CAE Inc. (CAE:CA) Q3 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call presented a mixed outlook. While there are positive elements such as strong free cash flow expectations and strategic growth plans, concerns remain about softer-than-expected demand in Civil Aviation and management's reluctance to provide specific guidance on certain metrics. The market cap indicates moderate sensitivity, so the stock is likely to remain stable in the near term.
Key Financial Performance
Consolidated Revenue $1.25 billion, increased 2% year-over-year. Reasons: Reflects a more balanced portfolio, improved cost discipline, focus on program management, and better cash flow collection.
Adjusted Segment Operating Income $195.8 million, up 3% from $190 million in the third quarter last year. Reasons: Improved cost discipline and operational strength.
Adjusted EPS $0.34 compared to $0.29 a year ago, reflecting a 17.2% increase. Reasons: Improved cost discipline and operational strength.
Net Finance Expense $54.1 million, down from $56.6 million in the third quarter last year. Reasons: Lower finance expense on long-term debt due to decreased level of borrowings, partially offset by higher expenses on lease liabilities.
Income Tax Expense $29.6 million for an effective tax rate of 21%, compared to 29% in the third quarter of fiscal 2025. Reasons: Changes in geographical mix of earnings and ongoing tax legislation reforms.
Net Cash Flow from Operating Activities $407.6 million compared to $424.6 million in the third quarter of fiscal 2025, a slight decrease. Reasons: Reflects continued discipline and operational strength.
Free Cash Flow $411.3 million, above the $409.8 million recorded in the third quarter last year. Reasons: Reflects continued discipline and operational strength.
Capital Expenditures $50.6 million this quarter, with approximately 75% invested in growth. Reasons: Reflects tighter capital discipline and a reduction in Civil CapEx.
Net Debt Position Approximately $2.8 billion for a net debt to adjusted EBITDA of 2.3x, surpassing the goal of 2.5x by the end of the fiscal year. Reasons: Improved cash flow and reduced borrowings.
Civil Segment Revenue $717.2 million, decreased 5% year-over-year. Reasons: Lower simulator sales, lower utilization in training centers, partially offset by sales of used simulators.
Civil Segment Adjusted Operating Income $141.8 million, decreased 6% year-over-year. Reasons: Lower simulator sales and training center utilization, partially offset by sales of used simulators.
Training Center Utilization 71%, down from 76% in the prior year period. Reasons: Lower demand for commercial and business training.
Defense Segment Revenue $534.9 million, increased 14% year-over-year. Reasons: Higher activity and profitability on new higher-margin program awards and ramp-up of recently awarded contracts.
Defense Segment Adjusted Operating Income $54 million, increased 38% year-over-year. Reasons: Higher activity and profitability on new higher-margin program awards and ramp-up of recently awarded contracts.
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Operating Highlights
eVTOL Training Solutions: CAE has partnered with Joby Aviation and Embraer Eve Air Mobility to develop training solutions for advanced air mobility, focusing on cutting-edge and disruptive aircraft technologies.
Prodigy Image Generator: This technology is highlighted as a key differentiator for complex low-altitude operations in urban environments, providing high-fidelity visualization.
Defense Market Expansion: CAE has partnered with Saab on the GlobalEye Airborne Early Warning platform and secured a $270 million contract for Australia's Future Air Mission Training System, showcasing its global reach and capabilities.
Civil Aviation Market: Signed agreements worth $160 million at the Singapore Airshow, reflecting strong customer relationships and global training network relevance.
Training Network Rationalization: Plans to remove approximately 10% of deployed commercial airline simulators to improve utilization and returns, with execution expected over 12-24 months.
Shared Service Operations: Transitioning 80 finance and HR processes to a modernized global shared service operation to reduce costs and improve scalability.
Portfolio Sharpening: Identified noncore assets representing 8% of revenue for potential divestiture to focus on core operations.
Capital Discipline: Implemented stricter capital allocation policies, reducing CapEx and R&D investments, and prioritizing high-return projects.
