CAE INC (CAE) Q1 2022 Earnings Call Transcript


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CAE INC (NYSE:CAE)
Q1 2022 Earnings Call
Aug 11, 2021, 1:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen. Welcome to the CAE First Quarter Conference Call. Please be advised that this call is being recorded.

I would now like to turn the meeting over to Mr. Andrew Arnovitz. You may now proceed, Mr. Arnovitz.

Andrew ArnovitzSenior Vice President, Strategy and Investor Relations

Good afternoon everyone and thank you for joining us today. Before we begin, I would like to remind you that today’s remarks, including management’s outlook for fiscal year ’22 and answers to questions contain forward-looking statements. These forward-looking statements represent our expectations as of today, August 11, 2021 and accordingly are subject to change. Such statements are based on assumptions that may not materialize and are subject to risks and uncertainties. Actual results may differ materially and listeners are cautioned not to place undue reliance on these forward-looking statements. A description of the risks factors and assumptions that may affect future results is contained in CAE’s annual MD&A available on our corporate website and on our filings with the Canadian Securities Administrators on SEDAR and the US Securities and Exchange Commission on EDGAR.

On the call with me this afternoon are Marc Parent, CAE’s President and Chief Executive Officer; and Sonya Branco, our Chief Financial Officer. After remarks from Marc and Sonya, we’ll take questions from financial analysts and institutional investors. And following the conclusion of that Q&A period, we’ll open the call for questions from members of the media.

Let me now turn the call over to Marc.

Marc ParentPresident and Chief Executive Officer

Thank you, Andrew, and good afternoon to everyone joining us on the call. Our positive momentum continued into the new fiscal year, and I’m pleased with our strong first quarter performance. Even in the midst of a pandemic, we’ve been able to drive results by being adaptive and agile through some of the most rapidly changing circumstances. We reported top and bottom line growth across all three business units during the quarter and on a consolidated basis, we generated 37% year-over-year growth and CAD0.19 of adjusted earnings per share.

In Civil, first quarter average training center utilization was 56%, which is 1% higher than last quarter and much higher than the 33% in the first quarter last year. We also delivered 11 full-flight simulators to customers around the world. On the orders front, we signed training solutions contracts valued at CAD338 million, including five full-flight simulator sales, new four-year business aviation training agreements with Journey Aviation and GAMA Aviation, and a three-year business aviation training agreement with Avcon Jet. We also succeeded to penetrate more share of the traditionally insourced airline training market with two new 10-year exclusive aviation training agreements with Scandinavian Airlines SAS and WestJet. We are also selected as partner of choice to aircraft OEMs in the emerging Advanced Air Mobility market. We’re leading the design and development of the Jaunt Aircraft Systems Integration Lab for the company’s new all-electric vertical takeoff and landing or eVTOL aircraft, the Journey aircraft. And just at the end of the quarter, we announced a strategic partnership with Volocopter, to develop, certify and deploy an innovative pilot training program and courseware development for eVTOL operations.

On the M&A front, we expanded our position with civil maintenance training with the acquisition of GlobalJet Services, a proven leader in aviation maintenance training. This tuck-in acquisition expands our capabilities with increased addressability of business aircrafts and helicopter platforms for maintenance training to a world class regulatory approved training programs. By leveraging our experience in pilot training, we expect this to enable rapid growth for CAE in the maintenance training market.

In Defence, we booked orders for CAD152 million including newly awarded contracts from the United States Army to provide a new and upgraded Maritime Integrated Training System and the SOSSEC consortium to design and develop the initial prototype HH-60W virtual reality/mixed reality aircrew trainer for the United States Air Force. Other notable contracts include, continuing to provide upgrades and updates on C130J training systems for the US Air Force, as well as KC130J training systems for the US Marine Corps. Continuing as well — continuing to provide in a range of in-service support solutions for the Royal Canadian Air Force’s CF18 aircraft and continuing to provide management and support of Royal Australian Air Force aerospace simulators. Defence also received an order to provide a new part-task trainer, a range of updates and additional training support services for the PC21 ground-based training system supporting pilot training for the French Air Force.

I’m especially pleased with the speed at which the team concluded right after the end of the quarter, our acquisition of L3Harris Military Training, having obtained all regulatory approvals and meeting all other closing conditions. We’re excited to welcome some 1,600 members of the L3Harris Military Training team and to leverage our combined expertise to support the mission of our Defence & Security customers. Our combined teams are now squarely focused on integration efforts and seizing on our expanded market opportunities.

As testimony to how our position as already been substantially augmented by L3Harris Military Training, since the end of the quarter, Defence won key positions on three major IDIQs and two noteworthy prime contracts that together significantly expand CAE’s customer base and market reach. Specifically we won the largest IDIQ contract in CAE’s history with our prime position on the US General Service Administration or GSA ASTRO IDIQ vehicle for data operations, aircraft development and systems integration support and training pools. We gained access to four of the five pools, because of the three L3Harris Military Training acquisition, which in total represents a budget of several billions of dollars over a 10-year period. We also won a prime contract on the Multiple Award Task Order Contract or MATOC IDIQ to provide mission support services for the United States Army Futures Command. Defence also won a position in an important growth domain as a key partner to small business on the National Cyber Range Complex IDIQ. Furthermore Defence won a competitive prime contract with expected life cycle value of US$90 million over eight years to develop simulators in training for the US Air Force Joint Terminal Attack Controllers. And in another first for CAE, Defence won the three letter agency prime contract with the GSA, expanding our market penetration into synthetic-environment enhanced multi-domain operational support and training.

In Healthcare, I’m encouraged by the double-digit year-over-year growth that we had in the quarter which is driven by our core Healthcare simulation and training business. We continue to bring highly innovative solutions to market with the release of CAE Vimedix 3.2, an advanced software technology that makes our platform, the industry’s first ultrasound simulator with 3D/4D ultrasonography and multiplanar reconstruction for improved fidelity and realism. We also launched CAE ICCU, which is a digital portfolio of learning solutions targeting critical care clinicians for ultrasound education.

