But in total, we're going to be generating a lot of incremental free cash flow for shareholders.

Got it. Okay. And then with respect to the 2027 guide, it doesn't sound like you're going to add back effectively all of the ERP or maybe even all of the transformation costs in your EBITDA numbers. So are you able to ring-fence for us just how big of an impact that ERP spend is and some of those sort of nonrecurring onetime costs actually are?

Yes. So I mean, there's -- when we look at '27 versus '26, there's a number of headwinds embedded in that guidance. Those, I'll call them, investments. As we've talked about, they're intentional, they're time-bound. It's about 1/3 of the cost. And there are costs we can't capitalize. They're not restructuring, but they are important enablers for the transformation and for the long-term success of the business and helping to unlock some of the benefits we see and are working towards as part of the transformation.

So it's about 1/3 of that. There's some headwind, as we've talked about from not having the government funding benefits. Again, that's an intentional choice we're making is we want to make sure that whatever funding that we're seeking and getting is well aligned with the plans and operational plans for the business. And then the rest is -- we've talked about, it's a softer civil backlog going into the year. There's the Middle East headwinds, excuse me. And so that's kind of the high-level bridge from '26 to '27.

Your next question comes from Sheila Kahyaoglu with Jefferies.

This is Kyle, on for Sheila. I had a question just about the FY '27 guide for the Civil business. You talked in the prepared remarks about, I think, fewer simulators in backlog entering the year. That's despite planned higher airframer build rates and then obviously, the training side of the business still being subdued. Can you sort of parse that out across sims and training and then commercial and business aviation as you look at the near term and ultimately, what the sort of terminal growth rates could be for those pieces of the business as you look out towards that mid-single-digit growth rate to FY '30 for the total comp?

Yes. Thanks for the question. Let me start, and then I'll turn it over to Ryan. Entering 2027, 2026 was one of the lightest order years we've had since COVID. And so we have a much lower backlog going into the year. Lead time on our devices is 12 months plus or minus. So that's the backdrop. Add to it the network, which we all have come to recognize was overbuilt given the market, and so we're rationalizing it. So those are the primary moving pieces.

If you step long term, as air traffic grows 4% to 5%, putting aside year-over-year ups and downs on deliveries and other factors, the need for simulators is going to grow 4% to 5%, and we're the market leader. And so if I look long term, that's how I frame it. There will be ups and downs inside there. There'll be deliveries and new aircraft type, but that's the market if you look over the next 20 years, it's been the market for the last 20 years, and we intend to maintain our market share and continue to grow our position. I'll turn it to Ryan for a little bit more specific.

Well, yes, I think that largely covered it. I mean the headwinds in Civil, I just kind of talked through, there's -- as Matt said, the lower backlog, there's some -- as these simulators come offline as they get relocated, there are stranded costs tied to that. There's cost to move them. There's some inefficiencies as these things wind down. And so that's, call it, 1/3. And then as we've talked about the Middle East, the uncertainty there is really the balance.

Okay. That's very helpful. Follow-up on margin trajectory for the Civil segment. It sounds like some of those stranded costs are at the company level about like the ERP integration and whatnot in FY '27. When you think about the Civil margin over the longer term, is there any reason why it shouldn't be structurally higher than it is today as it comes to rationalizing some of the footprint and some of the pricing comments you made earlier?

Well, I mean, our expectation is over the mid- to long term and embedded within the longer-term outlook is there's margin expansion in both sides of the business, both civil and defense. And whether measured under the new definition or old definition, the margins in both businesses would be at levels that we haven't -- it hasn't been achieved in this business. So the transformation is an important part of unlocking that. But certainly, there is margin expansion expectations in both businesses.

Your next question comes from Krista Friesen with CIBC.

Your next question comes from Mark Neville with Canaccord Genuity.

Maybe first on the cost savings, maybe just 2 parts. I guess, just first, how much of that sort of -- I'm just trying to handicap or think about the number. How much of that $125 million to $150 million is identified now and just needs to be acted on? Just sort of thinking, is there potential for that to grow over the years? And the second part, I would -- I presume any CapEx or working cap efficiencies is on top of that number or incremental?

Yes. So the short answer, Mark, is it's all identified. Now I don't mean to sound overconfident. We're very confident in achieving the target, but there's going to be pluses and minuses certainly as we get into execution. But the short answer is it's all identified and roughly half of it is going to come from labor productivity, about 1/3 is tied to footprint efficiencies, and then the balance is other operational efficiencies. So there's a very robust plan set of targets that are tied to that.

Your question or the second part around CapEx. So that I would look at is not margin driving as much, but certainly will positively impact the free cash flow, and that's partly how we get to the free cash flow conversion that we've -- that we're targeting. And so I mentioned this in the prepared remarks, but over the last 4 or 5 years from '22 to '25, our free cash flow conversion was less than 50%. And so as we look at targeting 100%, there's an element of margin expansion there. There's an element of growth, but a lot of that is going to be capital discipline.

As Matt said, there's still -- we're still going to spend capital. This is not a low single-digit CapEx business. This is a mid- to high single-digit CapEx business. That will vary year-to-year depending on the nature of projects. And it's also a long-cycle business. So if we build out a training center, that's a year process minimum. And then it takes a year to ramp up. And so you got to think about these in 2- to 3-year sort of time frames from beginning then. But as I said, that's all embedded in that free cash flow conversion that we've outlined in our targets.

Thanks, Ryan. Let me just amplify -- yes, I just want to amplify, behind every one of these boxes in our spreadsheet that makes up the $125 million to $150 million savings, there's a project, there's a time line, there's a team of dozens, if not hundreds of people. As I talk about with the training center, it is a lot of moving pieces. We have landlords. We have suppliers. We have customers. We have employees. We have work councils, and so we feel good about it. It's about executing. And every 2 weeks, we get together with the leadership team and we go down and review project by project. So we feel good about the portfolio of projects, and we have to now go work them, and the team is up to the task. We know how to do these, can do it. We've done it before, and that's the focus of 2027.

Got it. That's super helpful. Maybe a second question. Maybe just on the noncore assets. I can appreciate they consume capital effort. They may not be meeting the return thresholds. But when you think about sort of what you would consider a value-accretive divestiture or finish to sort of divesting these assets, how -- there's a certain way, I guess, analysts think about it. So how would you sort of think about a value-accretive resolution to those assets?

Yes. First, let me start from a strategic lens and let Ryan follow up from a financial lens. Strategically, I look at these businesses and try and understand do they support our core training and simulation franchises, and they don't. While they're aviation service related, they're not right in the center of what we do, which is aviation safety and training and simulation. Secondly, we look at how it impacts our customer discussions, and they're in different parts of the airline organizations. And third, if I think about use of the capital, we're very, very good at allocating capital to develop, manufacture and deploy full flight systems and building training centers. And that's the best use of my growth capital going in the future. And so strategically, when I look at that lens, that's why these businesses, aviation service businesses, good businesses are not core to what we do. Now Ryan from a financial perspective can add to this.

Well, I mean, I don't want to get into too many specifics. I think the way to think about it, Mark, is there's a value to CAE if we retain the business, and there's a value if we divest. And when we think about that in the strategic lens that Matt just talked about, we think there may be a better opportunity for these businesses with another owner. And that's -- it's as simple as that without getting into the specifics on expectations of value and so forth.

Your next question comes from Tim James with TD Cowen.

First question, just returning to the asset divestitures. Is there any color you can provide on kind of a margin profile or how we should think about the assets being sold? I mean you've mentioned that the majority of them are civil businesses. Would we be wrong in assuming that the margin profile is generally lower than kind of the consolidated Civil business just by virtue of your decision to sell them? Or is that not necessarily the case? I'm just trying to get a bit of a sense on how we should think about the margin that's coming from those assets?

Yes. No. So your assumption is fine. They're below the company average. But I guess to be clear and maybe it'll be a little bit repetitive with my previous answer, it's not as simple as to say it's a low-margin business, and therefore, it should be divested. It's more of a where is it today? Where can it be in the future? The capital required to get it there? Does it fit with the strategy? Is it a distraction to management? And so all those factors go into that framework to make that kind of a decision.

Okay. That's helpful. My second question, just thinking about sort of future potential M&A. And I realize I'm kind of looking forward and this is maybe a strategic question. I'm just wondering, is it possible to kind of identify the type of targets that might be valuable CAE? And I guess I'm thinking more on the defense side. Is it about bringing new capabilities in-house that kind of tack on nicely with what you've got? Is it more about building scale in certain areas? Just any insights you can, if you have them at this point on the M&A opportunity set that investors could maybe think about for the next several years?

Yes. Look, I appreciate the question, and I view it as a great question because we will earn the right to go back into the M&A market. That is one of the primary purposes of the transformation strategy. And I think defense is a very attractive field. So yes, one lens is defense technology. We have an amazing suite of simulation training, synthetic environment technologies. We'll start talking more about that in the future. But there are areas where we can augment that using some of these exciting small defense tech companies. We will bring the scale, go-to-market. They'll bring unique technologies. And we're pragmatic. If we have it in-house, we'll develop it. If we need to partner or buy it, we can. So that's one lens.

The second lens, as you said, is there are sovereign opportunities where we may not have the scale we want or those companies may not have the resources we have. So adding scale in the right geographies is the second lens. The third that you didn't mention is domain. So we are heavily focused on aviation. It's not surprising because simulation and training started in the aviation segment. But over the past few years, it's evolving quickly into land, maritime, space and cyber. So we're excited with our partnership with TKMS because that is a chance to bring our world-leading simulation training, hardware, software integration technology to a submarine and maritime environment, but we're going to continue to look for other companies in other domains because those are rapidly growing parts of the addressable market. So those are 3 lenses I would think about as we earn the right to go back into the M&A market over the next couple of years.

Sorry, operator, I see we've exceeded the time here, but glad that we got everybody in here for questions. I think we'll conclude the call here. And I want to thank all participants for joining us today and to remind you that a transcript of the call can be found on CAE's website. Thank you, and 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.

Good day, ladies and gentlemen. Welcome to the CAE Third Quarter Financial Results for Fiscal Year 2026 Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions]

I would now like to turn the conference over to Mr. Andrew Arnovitz. Please go ahead, Mr. Arnovitz.

Good morning, everyone, and thank you for joining us today. Today's remarks, including management's outlook and answers to questions, contain forward-looking statements, which represent our expectations as of today, February 13, 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 risks, factors and assumptions that may affect future results is contained in CAE's annual MD&A and MD&A for the 3 months ended December 31, 2025, which is available on our corporate website and on 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 Matthew, the company's President and Chief Executive Officer; and Constantino Malatesta, our Interim 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.

Thank you, Andrew, and good morning, everyone. Before Matt and Constantino take us through the Q3 results and discuss the transformation plan, I want to briefly add my perspective. Q3 was a solid quarter, all things considered, despite the Civil business experiencing a somewhat softer order activity than expected. Defense, on the other hand, had a stronger quarter than expected, and we're increasing our outlook for that segment.

In my view, a quarter like this reinforces why we firmly believe that having two strong businesses with leading positions in attractive markets like our Civil and Defense segments makes so much sense for CAE. As you'll hear from Matt, we're starting to implement the several phases of our multipronged transformation plan with a focus on sharpening our portfolio, disciplined capital management and capital allocation, and improved performance through operational excellence and cost transformation. We expect this plan to lead to increased earnings and cash flow and long-term sustainable value creation.

We've already made certain important organizational changes to several areas of our company. We've identified several opportunities for network rationalization and potential noncore divestitures. We've reduced capital expenditures and are building a plan for improved utilization and returns from our simulators. Specific targets resulting from the transformation plan are expected to be made available after next quarter so that you will be able to more closely monitor our progress.

As we said on the last call, CAE's culture over the last years has centered primarily on growth, and it's now time to harvest that growth. The Board and I are strongly supportive of the disciplined data-based approach that Matt and the leadership team are undertaking, challenging the status quo while protecting what is core to CAE. We are closely aligned with both the direction and pace of the transformation and fully recognize that some of the actions required to strengthen the business will have some near-term revenue impact. We're comfortable with that trade-off as we position the company to become more resilient and to deliver stronger returns with more disciplined capital allocation.

And with that, Matt, over to you.

