CAE's Q2 2026 Earnings Call: Contradictions Emerge on Civil Market Recovery, Defense Growth, U.S. Commercial Aviation, and Defense Margins

Date of Call: November 12, 2025

Financials Results

• Revenue: $1.24B, up 9% YOY
• EPS: $0.23 adjusted EPS, down from $0.24 in Q2 FY2025
• Operating Margin: Adjusted segment operating income $155.3M, up 4% YOY (vs $149M in Q2 FY2025)

Guidance:

• Expect free cash flow conversion of adjusted net income of ~150% for the year.
• Net debt-to-adjusted EBITDA target of ~2.5x by fiscal year-end.
• Total CapEx expected roughly 10% lower YoY (about 25% reduction in civil spending).
• Civil performance for the year expected roughly in line with prior year.
• Defense: maintaining full-year outlook; robust backlog and pending awards.

Business Commentary:

• Civil Segment Performance:
• Civil segment revenue in Q2 grew 5% year-over-year to $670 million, while adjusted segment operating income decreased 6% to $108.7 million, resulting in a 16.2% margin.
• This performance reflects a seasonal slowdown in training activity and lower commercial training utilization.

• The company delivered 12 full-flight simulators compared to 18 last year, indicating a decrease in demand.

• Defense Segment Growth:

• Defense segment revenue grew 14% year-over-year to $566.6 million, with adjusted segment operating income increasing 41% to $46.6 million, delivering an 8.2% margin.

• This growth was driven by higher activity on new higher-margin program awards and the ramp-up of recently awarded contracts in the U.S. and Canada.

• Transformation and Strategic Focus:

• CAE is embarking on a transformation plan focusing on sharpening its portfolio, disciplined capital management, and operational excellence.
• The company aims to unlock shareholder value through strategic portfolio assessments, capital discipline, and improved performance.
• Organizational changes include consolidating leadership and streamlining the structure to improve execution and drive operational efficiency.

Sentiment Analysis:

Overall Tone: Positive

• Management called Q2 "solid," highlighted technology leadership (e.g., Prodigy image generator), double-digit defense growth and stronger free cash flow (+44% to $201M). They emphasized a disciplined transformation to sharpen portfolio, raise capital return thresholds, and target net-debt 2.5x — framing the call as constructive and proactive.

Q&A:

• Question from Fadi Chamoun (BMO Capital Markets): How has the threshold to approve capital changed and can CAE return to double-digit ROIC over a 3–5 year period?
  Response: Capital approval tightened with higher return filters and CEO review of all material projects; aim to improve ROIC but it’s premature to quantify — specifics to be provided with next-year guidance.

• Question from Krista Freezen (CIBC): Any surprises since taking the CEO role and any near-term organizational changes before the full blueprint?
  Response: Only positive surprises—strong employee energy and deep technology; further organizational moves will be deliberate and executed over coming quarters.

• Question from Konark Gupta (Scotiabank): What is driving the ~10% CapEx reduction (market vs. capital-discipline) and how are you thinking about leverage going forward?
  Response: CapEx down ~10% YoY due to market-led 25% reduction in civil growth spend (≈1/3 maintenance, 2/3 growth); ~40% of growth CapEx this quarter tied to FSTSS; priority remains deleveraging to ~2.5x and investing only if return thresholds are met.

• Question from Benoit Poirier (Desjardins): Civil capital employed doubled over seven years—how will you optimize capital and is current utilization a trough; can the network support large BizJet orders?
  Response: We’ll reassess and likely reduce capital intensity and R&D; current global network can support BizJet training; capital-allocation changes and targets will be disclosed with 2027 guidance.

• Question from Christine Lang (Morgan Stanley): Have you set a new ROIC threshold or are you still defining it?
  Response: Higher ROIC thresholds have been identified, but precise targets and implementation details will be shared with 2027 guidance after assessing existing capital productivity.

• Question from Cameron Doerksen (National Bank Financial): When should investors expect margin and FCF improvements and can you reprice or exit low-return contracts?
  Response: Some initiatives will deliver near-term gains while others take longer; timing and scope will be detailed with 2027 guidance; contract actions (renegotiation/exit) will be evaluated pragmatically on a case-by-case basis.

