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CAE Inc (NYSE:CAE)
Q2 2021 Earnings Call
Nov 10, 2020, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the CAE Second 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 Arnovitz -- Vice President, Strategy and Investor Relations

Good afternoon, everyone, and thank you for joining us. Before we begin, I'd like to remind you that today's remarks, including management's outlook for fiscal year '21 and answers to questions, contain forward-looking statements. These forward-looking statements represent our expectations as of today, November 10, 2020 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 in our filings with the Canadian Securities Administrators on SEDAR at www.sedar.com and the U.S. 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 will take questions from financial analysts and institutional investors. And following the conclusion of that Q&A period, we will open the call to questions from members of the media.

Let me now turn the call over to Marc.

Marc Parent -- President and Chief Executive Officer

Thank you, Andrew, and good afternoon to everyone joining us on the call. I'll first discuss some of the highlights of the quarter, and then Sonya will provide additional details about our financial performance. I'll come back at the end to talk about our outlook.

We began the fiscal year just as the brunt of the pandemic bore down, and while we're managing through a still difficult environment eight months later, we're starting to see the results of our cost and cash actions, and our initiatives to strengthen our market position. We drove solid sequential improvements in our second quarter, which is testimony to these efforts and to the resiliency of our business, which is largely recurring and driven by regulations.

We delivered CAD0.13 of earnings per share and we generated CAD45 million of free cash flow, which is a good reflection of the cash-generative nature of CAE's business. We also booked CAD668 million in new orders for a 0.95 times book-to-sales ratio.

We saw sequential improvements across all business segments in the quarter, most notably in Civil, where revenue increased 47% compared with the first quarter. This was driven by 49% average training center utilization and the delivery of 10 full-flight simulators. Demand improved in both commercial and business aviation training, with the latter recovering more rapidly, driven by the relatively higher level of activity involving the global installed fleet of business aircraft.

Civil enjoys a high degree of operating leverage in training, and the higher volume helped drive its operating margin back to the double digits, coming in at 14.2%. We also continued to book new orders, with Civil signing training solutions contracts valued at CAD353 million. These included three full-flight simulator sales, a five-year business aviation training agreement with a charter company in the United States, a five-year exclusive training extension with Virgin Atlantic, a two-year business aviation training agreement with XOJET Aviation, and a two-year business aviation training extension with VistaJet.

In Defence, we also began to see a more positive picture than the first quarter, with some movement on programs impacted by COVID-related restrictions and the resumption of certain training operations. Defence revenue grew 8% over the last quarter and operating margins improved to 8%. Notwithstanding a still challenging environment, Defence booked orders for CAD278 million, including contracts to continue providing fixed-wing flight training and support services to the U.S. Army at the CAE Dothan Training Centre, and to support Leonardo with AW139 and AW169 full-flight simulators.

Other notable contracts include providing the United States Air Force with upgrades and enhancements to both the KC-135 and C-130H aircrew training system programs. Defence also received orders for maintenance and logistics support services for the German Air Force's Eurofighter training devices and to support the development of a Single Synthetic Environment for the U.K.'s Strategic Command. In addition, we were awarded a prototyping contract to support the U.S. Special Operations Command's Global Situational Awareness program, which will leverage synthetic environments to fuse data into a common operational picture for improved planning and decision support.

And in Healthcare, revenue grew by 66% compared to last quarter and was 22% higher than last year. With the benefit of additional volume and the commencement of CAE Air1 ventilator deliveries, Healthcare's margin reached 8.6%. I'm very proud to say that we're continuing to support healthcare workers in the fight against COVID-19, with complementary webinars and learning modules for clinicians. We recently developed a Pathogens of High Consequence learning module to help prepare clinicians for infectious disease outbreaks. Not only is this the right thing to do being there for our customers and frontline workers in this difficult time, I also believe it cements CAE as a leader in developing training content in the healthcare space.

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

Sonya Branco -- Vice president, Finance and Chief Financial Officer

Thank you, Marc, and good afternoon, everyone. Consolidated revenue of CAD704.7 million was up 28% compared to the first quarter and is 21% lower compared to the second quarter last year. Segment operating income was CAD79.3 million, compared to a loss of CAD2.1 million before specific items in Q1, and an income of CAD126 million before specific items last year. Quarterly net income before specific items was CAD34.2 million or CAD0.13 per share, which on the same basis compares to negative CAD0.11 in Q1, and CAD0.28 in the second quarter last year.

Free cash flow was CAD44.9 million in the quarter, which is an improvement over the negative CAD7.1 million free cash flow result last year. The increase results mainly from a lower investment in non-cash working capital, the suspension of the dividend, and lower maintenance capital expenditures, partially offset by a decrease in cash provided by operating activities. We expect to be free cash flow positive for the year, based on our expectation for continued positive operating cash flow and the expected timing of reversals in our non-cash working capital accounts. Return on capital employed, before specific items, was 7.2% this quarter, compared to 8% last quarter and 11.5% last year.

Growth and maintenance capital expenditures totaled CAD15.2 million this quarter and for the first half of the fiscal year, totaled CAD33.2 million relative to our outlook of approximately CAD50 million. We expect total capex of approximately CAD100 million for the year, commensurate with our opportunities to invest incremental capital with accretive returns and free cash flows.

Income tax recovery this quarter was CAD1 million, representing an effective tax rate of 14% compared to 17% for the second quarter last year. The tax rate was lower due to the impact of restructuring costs, partially offset by the change in the mix of income and losses from various jurisdictions. Excluding the effect of the restructuring, the income tax rate would have been 25% this quarter.