With that, I’ll now turn the call over to Sonya, who will provide additional details about our financial performance and I’ll return at the end of the call to comment on our outlook. Sonya?

Sonya BrancoExecutive Vice President, Finance & Chief Financial Officer

Thank you, Marc and good afternoon everyone. Our results continue to reflect the success of the measures we’ve taken to strengthen the company, both externally in terms of expanding our reach and adapting to dynamic market conditions and internally to lower our cost structure. Consolidated revenue of CAD752.7 million was 37% higher compared to the first quarter last year. Adjusted segment operating income was CAD98.4 million compared to a loss of CAD2.1 million last year. Quarterly adjusted net income was CAD55.6 million or CAD0.19 per share, compared to negative CAD0.11 in the first quarter last year. Cash used in operating activities this quarter was down 46% to CAD129.1 million, compared to CAD88.4 million in the first quarter of fiscal 2021. Free cash flow was negative CAD147.6 million, compared to CAD92.7 million last year. We usually see a higher investment in non-cash working capital accounts in the first half of the fiscal year, as in previous years, we expect the portion of the non-cash working capital investment to reverse in the second half. We continue to target a 100% conversion of net income to free cash flow for the year.

Growth and maintenance capital expenditures totaled CAD73.9 million this quarter, mainly for growth and specifically to add capacity to our global training network to deliver on the long-term exclusive training contracts in our backlog. Our growth capex is directly linked to our opportunities to invest incremental capital with attractive returns on free cash flows, with several attractive market-led expansion investment opportunities on the horizon, we are in good position to deploy more organic capital and so we are raising our expectations for total capital expenditures to more than CAD250 million in the fiscal year 2022.

Income taxes this quarter was CAD10.3 million, representing an effective tax rate of 18% compared to 24% for the first quarter last year. Income tax was impacted by restructuring costs this quarter, excluding which the rate would have been 19%. On this basis, the decrease in the tax rate was mainly attributable to beneficial impact of certain tax assets, partially offset by the change in the mix of income from various jurisdictions.

Our net debt position at the end of the quarter was CAD1.6 billion for a net debt to capital ratio of 33.9%. And net debt to adjusted EBITDA was 2.43 times at the end of the quarter. All told, between cash and available credit, we have approximately CAD2.6 billion of available liquidity. On the restructuring front, we continue to make very good progress. The program is enabling CAE to best serve the market by optimizing our global asset base and footprint and adjusting our business to correspond with the expected level of demand and the structural efficiencies that we’ll be enduring. We continue to expect significant annual recurring cost savings to wrap-up of a run rate of approximately CAD65 million to CAD70 million by the end of the current fiscal year.

We began executing our restructuring program in the second quarter last year and as at the end of June 2021, we had incurred a total of CAD136.2 million of restructuring expenses for the entire program including CAD12.2 million this quarter. We expect to incur total restructuring expenses related to this program of approximately CAD50 million in fiscal 2022.

Now turning to our segmented performance. In Civil, first quarter revenue was up 75% over Q1 last year to CAD432.9 million and adjusted segment operating income was up to 85 — was up CAD85.9 million over the first quarter last year to CAD69.7 million, for a margin of 16.1%. The Civil book-to-sales ratio for the quarter was 0.78 times and for the rolling 12-month period it was 0.88 times. In Defence first quarter revenue was CAD288.2 million, was up 3% over Q1 last year and adjusted segment operating income was up 37% over the last year to CAD23.7 million, for a margin of 8.2%. The Defence book-to-sales ratio for the quarter was 0.53 times and 0.87 times for the last 12 months. And in Healthcare, first quarter revenue was CAD31.6 million, up 42% from CAD22.3 million in Q1 last year. Adjusted segment operating income was CAD5 million in the quarter compared to a loss of CAD3.2 million in Q1 of last year.

With that, I will ask Marc to discuss the way forward.

Marc ParentPresident and Chief Executive Officer

Thanks, Sonya. As we look to the period ahead, I expect our positive momentum to extend throughout the fiscal year and beyond. 18 months ago, we were just beginning to confront the more severe shock the company had ever faced and yet despite the many uncertainties at that time, we were resolute in our determination, not — to not only recover from the pandemic, to emerge as an even stronger company. We’re still independent and despite that reality, we’ve gotten stronger. I’m really encouraged by everything that we’ve done to reinforce CAE’s base over the last year and a year and a half actually to expand our horizons for long-term sustainable growth. The slope of our recovery to pre-pandemic levels and beyond continues to depend on the timing and rate at which border restrictions can be safely lifted and normal activities resume in our end markets and in the geographies where we and our customers have significant operation. But notwithstanding, they are really desperate at global vaccination rates and the volatility of border restrictions, which continues to obscure the usual market visibility. We still expect strong growth in our core markets this fiscal year coming mainly in the second half.

We draw confidence from several important moves that we’ve made to expand and solidify our leadership position, including pursuit of the growth opportunities pipeline that has so far netted five acquisitions in Civil, consolidate our position and expanding to growth adjacencies and our largest ever acquisition namely L3Harris Military Training in Defence, which doubles our presence in the US Defence market and accelerates our Defence & Security strategy. At the same time as expanding CAE’s reach externally, we embarked on enterprise level projects to substantially lower our cost structure and achieve even greater levels of operational excellence.

You heard Sonya reiterate our expectations that will reach an exit rate this fiscal year of CAD65 million to CAD70 million for annual recurring cost savings from those initiatives. In Civil, we’re in an excellent position to benefit from a broader market recovery. We so far have been more narrowly led by domestic air travel, specifically in regions with relatively high vaccination rates and cargo operations. The rebound in domestic operations demonstrates the pent-up demand for air travel and the potential for rapid ramp-up when restrictions ease. Cross-border and transcontinental operations have continued to lag, as they are much more tied to the easing of border restrictions, but we believe considerable pent-up demand exists there too. At the same time as a broader market recovery looks to take hold in commercial aviation, we intend to continue expanding our market share and securing new customer partnerships drawn from a large pipeline of airline prospects.

