Sonya Branco: Yes, Benoit. So a couple of points there. So first on your point of the 200 basis points, as I mentioned earlier on the call, there is a 200 basis points as a reflection of the impact of those legacy contracts, but there’s also the impact of the under absorption that we should consider. So these are the costs needed to achieve scale and support the business like R&D and SG&A. So that could be another up to 100 basis points. So I use that basis, the 300 in total. In addition, as we’ve mentioned in the past, the delay of the ramp up of new expected orders and especially the transformational ones because they move the needle. So as these start to come in and start to really reflect through the revenues, we spoke to it last quarter, it was 3%. It’s really still minimal representation in the revenue, but 20% of backlog. So as these, start to ramp up more materially, that’s we expect that to step up and drive a meaningful impact.
Benoit Poirier: And what is the strategy within Defense business now to ensure that you don’t run into contract issues like this in the future?
Marc Parent: Well, I can tell you, Benoit, there’s a lot of tuition value to where we’ve lived this in the last three years. So there’s a lot. But — and they’re well implemented. I think the first thing and foremost which is obvious, and we have a lot of commonality with our peers in the Defense industry across the board here is we’re certainly not getting into firm fixed price development contracts. Because in a lot of cases, that’s what got us into the situation in the first place where you have development contracts, that again, fixed burn price, you incur delays because of, well, first, we went through COVID with everything that goes along with that with regards to part shortages, with manpower shortages on top of everything escalating basically compound escalation with regard to the inflationary environment where we have no protection.
So those are some of the things that obviously we’re not doing. There’s other things that we’re doing like, for example, making sure that we band the service contracts establish tighter pricing bands. So utilization, so we don’t get caught out that if the customer uses more or less of the demand that we somehow are disproportionately affected. I would tell you there’s a number of things, but that’s what we’re doing and a very tight monitoring of execution at all levels.
Benoit Poirier: And just looking at the Civil margins, you reached 20% EBIT margin this quarter, which is a step down versus to the 25.4% achieved a year ago despite having stronger revenue, greater utilization rate. Could you please let us know what drove that and what makes you confident to achieve the implied 26% plus EBIT margin in Q4 in order to reach the mid-double-digit growth for the year?
Marc Parent: I’ll separate up to say, I didn’t tell you 26%. You said that. But hey, okay, we said you can do the math. But look, I think if you go back to what I think what I said to you in the last conference call in the last quarter, I tried to point to that. So I would tell you that margins, as I said, are there — where we expected them to be — and I’ll give you some of the components here, a very — there’s — mix is very much at play here. And we talked about mix before. And yes, this mix looks kind of high. And you don’t — on the base of it is high. But I would point to last year Q3, the mix was very favorable from a couple of perspective. It was from our products business, and it’s also what from kind of the new segment that we have in other segments, in part of our Civil which is our software business because last year, we had a lot of what we call very favorable on-premise work.
And I’ll tell you what we mean by that. And in our software business, we are actively as a strategy, going to winning contracts, we’re trying to move customers from on-premise work to Software-as-a-Service. So let me make you an analogy on that. If I was to say on-premise work, it would be like us in the core business to sell simulators. You sell simulators, you get the revenue, you get the contract literally very fast. Now contrast that with the training market going through a Software-as-a-Service is kind of like we’re doing in training, where basically we’re going to get paid over time. So from a much better recurring standpoint, much more longer term, very attractive work, but obviously, it’s not going to give you a big SOI bump in one quarter.
That’s what we see. And when we look at the upcoming quarter in Q4, we expect that kind of that particular dynamic to be very favorable again. And that’s really coupled with a number of simulators we deliver and utilization in our training centers, that’s why we’re basically saying we expect a strong Q4, reflecting in the heightened guidance that we gave for Civil last quarter.
Benoit Poirier: And maybe last one for me. If we look at air center, it looks like that there is about $1 million of integration and acquisition costs taken so far obviously, the valuation multiple was very attractive and you knew that it would be a 2-or 3-year journey. You just mentioned that the IT infrastructure integration will be substantially complete by mid fiscal year ’25. So I’m just wondering if you could give an update on the remaining costs to be taken and how much air center could be incremental in terms of margin and whether it’s meeting the — any color about the return on capital employed specifically so far?