Our net debt position at the end of the quarter was CAD2.4 billion for a net debt-to-capital ratio of 50.1%, and net debt-to-EBITDA before specific items was 3.16 times at the end of the quarter. All told, between cash and available credit, we continue to have approximately CAD2 billion of liquidity.

We are making good progress with our recently announced restructuring program, intended to enable CAE to best serve the market by optimizing our global asset base and footprint, adapting our global workforce and adjusting our business to correspond with the expected level of demand and enduring structural efficiencies that we will drive. These measures include the introduction and acceleration of new digitally enhanced processes such as remote installations and certifications, and work-from-home practices.

We continue to expect to record restructuring expenses of approximately CAD100 million for the entire program, which will be carried out through fiscal '21 and into fiscal '22, consisting mainly of real estate costs, asset relocations and other direct costs related to the optimization of our footprint and employee termination benefits. Actions include the consolidation of some facilities so that we gain the efficiencies of operating from larger centers, and we will also be relocating several training assets to optimize utilization. Taken together, these measures are expected to enable CAE to emerge from current period from a position of strength and we expect to fully realize our annual recurring cost savings of approximately CAD50 million starting in our fiscal '22. We began executing our restructuring program this quarter, and as of the end of September, we had incurred CAD51.1 million of restructuring expenses.

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

Marc Parent -- President and Chief Executive Officer

Thanks, Sonya. The COVID-19 pandemic continues to be a day-to-day global reality, and we're encouraged to have learned yesterday on the progress being made to discover a vaccine to this terrible affliction that has so deeply affected the lives of so many. As we consider the step-change improvement in quarterly performance that we just delivered, we recognize that the continued pace of CAE's recovery, from this point forward, will be highly correlated to the rate at which travel restrictions and quarantines can be safely lifted and market activities resume. Short-term visibility in that context remains limited. However, I take confidence in the fact that we're in a better position now than we were at the start of the fiscal year, and we continue to expect a stronger second half.

Looking beyond the current period, we remain encouraged by CAE's long-term prospects. We're seizing opportunities to strengthen CAE internally during this period and as you've heard from Sonya, our restructuring program currently under way is on track. We're also well positioned to bolster our standing as the global market leader in our field through the application of advanced technologies and by expanding the aperture of our market reach. We're continuing to invest in CAE's capabilities to revolutionize our customers' training and critical operations with digitally immersive solutions and to increase our market share. And we remain confident that CAE will emerge from the current period as an even stronger company.

Looking at each of the business segments. In Civil, as the global fleet gradually recovers and daily flights resume service, we expect to continue to expand our market share and secure new customer partnerships with our innovative training and operational solutions. We continue to have discussions with airlines about potential outsourcings and partnerships, and while we don't control the timeline of those agreements, we expect some from our pipeline to come to fruition in the period ahead. At a steady state, business aviation training represents about a third of our Civil business, and based on global aircraft fleet activity levels, we expect this segment to continue recovering faster than commercial aviation.

Demand for Civil full-flight simulators is driven by new aircraft deliveries, and while the total market is currently much smaller, we expect to maintain our leading share of available full-flight simulator sales. We benefit from a large backlog of customer funded full-flight simulator orders, and we expect to substantially deliver this backlog over the next couple of years, including 35 to 40 this fiscal year.

In Defence, we're managing through a transition year, as we work our way through the short-term challenges brought by the pandemic and as we ramp up new leadership. The long-term outlook for Defence continues to be for growth, supported by a large addressable market for our innovative solutions and the realization of the benefits our bolstered team and how that will bring to bear. I'm very encouraged by our recent competitive wins and large pipeline, which bode well for Defence in the long-term.

Despite near-term headwinds, we're maintaining our leading position as a training and mission support partner thanks to our leading-edge capabilities in translating the physical world into the synthetic world. We're expanding beyond training to become a leader in digital immersion and the application of synthetic environments to support analysis, planning and operational decision-making. With our expertise in the integration of live, virtual and constructive training, along with capabilities to address mission and operations support, we believe we'll make inroads into the broader defense market in the period ahead.

And in Healthcare, we've also bolstered our leadership to enable CAE to fully capitalize on the greater market appreciation of the benefits of healthcare simulation and training to improve safety and to help save lives. The pandemic is serving as a catalyst to accelerate digital transformation across the enterprise. And in Healthcare, we see an emerging growth vector with the ramp up of distance-learning this fall. While still early, I'm encouraged by our progress, including new tools we just recently introduced, on how to deliver training using our platforms, Maestro and CAE Learning Space, which offer remote and distance-learning capabilities for virtual clinical examination and telehealth training.

In closing, I'd like to thank all of the employees at CAE who are collectively responsible for these solid results against a macro backdrop that has been complex, and of course it goes without saying, under higher-than-usual uncertainty. Our employees have conducted themselves through these challenging last eight months with true professionalism and teamwork, retaining an impressive and singular focus on serving our customers' as their partner of choice. I'm truly inspired and humbled to lead this great team of people here at CAE and I couldn't be prouder of how we rose up against an incredible macro event that's almost been like a wartime effort and are arising it -- from it stronger and even more aligned together.

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

Andrew Arnovitz -- Vice President, Strategy and Investor Relations

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

Questions and Answers:

Operator

Absolutely. Thank you. We'll now begin the question-and-answer session for our analysts. [Operator Instructions] Our first question comes from the line of Steve Arthur with RBC Capital Markets. Please go ahead.

Steve Arthur -- RBC Capital Markets -- Analyst

Great. Thank you very much. Just a couple of questions. First on the training center utilization. The 49%, I realize is an aggregate of many different training centers, different simulator types, but I just wonder if you can expand a little bit more on the dynamics within there? For example, the utilization at business jet training versus commercial or in addition to the recurrent training, any signs of more transition training as pilots move around for different aircraft types?