Thank you, Calin, and good morning, everyone. Q3 was a solid quarter despite the softness in Civil. Our performance reflects a more balanced portfolio, improved cost discipline, a focus on program management and better cash flow collection. I'm very proud of the team for delivering these results ahead of our expectations, especially while advancing the transformation plan. Even in the planning phase, the transformation plan is influencing our decisions with respect to portfolio focus, capital discipline and performance.

For instance, focusing our capital on core opportunities is further reducing our fiscal 2026 CapEx outlook, and our focus on working capital has improved free cash flow. Combined, we've achieved our full year deleveraging target ahead of schedule and further strengthened our balance sheet. While there is still much to do, these early improvements give us confidence in the strategy and in the opportunity ahead.

Over the past 90 days, I've met with over 100 investors to discuss CAE's performance and to review the transformation plan. In these discussions, 4 themes resonated. First, CAE competes in an industry with strong tailwinds. We operate at the intersection of Civil Aviation and Defense, two markets with durable long-term growth drivers. We have world-class technology. We have unparalleled customer relationships. And most importantly, we have exceptional employees across the organization.

In our Civil segment, we are the market leader in simulator development and sales, and we operate the largest independent training network in the world. In Defense, we operate around the world locally and with a strong core of capabilities in simulation, training and mission rehearsal. In this segment, we are the largest independent Defense training company in the world, and we have unparalleled breadth of platforms and capabilities. These are strategic assets that give us long, consistent runway.

Second, we developed simulation and training solutions for more than 220 aircraft platforms. That's more than anyone in the industry. We bring unmatched depth in system engineering, hardware, software integration and image generation. Moreover, we have some of the most -- some of the world's most comprehensive databases for geospatial environments, aircraft, airports, sensors and operational performance.

Third, I've been struck by the level of trust, our Civil Aviation and Defense customers place in CAE. Our customers trust CAE with their most valuable assets, their pilots, their aircrew, their passengers and the military personnel. That trust reflects the critical role we play in ensuring readiness in moments that truly matter, and it underscores the responsibility we carry as a company.

And finally, building on the strong foundation, the transformation plan will establish a more consistent, higher-quality business that generates higher margins and higher cash flow. The transformation plan has three focus areas: portfolio sharpening will simplify our portfolio and focus our resources on what we do well. Tighter capital discipline will ensure that every investment meets strategic and financial targets and that capital, R&D and all expenditures will be assessed against a balanced scorecard to ensure awards, sales, profit, cash flow and return on investment thresholds are all met.

And finally, performance improvement will streamline the business and focus on every element of operations from engineering to production, from sales to free cash flow. Some of these actions will have near-term revenue impact as we ramp and move through the transformation, and that is expected.

Now I want to briefly touch on our most recent leadership changes. As we announced earlier this quarter, Ryan McLeod will be joining CAE as our Chief Financial Officer. Ryan brings deep experience in operational finance, capital discipline and transformation execution. His background and approach align closely with the priorities we are driving across the company. His culture will fit exactly with what we are and where we want to go, and I'm very much looking forward to partnering with him as we move into the next phase of CAE's transformation plan.

But I also want to take a moment to recognize Constantino Malatesta. Over the past 1.5 years, Constantino has served as an interim CFO during a period of significant change for CAE. His leadership, his judgment and his steady hand have been instrumental in strengthening financial discipline and maintaining stakeholder confidence. And on a personal note, he has made my own transition into the role as smooth and effective as possible. I'm very grateful for his hard work, his continued support, and I really enjoy working with him. Thank you, Dino.

In summary, we operate two strong businesses, and I see clear opportunity to do more. Returns are below where they should be and capital intensity across CapEx, R&D, SG&A is higher than warranted. Over the past 6 months, our analysis has confirmed these observations and sharpened our view of the opportunity ahead. And this is precisely what our transformation plan is designed to address. I'll come back to that in a moment, but first, I'll ask Dino to walk through the financial results.

Thank you, Matt. I appreciate the kind words. Good morning, everyone. Third quarter consolidated revenue of $1.25 billion increased 2% year-over-year. Adjusted segment operating income was $195.8 million, up 3% from $190 million in the third quarter last year, and adjusted EPS was $0.34 compared to $0.29 a year ago. During the quarter, we incurred $7.3 million of transformation-related expenses, primarily recorded in SG&A. These costs are included in adjusted segment operating income and adjusted EPS and reduced adjusted EPS by approximately $0.02. Net finance expense this quarter amounted to $54.1 million, down from $56.6 million in the third quarter last year, mainly due to lower finance expense on long-term debt due to a decreased level of borrowings during the period. This was partially offset by higher expenses on lease liabilities.

Income tax expense this quarter was $29.6 million for an effective tax rate of 21% on a statutory and adjusted basis compared to an adjusted effective tax rate of 29% in the third quarter of fiscal 2025. We continue to expect a run rate effective income tax rate of approximately 25%, reflecting the expected geographical mix of earnings and ongoing tax legislation reforms from various jurisdictions. Net cash flow from operating activities was $407.6 million this quarter compared to $424.6 million in the third quarter of fiscal 2025. Free cash flow was a solid $411.3 million, above the $409.8 million recorded in the third quarter last year. This underscores continue discipline and operational strength.

Capital expenditures totaled $50.6 million this quarter with approximately 75% invested in growth. Reflecting tighter capital discipline, we now expect full year capital expenditures to be more than 10% lower than last year, driven by a further reduction in Civil CapEx, which is now expected to be approximately 30% lower year-over-year. Our net debt position at the end of the quarter was approximately $2.8 billion for a net debt to adjusted EBITDA of 2.3x at the end of the quarter, surpassing our goal to reach 2.5x net debt to adjusted EBITDA by the end of the fiscal year.

Now turning to our segmented performance. In Civil, third quarter revenue decreased 5% year-over-year to $717.2 million. Adjusted operating income decreased 6% to $141.8 million, resulting in a margin of 19.8%. These decreases were driven by lower simulator sales and lower utilization in our trading centers and were partially offset by the contribution from sales of used simulators across the network. Civil adjusted segment operating income this quarter includes $4.9 million of transformation-related expenses, which impacted the adjusted segment operating income margin by approximately 70 basis points.

Training center utilization was 71%, down from 76% in the prior year period, and we delivered 15 full-flight simulators compared to 20 last year. This primarily reflects lower demand for commercial and business training and simulator deliveries versus the same period last year.

In Defense, revenue increased 14% year-over-year to $534.9 million, while adjusted segment operating income increased 38% to $54 million, delivering a 10.1% margin, which marks the first time in over 6 years, the Defense margin has been at or above 10%. This performance was driven by higher activity and profitability on new higher-margin program awards and the ramp-up of recently awarded contracts in the U.S. and Canada, reflecting a more favorable mix of products. Defense adjusted segment operating income this quarter includes $2.4 million of transformation-related expenses, which impacted the adjusted segment operating income margin by approximately 40 basis points.

With that, I will turn the call over to Matt.

Thanks, Dino. Before turning to the outlook, I want to highlight a few recent developments that underscore momentum across both Civil and Defense segments. In Defense, we continue to see strong demand across allied markets, supported by this multigenerational increase in Defense spending. Our Defense & Security segment has unique capabilities and global reach. We operate through strong locally rooted businesses in the United States, in Canada and across key international markets. And this allows us to serve sovereign customers with credibility, proximity and trust. That combination of global scale and local presence positions us to capture international opportunities.

A good example is our partnership agreement with Saab announced in November on the GlobalEye Airborne Early Warning platform. Saab is a well-established global aerospace and defense company serving government customers across many markets. Our agreement on GlobalEye underscores how leading OEMs and airframers view CAE as best-in-class at what we do as a critical enabler to the effectiveness and competitiveness of their platforms. For Saab, CAE's training and simulation capabilities enhance the operational value of the platform and strengthen its appeal to sovereign customers and operators. Programs like GlobalEye illustrate how CAE partners with leading OEMs to deliver long-tenured integrated training solutions. On GlobalEye, CAE is uniquely positioned to provide integrated training that combines the cockpit, front-end flight training with back-end mission systems training. We do so by leveraging CAE's ability to integrate simulation, mission rehearsal and system engineering across the full operational life cycle and across the entire platform.

Combined with our global footprint, this enables CAE to deliver scalable training franchises deployable across allied markets. Looking ahead, CAE expects to benefit from Canada's defense spending as international platforms are selected in partnership with leading OEMs across air, maritime and multi-domain environments. Beyond Saab, CAE works with a broad set of partners, including Lockheed Martin, General Atomics, Leonardo, Airbus and many others. These partnerships are expected to support CAE's role as a long-term provider of mission-critical training, simulation and mission rehearsal capabilities to sovereign customers. We intend to continue broadening our relationship with key strategic partners over the next few years.

Also during the quarter, we announced our selection to deliver Australia's Future Air Mission Training System, a highly significant and competitively awarded program for CAE. This award is another example of CAE's differentiation in large complex integrated flight training programs, where we bring together simulation, training and mission rehearsal into a single integrated training ecosystem. With an initial 10-year period of performance and a value of more than $270 million, this contract positions CAE shoulder to shoulder with the Australian Defense Force. It represents a meaningful step forward in advancing next-generation air mission training capabilities for Australia.

More broadly, this award underscores an important characteristic of integrated flight training programs. They are not transactional in nature. They provide long-term visibility, deep customer relationships and establish scalable platforms that expand as customer needs and operational concepts evolve. These programs are supported by dedicated CAE teams, many of whom will spend the majority of their careers working on the same tenured program working side-by-side with uniform personnel. The Australian Future Air Mission Training Program and as another example, the Canadian Future Air Crew Training Program, or FACT, are just two of many opportunities and examples where CAE can provide the front-end and the back-end training solution. These are infrastructure-like businesses that leverage all of our capabilities to benefit the war fighter.

Now turning to Civil. In Civil, we had a highly successful Singapore Airshow, where we signed 8 agreements for more than $160 million, and that reflects CAE's position as a long-term training partner across Civil Aviation. Taken together, these announcements underscore the durability of our customer relationships, the relevance of our global training network and our ability to support operators across regions, aircraft types and business models.

While we continue to lead the industry in today's training requirements, we are also looking to the future. Over the past quarter, we announced that our training solutions have been selected by two of the pioneering companies in advanced air mobility or eVTOL emerging space. We are proud to be selected by Joby Aviation and Embraer Eve Air Mobility. We are partnering with Joby and Eve to enable an entry into service underpinned by CAE's track record of innovation, integration and certification. CAE has a long history of industry firsts, and this emerging aviation segment is just another proof point. Joby and Eve have put their confidence in CAE to help establish the training standards for this new category of aircraft. It's my observation that while these companies are focused on developing cutting-edge and disruptive aircraft technologies, they want to leverage our experience and our footprint in end-to-end training.

CAE has fielded more than 220 aircraft platforms, as I mentioned before, and operates in every corner of the globe, more than any other provider. And once again, our Prodigy image generator is a key differentiator. It allows us to deliver high fidelity visualization required for complex low-altitude operations in urban environments, where situational awareness and accurate visual clues are critical. Taken together, these developments reflect our focus on maintaining our customer-centric relationship with existing operators while also providing -- developing new partnerships to ensure CAE continues to lead in the evolving markets. We'll continue to do so where we can differentiate through our intellectual property, our global infrastructure and our standards. And as we do this, we will maintain focus on the heightened financial expectations that we have set for the entire organization.

Now looking ahead to the balance of the year. CAE's business portfolio is becoming more balanced. And for the year on a consolidated basis, near-term softness in the Civil segment and strength in the Defense segment largely offset each other, leaving us in the range of where we expected to be overall. We still expect the fourth quarter to be our strongest of the year in Civil. However, our outlook for the year has softened with mid-single-digit percentage decline in annual adjusted segment operating income compared to last year.

Overall, we expect an annual Civil adjusted segment operating income margin in the 20% range. This change is driven by three factors: softer-than-expected market conditions, U.S. dollar translation impacts and the rationalization of our commercial simulator network. The network actions are being accelerated to align capacity with current and expected demand and are intended to improve utilization, returns and resilience over time. In parallel, we are reinforcing a more disciplined operating and commercial culture, supported by strengthened processes and a more structured go-to-market approach, including the use of a balanced scorecard for capital allocation and commercial decisions.