Sonya Branco: Yes, Benoit, so we continue the integration of our customers on our systems to our network. And as I mentioned in the remarks, we expect to be done by mid next year. So there’s really good great ramp-up of migrating our customers out of the previous network and to our network. And so great progress done last quarter, and we expect a lot of great progress this quarter as well. While we won’t necessarily kind of give an outlook on the cost, we expect that to be pretty much finished during — in the next — first half of next year.
Operator: Our next question comes from Tim James with TD Cowen.
Tim James: Most of my questions have been answered. But just maybe one quick one for Sonya. Just looking at some detail here. The depreciation expense in the Civil business jumped surprisingly significant amount in the quarter relative to the second quarter, I’m looking at, in particular, just the sequential change. Is there any particular reason for that? Is this new or the report of the Q3 rate a good proxy going forward?
Sonya Branco: Well, I think the headline is growth, right? So we deployed 20 plus simulators last year, [indiscernible] year-to-date this year and we’ve onboarded several training whether it’s Las Vegas, Savannah came online this quarter. We have another extension of our Phoenix training center that came online also this quarter. So you’ll see that driving that depreciation expense and some of the interest that I spoke to on the lease liability. It’s really deployment of new simulators and new training centers.
Tim James: So it is just a natural step-up then in relation to the assets in the business?
Sonya Branco: Yes.
Operator: Our next question comes from Kristine Liwag with Morgan Stanley.
Kristine Liwag: Marc, you just reiterated the margins for the next quarter. I mean, it seems like for 4Q ’24 to get to your guidance, that implies about 16% revenue growth for the quarter year-over-year and margins a little bit north of 26%. So with all the mix headwinds that you highlighted, this quarter, and it seems like some of that goes away next quarter. How do we think about the run rate for fiscal year ’25? Is 26% the starting point? And how do we think about that for next year?
Marc Parent: Well, I’m not going to question your math. But we’ve given you enough. But look, we’re not guiding for 25% now. But clearly, I mean, if you look at the order intake that we have, the book-to-bill that we have, and I think you’re going to continue to see strong growth.
Kristine Liwag: And Marc, in terms of the software business, I mean Software-as-a-Service, especially Sabre historically would be a very accretive margin. I mean when you look out a few years for the composition of software within Civil, how large could that be?
Marc Parent: Again, you’re asking me for guidance that we’re not ready to give that at this time. But obviously, we built — we bought this business to grow it. And I’ve been very happy with the order intake that we’ve had from customers. There’s a lot of interest from the airline customers. They see — they — and I’ve been quite satisfied with assumption that we had from day one that people would be various airlines specifically be very receptive for us bringing CAE’s culture into this business. And we’re seeing that. I said customers that have basically moved away from legacy Sabre and once we bought it and with the efforts that we’ve had, the customer reach, the product development we’ve had, the investment that we made that they’ve come back to us.
So look, without giving you a precise number, I see this growing. And I see that a very strong interest in us delivering what we call our next-gen solution, which is Software-as-a-Service. And that’s going to be pretty good for recurring revenue going forward. Obviously, we’ve got to get through the time it takes to move to on-premise to a Software-as-a-Service. And there’s a lot of history from other companies to do that, but suffice it to say that I’m very optimistic.
Operator: Our next question comes from Anthony Valentini with Goldman Sachs.
Anthony Valentini: You got Anthony on for Noah. So I just wanted to ask on the Defense business. We’re hearing from a lot of the U.S. defense primes that they’re shifting their strategy in terms of how they are bidding on contracts getting away from fixed price and going more towards cost plus. Is that something that you guys are also implementing into your strategy? Can you just talk about that a little bit?
Marc Parent: Absolutely, absolutely. I mean, look, the impact that we’ve had of fixed firm price contracts that are development type contracts going through the period that we’ve had through COVID has been very, very [indiscernible] and impactful, and we see them in our results. And we’re going to see them as we talked about in these legacy contracts. Now having said that, we’re going to work with our customers all the time. So although we might not do that, we’re going to be [indiscernible] and working with our customers to give you an example that in some cases, and we have entered into new contracts where the government specifically have said, okay, we agree that with you that we don’t necessarily have to take the costs, which have a lot of inflation relative to do them and consider them as pass-through contracts.