Marc Parent -- President and Chief Executive Officer

Okay. Steve, I think that maybe it was slightly higher in business aircraft. It's been doing somewhat better based on the fact that there has been -- this aircraft has been less affected overall in terms of the flight activity, which is a driver for us. In commercial, I think it's kind of plateaued and as we said last quarter, it's pretty much in line with the activity on the aircraft -- in the commercial aircraft that are being utilized right now. If you look at the market right now, there is -- it's been -- overall for commercial aviation, there has been approximate 50% recovery in daily flight activity, which is obviously well off the lows back in April, which explains part of the explanation for our sequential performance here. But it's more or less plateaued in recent months as we went into the fall with the second wave and everything.

Business aviation, as I mentioned, has been recovering faster than commercial and I continue to be bullish on that because -- and it does represent about a third of our Civil business. And if you just put some numbers around it, business jet cycles in the United States and Europe are within about 10% or 15% pre-pandemic levels, which is pretty impressive when you think about it. And anecdotally, I put a -- and I provided little color last quarter on this is, our charter operator customers are seeing significant volume in business aircraft from customers who are new to private jet travel. And in my experience, we can't -- when you're in 35 years in this industry, once people experience private jet travel, there tends to be a high retention rate. So that's the kind of color I would give you right now with regard to utilization.

Steve Arthur -- RBC Capital Markets -- Analyst

Okay. And it's still the same dynamic within the two, more and more wet training, with business jet training and a lower but growing amount in commercial?

Marc Parent -- President and Chief Executive Officer

Yeah. That's about right, yes.

Steve Arthur -- RBC Capital Markets -- Analyst

I guess, just related to that, just any updates at all on the nature of the potential outsourcing agreements with airlines? Of course, you can't get into any customer specifics, but are those kind of conversations still advancing and what's the reception of the airline customers?

Marc Parent -- President and Chief Executive Officer

No, absolutely. There are several discussions under way. That hasn't changed. That dynamic continues. The airlines are more amenable to partnering with us. It's become more resilient that they have flexibility in their training operations by turning a fixed cost into a variable cost. You can well imagine that airlines are pretty busy these days, they're also managing our operations, but I do believe that some of these deals will come to fruition and it's just a natural for us. So -- but we'll keep you informed as they -- we don't control the timeline and certainly we're patient.

Steve Arthur -- RBC Capital Markets -- Analyst

Okay. And I guess just a final one for me, just on the Healthcare segment. Any color you can provide on the contribution from the ventilators in the revenue in the past quarter or the sense of the scale of that 10,000 unit order?

Marc Parent -- President and Chief Executive Officer

Well, in the quarter, we had approximately CAD7 million of revenue that came -- from the Healthcare sector that came from the ventilators. It's modestly profitable. That's what we expect. We've been deliberate not to create expectations on the profitability of those ventilators because -- although I do expect it to be profitable and cash generative, I mean you can well imagine that what we're doing here is reacting primarily to what really is a biological wartime effort here, due to our fight against COVID-19, and I'm extremely proud of what we've been able to do. But our top priorities on the contract are really making sure on the quality of those devices and their speed-to-market because obviously we want to put it in the hands of the public health authorities as quick as we possibly can. Does that answer your question, Steve?

Steve Arthur -- RBC Capital Markets -- Analyst

Yeah. No, I think it does. I understand that, and appreciate it.

Marc Parent -- President and Chief Executive Officer

Okay.

Steve Arthur -- RBC Capital Markets -- Analyst

Thank you.

Operator

Thank you for your question. Our next question comes from the line of Konark Gupta with Scotiabank. Please proceed.

Konark Gupta -- Scotia Capital -- Analyst

Thank you, and good afternoon. So maybe just wanted to follow-up on the utilization trends. You spoke about commercial versus business aviation. Within commercial, obviously, there are multiple silos there as well, like narrow-body, wide-body, as well as cargo. I wanted to understand, given obviously wide-body fleet still remains pretty much grounded by 50% or so, and narrow-body might be doing better. So any sense you can provide on utilization rates for you guys on narrow-body side as well as cargo, given a lot of airlines and operators are accelerating passenger to freighter conversions these days? So how are you leveraging those opportunities? Thanks.

Marc Parent -- President and Chief Executive Officer

Well, we -- I would break it down -- right down to that level, but I can tell you that, as we said before, about two-thirds of our training footprint is narrow -- actually, it's about 75%, actually, of our fleet is narrow-body. So, we're well exposed to that. And actually, a lot of aircraft -- those that we do have on wide-body, some of them are being used for cargo, and we are actually seeing actually a lot of narrow-body airplanes being used for cargo and being converted to that end.

Konark Gupta -- Scotia Capital -- Analyst

Great. But are you seeing any significant increase in cargo training, Marc?

Marc Parent -- President and Chief Executive Officer

Well, definitely there is more. I'm not saying that you don't know, there is a lot more cargo activity. And to the extent that we train cargo, yes, we have seen improvement in that -- in the training that's related to training of cargo aircraft crews for sure. I just would break out the number for you.

Konark Gupta -- Scotia Capital -- Analyst

Okay. No problem. That's good color. On -- then moving on, on the commercial side on MAX. Obviously, MAX is getting quite close to its recertification. I guess couple of airlines in the North American market have spoken about ungrounding them pretty shortly. And Boeing has disclosed the backlog is sitting around about 3,300 aircraft. So my question is really on, if you can help us understand the size of the potential opportunity for CAE from MAX in terms of what is the incremental demand potential for simulators as well as training as MAX comes back? Or do you see maybe a pent-up demand after they have delivered maybe a couple hundred or so aircraft?