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Risk or Challenges
Civil business softer order activity: The Civil business experienced softer order activity than expected, which could impact revenue and growth in this segment.
Near-term revenue impact from transformation actions: Actions required to strengthen the business, such as network rationalization and noncore divestitures, are expected to have some near-term revenue impact.
Lower simulator sales and training center utilization: Civil segment revenue decreased due to lower simulator sales and reduced training center utilization, which dropped from 76% to 71%.
Underperforming assets in Civil training network: Approximately 10% of deployed commercial airline simulators are underperforming and require rationalization, which may lead to near-term revenue impacts.
Softer-than-expected market conditions in Civil: Market conditions in the Civil segment have softened, impacting the annual adjusted segment operating income outlook.
U.S. dollar translation impacts: Adverse U.S. dollar translation impacts are affecting financial performance.
Rationalization of commercial simulator network: The rationalization of the commercial simulator network to align capacity with demand may result in short-term revenue impacts.
High capital intensity: Capital intensity across CapEx, R&D, and SG&A is higher than warranted, requiring tighter capital discipline.
Geopolitical and regulatory challenges in Defense: Defense segment faces challenges related to geopolitical and regulatory environments, which could impact operations and contracts.
Execution risks in transformation plan: The transformation plan involves significant changes, including shared service outsourcing and portfolio refocusing, which carry execution risks.
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Guidance & Outlook
Defense Segment Outlook: The outlook for the Defense segment has been increased due to stronger-than-expected performance. Adjusted segment operating income for Defense is now expected to grow by more than 20% year-over-year, with an annual adjusted segment operating income margin of approximately 8.5%. This growth is supported by a multigenerational increase in defense spending across NATO and allied countries, as well as Canada's commitment to spend $82 billion in defense over the next five years.
Civil Segment Outlook: The Civil segment is expected to experience a mid-single-digit percentage decline in annual adjusted segment operating income compared to last year, with an annual adjusted segment operating income margin in the 20% range. This is due to softer-than-expected market conditions, U.S. dollar translation impacts, and rationalization of the commercial simulator network. The fourth quarter is expected to be the strongest of the year for Civil.
Capital Expenditures: Full-year capital expenditures are expected 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. This reflects tighter capital discipline and a focus on improving utilization and returns from simulators.
Transformation Plan: The company is implementing a multipronged transformation plan focused on portfolio sharpening, disciplined capital management, and operational excellence. Specific targets and progress updates are expected to be provided after the next quarter. Near-term revenue impacts are anticipated as the company rationalizes its commercial simulator network and explores strategic alternatives for noncore assets, which represent approximately 8% of revenue.
Market Trends and Long-Term Growth: The long-term fundamentals in the aviation market remain strong, with a global commercial aircraft backlog of approximately 17,000 aircraft and healthy backlogs for business jet OEMs. Defense spending is expected to grow at a much faster rate in the future, supported by geopolitical factors and increased commitments from allied nations.
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Shareholder Return Plan
The selected topic was not discussed during the call.
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Key Q&A
Q:Can the Civil business generate solid mid-teen return, lower ROIC return? What is the range of ROIC target achievable over the next 24 months?
A:Management emphasized the long-term fundamentals of the Civil market, which grows at 4%-5% annually. However, they avoided providing specific ROIC targets, stating that it is a complex equation requiring more time to evaluate.
Q:What are the revenues of the 25 simulators or 10% of capacity intended for retirement in the commercial full-flight simulator side? Can Civil grow EBIT in the next 12 months?
A:Management did not provide specific revenue figures for the 25 simulators. They stated that removing these simulators would increase utilization by 400 basis points to 75%, but emphasized that this process will take 12-24 months. They avoided directly answering whether Civil can grow EBIT in the next 12 months, citing ongoing disruptions.
Q:Have conversations with Civil customers about rationalizing the network started, and how are they progressing?
A:Yes, conversations have started, and initial feedback has been positive. Management emphasized that each conversation requires a tailored approach and that the network is being resized to match current demand.