We are prioritizing opportunities that meet our return thresholds and capital objectives while maintaining our leading market position. And as a result, some previously forecasted full-flight simulator orders and deliveries have shifted to the right. While our near-term outlook reflects the factors we've discussed, the long-term fundamentals in the aviation market remains strong. Boeing and Airbus each have backlogs that extend roughly a decade at current production rates. And when combined with other major OEMs, the global commercial aircraft backlog totals approximately 17,000 aircraft, providing multiyear visibility for the industry. Business jet OEMs similarly report healthy backlogs representing several years of deliveries and activity in the fractional ownership market continues to strengthen. These fundamentals reinforce our confidence and our bullish view on the secular outlook for aviation.

In Defense, our performance year-to-date has been stronger than we expected. We now expect the Defense adjusted segment operating income to grow by more than 20% year-over-year compared to the low double-digit percentage growth we previously guided. We expect the annual adjusted segment operating income margin for Defense to be approximately 8.5%. Defense budgets allocate substantial and growing resources to training, simulation and mission rehearsal, areas where CAE has long-standing capabilities and competitive positioning. While not all the spend is directly addressable, it highlights the size and strategic relevance of the opportunity in front of CAE.

Given the geopolitical environment and this multigenerational commitment to increase spending across NATO and allied countries, Defense spending will grow at a much faster rate in the future than we've seen historically. And Canada's commitment to spend $82 billion in Defense over the next 5 years with a long-term ambition to reach roughly 5% of GDP by 2035 are very important tailwinds for CAE. These commitments will last for decades. For CAE, this is an opportunity. With our capabilities aligned to training, simulation and mission rehearsal, where a meaningful portion of Defense spending flows and a sovereign incredible footprint across many allied markets, we're uniquely positioned. With our strong Montreal-based engineering and manufacturing facility, we're uniquely positioned. With our worldwide footprint, we're uniquely positioned. And with our industry-leading capabilities and technology, we're uniquely positioned.

Now let me pivot and talk about the transformation plan. Before I get started, this is not a sprint. It's not a loose run. It's more of a marathon. It's going to take time. But we've been training and we're getting ready, and we're going to start moving quickly forward. This quarter reflects progress in the planning and evaluation phase of the transformation plan. As I mentioned earlier, we're already seeing benefits in our cash flow and leverage ratio. These benefits are a direct result of the team's focus on a sharpened portfolio, improved capital discipline and our performance-driven operating model.

In particular, we have launched a process to explore strategic alternatives for noncore assets. We've commenced rationalizing our Civil training network to rightsize it for market demand, and we are looking at every aspect of our operating model, starting with a shared service outsourcing initiative launched last week. The work is advancing well, and we expect to have the evaluation phase substantially complete by the time we report year-end results in May. At that point, we will provide an outlook for next year together with some specific longer-range targets and a clear articulation of how the transformation plan all comes together to benefit the company.

We launched the transformation plan in November and established a transformation program office with dedicated executive leadership. The team is currently managing a range of initiatives, each evaluated based on a balanced scorecard and each aligned to one of our three priorities: portfolio focus, capital discipline and performance excellence. Our governance cadence is rigorous with detailed line-by-line status reviews with the entire executive management committee meeting -- committee every 2 weeks, and this will ensure execution and results. The plan will leverage our market position, our leading Civil network and our unique technology foundation to transform CAE into a higher-performing business with improved margins, stronger free cash flow and better returns on investment.

Now let's go into a little bit more detail. First, our portfolio refocusing. We have completed our business and asset review, and have identified several noncore assets representing approximately 8% of revenue. For each of these assets, we will explore strategic alternatives. We have already identified several potential transactions, engaged advisers and will quickly move through our execution phase. Announcements will be made when the strategic direction becomes clear with a suitable strategy, a suitable counterparty and open market and of course, with economics and timing that enables value creation for CAE.

Second, it's our focus on capital discipline, and that starts with taking a rigorous bottoms-up view of the balance sheet to ensure that every dollar of capital employed is delivering maximum value. This includes aggressively removing non-value-added costs from the business. We are also applying a significantly higher bar for returns and payback periods on all newer projects -- new capital projects. These process changes are already yielding benefits as we are reducing our CapEx and R&D forecast, as Dino indicated. However, the most significant near-term opportunity lies in the Civil training network.

Today, we operate 373 full-flight simulators globally, of which 250 are for commercial airline training. The performance across this network varies meaningfully. Our data shows a clear distribution. We know where every simulator is, and we know how it performs. Clearly, there's an upper tier of strong performers, but a lower tier of underperforming assets and a sizable middle market that could be further optimized. As we assess the underperforming tier, we see significant opportunity to rationalize our commercial airline training capacity. As mentioned, we will move approximately 10% of deployed commercial airline simulators. As we do this, we will look at our footprint for other opportunities to relocate devices and improve utilization and returns.

As I've mentioned, these actions take time. These actions require us to work through customer contracts and commitments to find suitable alternatives for their training. We also need to work through facility leases and local regulation. So overall execution is expected to take between 12 and 24 months. As we move through this process, some near-term revenue impact is expected. Mitigation plans are in place and customer focus is at the forefront. In parallel, we see opportunities to unlock additional value by selectively integrating elements of our business aviation and commercial aviation training networks, where it will be optimal to combine capabilities and footprint, we will do so.

The objective is a training network that is rightsized for the market and its expected growth, supported by a leaner cost structure and a stronger go-to-market execution. Given that the training network represents a material portion of our capital base, these actions are central to driving higher margins, stronger cash flow and improved returns on capital. We are also conducting a comprehensive view of our R&D portfolio to ensure alignment with strategy and return thresholds. Projects that do not meet the bar will be ended or curtailed, and we expect R&D investment to moderate over time. We are demanding greater rigor and discipline around capital approvals. We revised our corporate policies and procedures, in particular, as it relates to CapEx. These changes tighten the standards under which capital investments are approved. As a result, any material capital decisions elevated in my office raising the bar in returns, cash flow and capital efficiency.

Finally, we have raised the bar in our bidding and commercial decision-making, applying more rigorous standards that prioritize returns, free cash flow, pricing discipline and are aligned with our current network strategy. We're being more selective by design, reflecting a clear focus on value creation rather than just volume. Taken together, these changes we are putting in place are more about metrics. They represent a shift in culture. In addition to tightening capital accruals and bid discipline, we are reinforcing execution and accountability day-to-day. We are increasing ownership for nonworking capital with a clear expectation and tighter discipline around inventory management, billing accuracy and timely collection of receivables. And that leads to performance.

We're focusing on embedding the same disciplined balanced scorecard approach we apply to capital allocation and commercial decisions to everything we do. We're simplifying the organization, tightening accountability and increasing the operating cadence. We recently signed a global partnership with a world-leading enterprise transformation provider to implement a shared service operations model for selected back-office functions. In the initial phase, we are transitioning approximately 80 finance and HR processes into a modernized global shared service operation. This provides CAE immediate access to best-of-breed processes and Gen AI-enabled tools. And we expect to deliver meaningful reductions in corporate administrative costs while improving the scalability, execution and quality over time.

Free cash flow has strengthened during the quarter, driven by greater discipline around noncash working capital. In Civil training, account receivable improved steadily, primarily due to reductions in aide receivables and tighter collection practices. Even at this early stage of the transformation, we have reinforced clearer ownership it's due to weekly tracking and implemented stronger enforcement mechanisms. And as a result, utilization of our revolving credit facility declined, contributing to lower interest expense for the quarter. More to come. And looking forward, we're developing a Factory of the Future road map, designed to build the simulator of the future and strengthen our competitive edge. This work is focused on modernizing how we design, how we produce and how we deliver simulators by improving our production processes, logistics, supply chain, quality and delivery across the products organization.

In parallel, we're laying out the groundwork for a modular open architecture product strategy that will allow us to build more scalable, upgradable simulators and insert new technologies more efficiently over time. While these initiatives are not yet in execution, they're deliberate elements of our longer-term road map and are intended to help CAE outpace competitors through lower complexity, shorter lead times and a more modern, efficient production model. We are also strengthening accountability by more directly aligning executive compensation with the objectives of the transformation. This work began early in my tenure with discussions with the Board starting roughly 6 months ago, recognizing that calibrating these changes thoughtfully takes time.

You should expect a clear and more direct linkage between compensation and outcomes, metrics such as return on capital, free cash flow generation, margins and earnings per share are expected to feature prominently across both short-term and long-term incentive programs. And more importantly, it's not just about senior leadership. Over time, we expect these same performance standards and scorecard-driven priorities to cascade more broadly through the organization. So incentives at multiple levels reinforce the behaviors required to improve returns, strengthen cash generation and deliver sustainable value creation. To sum up, we are challenging assumptions, we are executing with discipline, and we're maintaining a clear focus on improving returns.

The actions we are taking are grounded in data and designed to position CAE for stronger performance over time. We benefit from powerful fundamentals across both end markets. As I've mentioned, in Civil Aviation, we are positioned for long-term growth in our market, driven by global air travel demand, fleet expansion and pilot requirements. And in Defense, we're seeing multigenerational growth supported by sustained increases in Defense spending across allied nations in training, simulation and mission reversal, and that will play an important part in international readiness. I look forward to sharing the details of our transformation plan and again, specific longer-term targets and our fiscal 2027 outlook when we report our full year results in May.

Thank you. Back over to you, Andrew.

Thanks, Matt. Operator, we'd now be pleased to take questions from financial analysts.

[Operator Instructions] Your first question comes from Fadi Chamoun with BMO.

Matt, I think you'll probably realize for us on this side of the equation, we're not known for patients. So I'm going to ask you a few questions about kind of the longer-term perspective that you're providing today. So can you kind of help us understand where the goalposts are 2, 3 years down the road? Can the Civil business generate solid mid-teen return, lower ROIC return? What is the range of kind of broadly speaking, ROIC target that you think could be achievable as you undergo all of these kind of changes over the next 24 months? And a couple of quick follow-ups. Can you share what the revenues of the 25 simulators or 10% of capacity that you intend to retire in the commercial full-flight simulator side? And when you look at, I mean, utilization in the low 70s, the orders lagging full flight simulators deliveries, can Civil grow EBIT in the next 12 months? Or is this going to be -- with the disruption that you're doing in the short term, it is going to be a bit of an off year basically as we get to the other side of this transformation. A lot there, but any quick color you can share would be great.

Thanks for all the questions. Let me try and take them one by one. First, from a longer-term perspective, we're still looking at how each one of these initiatives will impact the portfolio, and that takes time, and we want to be cautious so that we don't over or undercommit to you and the other analysts. However, I go back to the longer-term fundamentals of our industry. On the Civil side, and this is what matters, the industry grows at 4% to 5% every year over the long term. There are disruptions. There are geopolitical disruptions, there are supply chain challenges. We've seen it before, and we'll see it again. But if you step back from an annual disruption, that's the long-term trajectory of the Civil market. And we CAE play a unique role. We're the world leader in full-flight sims, production, development, deployment, and we have the largest independent training network in the world. So long term, those fundamentals are strong and will continue.

And on the Defense side, which I think is unique, we see the same outlook. For the first time in my career, we see 4% to 5% of long-term outlook in Defense as well, and we're uniquely positioned to capitalize on that. You asked secondly about how returns will evolve over time. Give us some time to look at it. It's a complex set of equations, and we have to look at each asset. We have to look at each strategy, and we have to make sure that we understand the impact. But I will answer your question about utilization and what the reduction in the Civil training network would do. If -- and let me emphasize this, Fadi, if I could take out all those sims immediately, and I can't. Remember, I said it will take anywhere from 12 to 24 months to do it. And if I retain all the customer volume that's in there, and that is our intention, but that requires a lot of negotiations, then Civil utilization would go up to 75%, 400 basis points. Now I can't take them out overnight, and I need to work on retaining them, but that's the impact on utilization.

So when you look at those assets, the 25 simulators, they're clearly the underutilized, underperforming assets to our network, but they consume resources. They consume capital, they consume real estate and they consume inventory. And so by doing this, we'll strengthen the focus of the network, and then we'll attempt to better utilize, better sweat the other assets to improve utilization and focus. And remember, it's not just about utilization, it's about the contract. We have a variety of different contractual mechanisms. And so you need to look at the profitability and the revenue that comes out of that, all that's in front of us. So Fadi, thanks for the question.

Your next question comes from Krista Friesen with CIBC.

Maybe just to follow up on the last one there. Have you started to have these conversations with your Civil customers in terms of rationalizing the network? And how have those been going? And do they seem amicable to the consolidation of some of these changes?