Marc Parent -- President and Chief Executive Officer

Well, I don't think -- look, obviously, there is a short-term dynamic that's occurring here. But I think, in aggregate, when you look at all of the whole order book that you mentioned that, that's Boeing, I mean it's got a very solid order book as we know, very large. And when you look at the, basically, excluding lessors, there is about 73 operators at the moment who account for about 1,300 of those orders on MAX that we know they don't currently have a MAX training solution. So that gives you an idea of what the opportunity for us over time. And I think that the dynamic will be similar to -- at a steady state to other narrow-body deliveries that we've had.

So in the past, we've given you that the market driver statistic that we used at every about 30 narrow-body deliveries, necessitates a simulator in the market. And now that it's clear that the MAX will require simulation-based training, you would expect that airlines that previously were going to be able to consider they had a MAX, the NG fleet, and we're going to transition to a MAX, well, maybe then they're going to be -- well, it most likely they are going to less using their NG simulators because it would more advantageous to them to move to a permanent solution using MAX simulators or outsourcing their training to providers like ourselves, which offer MAX training. So that gives you some of the -- I guess, at a steady state, I expect this to be just like another narrow-body type.

Konark Gupta -- Scotia Capital -- Analyst

Right. And I think Boeing was recently mentioning about some updated pilot training requirements that the regulators from the U.S., Canada and Europe have mapped out. Have you been involved in those discussions at all? Or do you expect discussions going forward?

Marc Parent -- President and Chief Executive Officer

Well, I wouldn't break it down. I'll leave it -- Boeing answered the overall questions to their best, but I could tell you though that we have high-level meeting, I personally on lot of calls every month with senior leadership of return to service at Boeing. We're a partner to them to get the fleet back in the air and to support the authorities and our customers because we have the great majority of sales of simulators for 737 MAX, we have. So you can well imagine that we're involved, but in terms of the decision-making, it's coming out of the authorities.

Konark Gupta -- Scotia Capital -- Analyst

Okay. Thank you for that. That's all my questions.

Operator

Thank you. Our next question comes from the line of Fadi Chamoun with BMO. Please proceed with your question.

Fadi Chamoun -- BMO Capital Markets -- Analyst

Yes. Good afternoon. Thank you. Sonya, we're getting a lot of question about this Canada Wage program, I guess. And I think you've collected year-to-date somewhere around CAD80 million, and I think in this quarter, around CAD35 million. Should we consider these as income that would have otherwise basically subsidizing or offsetting what could have been wage reduction or headcount reduction or things like that? Or is there a bottom line impact from these wage subsidy program on the first half results? And if you can -- if you have visibility, if you can give us an idea, what do you expect from those kind of programs in the second half of the year?

Sonya Branco -- Vice president, Finance and Chief Financial Officer

No. So you should absolutely look at it as ultimately an offset, as you mentioned. So by the mitigation measures we sought out different government programs globally and we've got about, I think, 20 different countries. The lion's share is really in the Canadian program. So the other countries sometimes it's literally just a flow-through that the governments use to subsidize the employees, the Canadian program is slightly different. So in total, as you mentioned, CAD35 million in the quarter. But as you remember, some of the measures that we took quite early on was highly impactful, 2,400 people furloughed or reduced work weeks and so on. And so what this program essentially allowed us to do is to call back those furloughs and employees and work weeks, so essentially neutralizing the impact. So it's relatively neutral. As for the future, the program is continually being changed, it's still there until June and a lot of moving parts to really kind of be able to answer that question.

Fadi Chamoun -- BMO Capital Markets -- Analyst

Okay. That's great. The other question I had is on the cadet. On the cadet training program, I think you have a number of cadet training programs with various airlines. Have these programs been kind of scaled back? I'm just trying to understand how kind of airlines are looking at some of their ab-initio training requirement going forward, if they are scaling back or are you seeing them kind of remain with their original plan despite the pandemic?

Marc Parent -- President and Chief Executive Officer

Well, that's exactly the case, Fadi. People have maintained their original plans. Don't forget it takes at least in the neighborhood of two years to create a pilot. And actually, we came out with our CAE pilot forecast just yesterday. If you have a look at it, I still think it's a good career to become a pilot because we were in a pilot shortage situation, as you will recall in the not-so-distant past. And although obviously the pilot profession was affected significantly in the shorter term because of COVID, the wave of retirements as well as basically movements in the workforce will recover and we will need quite a number of pilots going forward.

So going back to your question, the -- all of our programs have been maintained. In fact, we've won more business. We won, for example, with Boeing, we announced that last quarter, a contract to deliver pilots for them. So I haven't seen any impact. In fact, our flight hours are basically the same. And the only effect that we've had is where we've had to close centers temporarily like, for example, in Australia, in Melbourne, because of COVID and that's affected our flight operators. But in the end of the day, going back to our pilot demand forecast, well, we forecasted demand for 27,000 new pilots by the end of 2021. And if you think about it, it takes two years to make a pilot, when you want to make sure that you maintain it and that's what our airline partners are doing.

Fadi Chamoun -- BMO Capital Markets -- Analyst

Okay. That's great color. Thank you. And maybe one last question. You said 35 to 40 deliveries of full-flight simulators this year. If you have enough visibility, can you give us an idea what kind of orders run rate do we expect this year?

Marc Parent -- President and Chief Executive Officer

What kind of runway you meant? Sorry...

Sonya Branco -- Vice president, Finance and Chief Financial Officer

Run rate on new order sales.