We’re also succeeding to expand our Civil addressable market by over CAD1 billion to over CAD6 billion by extending beyond pilot training solutions into the rapidly growing market for digitally enabled crew optimization services and aircraft maintenance training services. In business aviation, demand has rebounded at a very rapid pace with current flight activity in the US now exceeding 2019 levels and approaching the prior levels in Europe. This bodes very well for pilot hiring and business aviation training demand in this highly important segment of the Civil training market. Much of the current demand is coming from first time consumers of private aviation and we believe the market is structurally expanded as a result. Civil full-flight simulator sales are driven by new aircraft deliveries, which — new aircraft deliveries, which are showing signs of improvement. The total market for simulator products remains small at present, but we expect to remain our — maintain our leading share of available full-flight simulator sales and we still expect to deliver upwards of 30 in fiscal year 2022 driven mainly from backlog.

We’re also expecting to build on our initial successes in the emerging Advanced Air Mobility market, which we see as a new potential secular driver for pilot training and seize expertise in modeling simulation. Already with the selections by OEMs including Jaunt Air Mobility and Volocopter, we see an important leadership role for CAE helping to shape the training standard for an estimated 60,000 new pilots by 2028 in support of this entirely new modality of air transportation.

In Defence, the rapidly — the rapid closing of the L3Harris Military Training acquisition provides greater definition to the remainder of fiscal 2022 and beyond. And our focus will be on successful integration of this acquisition. International opportunities are somewhat slower to materialize in the current environment, but we see this headwind is temporary and we have a strong pipeline with some CAD5.8 million of bids of proposals pending customer decisions. From a balance standpoint, having now substantially augmented our presence in the Defence segment and in the United States in particular, we expect Defence to benefit from the great — from the greater government budgetary stability that this provides.

CAE’s Defence business has becomes the world’s leading platform agnostic global training and simulation pure play and we’re very excited by the increased potential that that brings to capture business around the world, accelerated with the expanded capability and customer set that we now possesses. Our new client positions on major IDIQs and our contract to develop simulators in training for United States Air Force Joint Terminal Attack Controllers all are perfect examples of what we mean by synergies and how L3Harris Military Training expands our core offerings across multi-domain operations and brings access to new customers and programs.

Our Defence priorities are focused on the long-term and investing in our leading position as a training and mission support partner with leading edge capabilities in digital immersion. We’re also enhancing our position by laying the groundwork to strategically team with major OEMs on next-generation platforms. With our expertise in integration of live, virtual and constructive training, along with our newly expanded capabilities to address mission and operations support, we believe we’ll make significant inroads instead of broader defense market in the years ahead.

And lastly in Healthcare, I believe we have the right team in place, including a reinvigorated front-end to fully leverage the greater market appreciation of the benefits of Healthcare simulation and training to improve safety and help save lives. We’re making deliberate moves to increase our addressable market and access the larger pools, or the largest pools of value in Healthcare training, like nursing, and then the Military. Here too, we expect good momentum and I look forward to gaining substantial — sustainable scale with our innovative solutions to make Healthcare safer.

In summary, CAE is poised to benefit from how the world is changing in the post COVID-19 environment and we adapted our growth strategy to seize on the opportunities presented by these new realities. We made several important moves over the last year and a half to expand and strengthen our position, and the investment thesis for CAE is more compelling than ever. We look forward to strong growth in the year ahead and superior and sustainable growth and strong free cash flows over the long-term.

With that, I thank you for your attention and we’re now ready to answer your questions.

Andrew ArnovitzSenior Vice President, Strategy and Investor Relations

Operator, we will now be pleased to take questions from analysts and institutional investors.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Konark Gupta with Scotiabank. Please proceed.

Konark GuptaScotiabank — Analyst

Thanks, and good afternoon everyone. So maybe the first question on the order activity. The book-to-sales ratio was a bit low in the first quarter for both Civil and Defence segments. And did you see any delays and/or any cancellations that may have impacted the orders?

Marc ParentPresident and Chief Executive Officer

No. Specifically, no cancellations for sure, Konark. Continued headwinds on timing of international orders in Defence, I mentioned that out in the call. Still — there are still some COVID impacts there. And things are not back to normal — not only in Civil but in Defence overall because again of travel restrictions and basically just things just not being back to normal. So we’re seeing that internationally. That’s affecting things. But if you look Defence in particular, I’ve never been fan — said this many times before to not look at orders on the Defence side on a quarterly basis. I was looking on 12-months run rate. And even on that base, you’ve come to the conclusion is below one. But I would point to the recent orders that we’ve had and the really very, very encouraging awards on — not only on orders, but on IDIQs that we’ve gotten since the quarter specifically since we’ve done the complete the acquisition of L3Harris Military Training. That is, of course, that does materialize into order intake. It’s kind of a license to play. But the fact is just selected prime on those IDIQs is a very strong indication because that gives you access to literally billions of dollars over the next few years. So I’m very encouraged by that. So I’m not overly concerned on a sustained basis.

On the Civil side, I think what I’d point — there couple of things. If you look at — we’ve made no secret that simulator orders are going to be slow in the quarter. So we don’t — we didn’t expect to have a book to bill anywhere near one-fourth on the product standpoint at this time. And on, if I look at training itself — training — if you were to take training itself book-to-bill is higher than one. And I think that — an important thing to note there as well as, if you look at our business jets. The book-to-bill — business jet is a trend largely transactional business. So the book-to-bill always around one to kind of you just because of the way we book that business. So if we’re above one substantially, it means that we’re quite a bit above one in the commercial aviation training business. So that’s the way I would look at things, if that gives you a bit more color.