Yes, it's a great question. Thank you for asking it. We have started the conversations, and each one requires a tailored approach. And I remind you, when we built the network, every full-flight simulator in the training center was built for a reason. And over years, operating strategies, airline strategies, demand for travel changes. And so taking a pause in the network and looking at it is a rational, appropriate thing to do. If we step back from individual conversations, what we're really doing is sizing the network for today's demand. We overbuilt the network. It's too large for the demand that we see today. And so we're going to reduce the size of the network to accommodate today's demand and the expected growth we see. Now each one of those conversations with airlines requires time and patience. We're a very customer-centric organization and initial conversations are positive, but we have more work to do. Thanks for the question.

And if I can just ask a follow-up. It sounds like 2027 will be a noisy year just as you go through some of these transformations. But how are you thinking about free cash flow for 2027? Is there an opportunity there just as CapEx starts to come down?

Yes. Let me turn that over to Dino.

Thank you, Matt. So definitely, our focus will be continued strong free cash flow generation. I'm really proud of what we delivered in the quarter, and we're maintaining that focus highlighting some of the things that Matt said, focus on inventory management, payable management; focus on collections of ARs. It really will be continued discipline, and we are committed and expecting to generate strong free cash flows in the future and continue to be below the leveraging 2.5x net debt to adjusted EBITDA on a continued basis.

And thanks, Dino. Let me just add, as we generate strong free cash flow and potentially proceeds from some of the portfolio actions that we're taking, the first initiative will be to invest and fund the transformation. A strong balance sheet and strong cash flow will allow us to put those resources to work. Each one has a business case, each one has to meet our expected return thresholds, but that's priority one. Obviously, second priority is to make sure we continue to delever, and that will take some time. And after that, when we have the luxury to do so, we'll revisit what to do with the free cash flow.

Your next question comes from Konark Gupta with Scotiabank.

Matt, I wanted to dig into the nature of the assets that you have identified, the noncore assets, 8% of revenue. Is it safe to presume that most of these assets, maybe all are in the Civil segment or they're in Defense as well? And I mean, when these assets come out of the system, have you identified how much of the margin drag these were causing? And what can we expect post divestitures?

Yes. Thank you for the question. So there are assets, businesses in both the Civil and Defense side, to be clear. And these are good businesses. These are really good businesses. But as we look at where we do well and where we want to focus our resources, these businesses will do better with another owner. And so that's what we're focused on. And each individual asset business requires us, again, as I mentioned in my comments, to have the right counterparty, the right strategy and the right economics for CAE. And so we'll give you more details on each one as we get more confidence in the future state. Thanks for the question.

I appreciate that. And if I can follow up. I think you mentioned about real estate a few times in the past. With the simulator rationalization and these noncore asset sales, are you taking out some of your real estate portfolio as well? I mean, whether it's leased or owned?

Yes, I appreciate the question. We're looking at it, and the intention is to do that. We have a very large real estate portfolio. But as I mentioned also, we have to look at leases, we have to look at the base space where the simulators go and see what the opportunities are. And that will be more of the details that will come out in subsequent quarters. But absolutely, we want to look at the real estate portfolio as well as the asset base.

Your next question comes from Cameron Doerksen with National Bank.

Maybe a question on, I guess, the market outlook. Obviously, Civil continues to be a little bit of a challenge for yourselves. Just wondering if there's, I guess, any light at the end of the tunnel here? I mean, are there, I guess, any indications that you see on the horizon that maybe some of the Civil Aviation training demand might pick up? Or is it kind of the same as what we've seen in the last couple of quarters?

Yes, I appreciate the question, and I've spent a significant amount of time with the team looking at the Civil market. I think we over-indexed ourselves looking at specific metrics. I think if you step back, you have to look at the entire market, aircraft deliveries, grounding, supply chain issues, air traffic control disruptions. It's a complex weather metrics and we all look at it. From my perspective, this is the market. We're sitting at it. We're not trying to reach some destination, this is the market. And as I mentioned earlier, we overbuilt the network.

So we're going to resize the network for the market demand we have today, and that positions us well for the future. And as I mentioned just a couple of moments ago, as we resize the network and stabilize ourselves for the growth, the market will grow long term at 4% to 5%. It has for the past 20 years, it will for the next 20 years. But I'm not in a position to predict exactly what next quarter will look like. The demand that we're seeing today is softer than we expected, but this is the market, and we expect to size everything around it. So I appreciate the question.

Okay. That's great. And maybe just a quick follow-up on the, I guess, the divestitures. I mean, have you actually had early conversations with any potential buyers of some of these businesses? Just trying to get a handle on what the timing of a sale of some of these businesses might be. I mean, is this something that could happen in the next 12 months?

Yes. I appreciate the question. I've run portfolio transformations before, and we have a very experienced team. You have to move slowly through this process and you have to move cautiously to the process to make sure you get everything ready. So it's 18 to 24 months is typically what these transformations take, and we're not going to rush it. And so it's too early to talk about buyer interest or discussions or any of those details. But again, as each individual business gets more mature in its own process, we'll start to make those announcements when we're ready.

Your next question comes from Kristine Liwag with Morgan Stanley.

Just wanted to follow up on Defense. Margins were pretty good in the quarter. And so I was wondering, is this a function of the low-performing contracts finally rolling off? Are there any left? Or what did you have a particular gain on sale or -- sorry, incremental benefit from a more profitable contract. So a little bit more details on what's happening in the Defense margin would be great.?

Yes. Look, I appreciate the question. It's a combination of things. It is good focus on existing programs. And going forward, we're going to talk about growth. We're going to talk about margin expansion. There's still some of the legacy programs left to wind down, but I'm confident that the team continues to maintain its focus on execution. In addition, it's been really good focus on cost controls inside the Defense business, and that is also helping performance. The Defense business has an infrastructure and cost base just like the Civil business and focusing on those cost controls is paying dividends.

In addition to that, as we look forward, we're going to try and sign contracts that will have margin accretion opportunities, and we've talked about that before. These things are all combining. But in this particular quarter, we had a contract mix that provided some tailwind that we don't expect to reoccur. And that's why we provided guidance for the year that's going to be 8.5% margin. That's solid improvement, and that's not a stopping point. That is a pause in the journey of driving this business to where I expect to achieve, which is like any other strong Defense business between 10% and 11%. We'll provide that guidance at the end of the year on how long it will take to get there, but don't view this quarter as where we are yet, just view it as a combination of those three factors. So I appreciate the question.

Great. And if I could follow up, Matt, your background is from U.S. Defense companies. When you look at CAE's Defense portfolio and you assess its strength, it is the largest training Defense company in the world. How do you assess its strength? What do you think its role is? And when you start looking at potential $1.5 trillion U.S. budget, the Europeans are spending a lot on Defense too. Where do you think CAE sits in that broader picture?

Yes, it's a great question. So let me answer it from a few dimensions. First, when Defense money is spent, anywhere from $0.07 to $0.10 out of every dollar is related to simulation training and mission rehearsal. That money comes out of both procurement dollars and operational maintenance dollars. So that puts us in a fantastic position. Not all of that is addressable to us because often training is done organically, meaning by the Defense department, but a lot of it will be available to us. Secondly, we have a very large international footprint. That's unique. There are many Defense companies that wish they had the international presence we do in terms of facilities and teams on the ground working side by side, and they have strong relationships.

Just a couple of weeks ago, I was in Germany at our Stolberg facility, celebrating its 65th anniversary working side-by-side with the German Air Force. That is a fantastic facility, and that creates fantastic relationships and puts us in a fantastic position. So I think we're well positioned geographically to capture the opportunities you've talked about. And as I mentioned earlier, we're unique in the industry that we have 220 different platforms that we've developed over time. That's a combination of Civil and Defense. So when someone comes to us and wants to develop a new simulation system, a new mission training center, we're uniquely positioned to do that.

We know more about hardware and software integration, how to combine front-end and back-end training, and how to have the best final output that uniquely positions us as well. We do one thing. We do training, simulation and mission rehearsal. And then finally, our ability to do programs like FAcT and the Australian program I mentioned, it's an end-to-end training solution. So we bring our training centers, our training simulation capability. We train integrated flight training, flight ops. We train, we bring courseware. And taking the requirements to train a war fighter, to train a pilot, it's complex. We know how to decompose those, we know how to execute them, and we do it better than anyone else. Thanks for the question.

Your next question comes from James McGarragle with RBC.

I just wanted to follow up on one of the comments in the prepared remarks. Obviously, you're looking for higher return, higher margin type of business. So on one hand, being more selective is going to help you get higher returns, higher margins. But how do you also think about being more selective while driving absolute levels of free cash flow growth and kind of capitalizing on all the secular opportunity available to you?

Yes. Could you, sorry, repeat the question? I didn't quite follow. I apologize.

Yes. No worries. So just in the prepared remarks, you mentioned you're looking at higher return and higher margin type of business. So obviously, being more selective is going to help you get higher returns and higher margins. But just how do you look at being more selective while also driving higher absolute levels of free cash flow growth and kind of capitalizing on the secular opportunity available to you?

Okay. Yes. Thanks for the question. I think I follow where you're going. First, being more selective in our capital decisions obviously means we'll spend less of our free cash flow on future capital deployments. That's the first step. And we will make decisions based on a more balanced scorecard. We will try to ensure that every asset meets a higher set of return thresholds, and that's going to reduce CapEx and that's going to improve cash flow. Secondly, we're doing the same thing in our research and development portfolio. I mentioned we're doing a bottoms-up review of every project. We have a significant number of research and development projects, too many. And so we're going to look at the ones that we're executing. And if they're core, strategic, we'll maintain it, but focus on disciplined execution. If they're not, we'll curtail them or wind them down. And then going forward, we'll be more selective about where we spend money on research and development. That will improve our free cash flow.

And then finally, in a big part, it's about solid sustained performance execution, ensuring that we write the right contracts, that we collect quickly and that we focus the entire team on free cash flow. That includes inventory management as well. That's new focus for the company. It's not an overnight change. But as I indicated, we're already seeing the benefits of focus on account receivable collections, and there's more to come. So everything across the transformation plan will improve our free cash flow. Thanks for the question.

And then just a quick follow-up. How are you thinking about your ability to pass on higher pricing? Is there any flexibility to drive higher pricing with your customers and long-term partnerships? Just trying to understand how quickly you can use price as a driver of better returns across your customer set?

Yes. I appreciate the question. I've been asked this question a lot. We don't operate with a catalog. We don't operate out of a storefront. We negotiate agreements with airlines, and they're sophisticated, very important customers. What matters to me and the team is that we get the right value for what we provide, whether it's a full-flight simulator or a training center and then they get the right value out of what they buy. We have long-term agreements and lots of joint ventures. And so it's not a catalog, it's not a storefront, but focusing on getting value for what we provide and making sure we make the right decisions going forward, that's front and center.

Your next question comes from Benoit Poirier with Desjardins Capital Markets.

Matt, could you maybe talk about the opportunity to improve pricing through a dynamic approach, but also about the opportunity to leverage synergies between Civil and Defense. I'm just curious to know where you are in this journey.

Okay. I appreciate the question. As I mentioned earlier, pricing with sophisticated airline customers is a complex endeavor. It's not a catalog. It's not a shared app of some nature. It's how we create relationships that go many, many years. And so we'll look at providing, as I said previously, the right value to the customers and ensuring that we get the right value back for what we provide. That's what we're going to focus on.

When you think about utilization, our focus is to improve it. We want to sweat those assets. We want to harvest them. We want to improve utilization, and that will improve everything about the business. It will improve our return on invested capital. It's going to improve the utilization of the assets. It's going to improve free cash flow. And there are a variety of tools that we'll explore in doing it. So sorry, can you repeat the second part of -- Oh, the question was Defense and Civil, yes. So on Defense and Civil, we already have many opportunities to work closely together. As I mentioned in our remarks, the core of our engineering capability and our manufacturing capability is here in Montreal. And that's important because we leverage this large infrastructure, which has higher Civil volume than Defense volume to reduce the cost and improve the efficiency of delivering Defense products.