Marc Parent -- President and Chief Executive Officer

Go ahead, Sonya, you really understood the question.

Sonya Branco -- Vice president, Finance and Chief Financial Officer

Yeah.

Marc Parent -- President and Chief Executive Officer

Go ahead.

Sonya Branco -- Vice president, Finance and Chief Financial Officer

No, I think, what we've said is that we expect order intake or order sales, the number tends to be lower this year, reflecting the environment, but that we'll keep and expect to keep a market-leading share of that.

Marc Parent -- President and Chief Executive Officer

Yeah. That's exactly right, Fadi.

Fadi Chamoun -- BMO Capital Markets -- Analyst

Okay. Thank you.

Operator

And thank you. Next we have a question from the line of Kevin Chiang with CIBC. Please go ahead.

Kevin Chiang -- CIBC World Markets -- Analyst

Hi. Good afternoon. Thanks for taking my question here. And thanks for the color on the Qs and how you think about it, Sonya. So if I look at the quarter, you did a mid-teen margin with utilization at 49%. The last time we saw your margins around these levels, you had utilization of somewhere in the 60s and I know mix plays a role, and you've obviously taken a lot of cost-cutting measures here. But do you think you can get back to pre-pandemic Civil margins at a significantly lower utilization rate than you were seeing, I guess, pre-crisis, just given where your revenue mix sits today?

Sonya Branco -- Vice president, Finance and Chief Financial Officer

I think I will maybe comment on the quarter first. And just you were comparing a highly kind of impacted Q1 versus kind of maybe a little bit, I guess, more stabilized dynamics in Q2. And what I'd highlight is that the model has really good operating leverage, right? So, we saw more volume on the -- through the utilization. And also like you said, mix matters and has some impacts. So there is a higher proportion of faster recovery on BAT, which is generally higher yields, but also there was a higher volume on the product side. So, you'll remember that there were only two deliveries last quarter, so revenue is driven on the delivery side, and so 10 in this quarter helped also on the volume and drive the leverage there.

Going forward, I think, listen, it's a bit early to kind of give outlook for the future -- for upcoming years, but that's the reason we've been engaged in this restructuring program and really kind of focusing on the internal processes, the optimization of our asset base footprint, really focusing on digitally enhancing processes and kind of taking the lessons learned through the pandemic and more and becoming even more efficient, right? And so driving CAD50 million of recurring structural savings for FY '22 and on. And so that'll be part of that conversation because the volume doesn't necessarily have to come up at the same level or at the same speed to drive a higher level of profitability.

Kevin Chiang -- CIBC World Markets -- Analyst

I appreciate the color there. Maybe just turning to Healthcare, it looks like a little bit of a leadership change there with Heidi Wood just taking over as President or being appointed as President. And I think, Marc, you mentioned some of the opportunities that you see within Healthcare that may have materialized here during the pandemic. Just wondering, as you look at those opportunities, do you see those as being complementary to the previous strategy you had within Healthcare? Or should we think about this segment now kind of pivoting toward another direction? And it feels like this division has been in bit of an incubation phase for I guess quite a while now. Just wondering when you think it hits an S-curve within its growth trajectory and it kind of breaks out of this kind of CAD30-some-odd-million of quarterly revenue, which it seems to generate pretty consistently right now?

Marc Parent -- President and Chief Executive Officer

Well, look, I'll tell you, I am very bullish on Heidi Wood leading our medical division. Perhaps, we are sure about that. I think if anything that's been going to be propelled going forward post-pandemic, one of them is going to be the propensity for simulation-based training in Healthcare. And I think what -- we're quite happy and I know I just got a -- had a review with Heidi with regards to the Healthcare division, and she is very, very complimentary of the people in the organization and the products and services suite that we have.

As I've mentioned before, the products that we have in the Healthcare division are very profitable, in lot of cases more profitable than in our core -- more core divisions, and it's a question of volume. It's a question of volume. We know that -- we expect that the volume is there. She has been meeting with a lot of customers and came away from it very encouraged. So I would basically say that, we're pretty good executive in-charge here, an executive with a lot of bandwidth, lot of experience and a lot of business experience, and that is singularly going to propel our products and services and lead the workforce to what I know is the growth that's out there in this business, which is only going to get better in this post-pandemic world.

Kevin Chiang -- CIBC World Markets -- Analyst

That makes sense. And maybe just last one for me. I think in the midst of kind of repositioning some of your assets, just given all that's happening in the world today and you did put out your pilot outlook yesterday. I'm just wondering, when you think of repositioning your assets, do you think of positioning them based on just kind of decade outlook of where you see pilot demand and where you see the various growth rates across various continents? Or are you taking a more near-term approach and trying to position those assets where you see maybe near-term growth where Asia-Pac might be returning faster to travel and some other markets are a little bit more constrained because of travel restrictions?

Marc Parent -- President and Chief Executive Officer

No, look, just like the rest of our business, we always take a strategic view on it and it's certainly not a short-term consideration. And as I mentioned when we talked about the restructuring and the asset relocations and some of the main training center consolidations that we're going to -- that we're having, some of them that we've announced already, is mainly looking at the -- what is going to be the market demand or sort of the demand that we expect to be out there, based on the forecast of the industry's recovery and of course the conversations that we have with airlines around the world and business jet operators.

I mean this is one of -- again, crisis favored -- like this one, favors the leader and one of the consequences of that or maybe an artifice of that is the fact that we have conversations with the majority of the world airlines because they are our customers in one way or form. So we're able to get a pretty good view of what training activity should be like over the next two years to five years, and that's what we -- that plus the IATA forecast is what we use to basically plan our footprint going forward.