Konark GuptaScotiabank — Analyst

That’s very helpful, Marc. Thank you. And you mentioned the three IDIQ contracts, so congrats on that and the two prime contracts as well. Just to clarify, do they — do these five contracts belong to the acquired L3Harris business or is it for the existing business in Defence?

Marc ParentPresident and Chief Executive Officer

While they all belong to us, because we own the L3Harris Military Training business and it was bid by L3Harris link and the Link is now owned by us. So they are our contracts. They are our IDIQs.

Konark GuptaScotiabank — Analyst

No, I’m sorry, just to be clear, I wanted to understand is that related to the L3Harris asset that you acquired or is it outside of that?

Marc ParentPresident and Chief Executive Officer

Okay. Well, yes part of it is like, the IDIQs for example, on those IDIQs there is various pools, one of them is training, OK. So there was five pools, I won’t go through the details of all the pools, but L3Harris linked bid on five of those pools and they actually I’m not sure there was five, but they were selected as prime on five out of the 10 pools that we were selected on one of those CAE legacy, so I think that’s called legacy for a moment. We were selected on one of the pools, which was training as prime contractors. So as a result of this and what we get from the acquisition is obviously a prime position on those other pools which directly come about as a result of the acquisition. The other order that I would point to is a CAD90 million order for the training system for the JTAC US Air Force JTAC, that comes from the Link acquisition as well.

Konark GuptaScotiabank — Analyst

That’s great color. Thanks and last one from me before I turn it over. Maybe for Sonya. So you raised the capex guidance lightly and you are still expecting 100% free cash flow conversion. Should we interpret that as you’re expecting higher net income versus your prior expectations this year or is it the better working capital performance that you’re expecting? Thanks.

Sonya BrancoExecutive Vice President, Finance & Chief Financial Officer

So free cash flow and net debt in the quarter are really driven by non-cash working capital, and really what we see there is the usual seasonality. We — there is usually a larger amount of kind of annual payments in the first and — in the first quarter, in the first half and also maybe a bit of volume shift from Q4 to Q1. Now, so really the variation here is that we expect this to reverse in part in the second half as we — as we’ve done before, because we keep a continued laser focus on working capital metrics and optimizing that and really still guiding to the 100% net income to free cash flow conversion. Now, I’m just going to highlight that the free cash flow is not really defined as does not include the growth capex, right. So the capex increased to over CAD250 million is not included in that free cash flow.

And as I may, on the capex, one of the reasons that we have raised our view on that is really I think a positive development and to tag on to what Marc was saying, we are seeing some good orders on the training side, on the commercial side of airlines need and request more capacity. So they’re not only asking for more capacity, but some of these airlines that we’re working with, actually we are seeing some change behaviors, whereas they would have purchased the simulator in prior to COVID. We’re entering into long-term training agreements and that’s one of the reasons that we’ve increased our view on the capex, and I’ll remind you that the organic capex is really the most accretive capital and growth investment that we have delivering 20% to 30% incremental returns in the first two to three years and the best example of growth compounding that we have.

Konark GuptaScotiabank — Analyst

If I can clarify Sonya, why would you need to invest into incremental capacity when your utilization levels are still below 60%, let’s say, I mean you — should you not have excess capacity in your training centers already and like where is the demand coming from?

Marc ParentPresident and Chief Executive Officer

Well, because — I’ll answer that one Konark. It goes directly to the question of different behaviors being exhibited by airlines which was 22 — that airlines are basically looking to change from the traditional insource kind of model to looking more an outsourced model. We keep on commenting on that, that we have more conversations today to adjust to that results. So we announced like two outsourcing this quarter, where we got two 10-year contracts with two separate airlines on those type of deals. So what you see is airlines investing in this in new capacity, mainly for new aircraft and rather than going to the model of basically investing in the simulators they’re turning over and signing long-term contracts with us. So that’s what you’re seeing here. So a lot of that incremental capex is exactly for that kind of behavior. And as we are saying that we said many times and we demonstrated, investing in that type of capex is the best example of growth compounding that we have. We won’t invest in it unless we see the type of return accretion that anyhow basically we presented the streak, which is very quite nice. Thank you. So that’s the kind of, that’s what we’re seeing and to your question, we’re still operating at 56% capacity. While this once the market is back to normal and we fully expect to return, let’s say apples-to-apples on the same level, let’s say, the same level of capacity, well, what we’re talking of this capex in investing is incremental to that.

Sonya BrancoExecutive Vice President, Finance & Chief Financial Officer

And I just add that the demand is going to either new platforms or platforms where we don’t have excess capacity. Of course that we have simulators that are underutilized. And that’s part of the restructuring program, we move them around to match up with demand. And so these contracts are for platform leader that are under or already all utilized or all new.

Konark GuptaScotiabank — Analyst

I appreciate the time. Thank you.

Operator

Our next question comes from Kevin Chiang with CIBC. Please proceed.

Kevin ChiangCIBC — Analyst

Thanks. Thanks for taking my question. Maybe just two from me. It does seem like during this pandemic you’ve invested in some of these adjacent services, you talked about the maintenance training acquisition, you’ve been growing the crew management. Just wondered how you think about new adjacent service opportunities you can bolt-on into Civil, I guess over the medium to longer term. Are there areas you still want to focus on that you don’t offer now? And then are you seeing benefits from cross-selling. I presume that’s the end goal here where someone comes to you for pilot training, maybe maintenance training and to manage their crews as well, is that kind of the best-case scenario as you bring this altogether.