And on the other side, we leverage Defense product development, which is often several years ahead of where the Civil market needs to improve the technology that sits in our portfolio. The hardware, software integration, the system engineering, in some cases, the image generation required for military products can be several years ahead of where we need it for Civil products, and we've done that in the past. What we want to do is do more of that. We want to leverage the demanding nature of Defense products, simulation, training, mission rehearsal, live virtual constructive environments. We want to leverage all that development and use it to benefit the Civil side of our business, and we want to leverage our Civil infrastructure, supply chain, factory to improve the cost effectiveness of the Defense solution. I do firmly believe in having a balanced business, and I think they work well together. A lot of that opportunity is in front of us, and we're focused on unlocking it, but it's a great question, and thank you for it.

Okay. And maybe just a quick follow-up on the balance sheet. You ended the quarter with a strong leverage ratio of 2.3x ahead of the plan. You mentioned the desire to reinvest, put those resources to work you need to deliver. But with the upcoming strong free cash flow, it looks like you'll be in a position to discuss about capital deployment opportunity, not far away. So any thoughts about where do you see an optimal leverage ratio for this type of business and your -- maybe the preferred avenues when it comes to capital deployment to shareholders?

Yes. Let me have Dino first answer, and then I may add a couple of comments. Dino, please?

Thank you, Matt. Thank you, Benoit, for the question. So definitely, the expectation is that we do maintain the leverage ratio to be below 2.5x. And we do want to continue to reduce debt and of course, reduce the interest costs. So that will be very much a focus on our side. I think Matt said it earlier, right, we want to deliver -- continue to deliver strong free cash flow. The cash generation will help us position ourselves for the future, right? We want to continue and operationalize the transformation costs -- transformation plan and the costs associated with that. So we are looking at that. We're looking at being below 2.5x and maintaining that. That's our expectations, and we'll continue that focus. But really, it goes back to a disciplined approach, both to noncash working capital, CapEx, raising the bar and making sure that the decisions that we make meet that balanced scorecard approach.

Yes. And I'll just add, I'd ask everyone internally and externally to get -- allow us to get a few quarters under our belt. It wasn't too many quarters ago, and we had a lot of pressure in this company because of our balance sheet. So we want to ensure we have sustained repeatable processes. We want to fund the transformation plan. We want to focus on the right investments when they matter and go forward. So it's great that we all see we're in this inflection point, but let's ensure that we continue to execute and build sustainable cash flow generation for the future.

Your next question comes from Sheila Kahyaoglu with Jefferies.

Congrats on all the things you have going on. It looks like you're going to make a lot of progress. Maybe just on the pilot hiring. In the U.S., at least, it looks like it's rebounding a little bit towards the end of 2025 after a pretty dismal summer. So -- but it still seems like conditions are pretty soft within the Civil business. How much of that softness is coming from commercial versus business aviation customers?

Thanks, Sheila. Appreciate the compliment, and I appreciate the question. I think, as I mentioned earlier, we over-indexed on pilot hiring. We need to step back and look at the overall industry. There are many ratios and metrics that we can look at aircraft deliveries, aircraft grounding, pilot hiring, crew ratios. There are many factors that disrupt that, bankruptcies and incidents around the world. It's a global industry. As I look today at the softness, it's more on the commercial side than on the business side, but the markets are tied together. The demand for pilots on the commercial side affects directly the demand for pilots on the business side and the demand for new pilot training. It's a combined ecosystem as people progress up through the aircraft types.

So as I said earlier, this is the market. This is where we are.

We're going to size our deliveries. We're going to size our network for the market, and we're going to make sure that we're ready to capture the opportunities as the growth occurs. It's almost like we're -- I hate to use a bad analogy, but it's like on The Wizard of Oz and we're on Yellow Brick Road, and we think there's something out there. Now, we're there. This is the market. We want to position the network. We want to position our factory. We want to position our customers so that we can grow together. And that's why I step back from a quarter-over-quarter point and say, if you look at this market, it's going to grow at 4% to 5% a year. We're the market leader in full-flight sims, and we have the largest training network. We're just going to size it for where we are today. Thanks, Sheila.

Got it. And if I could ask a follow-up to Kristine's question on Defense margins. I understand this is the new baseline we should be working off of with the problematic contracts fully rolled off. I guess from here, how do we think about timing of new contracts anniversary-ing and resizing, repricing the portfolio?

Yes. Let me clarify. I didn't say or I didn't mean to say that we've rolled off the old contracts. We're still in execution, and there's time in front of us. What I want to emphasize is that the team is focused on program management, program execution, ensuring that we control costs. As we've been doing for the past couple of years, we'll continue doing it forward. When we look forward, we want to embark and sign contracts that will be value accretive to the business that have high return thresholds, higher margins and higher cash flow.

That takes time. I've been doing this for a long time and Defense dollars take many years to be awarded. And even when they're awarded, it takes many years to flow to contractors. So Q3 is not a new baseline. As I indicated, we plan to end the year at about 8.5% margin, and our focus is on steady continued margin expansion in the Defense business, which is going to be based on executing these legacy contracts, focusing on the new contracts and more importantly, controlling costs because that's within our control and our timing. And so that will be more of the guidance we provide at the end of the year.

[Operator Instructions] Your next question comes from Anthony Valentini with Goldman Sachs.

Matt, just to stick on the Defense margin conversation for a second. You know better than anybody else that the international margins for the Defense primes are typically -- significantly higher than domestic work. And you pointed to the fact that you guys have higher mix to international, which is exciting, obviously, on the growth side, given everything that's happening. But I guess I'm curious if there's something structural that will limit you guys in having higher mix to this higher international margin, and therefore, you guys can achieve margins higher than the Defense primes. Or if it's the right way to think about it that, that mix to international means that the margin potential is actually better than what the Defense primes achieved given they're only 80% or 90% domestic.

Yes, I appreciate the question. When you're looking at Defense markets, yes, generally, international margins can be higher, but there's other factors to consider. You have to consider the award channel. Is it a foreign military sale award channel? Or is it a direct commercial sales channel? You have to consider the product. When we sell our commercial products to the Defense world, and we do, we sell many commercial full-flight sims into the Defense world because they're used by Defense players, they come with commercial margins. But where we sell bespoke Defense products, that's different. We also have development work versus production work.

So I don't think you can generalize and say Defense margins are significantly higher to use your term, they're not. What we want to do is develop the right mix and the right contract portfolio, and that's where we're going to focus going forward. It comes back to as we continue to improve our overall Defense margins, we're going to provide guidance on how we see it increasing. I don't think it will be an overnight change in Defense margins. It's going to be methodical, controlled improvement in our performance based on everything I mentioned.

Okay. That's incredibly helpful. Maybe on the -- quickly on the Civil side, I think, obviously, you have no control over what's happened historically. But a few years back, there was an initiative to consolidate some facilities and some simulators. And I know that's been a huge part of your transformation strategy, and you guys are talking more about that today, and it sounds like it's going to become more efficient. But how do investors get confidence around this not being something that is like cyclical, a part of this business that will need to happen every few years and get comfortable that like this is the last time that they're going to have to go through this type of thing. Like is there anything that you guys have learned as you were going through and identifying that you think you can make this kind of be the last time?

I appreciate the question. I can't focus or comment on what happened previously, but I can tell you what we're doing today. What we're doing today is sizing the market for today's demand. That's important. What we're doing today is we're going to be disciplined about putting new sims in place. It's going to reduce our CapEx. It's going to reduce the growth of the network, and we're going to sweat the assets. We're going to utilize them. That requires a completely different operating model, a different cadence and different KPIs and all that is being deployed. And so the final thing I'll say is that's why we increased the threshold for capital approvals to make sure that I see them so we can control the outflow. So there's many elements to how we're going to control and monitor this. And that's the elements that we put in place that we've talked about. So I'm not going to speak to the past. I tell you where we are and where we're going, and we're going to control it. We're going to be disciplined.

This concludes question-and-answer session.

Yes. Thank you, operator. I see we've overrun here a bit. I want to thank all of the participants today for joining us and for their questions. And I'll remind you that later today, a transcript of today's call, including the Q&A session, will be made available 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.

Good day, ladies and gentlemen. Welcome to the CAE Second Quarter Financial Results for Fiscal Year 2026 Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Andrew Arnovitz. Please go ahead, Mr. Arnovitz.

Good morning, everyone, and thank you for joining us today. Remarks, including management's outlook and answers to questions contain forward-looking statements, which represent our expectations as of today, November 12, 2025, and accordingly, are subject to change. Such statements are based on assumptions that may not materialize and are subject to risks and uncertainties. Actual results may differ materially, and listeners are cautioned not to place undue reliance on these forward-looking statements. A description of the risks, factors and assumptions that may affect future results is contained in CAE's annual MD&A, and MD&A for the 3 months ended September 30, 2025, 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, the company's Executive Chairman; Matthew Bromberg, President and Chief Executive Officer; and Constantino Malatesta, our Interim Chief Financial Officer. Nick Leontidis, Chief Operating Officer, is also on hand for the question period. After formal remarks, we'll open the call to questions from financial analysts. Let me now turn the call over to Calin.

Thank you, Andrew, and good morning, everyone. Q2 was a solid quarter, all things considered, and Matt and Constantino will comment on it shortly. More importantly, since Matt's appointment, we have started to build out the transformation plan for the next chapter of CAE's evolution with a focus on: one, sharpening our portfolio; two, disciplined capital management and capital allocation; and three, improved performance through operational excellence and cost transformation. We expect this plan to lead to sustained value creation and long-term shareholder returns.

The first order of business for Matt as he took the reins as CEO was to undertake a comprehensive review of CAE's business and operations, and my focus has been on ensuring continuity providing counsel and engaging with stakeholders as we chart the transformation plan that Matt will set out in a few minutes. Matt and I have also met with many investors and prospective investors and equity analysts both to take their feedback as well as to discuss the huge opportunities in front of us, especially as regards the Defense business, which will remain a key component of CAE going forward.

In fact, I recently participated in a Bloomberg conference panel in New York, focused on Canada's generational defense investment push, a discussion that underscored the market's confidence in the opportunity ahead for CAE.

Canada's creation of the new Defense Investment Agency is an important step toward renewed emphasis on capability, modernization and industrial sovereignty, priorities that align closely with CAE's global position and core strengths. Last week's federal budget reinforces that direction with a total of $81.8 billion in new defense spending projected over the next 5 years and substantial incremental amounts over the next 20 years. As you'll hear from Matt, we're making meaningful progress on the first stages of the transformation plan, which has already resulted in some important organizational changes. Having led several successful programs to unlock shareholder value in the past, I'm confident we're on the right track, challenging the status quo while protecting what is core to CAE.

We selected Matt as our CEO because he has the operational depth and proven record of building and leading high-performance teams that drive value in some of the world's leading aerospace and defense companies, and he has the full support of the Board as we embark on this next phase of CAE's journey.

CAE's culture has centered primarily on growth over the last 2 decades, and it is time now to harvest that growth and extract even greater bottom line profitability. And that is what our transformation plan will seek to do.

With that, I'll turn the call over to Constantino to provide some financial highlights, and then to Matt to share his perspective from his first 90 days, outline the high-level approach to the transformation plan and discuss the organizational changes that we announced today.

Constantino, over to you.

Thank you, Calin, and good morning. Consolidated revenue of $1.24 billion was 9% higher compared to the second quarter last year, while adjusted segment operating income was $155.3 million, up 4% compared to $149 million in the second quarter last year. Our quarterly EPS -- adjusted EPS was $0.23 compared to $0.24 in the second quarter last year. Net finance expense this quarter amounted to $56.9 million, up from $52.9 million in the second quarter last year, mainly because of additional financing costs associated with the acquisition of the rest of SIMCOM in Business Aviation, which took place in Q3 last year, and additional lease expenses related to training center expansions in our global network. The increase was partially offset by lower finance expense on long-term debt on a lower level of borrowings during the period, in line with our ongoing deleveraging undertakings.

Income tax expense this quarter was $22.3 million for an effective tax rate of 23% on a statutory and adjusted basis compared to an adjusted effective tax rate of 18% in the second quarter of fiscal 2025. We continue to expect a run rate effective income tax rate of approximately 25%, reflecting the expected geographic mix of earnings and ongoing tax legislation reforms from various jurisdictions.

Net cash from operating activities increased this quarter to $214 million compared to $162.1 million in the second quarter of fiscal 2025. Similarly, we had strong free cash flow, which increased by 44% to $201 million compared to $140 million in the second quarter last year. The increase was mainly due to higher net income adjusted for noncash items and higher dividends received from equity accounted investees.