Q:How is free cash flow for 2027 expected to evolve as CapEx starts to come down?
A:Management expects strong free cash flow generation, focusing on inventory management, payable management, and AR collections. They plan to use cash flow to fund transformation, deleverage, and potentially revisit other uses in the future.
Q:Are the identified non-core assets mostly in the Civil segment or also in Defense? What is the margin drag caused by these assets?
A:Non-core assets are present in both Civil and Defense segments. Management avoided providing specific details on the margin drag but stated that these assets are good businesses that will perform better with another owner.
Q:Will the simulator rationalization and non-core asset sales include reductions in the real estate portfolio?
A:Yes, management is reviewing the real estate portfolio, including leases and base spaces for simulators, but specific details will be provided in subsequent quarters.
Q:Is there any indication that Civil Aviation training demand might pick up soon?
A:Management stated that current demand is softer than expected and avoided predicting short-term improvements. They emphasized resizing the network for current demand and highlighted the long-term growth trajectory of 4%-5% annually.
Q:Have there been early conversations with potential buyers for the non-core assets? What is the expected timeline for divestitures?
A:Management stated that the process will take 18-24 months and avoided discussing buyer interest or specific timelines for divestitures.
Q:What factors contributed to the strong Defense margins in the quarter?
A:The strong Defense margins were attributed to good program execution, cost controls, and a favorable contract mix. Management noted that some legacy contracts remain and that the favorable contract mix in this quarter is not expected to recur.
Q:How does CAE's Defense portfolio position it in the broader Defense market?
A:CAE is well-positioned due to its focus on simulation training and mission rehearsal, its large international footprint, and its expertise in hardware and software integration. Management highlighted its unique capabilities and relationships with global Defense organizations.
Q:How does CAE plan to balance being more selective in capital decisions while driving free cash flow growth?
A:Management plans to reduce CapEx by being more selective, focus on core R&D projects, and improve operational execution, including inventory and AR management, to drive free cash flow growth.
Q:Is there flexibility to drive higher pricing with customers to improve returns?
A:Management stated that pricing is negotiated with sophisticated airline customers and is not catalog-based. They emphasized focusing on providing and receiving the right value in long-term agreements.
Q:What is the opportunity to leverage synergies between Civil and Defense segments?
A:Management highlighted leveraging Civil infrastructure to reduce Defense costs and using advanced Defense technologies to enhance Civil products. They emphasized the balanced business model and opportunities for further integration.
Q:What is the optimal leverage ratio for CAE, and how will capital deployment be prioritized?
A:Management aims to maintain a leverage ratio below 2.5x and prioritize funding the transformation plan, deleveraging, and disciplined investments. They avoided discussing specific capital deployment to shareholders.
Q:How much of the softness in Civil business is coming from commercial versus business aviation customers?
A:Management stated that the softness is more pronounced on the commercial side but emphasized that the markets are interconnected. They avoided providing specific figures.
Q:How does CAE plan to ensure that simulator rationalization is not a recurring issue?
A:Management plans to size the network for current demand, implement stricter capital approval thresholds, and focus on asset utilization to prevent recurring issues.
Q:Review of Unclear Management Responses
A:Management avoided providing specific ROIC targets, revenue figures for the 25 simulators, and details on the margin drag caused by non-core assets. They also avoided predicting short-term improvements in Civil Aviation training demand, discussing buyer interest for non-core assets, and providing specific timelines for divestitures. Additionally, they did not specify capital deployment plans for shareholders or provide detailed figures on the softness in Civil business.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
CAE training
Civil Aviation
Defense segment
Defense spending
Future
GlobalEye
OEMs
RD
Saab
Training
aircraft
aviation
capital discipline
cash flow
customer
footprint
income margin
mission rehearsal
outlook
phase
platform
portfolio
return
scorecard
segment income
simulation mission
simulator
training network
training simulation
transformation plan
utilization
view
world
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