Kevin Chiang -- CIBC World Markets -- Analyst

That's it from me. Thank you very much for taking my questions.

Operator

Thank you. And we now have a question from the line of Cameron Doerksen with National Bank Financial. Please proceed.

Cameron Doerksen -- National Bank Financial -- Analyst

Yeah. Thanks. Good afternoon. Question on Defense. Marc, you had prepared remarks on the Defense business there. I'm just wondering, if you can go into maybe a little more detail on what the game plan is going forward to improve the profitability in Defense because as you know it has been lagging for a number of quarters?

Marc Parent -- President and Chief Executive Officer

Yeah. Well, look, first and foremost, I think, I always say there's nothing wrong with the Defense business, it had a few hundred million of orders when fixed. I say that, and I say that to the team all the time. So clearly, it's about growth, and you throw more growth. And of course, when we bid on projects, we certainly bid to be able to go into the contract with a market that will be accretive to see. I mean, obviously, it depends if it's service or products contract.

So first and foremost, get more volume. And more volume, of course, that affects your profitability because you lower your overhead rates that in which case that helps you -- even better makes you more profitable and more marketable, going forward in terms of winning bids. At the same time, we can absorb more SG&A, and that's -- where we get multi-year service contracts, that helps because you don't have to eat what you kill every year.

And we have a project under way, well, which -- its part of our overall restructuring and the improvement programs that we've launched and learnings to do things differently, with some of the insights that we've gained during a pandemic and before, and we call those eternally Project Phoenix, Project Crossroads [Phonetic], and those to me is a couple of more growth will be the result in better execution, coupled with growth, will result in -- well, I certainly expect to be double-digit margins in Defense.

Cameron Doerksen -- National Bank Financial -- Analyst

Okay. So that's good. Thanks. And just secondly on, I guess, maybe a capital allocation question. I think the free cash flow is probably trending a little better than what you might have expected earlier in the fiscal year. So I'm just wondering, if you can comment on what the -- when the decision will be made to reinstate the dividend? If that's something that we should potentially expect the next couple of quarters?

Marc Parent -- President and Chief Executive Officer

Well, I tell you, the capital allocation priorities haven't changed. We always take a balanced approach to invest in our first priority, which is accretive to sustainable growth opportunities, while maintaining a solid financial position. That's what we're going to be doing. The current returns to shareholders have been there in our past obviously, and it's always been a function of level of excess free cash flow. And it's an ongoing discussion that we have with the Board. So I think we have to look at things on a case-by-case basis as we go. But there is a lot of -- we see pretty interesting growth opportunities in front of us right now.

Cameron Doerksen -- National Bank Financial -- Analyst

Okay. Fair enough. That's all for me. Thanks very much.

Operator

Thank you. And we now have a question from the line of Benoit Poirier with Desjardins Capital Markets. Please go ahead, sir.

Benoit Poirier -- Desjardins Capital Markets -- Analyst

Yeah. Good afternoon, and thank you. Just on Defense, could you provide maybe an update on the large project contract that were impacted early independent? And maybe that mix between equipment and services you're seeing these days?

Marc Parent -- President and Chief Executive Officer

Well, I think, Benoit, as we said this year in Defense is a transition year because of some of those -- the issues that we have on large contracts, contracts under lease, which we were literally tooled down and in some cases, still tools down, and the level of the less attractive because of our training centers because of pandemic-related restrictions. Certainly, beyond this current year, we see a growth business and I'm quite encouraged with the new Defense leader, Dan Gelston and the amount of insight he's driving it to the business, the amount of leadership and energy he's driving here. So I'm quite confident in that. In terms of product service mix, it's pretty similar to what has been in the past. So Sonya, do you want to add to...

Sonya Branco -- Vice president, Finance and Chief Financial Officer

Yeah. It's still, I think, a higher proportion on the services side than the product side. And that's being reflected in the margin profile.

Marc Parent -- President and Chief Executive Officer

And the margin is about two-thirds, I think?

Sonya Branco -- Vice president, Finance and Chief Financial Officer

Yeah.

Marc Parent -- President and Chief Executive Officer

Yeah. Two-thirds, yeah.

Benoit Poirier -- Desjardins Capital Markets -- Analyst

Okay. That's great. And maybe could you share any thoughts about your expectation for the new leadership under Daniel Gelston? And maybe, if you could give an update related to your active bidding proposal, the amount that you tend to disclose every quarter? Thank you.

Marc Parent -- President and Chief Executive Officer

Well, I think I can -- like said in previous question, I'm very pleased to have someone of Dan's caliber on board at CAE. Dan has very positive energy that he brings to the team in Defence. And, I'm very, very confident that he's going to do great things to bring out the full potential of our business, which going back to your question previously -- that was previously said, admittedly was not the case for last couple of years.

So, he brings a wealth of knowledge and experience, specifically in a kind of business that we have in running an SSA company and special security agreements, we're a Canadian company leading that to be able to sell, for example, the whole branch of the U.S. military, which we do. He understands the landscape within the current requirements in defense for multi-domain warfare and the real -- going forward, what he's going to be training for to deal with new peer threats that are out there, which is different. He understands the technological capabilities of CAE and really how to leverage them in the high-value areas, like the contracts that I mentioned during my remarks and from a Single Synthetic Environment or Special Operations Command, I just I was using that example.

So look, we've made some structural improvements in Defence. And so look, I think, stay tuned. We're confident that Defence is a solid growth business for longer term. And the latter end of your question, I think the number that we have right now is CAD4.8 billion.