With continued expected reversals in noncash working capital investments and our outlook for operations, we expect to generate strong free cash flow for the year with a conversion of adjusted net income of approximately 150%.

Capital expenditures totaled $87.6 million this quarter, with approximately 85% invested in growth. About 40% of growth capital expenditures this quarter were for simulators deployed to the FS TSS program in support of U.S. Army helicopter training in Alabama. We continue to expect total capital expenditures in fiscal 2026 to come in lower than last year, and now even below what we previously guided. More precisely, we are expecting a roughly 10% year-over-year decrease in CapEx, reflecting about a 25% reduction in Civil spending with the remaining investments focused on market-driven growth supported by multiyear customer contracts and simulator deployments across CAE's global training network.

Our net debt position at the end of the quarter was approximately $3.2 billion for a net debt to adjusted EBITDA of 2.66x at the end of the quarter. We continue to expect to reach 2.5x net debt to adjusted EBITDA by the end of the fiscal year.

In Civil, second quarter revenue grew 5% year-over-year to $670 million, while adjusted segment operating income decreased 6% to $108.7 million resulting in a margin of 16.2%. Training center utilization came in at 64%, down from 70% in the prior year. We also delivered 12 full-flight simulators compared to 18 last year. This performance reflects the normal seasonal slowdown in training activity, along with lower commercial training utilization than in the same period last year.

In Defense, revenue grew 14% year-over-year to $566.6 million while adjusted segment operating income increased 41% to $46.6 million, delivering an 8.2% margin, thanks to higher activity on new higher-margin program awards and the ramp-up of recently awarded contracts in the U.S. and Canada.

With that, I will turn the call over to Matt.

Thanks, Dino, and good morning, everyone. Before I get started, I want to acknowledge yesterday, November 11, Veterans Day and Remembrance Day. It's something that's very important to me and the over 10% of our employees that are veterans, and given that almost 45% of what we do is to serve the war fighter, it's an important time to take a moment and reflect.

Since stepping into the CEO role in mid-August, I have spent time with our customers, our partners, our shareholders and our employees across the company. These first few months have confirmed what those of you who follow the company already know. CAE is a strong business with strategic advantages and compelling industry fundamentals that support growth. We have world-class technology and a leading share of the markets in which we participate. CAE has very strong customer relevancy with airlines, OEMs, governments and defense services, and the CAE brand commands respect, not only for our capabilities, but what we stand for: safety, quality and mission readiness across both civil aviation and defense.

Looking forward, the task is now to leverage our team, our technology, our customer relationships and our strategic assets to not only grow the top line, but also improve cash flow and our return on assets. We will build on our strategic advantages to further unlock value in our markets. And that's what our transformation will seek to do. We are a world leader in flight simulation and training. I have discovered firsthand that we have an entrepreneurial culture and a highly passionate employee base, who all recognize the importance of what they do. It shows in our engagement surveys and in our customer satisfaction surveys. The key now is to harness that drive and align it behind a coherent strategy supported by disciplined capital management and tighter operational controls.

That same drive is reflected in the technology that powers our business. We have industry-leading capabilities embedded in our products and in our services. What is unique about CAE is that innovation here is built into how we think, how we design and how we execute. Our ability to simulate complex environments and scenarios is unmatched, and our model-based system engineering capability is world-class. Our expertise in hardware, software integration is a key differentiator, and unique database or knowledge base of aircraft, airports, pilot performance, environmental effects and sensor responses is a strategic asset. That innovative edge runs through everything we do.

For example, the new CAE Prodigy Image Generator is the world's first third-generation Level D certified image generator. Prodigy is redefining realism and efficiency by narrowing the gap between virtual and real worlds with ultra realistic visuals and high-fidelity motion and flight dynamics. And for the first time, we are applying the same image generator technology across both commercial and military training systems. It has been certified for commercial aircraft use and is already operational in multiple Eurofighter and CH-53 C-styling and simulators with dozens more in the pipeline. To me, it's a clear expression of CAE's technology differentiation.

Through capital -- sorry, excuse me, through disciplined capital allocation and a deep engineering culture, we can deliver dual-use technologies with lasting strategic and financial impact.

Another example is the NH90 C line program in Defense, which demonstrates our ability to deliver highly integrated mission level simulation environment at scale. It is a fully immersive multi-role training ecosystem that mirrors the operational complexity of naval helicopter missions and is powered by more than 3,000 CPUs, 50 GPUs and over 100 terabytes of data. The system rivals the computational scale of enterprise-grade defense networks. It is able to link multiple training devices together from full mission simulators to tactical and procedural trainers. This provides the flexibility for our users, the war fighter, to operate independently or together in coordinated scenarios.

What also sets it apart is the depth of its domain modeling, from advanced sonar acoustics to ship deck wind and wave dynamics, capturing the full realism of naval aviation operations.

These are just 2 of many examples of how CAE's technology leadership translates directly into customer value, competitive advantage and long-term growth. The technology advantage spans both Civil and Defense. The majority of what we do in each business is training and simulation, and I believe there is real potential to create greater synergy and shared innovation between them.

So looking forward, the task at hand, the opportunity is to protect and leverage the great technology, people and customer relevancy that has propelled CAE over the past decade, while at the same time, to sharpen how we operate with a focused portfolio, a simplified organizational structure and a higher bar for performance and returns. We are, therefore, embarking on a transformation plan, a transformation plan that will include several key drivers. To start, we have begun to align our organization and leadership for greater clarity of responsibilities and sharper execution. Nick Leontidis will retire at the end of the calendar year and transition to the role of Special Adviser to the CEO. Nick's 37-year contribution to CAE has been extraordinary, building civil into a global leader, stabilizing our defense operations and helping set the foundation for our next phase. And Nick is sitting here with me today and having gone through many transitions, I want to tell you, Nick, thank you personally as a mentor and as a friend over the past 90 days. It has been a pleasure to spend time with you and get to know you, and I look forward to working with you until the end of your retirement.

With his retirement, we are reducing a management layer by limiting the Chief Operating Officer role and moving to a more streamlined business-led production model organized around driving excellence and quality across product and service delivery. To that end, we have consolidated leadership of the Civil business with the appointment of Alexandre Prevost as its President. By doing so, we are combining commercial and business aviation to accelerate the transformation and to optimize utilization and efficiency on a global scale. This move also establishes a single integrated service excellence organization designed to best serve the needs of our civil aviation customers.

As many of you know, Alex most recently led our business aviation training division after heading commercial aviation training in Asia Pacific. He has an excellent customer relationship portfolio and brings a strong operational track record and financial acumen, having started his CAE career in structured finance and M&A.

In Defense, we've consolidated from 3 P&Ls into 2. Merrill Stoddard will continue to lead our U.S. defense business, while France Hebert will have the responsibility for Canada and International. In doing so, we will sharpen focus and improve coordination across our global defense organization. Together, these changes create 2 comparable segments with the technology, scale and reach to capitalize on growing defense market opportunities. I want to thank Marc-Olivier Sabourin, who will be leaving CAE in December for his decades of dedication to the company and for his instrumental role in developing our international defense presence. We are deeply grateful for his many contributions and wish him continued success in his future endeavors.

We are also welcoming Juan Araujo. Juan will join CAE in January as our new Senior Vice President, Operations. Juan brings over 25 years of global aerospace and industrial experience, with companies including Raytheon, Pratt & Whitney and Hamilton Sunstrand, and has a proven record of driving operational excellence. Juan will focus on productivity, quality, cost and continuous improvement across our product organization. In a typical year, CAE designs, manufactures and services over 300 training devices for the civil and defense markets, making this a prime opportunity to unlock further efficiencies and value. Juan's mandate is to unite several previously dispersed functional areas into a single end-to-end products team. In doing so, we will strengthen execution and product quality while lowering product costs and driving greater supply chain efficiency for both Civil and Defense segments.

Today's leadership announcements are only the first step in creating a leaner, more focused organization, one that has fewer layers, eliminate redundancies and is aligned to deliver sustainable value creation.

In addition to the leadership changes, the transformation will focus on 3 priorities: our portfolio, our capital discipline and our performance. First, let me comment on our portfolio. We have a strong balanced portfolio across Civil and Defense, 2 businesses powered by long-term secular tailwinds. Our Defense segment provides a durable, predictable growth, largely insulated from the broader economy with sovereign-backed contracts that generate steady cash flow. That cash gives us flexibility to fund the highest return opportunities across the company. And as I discussed a few moments ago, there is real technology and capability overlap between Civil and Defense that strengthen both sides of the portfolio.

In addition, our operations team are focused on unlocking value across both segments. However, we are taking a bottom-up look at every business, every investment in every partnership within our 2 segments to ensure that our capital and management attention are concentrated where CAE has the greatest advantage and the greatest potential return. Our portfolio assessment is in its early stage, but I fully expect decisions and actions to be made over the next few quarters.

Second, our capital discipline. One of my first actions as CEO was to review our capital approval and operating policies. While our previous practices were successful at supporting growth, we need to also reflect return on capital and free cash flow. We have already tightened policies around capital and operational expenditures, introducing sharper filters for returns, strategic fit and execution certainty. All material capital projects, again, all material capital projects and commercial proposals are reviewed by me to ensure that they meet the heightened return thresholds.

We're also standardized how we bid, how we track and how we evaluate projects, shifting from discrete investment reviews to a more holistic, rigorous portfolio approach that looks ahead and links directly to our strategy, to our risk appetite and to our expected returns and cash flows. Through these enhancements, we expect to identify certain businesses and contracts that no longer align with our long-term objectives, a healthy outcome of this review. We also invest significantly in research and development. Here too, we are taking a pragmatic data-driven approach, evaluating initiatives not only against their budgets, but also their original business case, where the assumptions or market dynamics have shifted, we have already identified projects for wind down, and as a result, we expect R&D spending to moderate later in the year. Ultimately, our goal is to be more selective, not less ambitious, just more selective. The opportunities set in our end markets is large and growing, and that allows us to drive profitable growth while raising our standards for return on capital.

In short, we'll be more disciplined, more selective and more demanding in all our commercial bids, in all our capital projects and all our research and development programs. Likewise, any acquisition will be considered only within our core markets.

And finally, our performance. We are already taking actions to simplify our structure, consolidating where it makes sense and aligning the organization around speed, around accountability and around execution. Today's leadership changes are the first steps towards driving that next level of operational performance. We are reviewing every aspect of the company from our real estate footprint, and our asset utilization to cost transformation and go-to-market strategies. We are taking a thorough and pragmatic approach to ensure that every part of CAE operates at its full potential.

One of our most powerful assets is our global aviation training network comprised of over 85 locations and 360 full-flight simulators, built over the past 2 decades. We delivered 1.3 million hours of training annually, far more than anyone else. Our global training network spans more than 6 million square feet, and we occupy roughly another 5 million square feet company-wide, which intuitively feels large relative to the scale of our output. We are looking for opportunities to better optimize that footprint so that we have the right simulators in the right locations and the network is sized appropriately to serve customer needs and optimize returns.

We will also ensure that we are being more selective on future expansions, matching supply with demand. The team is engaged, and we will look to unlock significant value through this effort.

On the product side, we manufacture more full-flight simulators than anyone else by far, and our factory operations will also be an important area of focus. The simulator production environment is a high-mix, low-volume business and our facilities need to reflect that reality through more modern processes and a stronger integration with product management. But performance is not just about scale and structure, it is also about the whole system works together. My philosophy is that great organizations require collaboration between people, processes, tools and purpose. Every improvement we make, whether in governance, decision rights or measurement, we tie it with our focus on capital and performance and measured with respect to impact on growth, profitability, cash flow and return on capital.

With that in mind, we're also putting in place stronger governance over how performance is measured and managed after every investment is launched, ensuring projects deliver what they promise, not just in inception, but through their entire life cycle. Furthermore, to align incentives with this philosophy, we are assessing our executive compensation plans with the intent bidding next fiscal year to make capital efficiency and free cash flow metrics more prominent.

There are multiple work streams and initiatives underway. This transformation will take time. However, the time and investment will unlock greater value from CAE's powerful platform, enabling us to delight our customers, drive higher returns on invested capital and generate stronger free cash flow.

So let me take a moment to walk you through how we see the transformation developing over the next few quarters. We are focused on implementing the organizational changes announced today as well as conducting a portfolio and project review, establishing baselines and setting the metrics that will guide us forward. By the end of the fiscal year, we expect to share a clear blueprint of the broader transformation plan with prioritized initiatives and financial and operational targets as well as our approach to monitoring and reporting on our progress. We are driving the work methodically deliberately, pragmatically and with a results-focused mindset.