Marc ParentPresident and Chief Executive Officer

Well, absolutely. I mean, that’s definitely a big part of it, Kevin. Traditional basic — enlarging the traditional share of wallet. We like to — in all of our transactions with our customers and that’s been our model all long is always to try to make ourselves more relevant and more important to our partners and have been training partner choice, but moving into more we call emission operations in Defence. In Civil, it’s capturing more of their needs around the pilots, around the technicians, around their operations. So maintenance training is a natural one. We’ve done it. We have a very nice franchise of doing that in business aircraft. In commercial aircraft, we basically embarked on that in a relatively good way with Telesis, for example, when we acquired that. And we’re expanding upon like here with this acquisition that we’re doing in this bolt-on in the United States. I feel very good about the growth of that market. The technician market is one that is poised of all for the same reason that the pilot — the need for pilots is going to grow. It’s a tenured — on an average basis on role it’s a very tenured workforce. It’s a regulated market in terms of, especially, in Europe, where you need technicians with certification. So it’s a natural market for us. Beyond that, again that we’re moving into a more sort of software enabled solutions that was what we did with Merlot, with RosterBuster and RB Group. Again, we’re making ourselves more essential to our customers. And they already outsourced these solutions or they are open to outsource solutions because we’re able to address heightened buttons that basically are not core to them.

Kevin ChiangCIBC — Analyst

And maybe just to club. Have you seen a difficult — have you been able to cross-sell some of these newly acquired services within your core customer base and when you think about the addressable market now, I think probably this year you talked about Civil being a CAD6.1 billion addressable market. Now with the maintenance training capabilities, give a sense of how big that pie is today?

Marc ParentPresident and Chief Executive Officer

Well, at the moment — when I talked CAD6 billion about the market that we see, including those adjacencies.

Kevin ChiangCIBC — Analyst

Okay. Okay. And just second for me, it’s just turning to Healthcare. In your outlook, in your press release, you highlighted growing their shortage in your outlook because of long-term tailwind for Healthcare and the services you provide. I’m just wondering when you talk to Healthcare customers, are you seeing, I guess, a similar realization that you see in Civil and Defence whereby, they recognize that simulator training could help free up labor or is it something to educate these customers on and so that might extend out — that might extend out the — this labor shortage issue in terms of revenue recognition opportunity for you at CAE?

Marc ParentPresident and Chief Executive Officer

Well, for sure, look at a macro level, and I was seeing in my comments, we definitely see the nursing shortage that exists and is poised to increase as a catalyst for our business, because if you are talking about you need more nurses, you need more courses for nurses, you need more slots in nursing schools, who do we sell our products and solution to, to nursing schools, training hospitals and those kinds of things. So just, as the first order response to that. Beyond that is the fact that you can — by using simulation-based training, you can make them more effective. You can provide value to those schools where by using their product they can then make themselves more relevant in a lot of cases in, for example, United States, is more profit operations.

So if they can have a nursing program that is steep in modern technology using medical mannequins and digital solutions that that is more appealing for example students who are looking to get a degree in that critical market. So all of this contributes to how we see the market in Healthcare, but that’s just one of the components, it’s a good one. It’s important one. But if I think — if I look at all of the catalyst in basically for a business, they are just coming out of the pandemic. I mean Healthcare is — I mean there’s never been a time where Healthcare is more on everybody’s mind. And we are reinvigorating the whole organization. We’re basically concentrating on the core business, which as you commented in nursing, for example, but we see opportunities, big opportunities for example in the military on government or paramilitary — para-government [Phonetic] organizations like for example, the FEMA in the United States for example, Federal Emergency Management Agency, where we can bring simulation-based training solutions to the whole. So I — we are ramping up in Healthcare and I’m very confident of a nice growth profile that would be good for our business.

Kevin ChiangCIBC — Analyst

That’s great color. Thank you very much for taking my questions.

Operator

Our next question comes from Tim James with TD Securities. Please proceed.

Tim JamesTD Securities — Analyst

Thanks very much. Marc, I was wondering if you could talk for a minute about type certification versus ab-initio versus recurrent training activity that you’re seeing throughout the network? And maybe just commenting on how each is faring relative to if you say fiscal 2020 as kind of a baseline. I’m just trying to understand how the relative strength of their rebounds have been?

Marc ParentPresident and Chief Executive Officer

I would say that, well, first of all, type rating, basically, our business in commercial aviation training, it’s pretty much operating in lockstep with the flying activity, and that’s the comment around that. That’s a first order catalyst. So when you think about the utilization in overall training centers, I would say that business there about is doing pretty darn well, because of the level of activity there. In the US, we’re doing very well. That’s training centers in the high levels of operation. Rest of the world in commercial aviation, not so much because of still border restrictions and very uneven levels of vaccination. So Europe, if you take average 56%, we would be significantly lower than that. Asia, I would tell you is still quite a bit behind because of again that — the level of very low level of vaccination. So just in the past few weeks we’ve had closures of centers in Vietnam and Kuala Lumpur and Australia even. So, there is still — so the fact I see that is perversely might say very positive, because we’re make — we’re able to make the amount of return that we’re making on 56% utilization with those dynamics. I feel pretty darn good as the rest of the world recovers like the United States does which will happen. That’s not a question.

And, having travelled internationally by self recently and I don’t know if you have, but the level of hoops that you have to go through to fly internationally, you really don’t want to. So when that — but when that starts getting reduced, I think we would see a lot of pent-up demand. In terms of avenue show activity, it’s very — it’s actually very strong. We haven’t really reduced the level of flying activity. The only areas where we’ve had to reduce is for example in Australia because very strict lockdowns forced us to close our stores back up now. But that’s the kind of activity. In fact, what you see is airlines that are anticipating a renewed pilot shortage and an increasing. So we’re seeing orders from major airlines increasing their number of testing our flight schools in a significant manner. So — that’s a positive for sure.

