Marc Parent: So, I think the way I look at it is, when we talk about your legacy contracts that we’re dealing with here. They’re not particularly large individually in terms of either revenue or backlog. But to your point, they can and they are and they have introduce disproportionately large cost in a given period as we work through them. Especially if you do like active efforts that we have to reach a customer settlement or agree to change in terms, things like that. So but we have to remember as well that the business is not the size that we want it to be. So in the end of the day, when you have a hit in any way the quarters, it has material impact because of the small quantum that you have in the absolute number.
Operator: Our next question comes from James McGarragle with RBC Capital Markets.
James McGarragle: My question is with regard to how you’re looking at deploying capital in the Defense segment, it seems like returns on that business right now, they’re below your target. Do you think there’s enough room to improve margins to bring returns in Defense within your internal targets or any other things to consider with regard to how you intend to deploy that capital that’s tied up in the Defense business?
Sonya Branco: Yes. So we always look at a balanced capital allocation strategy, James, and the first priority is continue — as we obviously continue to deleverage and drive towards a flexible balance sheet is to invest in accretive growth. And our top priority is to serve the demand that we see on the Civil market and that organic CapEx is highly accretive and drives returns of 20% to 30% incremental pretax returns within 3 to 4 years. So wherever we have those opportunities, that is the first priorities in terms of capital allocation. Sometimes we do deploy some CapEx on the Defense side. Ultimately, if we are to do so, we expect that to be on commercial terms and driving commercial like margins.
Marc Parent: Yes. And then maybe I’ll just add to that, Sonya. And we’ve already talked about some of those, like, for example, the U.S. Army, HADES contract that we’ll be deploying a global 6,500 simulator in our existing facilities in the Dothan Training Center where we already delivered the fixed wing training for the U.S. Army. And in that case, as Sonya said, because it’s a commercial solution, which we deploy in business aerograph, we can enter into what’s called a commercial contract with the U.S. Army, which of course, in that case would be capital that’s well deployed because it’s going to be the service with margins more likely get in it’s a kind of civil environment. So you can imagine that’s accretive to our term.
Another example I would give you stat is a contract that we’ve talked about for what was previously called the flight school 21 contract, but we call it is the FTSS contract where we will be deploying capital to replace all the similarities used by the U.S. Army at what we call Fort Rucker or Fort Novosel. Not that, again, we’ll be very accretive capital deployment in Defense because we will be able to enter the service contracts on delivery training to U.S. Army on again, commercial contracts, which are more favorable to us than traditional contracts in Defense.
James McGarragle: And then if we look at the book-to-bill on the Defense side, it came in below 1%. You did point to some unfunded backlog. So kind of within that backdrop, how should we be thinking about growth in this segment looking ahead? Is it fair to say you expect top line in defense to be higher in fiscal 2025 versus ’24?
Sonya Branco: To your point, the order intake at 0.9% is slightly below 1%, but I would look at the overall total backlog because there is a dynamic of kind of the first year funding and so on. So you could see the growth in the backlog. We’re expecting some big Q4 awards Marc, Q4, Q1 awards that Marc spoke about some large Canadian contracts that we’ve been selected, and then we’re expecting those to come in and that’ll drive some significant order intake and backlog growth.
Marc Parent: Now look, Defense is a growth business. As I said in the remarks, we have 20% backlog growth in the last two years. And that doesn’t include contracts that we’ve been selected on like the future aircrew training in Canada and the RPA’s training contract, we’ve misselected. Those two contracts are really generational in size. We’re not under contract yet. So you got to figure, okay, we got to get under contract, fully expect that to be in the first half of next year. And then we got to turn those start turning those to revenue. So there’ll be timing involved. But I mean, there’s no doubt that’s a growth business.
James McGarragle: And sorry, just one quick follow-up on the Defense side before I turn it over. Are the low margin contracts that are rolling off this, the eight contracts you’ve identified, are those EBIT positive? I guess, as those contracts roll off, although they might be accretive to margin, is it EBIT neutral? Or are those losing money right now?
Sonya Branco: We don’t necessarily give the details of the contracts individually. I think it’s a mix. And so they will be, they’re not particularly large on the revenue, but have that disproportionate impact on the cost. But I think the best measure to kind of look at it is a margin.
Operator: Our next question comes from Konark Gupta with Scotiabank.
Konark Gupta: Maybe just to follow-up on Defense, Marc, What has the dedicated team that you have deployed for these legacy contracts achieved so far, if you can give any concrete examples. And what is their mandate going forward?
Marc Parent: A mandate is a successful execution of the contract to deliver. What we committed to deliver to our customers, that’s first and foremost, all that because that’s what key is about and we have a critical mission Defense, which it goes without saying what to do. That’s first and foremost and of course, deliver it under the best financial terms that we can. And that’s what their mandate is. So execute on the contracts and get us to the softest landing that we can with regards to retirement of risk on those contracts. We work with our customers to try to establish win/wins, to rescoped those products, descoped those products, move the schedule to provide us with scheduled aviation, get requests for equitable adjustments where we definitely are entitled to get them because of the extremely high inflationary environment that we’ve had that disproportionately affected our costs.
Those are all some of the things that our team is doing. And I could tell you, we didn’t just put these teams on overnight. These teams have been working for some time and they have had good progress in executing and reducing the burden that we’re facing here in Defense already. So we’re already seeing the fruits of our labor here, which allows us to give the more precision that we give you today.
Konark Gupta: And if I can just quickly follow-up on several. Is there any change in discussion or language from customers, from airline customers especially in light of the A320 engine issue that we saw recently as well as now the Boeing 737 problems?
Marc Parent: The thing I would tell you is no, no, because airlines are scrambling to meet the demand that they see out there. Now, I mean the impact is real. I mean the impact of the engine issue that you talked about is real. You can have hundreds of airplanes grounded at any given time with not having some effect. So we’re watching that. I would tell you it hasn’t affected our business. The airlines that we operate with it, which is a great majority of airlines in the world, but are scrambling be able to get alternate lift whether it be keeping older airplanes on station rather than new ones, leasing, leasing O1 that kind of thing. So we’re watching that. We’re also watching the delivery delays specifically because the math is simple, right?
I mean, we’ve talked about it many times before, but for every about 30 narrow body deliveries that because it’s a regulated market, it fills up one similar worth of demand. So clearly, if this was to go on for a long, long time then that would add effect. But for now, based on the discussions that we have with customers, there’s still a lot of unmet demand in this market. And you can just see it with regards again to the order intake, this quarter, I mean, we’re talking about a very strong book-to-bill on top of 20% growth in revenue. And what you see there is a testimony to our success in more outsourcings. I’m very, very happy to join another marquee customer like Air France KLM, which historically has not outsourced, outsourcing a portion of their training requirements to us.
The growth we have is very large contracts in business aviation. So, look, to me, we’re seeing no we’re basically seeing those softening demand and going back to your question, the conversations with that we have with airlines and business aviation customers are essentially like the one I just described.
Operator: Our next question comes from Benoit Poirier with Desjardins Capital Markets.
Benoit Poirier: Just to come back on the Defense margin, if we strip out the 200 bps impact from the legacy frac, it implies that the base is running at around 6.4%, which is obviously, far from double-digit level. So could you maybe give us more color on actions to be taken to bring the base to double-digit? Is it related to delays in funding? Is it a matter of scale, revenue loss since the acquisition of L3 or higher bidding costs these days to support the high bidding environment?