So now that we've talked about the transformational plan, let me switch gears and talk briefly about current operations.

In Civil, financial performance in the quarter was in line with our expectations, reflecting, as Dino mentioned, typical seasonality and some short-term softness in commercial training. Adjusted order intake was $593 million, and we added 7 new full-flight simulator orders, bringing the total to 12 for the first half of the fiscal year. And that 12 still maintains our market share, although historically a soft number.

Order activity was lighter than we anticipated at this stage, consistent with the slow recovery in pilot hiring, particularly in the U.S. As a result, the Civil book-to-sales ratio was 0.88x for the quarter, a temporary dip or remaining above 1 at 1.22x on a trailing 12-month basis. We believe pilot hiring activity has passed the trough and is currently improving as indications from airlines in the U.S. are that pilot hiring has commenced again and will ramp in the second half of the year and into 2027.

Notwithstanding the lighter activity, CAE continues to maintain its leading market share and is well positioned to leverage the inevitable market recovery. We ended the quarter with a Civil adjusted backlog of $8.5 billion, up 27% from last year, providing a strong foundation as market conditions continue to normalize. Building on that base of solid fundamentals, we signed a 15-year training agreement with WestJet, announced but not yet reflected in the Q2 adjusted backlog for the establishment of the Alberta Training Center of Excellence for aviation and aerospace in Calgary, which is scheduled to open in 2028. It is a great example of an infrastructure-like investment that strengthens our recurring revenue and cash flow profile and builds long-term strategic partnerships with airlines as they plan future growth.

Also encouraging is that OEM production and deliveries have accelerated, driving renewed pilot demand and simulator sales. As I said, we are seeing indications of recovery and growth across the Civil market. U.S. Airlines, most of whom have recently reported encouraging results, are ramping up pilot hires for the second month in a row. And even in business aviation, customers at last month's MBAA reported a higher pilot turnover as commercial carriers resume recruitment. Global business jet activity is at record levels, up 20% in the U.S. and 12% in Europe compared to 2019, led by fractional fleets that have expanded more than 60% over the same time frame. These dynamics reaffirm the long-term trajectory of CAE. However, given the slower near-term cadence, we now expect Civil performance for the year to be roughly in line with the prior year. Consistent with that, as you heard from Dino, we are further reducing capital expenditures to reflect both the moderate pace of demand recovery and our disciplined approach to cash management and efficiency. We expect the benefits of the underlying market recovery to be more pronounced in fiscal 2027 and beyond. In defense, financial performance was also in line with our expectations, with steady margin improvement and double-digit growth, and we are maintaining our full year outlook. Momentum continues to build as we renew and strengthen the adjusted backlog with higher-value, longer-duration programs Second quarter adjusted order intake totaled $556 million, reflecting the continued success across key franchise platforms. This contributed to a book-to-sales ratio of 0.98x and for the quarter and 1.19x over the last 12 months, and resulted in an adjusted Defense backlog of $11.2 billion. The Defense pipeline also continues to be robust with some $6.1 billion of orders pending customer decisions. In the U.S., we were awarded a contract for 2 new F-16 mission training centers to be deployed to the Air National Guard base at Sioux Falls, South Dakota and the Joint National Guard base at McEntire, South Carolina. The F-16 program is a great example of CAE's enduring role on long-life defense platforms. Over its nearly 5 decades of production, more than 4,600 aircraft have been built with roughly 3,100 still in active service across 29 nations, making it the most widely operated fighter jet in the world. The fleet has logged over 19 million flight hours and flown more than 13 million sorties. And CAE has delivered more than 280 high-fidelity F-16 pilot and mission training devices worldwide, including recent awards, the total will be over 300. We have delivered more than 90% of all high fidelity F-16 simulators in service today, supporting over 15 nations.

This installed base represents a significant opportunity for modernization and upgrades as operators look to bring their training devices up to the latest configuration. Since inception, the F-16 franchise has generated roughly $2.5 billion in cumulative sales for CAE and remains one of our largest defense product lines. And the F-16 is just one of several key platforms on which CAE continues to play a critical role in training and mission readiness across some of the most enduring and widely deployed military platforms in the world. So you can see across both Civil and Defense, what defines our portfolio is the quality and sustainability of our revenue base. From long-term infrastructure like training partnerships that generate highly recurring cash flows to enduring platform franchises that anchor multi-decade defense programs.

So to summarize my take on current operations, both Civil and Defense are performing broadly as expected, and our near-term focus remains on disciplined execution, operational efficiency and free cash flow generation, and we advanced the company-wide -- as we advance the company-wide transformation.

Looking ahead, the outlook across CAE remains strong. We are uniquely positioned at the intersection of two enduring global growth markets, civil aviation and defense. In Defense, momentum continues to build across allied markets, supported by sustained modernization programs, including those underway in Canada, and we are well positioned to capitalize on that growth through our proven capabilities in mission readiness and training systems. And in civil aviation, while near-term cadence remains uneven, the fundamentals are powerful. Structural pilot demand and record OEM backlogs continue to support the compelling long-term growth story. And across CAE, our focus remains on execution, driving higher margins, stronger free cash flow and better returns on invested capital. These priorities are the foundation for sustained value creation and long-term shareholder returns.

As I look forward, the same 3 priorities that are informing our transformation, sharpening our portfolio, strengthening capital discipline and elevating performance will serve as my philosophy as CEO and as CAE's North Star going forward. This defines how we will operate, how we will invest and how we will measure success. This is a deliberate and disciplined journey and the direction is clear. We are aligning CAE structure, resources and incentives around performance, capital efficiency and accountability. I'm excited to lead CAE forward with a world-class team, an unmatched training network and a clear strategic vision. With discipline, focus and the continued support of Calin and our Board, I am confident in our future and energized by the opportunity ahead.

We are powered by leading-edge technology and strong secular growth tailwinds in both Civil and Defense. It gives us tremendous runway to deliver sustained performance and long-term shareholder value. Thank you, and I look forward for your questions.

Thank you for that, Matt. Operator, we'd now like to open the lines to questions from financial analysts.

[Operator Instructions] Your first question comes from Fadi Chamoun with BMO Capital Markets.

Nick, I just want to say, first, congratulations on your retirement, and I appreciate all the insight and help over the years. Just a couple of questions maybe around this capital efficiency focus, obviously. So you've talked a lot about kind of harvesting capital after a period of growth. Can you share a little bit how the threshold approved capital has changed? And I'm curious, when you look at the business and you look at the opportunity to streamline the portfolio that you talked about and to sweat the assets more, what is the order magnitude return on capital this business is able to generate over the medium, longer term? Not looking for kind of guidance here, but you were, at one point in the past, CAE generated double-digit ROIC, mid-teens ROIC in a few years as well. Is this order of magnitude possible still to kind of look at over a period of 3, 4, 5 years, potentially to see that kind of leap forward in the ROIC performance?

Fadi, thank you for the question. It's good to hear your voice. First, let me just give Nick the mic, and then I'll approach your questions.

Yes. Fadi, thanks for the kind words, and it's been a pleasure to work with you all of these years.

Thanks, again, Nick. So Fadi, you had several questions there, and I want to make sure I answer them in the right order. Why don't you slow down and ask the first one, and I'm going take sure I answer it correctly.

Yes. First, I'm curious if you can share how the threshold to approve capital change. You talked about kind of changing the mechanism within CAE and the threshold, how you approve capital? How has that changed? What does the threshold look like now?

So I appreciate the question, Fadi. Yes, we're evaluating all of our prior investments to make sure that the assumptions that went into them are still true. And that is a lens that we'll use to look at the current network and make sure it's located and optimized for today's performance. We're also reflecting today's market conditions. So when we make new investments, we're going to affect the reality of where airlines are and what their growth prospects are. And through those 2 lenses, we're going to make a more disciplined approach going forward. Again, we have a world-leading network, one that we're very proud of, one that's a strategic advantage. And we think there's tremendous opportunity for us to leverage that network going forward given that we have the largest training network in the world.

And the other question was around return on invested capital. This business did double-digit ROIC not very long ago. And through all this work that you're looking at in terms of portfolio streamlining and threshold and more capital discipline, do you see a vision where we can get back to that type of double-digit ROIC in the next few years?

Yes. Fadi, it would be premature for me to answer that question precisely today, but that is the top focus of me and the entire leadership team, looking at how we've invested capital over the past 5 years and how we will invest capital over the next 5 years and so how we can make better decisions for future investment and maximize return on the current investment. So that's exactly what we're going to spend the next few months unpacking. We'll be able to share that with you as we talk about next year's financial outlook.

Next question comes from Krista Friesen with CIBC.

I was just wondering if maybe you can speak to us about any surprises you've encountered so far? I appreciate you've only been in the seat for about 3 months now, but you've made some early changes. I'm just wondering if you've encountered anything unexpected?

Yes. Thank you for the question. I think there have been only positive surprises. The level of energy across the organization, the entrepreneurial focus and the strong customer relevancy is something I've seen in every part of the franchise. And so that has been an incredible reassurance. I knew that coming in, but it's a pleasant surprise. I also think the depth of our technology and how we can better leverage Defense and Civil is an opportunity I hope to unlock and quantify over the next few quarters. So all that's been very reassuring.

Okay. Great. And as you've mentioned in your opening remarks and in the press release, there have been some initial organizational changes. Are there any opportunities you see in the near term in the next quarter or 2 for additional changes you can implement before maybe we get your full blueprint for the company?

Yes, I appreciate the question. So the focus now is on giving the new team time to assess the responsibilities and create the strategic path going forward. And as that team is in place, we'll be able to share the objectives and the measurements we're going to use to chart the progress forward. So give us a few quarters. I have led transformations like this many, many times over my 25 years, and it's about identifying the opportunity, putting a team in place, identifying the management objectives and then letting them run. And that's what we intend to do.

Your next question comes from Konark Gupta with Scotiabank.

And I echo congratulations, Nick, for the remarkable career you had at CAE. My first question is on the CapEx side. I think you guys announced a 10% reduction in CapEx versus last year. How much of that is market condition driven as opposed to your capital allocation decisions you have taken early on? And of that CapEx, how much is that one large Defense contract if you can share?

Konark, thank you for the question. It's good hearing from you. So what I think is important to reiterate effectively is that we are reducing CapEx by 10% compared to last year. About 1/3 of that is maintenance and 2/3 of that is growth and driven really by a 25% reduction in Civil CapEx. So that is a reflection of really a disciplined approach to capital. So it is a reflection of the slowdown, the lull, the temporary lull in the activity. And so we have adjusted and used the agility that we've implemented here to adjust the CapEx on a go-forward basis.

About 40% of the growth CapEx this quarter was for the FSTSS program, specifically on the defense and security side of the business.

Okay. That's helpful, Dino. And on the leverage ratio side of things, I think it's more sort of a broader strategic question long term. But you guys are on very much track on 2.5x leverage ratio by the end of this fiscal year. And this is when the civil market is not running full steam at this point. And you have just started the transformation plan, Matt. So if you're disciplined on capital allocation, my guess is you might have an underlevered balance sheet over time. So how do you bring that to a reasonable level?

Yes. Thanks for the question. So our first and primary focus on the balance sheet is going to continue to delever. And secondly, as we look at investing for some transformation because it does take investment, we'll ensure that it meets our return thresholds going forward. And that will be the objective for the foreseeable future. Any change in the capital allocation strategy will be something we take up with the Board, but that's not in the near-term horizon.

Your next question comes from Benoit Poirier with Desjardins.

Just looking at the capital employed for Civil, Matt, it reached $6 billion at the end of Q2, which was up basically from $5.1 billion a year ago and has basically doubled over 7 years. And if I look at Civil revenue, it was up about only 50% over this time frame. So could you talk about the potential opportunity to maybe optimize capital employed? And when we look at the utilization rate of 64% in the quarter? If we put aside the pandemic, it looks like it's almost a trough level that was reached during the great financial crisis and also during the September 2001. So any optimal level that you would consider for the overall training network?