I don’t think that gives you or products side, I think that is what I said. Whenever this is historical, whenever there is a crisis, even though the products are sort of simulator deliveries are tied highly to deliveries, there’s always a lag when you have a shock and of course this is the mother of our shock, there is always a lag before airlines start to buy simulators in earnest. So we’re seeing that, that’s why we anticipated that we’re not going to get back to level of orders that we had pre-pandemic for some time, but we’re starting to see recovery. We had five in a quarter which I wouldn’t call it a run rate, but I’m encouraged by that and I’m encouraged by the level of activity. I think airlines are seeing come back. Airbus is increasing deliveries next year. We see the big four US Airlines, recall 3,500 pilots 6,000 flight attendants. We saw United Airlines order 200 MAXs and 70 A321s and of course again TSA passenger throughput in the USA continued to reach very high levels, were back at 80% pre-COVID. So it’s all pretty positive signs. I don’t know if that gives you a good answer Tim?

Tim JamesTD Securities — Analyst

No, that’s very helpful, Marc. Thank you. Very helpful. Just on the 737 MAX. I know when the issues were kind of working their ways through, I guess, we got to go back more than a year ago now, and see it was building some simulators, some MAX simulators in anticipation of demand. And then maybe not based on contracts in hand. How does the — how do those simulators and your — if you’re carrying any of those or have all those MAX simulators more or less been spoken for and are we kind of back to a normal trend in terms of MAX simulators, that would be being produced in CAE facilities?

Marc ParentPresident and Chief Executive Officer

Yes. So we have nothing. We have no backlog with 737 MAX, all delivered. And I anticipate good demand for 737 MAX.

Tim JamesTD Securities — Analyst

Okay, great. And then my last question and there’s great color on sort of where Defence orders are coming from. I am just wondering specifically, there was a very nice increase as you’ve talked about in the bid pipeline, I guess over CAD1 billion relative to the end of fiscal ’21. This is on the Defence side of course. Are there any platforms or trends you’re seeing or areas where that account for that big step-up in the bid pipelines? Any warfare types? Any kind of markets you could point to, or is it really across the board?

Marc ParentPresident and Chief Executive Officer

Well, it’s across the board, but obviously the US is the largest Defence market in the world. So you expect that’s a high level. But having said that, the contracts that we go after internationally are large contracts that basically establish turnkey training centers for fighters, that kind of thing. We have a number of countries that we are looking to do that, specifically some of those talks are going slow because of the pandemic, but that’s where we are seeing some of that order activities a bit protracted. But if you’re question is, I mean is that order pipeline is it sensitive to one or two major bids? I would tell you no. It’s across the board.

Tim JamesTD Securities — Analyst

Okay, thank you very much.

Operator

Our next question comes from Fadi Chamoun with BMO. Please proceed.

Marc ParentPresident and Chief Executive Officer

If you’re talking Fadi, we can’t hear you.

Fadi ChamounBMO Capital Markets — Analyst

Hi. I was on mute. Apologies. Good afternoon. So I was wondering on the SAS and WestJet, was there asset commitment on your path toward these outsourcing deals or is it purely kind of service side.

Marc ParentPresident and Chief Executive Officer

It’s asset commitments but asset that we put in the asset and it’s part of the increased capex that we’re talking about on both airlines. So it’s basically, they don’t invest in simulator but we get in these two cases 10-year exclusive contracts to — for training on those platforms for those airlines that’s essentially it.

Fadi ChamounBMO Capital Markets — Analyst

Okay. My second question is, as you look at this year, can you give us an idea about kind of what is the contribution that you’re expecting in terms of maybe revenues or operating income from the acquisitions that you’ve made and also if you can give us an idea about how much contribution you expect to realize on a full year basis from that CAD65 million, CAD70 million restructuring program?

Marc ParentPresident and Chief Executive Officer

Well, I’ll let Sonya talk about this question specifically. The biggest one obviously is L3Harris where we’re very, very happy to have behaved to close this. After giving us really I guess three pretty much three full quarters. So what we said in the past that’s probably a CAD500 million business, so we get nine months of it. So a quick math that tells me where we should be able to get. But having said that, you can well imagine that having closed it early brings its own share of complexities going through putting this two sets of numbers together, the teams together, so we’re solely focused on the integration right now. So the heavy lifting before we can be very definitive. But I think that’s what we — just on that would be one, which is supposed to be the big dog in this we would get. And Sonya maybe will comment on the others.

Sonya BrancoExecutive Vice President, Finance & Chief Financial Officer

Yes. So Marc — as Marc mentioned, completely focused on the integration. We had said it would be immediately EBITDA accretive, double-digit EPS accretive in the first full year of operation. So that’s FY ’23 and working up to a run rate of synergies of CAD35 million to CAD45 million also in that EPS accretion in the first full year after closing. So I go with those metrics. On the restructuring programs that for full year what we have given a guidance of CAD65 million to CAD70 million of recurring structural savings. And we are building up to that run rate over this year. So this quarter alone we’ve kind of flow through about 15% of that annual target and that’s already kind of — I think good progress and we continue to — at that from our progress as we optimize locations and continue relocation the simulators. So we’ll see that ramping up throughout the year in a little bit more in the second half as well.

Fadi ChamounBMO Capital Markets — Analyst

Okay and maybe a follow-up on this question, specifically on the aviation side. Now that it’s going to overlap the hardest quarter last year. Your run rate EBIT in that business is about CAD250 million for the last four quarters. Based on what you’re seeing in both delivery of full-flight simulator and opportunities on the services side, like would you kind of maybe — give us maybe an overall range of where do you think organic growth will look like as we go into the next nine months and year?

Sonya BrancoExecutive Vice President, Finance & Chief Financial Officer

So we didn’t give specific financial guidance really because the visibility is still quite uptake on I think the level of the border restrictions of volatility on travel restriction. And that’s the main driver to drive a lot of the recovery there now. So, but what we’ve said is that we expect very strong year-over-year growth. So on recovery on the flow-through of those cost savings we’re — we have got about — we delivered about CAD20 million that’s the lightest quarter and have 15% margin, and that’s a 56% utilization and 11 deliveries in the quarter. And Marc went into some detail on kind of volatility that we see across regions. So as that recovery ramps up and the rest of the cost savings ramp up, we’ll see the SLI follow and the margins move up.