Benoit Poirier -- Desjardins Capital Markets -- Analyst

Okay. Okay. That's great. And the last one for me. You talked about the growth opportunities, how should we be thinking about capex post fiscal 2021 as there might be some catch up, given the growth opportunities you foresee?

Sonya Branco -- Vice president, Finance and Chief Financial Officer

Benoit, I think we just came out with guidance for this year. So capex to-date at CAD33 million was tracking little under the CAD50 million that we provided as guidance and planning for CAD100 million for the year. Beyond that, I think, we'll wait until March and May. So, some of that capex is related to footprint optimization, as we consolidate training centers. And, of course, we'll pace investments with the level of demand in line with customer contracts. But essentially where we have and we continue to see some opportunities or some platforms, where there's demand, where there's these opportunities, capex deployments drive nicely accretive returns. And really within the five-year horizons are driving 20% to 30% incremental returns, and it's a good proxy for cash flow. Where we have -- we continue to see those opportunities, well, we'll be acting on them.

Benoit Poirier -- Desjardins Capital Markets -- Analyst

Okay. Thank you very much for the time.

Operator

Thank you. And now we have a question from the line of Doug Taylor with Canaccord Genuity. Please proceed.

Doug Taylor -- Canaccord Genuity -- Analyst

Yeah. Thanks. Good afternoon, and thanks for taking my questions. Just a couple for me. Firstly, with respect to the restructuring benefits, the CAD50 million that you were targeting, and I'm sorry if I missed it, but can you update us on where you are, what was recognized within the quarter, or how you now expect the remaining benefits to ramp over the coming quarters?

Sonya Branco -- Vice president, Finance and Chief Financial Officer

So we incurred that CAD50 million of costs this quarter and will -- it will kind of go into Q1 of next year with the bulk of those charges we expect this year. But there are some longer lead items with asset relocations and facilities optimizations now. In terms of the benefits, the guidance and the info is CAD50 million of recurring structural savings starting fiscal '22. So, we just started the program and a good part of that program is footprint asset optimization will require some bit of time to consolidate the facilities. And also Marc was talking about all the digital process enhancements, etc., that are under way and so on and ongoing throughout the year. So we will really start seeing the benefits come through next year, maybe some or little bit this year, but really next year CAD50 million of recurring structural savings.

Doug Taylor -- Canaccord Genuity -- Analyst

That's helpful clarification. My second question is with respect to the types of deals that you're looking to potentially cut with some of your airline customers for outsourcing training and that's certainly an exciting growth vector during this pandemic. So when and if that happens, can you speak to whether there are incremental investments that would be required on your part? Or will you be taking on additional capacity? Or would all the potential business you would -- be outsourced to you, you would be able to service within your existing portfolio and infrastructure? That would be helpful. Thank you.

Marc Parent -- President and Chief Executive Officer

I think it depends on the deal obviously that we look at, but if we look at the past airline outsourcings that we've done them, there has been quite a number of different types. But in lot of cases, we take over, for example, the partner's existing assets. Think about what we did with Japan Airlines, Singapore Airlines, so they basically contribute their existing training assets or simulators. So that's one way of doing it. So either way, we will look at it. Our view, it has to be accretive to seize go-forward picture, and I would expect that sometimes we're going to be combining assets to be able to do that.

Doug Taylor -- Canaccord Genuity -- Analyst

Okay. So is there any -- go ahead.

Marc Parent -- President and Chief Executive Officer

Go ahead. Carry on.

Doug Taylor -- Canaccord Genuity -- Analyst

I was just going to ask, I mean, given the pandemic is obviously a new phenomenon for the airlines, if that has changed the decision-making with respect to outsourcing to favor a certain type of outsourcing arrangement versus prior cycles more?

Marc Parent -- President and Chief Executive Officer

I don't think so. No, I think, look, at the end, it's usually the same kind of dynamic. If you're an existing airline and you have a trading operation, you still have -- don't forget our -- and that's the great thing of our business. It's a regulated business. Every six months, typically, pilots have to go back for training. So if you're an airline, you have to either have the capacity for all your pilots to be able to train on a regular basis and to take advantage or necessitate initial training as you base that pilots retire or pilots furloughed, so you have movement in your pilot workforce. So you need the infrastructure.

So if you are already in airlines and most likely you have that infrastructure, so typically what you bring into the deal is that -- those assets. And we are very good about because that's our business, and we do it for a very large number of airlines to tune of a million flight hours a year or a million training hours a year. We're very good at extracting maximum utilization by efficient scheduling, efficient deliveries of courses. So typically, what we would do is have less of a need for -- and then we're able to offload some of that capacity and sell it for third-party training.

So, I wouldn't expect the dynamic to change very much from that standpoint, except to say that in this kind of environment, we have more discussions because people want -- they really want to understand that, because if they can make their cost structure lower, which you could certainly do and more -- perhaps even better make it variable, so only use -- you only pay for what you use and when you use it because typically, for example, the western world, in a normal year, which of course this is not a normal year, but seasonal patterns, you don't train in the summer because you're fine. But if you have your training infrastructure then you're paying for it, the ergo being advantage.

And the only thing of course is that these days, obviously, with the pandemic still very much out there, pilot -- airlines have a lot of on their plates these days, and this is typically the same theme. So hopefully that gives you a bit of a broader color.

Doug Taylor -- Canaccord Genuity -- Analyst

That's very helpful. Thank you very much.

Andrew Arnovitz -- Vice President, Strategy and Investor Relations

Thank you. I want to thank...

Operator

Thank you.

Andrew Arnovitz -- Vice President, Strategy and Investor Relations

Thank all the members of the investment community for their questions. With the time remaining, I'd like to now open the call to members of the media should there be any questions from members of the media.