• Question from Matthew Lee (Canaccord Genuity): What indicators will show a recovery in simulator orders and how do deliveries affect margins?
  Response: Key indicators: airline pilot hiring (training follows ~6 months) and OEM delivery ramp; FFS orders have 12–18 month lead times — near-term lower deliveries hit FY margins, with recovery expected into 2027.

• Question from Anthony Valentini (Goldman Sachs): Can CAE get back to historical pre-tax simulator returns (20–30%) and how will autonomous systems impact training demand?
  Response: CAE will enforce disciplined placement/retirement of simulators to meet higher return thresholds; autonomous and remotely piloted systems still require training—CAE is already engaged and positioned in that market.

• Question from Connor Walters (Jefferies): Defense growth sustainability and why sequential margins stayed flat despite favorable macro?
  Response: Defense growth is driven by ramping higher‑margin contracts; elevated SG&A partially offset gains this quarter, but margins should improve as contracts scale and cost optimizations are implemented.

• Question from Jordan Leonette (Bank of America): How much of the defense product revenue is sustainable and how will CAE manage risk on fixed‑price contracts?
  Response: Product revenue strength reflects ramps of large programs (e.g., FACT); CAE can bid fixed‑price or cost‑type work and believes its scale, capabilities and commercial flexibility mitigate execution risk.

• Question from James McGarwill (RBC): Does the lower CapEx guide imply lower growth in 2027, or can growth be driven by utilization improvements?
  Response: FY26 CapEx reduction reflects discipline, not abandonment of growth; future investments will be selective and combined with utilization improvements — full plans will be outlined in 2027 guidance.

Contradiction Point 1

Civil Market Recovery and Demand Trends

It involves differing perspectives on the expected recovery and hiring trends in the Civil market, which are critical for understanding CAE's future revenue and growth strategy.

How has the capital approval threshold changed? What is the potential long-term return on capital for this business? - Fadi Chamoun (BMO Capital Markets)

2026Q2: We also believe the Civil market is starting to recover, albeit slowly. - Matthew Bromberg(CEO)

What indicators indicate a rebound in the Civil segment in the second half? - Cameron Doerksen (National Bank Financial)

2026Q1: We believe we've seen the trough in pilot hiring. - Calin Rovinescu(CEO)

Contradiction Point 2

Defense Market Growth Opportunities and Strategy

It highlights differing views on the growth opportunities and strategic direction within the Defense market, which is a key driver for CAE's growth and diversification.

Does the Civil utilization drop impact short-term CapEx spending opportunities? - Kevin Chiang (CIBC)

2026Q2: Defense revenue was $351.5 million, up 4% compared to the same period last year. - Constantino Malatesta(CFO)

How is CAE positioned to improve margins in the U.S. defense market and identify growth opportunities in Canada? - Benoit Poirier (Desjardins)

2026Q1: CAE's role transcends borders, with unique opportunities in a once-in-a-generation defense growth. - Matthew Bromberg(CEO)

Contradiction Point 3

U.S. Commercial Aviation Recovery and Training Demand

It involves differing perspectives on the recovery of U.S. commercial aviation and its impact on training demand, which is crucial for understanding CAE's potential future revenue and growth.

How is U.S. commercial aviation recovery affecting training demand? - Fadi Chamoun(BMO Capital Markets)

2026Q2: We're seeing the airlines planning for future hires. - Fadi Chamoun(CEO)

How should we assess the recovery of U.S. commercial aviation and its impact on training demand? - Fadi Chamoun(BMO Capital Markets)

2025Q3: When they hire in the future, they will need to train them. - Fadi Chamoun(CEO)

Contradiction Point 4

Defense Margins and Future Performance

It involves differing expectations for defense margins and future performance, which are critical indicators for investors and stakeholders.

What is the updated capital approval threshold? What is the expected ROIC for this business over the medium to long term? - Fadi Chamoun(BMO Capital Markets)

2026Q2: Defense margins have remained strong and we are focused on delivering sustainable high single digits. - Fadi Chamoun(CFO)

What drove the strong defense margins, and what factors could impact future performance? - James McGarragle(RBC Capital Markets)

2025Q3: We are confident in achieving low double-digit margins. - Fadi Chamoun(CEO)