Marc ParentPresident and Chief Executive Officer

Yes. If we try to break it down Fadi a little bit, think about just as you look in Civil alone, to break it down revenue and earnings from simulators well, I mean we’ve said we’ll — we expect to deliver about 30 from backlog. So you make your mind up what that looks like. Then you look at, we talked about our level of training activity in our flight training RSCOs and I talked about that. That’s pretty even because we all see big swings about that, because that’s kind of — you basically book your revenue as you’re flying. So you don’t use swings. But I would tell you it’s on the increase. And when you look at the rest, business aviation training is doing very well because business aircraft training is on a high, we’re in our Q2 that seasonally the low quarter. So you would expect it to grow in Q3 and Q4. And then you have commercial. Commercial is the one that is the wild card, because that’s the one as Sonya was saying that is really exposed to the variability in the vaccination rates and border restrictions. That’s the one that caused the most headache in predictability. US is doing great, is doing good really good. So Europe has still low, but we’re seeing signs of promise there and Asia I think it’s tied to the vaccination rates. So I guess that’s the best crystal ball I can give you.

Fadi ChamounBMO Capital Markets — Analyst

Okay, great. The SAS and WestJet go into effect now basically?

Marc ParentPresident and Chief Executive Officer

Well, no, we have to…

Sonya BrancoExecutive Vice President, Finance & Chief Financial Officer

Both the agreements are signed and we’re going to build the simulators to deploy.

Fadi ChamounBMO Capital Markets — Analyst

Okay. Okay, thank you.

Operator

Our next question comes from Cameron Doerksen with National Bank Financial. Please proceed.

Cameron DoerksenNational Bank Financial — Analyst

Yes, thanks very much. Good afternoon. Just one question from me. I’m just wondering if you can expand a little bit more on the latest R&D program that you’ve announced. I know you’ve kind of highlighted the Advanced Air Mobility and AI and some other things in there, but just wondering if you can provide any more specifics? And I’m just wondering what kind of new capabilities are you looking to develop at CAE that maybe you didn’t have before or maybe that you’re under-represented in before?

Marc ParentPresident and Chief Executive Officer

Well, a lot of it has to do with furthering the core competencies that we have. I mean some of the new areas specifically like development of capabilities among urban air vehicles. We talked about electric hybrid aircraft, green technologies, that’s another one. Others are continuing the path we were on everything digital in our business, basically using data — using the data that we get from our business today like — to basically develop technologies allow us to be more important to our customer give and get data enabled revenue streams from that. And lot of it has to do with furthering our expertise around the experts in the world in creating the synthetic environments that are so important to warfare specifically. That’s what I talked about specifically, one of the great outcomes coming out of the acquisition of L3Harris is we are now — we now have capabilities — strong capabilities in all five domains. And — because the military is now focused on basically preparing for a near-peer fight as again what is a military do when they’re not in operations, will they train for operation, train for war? So what they train for, they train for what they call the near-peer fight. And the near-peer fight is one that you can only really do virtually. And that in order to be able to do that you have to create an environment, which is a synthetic environment in which the military can exercise in. We are world-class at that. And — but again nothing standstill in life and we basically continue to invest in R&D to make sure that we continue to hone those skills that makes us the best in the world and more relevant to our customers. Those are some of the things that I was talking about.

Cameron DoerksenNational Bank Financial — Analyst

Okay. That’s helpful. Thanks very much.

Operator

Our next question comes from Benoit Poirier with Desjardins Capital Markets. Please proceed.

Benoit PoirierDesjardins Capital Markets — Analyst

Yes, good morning. Good afternoon, everyone. During the quarter, we’ve seen some big aircraft orders. Could those initial steps — could they lead to some sizable training opportunities?

Marc ParentPresident and Chief Executive Officer

Well, for sure, for sure, Benoit. As I said before, to the extent that they’re going to translate into incremental deliveries, and you see, as I was mentioning, Airbus increasing your production rates and that’s going to inevitably result in more simulators needed in the market and we fully expect to maintain our market lead specifically, we’ve gotten even more lead in that market with the acquisitions are true. So I think that will be good for us as well training market as well. They’re going to need incremental capacity whether that to get us deployed in terms of simulators or basically outsource training.

Benoit PoirierDesjardins Capital Markets — Analyst

Okay. And Sonya with respect to your increased capex guidance this year, could you maybe provide some color on how it will flow to return on capital employed matrix over time? And whether that the rent pop in accretive contribution is over a few years?

Sonya BrancoExecutive Vice President, Finance & Chief Financial Officer

Absolutely. And so as we are talking and great examples that these are all market-led contract secured opportunities. And so that means the ramp up is much faster. Now, there are some commercials, of course, as we’ve talked about and some of the contracts that we signed, but also a good amount of investment in Business Jet side and deploying that to our network in line with that strong demand and that market that’s recovering nicely. So the growth capex — organic growth capex is the most accretive capital that we deploy. And generally, as we’ve seen historically and in what we see ahead, I have a high incremental return on capital often within the first couple of years there in the 20% to 30% return on capital range. So this is very much in line with those metrics and those expectations.

Benoit PoirierDesjardins Capital Markets — Analyst

Thank you. That’s it.

Operator

There are no further questions at this time.

Andrew ArnovitzSenior Vice President, Strategy and Investor Relations

Operator, if there are any further questions, what do people need to press?

Operator

[Operator Instructions] We do have a question from Noah Poponak with Goldman Sachs. Please proceed.

Noah PoponakGoldman Sachs — Analyst

Hi, thanks for that. Because I missed the 1, 4 instruction the first time. Good afternoon, everybody.

Marc ParentPresident and Chief Executive Officer

Thanks Noah. We’ve got your email. Thank you.