Operator

Thank you. Now, we're going to continue on. This is a question-and-answer session for the press and media. [Operator Instructions] The first question from the press and media comes from Ross Marowits with The Canadian Press. Please proceed with your question.

Ross Marowits -- The Canadian Press -- Analyst

Hi, Marc. I have two questions for you. One is, you talked about how the recovery is going to be closely tied to the lifting of travel restrictions. Do you have any sense of timing of that or has your view on the timing changed recently?

Marc Parent -- President and Chief Executive Officer

Well, I have the same view as everybody else. To be be very frank, it hasn't changed. I mean, we model our planning based on the IATA forecast at the highest level, and that's complemented with discussions that we have with individual airlines because it's no exaggeration that the bulk of the world's airlines are customers one way or another. So I think the way that translates is, IATA forecast about a 66% reduction in passenger traffic this year. So that's what we would use overall, and that also calls for air passenger traffic to recover to 2019 levels in late 2023, early 2024. Yeah, maybe that gets better because of news we had yesterday, maybe, but to -- hopefully it does, that would be great. But our planning hasn't changed from those statistic I just mentioned.

Ross Marowits -- The Canadian Press -- Analyst

Okay. And the second thing is, I'm wondering in terms of Defence spending, with the new administration in the U.S. coming in, are your expectations of orders or business going to change?

Marc Parent -- President and Chief Executive Officer

No. No, and the reason I would tell you -- two reasons. Number one is that, first of all, I would tell you that the day that the orders that can get at CAE being a proxy to the size of the U.S. Defense Department, I would be very happy. I think we have lots of opportunities to grow within the defense budgets that are out there today, and are foreseen to be out there under any reasonable scenario going forward.

The other thing is that the products and services that we provide, we by definition align ourselves to the defense strategy and the expected defense -- where the money is going to be spend over the next few years. And the great thing about, for example, governments and specifically if I was to use the largest defense market in the world, the U.S. Defense Department, basically they tell you what they're going to spend on or what over the next few years. So our investments in research and development and bidding activity are very much aligned to those national defense priorities.

So I feel very good about our prospects for growth in the next few years. And then we -- and I think one thing that's obvious in there to understand is what we do is simulation-based training. That's actually saves money relative to, for example, training which you have to do, you have to continue to do. So If we can move forward with that training -- simulation-based training, well, obviously that reduces cost, you are on the spirit of goodness there.

Ross Marowits -- The Canadian Press -- Analyst

So you're not concerned about new government reducing spending on defense?

Marc Parent -- President and Chief Executive Officer

No.

Ross Marowits -- The Canadian Press -- Analyst

Okay. Thank you.

Operator

Thank you. And up next we have Allison Lampert with Reuters. Please proceed.

Allison Lampert -- Reuters -- Analyst

Hi. So when would you expect non-U.S. regulators like Transport Canada and EASA to lift the MAX grounding compared with the FAA? And as a follow-up, are you -- so what kind of timing are you seeing in terms of bookings for the MAX training?

Marc Parent -- President and Chief Executive Officer

Well, starting with your first question, Allison, look, I can't answer for the regulators, but the comments that I've seen and you saw probably news from the FAA literally today, positive comments from the head of the FAA today, I would expect Transport Canada not be far behind, typically just because they've been doing their certification testing in lockstep, but again, I can't speak for them. And the comments that I've seen from the Head of EASA, Patrick Ky most recently on the recovery -- the certification of the 737 MAX was positive. So I would expect that would come sometime behind. But again, I'm not the guy that really can answer with any certainty with regards, except that it's all looking very positive at this stage.

With regards to MAX orders, we are booking them now. We have -- again, the lion's share of the simulators for the MAX have been won by CAE. And I would expect that we're going to continue to do well there, and we're continuing to deploy MAX simulators for our own training centers in that regard.

Allison Lampert -- Reuters -- Analyst

And what about bookings for the training centers, when are you seeing those -- when the people coming in?

Marc Parent -- President and Chief Executive Officer

Well, actually the people are training now, I would give you an idea. Well, for example, here in Canada, Air Canada has two of our MAX simulators and I can tell you that even though the fleet has been grounded, as it has been around the world, Air Canada's maintained that the training of their pilots, I think they had about, memory serves, about 500 pilots that were trained on the 737 MAX and they've continued to keep those pilots train. So the training activity has not stopped, its continued during this whole time because of the time it takes to ramp up pilots. So it may take only a day or two to take an airplane out of mothballs, but if you haven't prepared for it, it could take you literally months to get your pilots back up to speed to be able to fly them.

Andrew Arnovitz -- Vice President, Strategy and Investor Relations

Okay. Operator, that's all the time we have for the questions this afternoon. Again, I want to thank members of the investment community and media for their time listening to us and for their questions. And remind you that a transcript of today's call can be found on CAE's website. Thank you, and good afternoon.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Andrew Arnovitz -- Vice President, Strategy and Investor Relations

Marc Parent -- President and Chief Executive Officer

Sonya Branco -- Vice president, Finance and Chief Financial Officer

Steve Arthur -- RBC Capital Markets -- Analyst

Konark Gupta -- Scotia Capital -- Analyst

Fadi Chamoun -- BMO Capital Markets -- Analyst

Kevin Chiang -- CIBC World Markets -- Analyst

Cameron Doerksen -- National Bank Financial -- Analyst

Benoit Poirier -- Desjardins Capital Markets -- Analyst

Doug Taylor -- Canaccord Genuity -- Analyst

Ross Marowits -- The Canadian Press -- Analyst

Allison Lampert -- Reuters -- Analyst

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