Yes, it's a great question, and I appreciate you asking it. As we look over the past 5 years, we've made significant investments in acquisitions and building out our network and some of our research and technology. And so what we're doing now is charting the path going forward. I can tell you there's some strategic advantages to the investments of the past. One, we have this fantastic defense portfolio, which is timed perfectly with a worldwide increase in defense spending, a once-in-a-generational opportunity. And on the Civil side, we have the world's largest training, one that's poised for the recovery, which is inevitable. So we're going to leverage both of those. But we will come back at the end of the year and talk about how we'll allocate capital going forward between M&A, between capital allocation in the civil network and our research and development.

In general, I think that the amount we spend on capital and the amount we spend on research and development is high for a company of CAE's size and I see opportunity to reduce it, but that will be something we talk about as we get into next year's guidance.

Okay. And Matt, maybe any thoughts about the potential training opportunity for the sizable Biz Jet order placed by Bond Aviation? And whether any new investment would be required or the current training network can support such a training opportunity?

Yes. I'll turn that over to Nick.

Yes. So Bond is going to be a customer. This is a Bombardier win with a large order. So as they start to ramp up the deliveries, we're going to be training Bond as a customer.

That's great. And maybe last one for me. Matt, you attended the Canadian Aerospace Summit in Ottawa towards the end of October. I suspect you met several industry participants. So any key takeaways from your meeting? And what are the next steps for building Canada's defense industrial strategy?

Yes. Thank you for the question. I enjoyed the conference, and I'm just getting to know all the defense industrial base participants here in Canada. And as Calin commented on the remarks, this is a once-in-a-generational opportunity for Canada to grow its defense industrial base. And my message to the participants in the conference and to the team internally is this is our moment as a Canadian company to participate in the growth of a Canadian-based industrial -- defense industrial base that will not only be important for Canada, but will be important for the world. So that was my message to the conference, that was the topic of my speech, and that's something that I'm very committed to drive from the CAE's standpoint.

Benoit, it's Calin here. So I'm going to add one thought to that as well. One of the potential additional opportunities here is that when Canada purchases equipment aircraft capabilities from other international providers where Canada doesn't have current capabilities. If there's a training footprint that attaches to that, if there's a mission readiness footprint that attaches to that, there are opportunities for CAE and frankly, for other Canadian companies to participate in some of those opportunities globally as -- almost as a requirement of the Canadian government. So the Canadian government is more open to that than they've been in the past, given the focus on promoting from an industrial policy perspective Canadian company. So there's an opportunity inside of Canada for Canadian defense spending, and there's an additional opportunity outside Canada where Canada purchases international capabilities. So that's a secondary interesting opportunity that will play out in the fullness of time.

Your next question comes from Kristine Liwag with Morgan Stanley.

Matt, I wanted to understand a little bit better where you are in the process of the new ROIC threshold. It sounds like it's going to be higher than where it is. But I want to understand better, are you in the process of identifying and firming up where this new level should be? Or have you already identified it and we'll share at a later date? Any more information on this and your process would be helpful.

Sorry, Mike. Thanks for the question. The answer is yes. We've ended at higher thresholds. But our capital base is large and doesn't move quickly, and we need to take time to sort out how we can drive top line performance out of the existing investments and ensure we make the right decisions going forward for future investments. We're not going to miss opportunities to grow our business. We're committed to growing our core markets, but we need to figure out how to leverage this capital base, which is a strategic asset. So all that guidance will come out as we announce financial guidance for 2027 and beyond. So thanks for the question.

Your next question comes from Cameron Doerksen with National Bank.

Just I guess a question on the time line when we should expect to see margin improvement, free cash flow improvement? I mean certainly, we can appreciate that you've got a lot of initiatives here that you've talked about today that are going to take some time. But is it to be expected that we would see some benefit to the bottom line as we get into fiscal 2027 from these initiatives? Or is this something that you think might take longer than that to really realize some of the benefits?

Yes. Thank you for the question. As I said earlier, we're not going to be giving 2027 guidance today. But having led transformations like this in the past, some initiatives will be shorter term and yield immediate results and some will take quarters or years to develop, but that's what we're going to spend the next couple of quarters refining and then articulate that at the end of the year. So I commit to providing you more guidance and more visibility as we present 2027 guidance.

Okay. Fair enough. On the sort of the portfolio, you've talked a little bit about, I guess, some of the contracts you have long-term contracts and perhaps some of them don't fit the return profile anymore. I guess what's the ability to either reprice some of these contracts or get out of them earlier? Or is this something that we would have to see those contracts kind of run off before we'd see the bottom line benefit? Just any thoughts on how that might play out?

Yes, it's a great question, and it is an approach we look pragmatically with all options on the table. Some contracts we can go renegotiate because we see long-term strategic value, others, we have to attrit out. And so there's not a single answer to that, but it's one that I've challenged the team to put everything on the table and we'll look at each one and find the right answer. And that will create that ladder of opportunity that we'll start to articulate at the end of the year.

Your next question comes from Matthew Lee with Canaccord Genuity.

Most of my questions have already been answered. But maybe just on the Civil side, can you expand on what type of concrete signs you're watching for that would help indicate a turn in simulator orders? And when should we expect that to show up first or where rather, utilization or new FFS orders?

Yes. It's a great question. I thank you for asking it. I've been watching the synergy for 25 years and a quarter or 2 of movement is not something that concerns me. The long-term fundamentals are what really matter here. The demand for air traffic will continue to grow. 80% of the world's population hasn't flown. The major airframers have 8 to 10 years of backlog, and there's a year of aircraft on the ground. So as all those things start to recover, and they will, we're the world leader in both flight -- full-flight simulator sales and training. And so we will benefit. From a lead time perspective, when an airline hires, it could be about 6 months before they start training depending on their indoctrination and onboarding process. And when someone orders a full-flight simulator, it's a year to 18-month lead time. So that's one of the reasons why we adjusted the second half of the year. We're seeing softness that we won't see recover in this fiscal year, and we're looking into next year, and we'll provide that guidance here towards the end of the year. So thanks for the question.

Yes, that's helpful. Just a clarification here. It sounds like your growth guidance reduction in Civil was mainly due to lower deliveries for the year. My understanding was that usually deliveries are a bit of a lower-margin business than training. So if so should margins be better year-over-year? And if not, maybe there's some facts I'm not considering?

Matthew, so I'll take that question. The reality is that we see both lower deliveries, yes, anticipated also in the second half, but also the utilization rate. There is a ramp-up effectively as the softness comes back, as the overhang essentially comes back, and we'll see utilization increase. And so it's actually a mix of both, full-flight simulator deliveries annualization in CAT and as well a little bit in the back business as well. As things pick up, we'll see a ramp-up of margins going forward into '27 and beyond.

Your next question comes from Anthony Valentini with Goldman Sachs.

Matt, I just want to put a little bit of a finer point on this. I think that the company historically had talked about pretax returns on capital of 20% to 30% within 2 years for each simulator that was deployed into the network. Given the focus on the operational excellence and removing costs, I'm curious if now that target is higher? Or is that the company just kind of got away from some discipline of achieving those returns and you feel like you can get the company back to those levels?

Thank you for the question. What really matters to me is what we're going to do going forward. And we have this world-class network. It's a field of strawberries that are going to continue to grow, and we want to harvest it. And we will be more diligent about where we put simulators in the future, and that's based on higher return thresholds. And where current simulators, and they were made with the right intention, the right investment, the right business case in the past, but the world has changed. And we'll make decisions on whether we relocate them or whether we retire them, and that's the activity that's underway.

And so as we come out at the end of the year, what matters is not where we've been, but what we do with this fantastic strategic asset and the decisions we make going forward.

Okay. Totally fair. Last one for me is, I would just love to get your view on the evolving defense environment. Obviously, the macro is really strong, but it seems like there's a push to get more autonomous systems and drones into the hands of the war fighter. How does that impact CAE's business? I mean, is there less training that is involved for those types of systems? Or is there still a lot of training that needs to happen?

Yes. I appreciate the question. And the space of drones and collaborative combat air and remote piloted vehicles is a very important growing market opportunity. And we're actively participating. And the short answer is, yes. When you train pilots, whether they're remote or operating systems of aircraft, training is required. And we have a fantastic partnership, for example, with General Atomics, and we do their predator training platform that supports not only the U.S. operator, but the international operators as well. So drones, remotely-piloted vehicles is a big part of the future for the Defense services. It's something we're very well positioned in with our modeling capability and something we'll continue to grow as we look forward. Thanks for the question.

Your next question comes from Conor Walters with Jefferies.

Congrats to Nick on a great career here. I wanted to follow up on DNS. In your prepared remarks, you guys attributed the 14% year-over-year growth to the ramp-up of new margin-accretive contracts. When we look sequentially, margins remained flat and the guide is kind of calling for them to remain in this ballpark. So with that favorable macro backdrop and demand environment, how sustainable do you think that level of growth could be? And how should we be thinking about the underlying mix dynamics for the year here?

Conor, this is Dino. I'll take that question, and thanks for asking it. So I think effectively, what we're seeing now is those higher-margin contracts ramping up and being signed and executed. And we're seeing some of the lower-margin contracts kind of get completed and done. There is also this, I think, opportunity that we're looking at for cost optimization. One of the offsets to the profitability in this quarter is higher SG&A that kind of offsets some with our profitability even as those merchants are coming on. So as Matt, I think, talked about, we're looking at all angles to optimize our structure, look at better ways to be more efficient and will drive that margin higher as we go forward and as we continue to sign the higher-margin contracts and they come on board.

Your next question comes from Jordan Lyonnais with Bank of America.

I just wanted to follow up on Defense. So the product revenue in the quarter was really strong year-over-year. How much of that should we expect will just continue throughout the rest of the year? And then also on the defense business for where you want to take it, push margin growth, how are you looking at post excess comments about reducing cost plus contracts companies taking on more of their own developmental risk. And what is your protection against taking on other fixed price contracts that could go or [indiscernible] again?

Yes. Thanks for the question. Let me answer the last one, and then I'll turn it Dino to answer the first. What's unique about CAE is we have the size and capability to respond to what all the defense departments are looking for. We are commercially organized entity with the defense business, which means we can go after fixed-price contracts and have the ability to execute, or if it's necessary, to a cost-type development contract. I've been doing this for 15 years, and I've never seen a more nimble capable company than CAE. We're also very flexible in how we go to market around the world. I think all those are really what [ Hegseth ] is trying to encourage from the large defense companies, and we have the opportunity to participate in that arena. So I'm looking forward to leveraging our skills, our technology, our operational base to answer the needs of both the U.S., Canada and the rest of the world. Dino?

Thanks, Matt. So I'll talk about that first part of the question. So effectively, there is a higher percentage or proportion of product revenue on the defense side this quarter, this year to date. And effectively on the Defense side, product businesses tend to have higher margins than the training business. What's driving that is effectively new contracts and recently signed contracts ramping up this year. The big ones, as we had talked about previously, is the Canadian FAcT contract, the one that have been subcontracted CAE, where the first 5 years were delivering mainly products. And then in the last 20 years, it's essentially sustainment. And there's a couple of other contracts in the U.S. that we have signed in the quarter that's allowed us to recognize good margins on as they ramp up.

[Operator Instructions] Your next question comes from James McGarragle with RBC.

I just wanted to ask a follow-up question on the lower CapEx guide. You referenced a step down due to the slower pace of demand in civil, but that said, is this the appropriate level of CapEx that we should expect going forward? And should we interpret this reduction in CapEx as a signal of potentially lower growth in 2027? Or do you think you can drive growth just through improving utilization in that segment? Just trying to understand how that aligns with your longer-term outlook for the Civil segment?

Yes, James. I guess we saved the best question for last, and I appreciate it. As I mentioned earlier, the amount we invest in capital, growth CapEx, maintenance CapEx, I view them together, and research and development is high for a company of our size, And what we're going to do is determine what that level should be. But we will make the right investments to continue growing. We'll make them at the right place and in the right segments. And as I said earlier, we have a world-class network. We produce more full-flight simulators than anyone else in the world, and we have fantastic customer relevancy. So as we moderate and come out with guidance in 2027, we'll provide full visibility to where we think the next few years will come. And I really appreciate the question from you and everyone else this morning.

Thank you, Matt. Thank you. And thank you, Matt and team. We seem to have run the hour here. Operator, we'll conclude the call here. I want to thank all the participants who joined us this morning and all the financial analysts for their questions. Remind you that a transcript will be available later today on CAE's website. Thank you, and have a good day.

This brings to close today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.