Noah PoponakGoldman Sachs — Analyst

Awesome. I had understood your prior comments to suggest that with the quarter under your belt here, Civil, a little firmer, business jet a lot firmer, the L3 deal closed that you would maybe be providing more formal guidance and outlook commentary this quarter. And I’m just curious, did I interpret that incorrectly or did Delta variant or the end market keep you from doing that? And when do you think you might have enough visibility to provide a more formal outlook?

Marc ParentPresident and Chief Executive Officer

Noah, I think you’re right Noah. That’s what we said. Last — we were there last quarter. At the same time, I fully expect it to be able to provide more specifics to that. I mean, to what level of specifics, to be honest, more than now? But I don’t know how much more. But look, the reality is that I think we’re not, let’s get our loan in this. To me, we still don’t have enough visibility, the recovery in vaccination and basically resultant — reduction in travel restriction out of that market and even Europe is a bit challenging to predict right now. So I know enough to be able to predict there is going to be what if see strong growth and specifically, in the back half. We are in the seasonably low quarter now for flying activity this year. If I talk for commercial aviation, that’s no different than any other year, somewhat affected by COVID, but traditional patterns that we see where airlines in the summer are flying in the Western Hemisphere, and they’re not training. We see some of that. So that’s going to recover in Q3, Q4, but to provide any guidance that’s going to be to me that it can really hang my head on that is neither going to be over the top or underwhelming. I need more specifics. We tend to be — and that’s I think we’ve always been that way a bit conservative with regards to providing any outlook on that basis.

Noah PoponakGoldman Sachs — Analyst

Has the actual business not evolved quite how you thought it would in terms of utilization rate or order flow or customer activity? Or is this really that COVID has progressed in a way that just hasn’t become as incrementally visible as you thought it might?

Marc ParentPresident and Chief Executive Officer

I think the latter — the latter is distinct. It’s basically that the business is going away, I would have anticipated it.

Noah PoponakGoldman Sachs — Analyst

Okay.

Marc ParentPresident and Chief Executive Officer

Business aircraft is doing — in fact, Business Aircraft is doing better, specifically in the United States.

Noah PoponakGoldman Sachs — Analyst

Right. Okay. Okay. That’s a good clarification. And Marc, you’ve mentioned a few times how you’re in the seasonally light quarter for Civil and we can see that in the model going back over time that’s usually the case — not always case, but it’s usually the case. Are you expecting that to be the case this year, because you’re — you have the normal seasonality, but then you just hands up working off the very low base that COVID has created. So are you expecting that to be the case?

Marc ParentPresident and Chief Executive Officer

No. Definitely. If that’s going to be the case, I can tell you that’s the case right now is business aircraft even though we have a lot of training going on. It’s not as much training as we could. And the reason for that is because the level of flying activity is higher than it was prior to COVID. So when pilots are flying, they are not training. And you take — you got it, I’m a business aircraft pilot myself. And I can tell you it takes time. We really got a plan to be able to manage your schedule and book of a week to go do train, which is what you have to do. So we see those dynamics and we expect to see it again that — we see it again this year. It is somewhat skewed by, as mentioned by COVID, but the seasonal pattern is still there and as part of the reason why we are basically giving more of the growth toward the back half.

Noah PoponakGoldman Sachs — Analyst

Got it.

Marc ParentPresident and Chief Executive Officer

We see the bus, by the way as well. I would comment that we see — we are going to see seasonable — seasonal variability with the virtual deliveries as well, because same as last year or every year we have shut-down in our factory. This year we really, really shut it down for an extended period, because of COVID-related issues. So that means you’re not building simulator. So we talk about 30 simulators for the year, you’re going to be more skewed to the back half, even though they are coming from backlog.

Noah PoponakGoldman Sachs — Analyst

Makes sense. And I’m just going to sneak in one more. I’m a little surprised by the rate of change in Civil EBIT dollars compared to revenue dollars sequentially. Just given business jet stronger and that’s higher margin and then typically with the utilization rate, or we’ve seen with utilization rate being kind of flattish sequentially that that’s the phenomenon of the JVs that you have that flow through EBIT differently than revenue dollars. So can you — is there a way to help me square up the variance there?

Sonya BrancoExecutive Vice President, Finance & Chief Financial Officer

Yes, well, on the margin front, it’s really a question of mix. Q4 had a very strong back contribution or proportion and so that the highest margin kind of creates some volatility in the margins and as discussed with the JVs in terms of the top and the bottom line. So both top and bottom line growth on both sides and several variables here. We saw growth from utilization and also on the cost side you saw growth or profitability growth coming from some of the cost savings. So lot of the restructuring program, it’s across the board on the company. But a large proportion goes to the Civil side. But you also saw where that the deliveries were lower quarter-over-quarter, right. So where you had some progress on those fronts, you had a better lower deliveries in Q1 versus Q4.

Noah PoponakGoldman Sachs — Analyst

Okay. Okay. I’ll leave it there. Thanks so much.

Marc ParentPresident and Chief Executive Officer

Great. Operator, I want to thank everyone in financial community for participating and for their questions. And with the time remaining we’ll open the lines to members of the media should there be any additional questions from members of the media for us to take those.

Operator

[Operator Instructions]

Marc ParentPresident and Chief Executive Officer

Okay. Well, if there are no questions remaining, we’ll conclude the call. Again thank everyone for joining us today. A transcript of today’s call can be found later this afternoon on today’s — on the CAE’s website. Thank you.

Operator

[Operator Closing Remarks]

Duration: 66 minutes

Call participants:

Andrew ArnovitzSenior Vice President, Strategy and Investor Relations

Marc ParentPresident and Chief Executive Officer

Sonya BrancoExecutive Vice President, Finance & Chief Financial Officer

Konark GuptaScotiabank — Analyst

Kevin ChiangCIBC — Analyst

Tim JamesTD Securities — Analyst

Fadi ChamounBMO Capital Markets — Analyst

Cameron DoerksenNational Bank Financial — Analyst

Benoit PoirierDesjardins Capital Markets — Analyst

Noah PoponakGoldman Sachs — Analyst

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