James McGarragle

James McGarragle questioned how CAE plans to balance being more selective for higher returns and margins with driving absolute free cash flow growth and capitalizing on secular opportunities, and the company's ability to pass on higher pricing to customers.

Answer

President and CEO Matthew Bromberg explained that selectivity in capital decisions will reduce CapEx and improve cash flow. He detailed a bottoms-up review of the R&D portfolio to curtail non-core projects, further enhancing free cash flow. He also emphasized solid performance execution, including improved inventory management, billing accuracy, and timely collections. Regarding pricing, he noted that CAE negotiates long-term agreements with sophisticated airline customers, focusing on ensuring fair value exchange rather than catalog pricing.

James McGarragle questioned how CAE plans to balance being more selective in pursuing higher-return, higher-margin business with driving absolute free cash flow growth and capitalizing on secular opportunities, and also asked about the company's ability to pass on higher pricing to customers.

Answer

Matthew Bromberg (President and CEO, CAE) explained that selectivity in capital decisions, a review of the R&D portfolio, and a focus on performance execution (collections, inventory) will drive free cash flow. He noted that pricing involves complex negotiations for long-term value with sophisticated airline customers rather than a catalog approach.

James McGarragle with RBC asked a follow-up question on the lower CapEx guide, inquiring if this level of CapEx should be expected going forward, if it signals lower growth in 2027, and if CAE plans to drive growth primarily through improving utilization in the civil segment. He sought to understand how this aligns with the longer-term outlook for the civil segment.

Answer

Matthew Bromberg, President and CEO of CAE, stated that the current investment in capital (growth and maintenance) and R&D is high for a company of CAE's size. He indicated that the company will determine the appropriate level, make the right investments for continued growth in the right places and segments, and provide full visibility on the outlook for the next few years when 2027 guidance is released.

James McGarragle followed up on the lower CapEx guidance, asking if this level is appropriate going forward, if it signals lower growth in fiscal year 2027, and if growth can be driven solely through improving utilization in the civil segment.

Answer

Matthew Bromberg, President and CEO of CAE, reiterated that capital, growth CapEx, maintenance CapEx, and R&D spending are high for CAE's size. He stated that they will determine the appropriate level, make the right investments for growth in the right places, and provide full visibility for the next few years when 2027 guidance is released.

James McGarragle of RBC Capital Markets questioned the puts and takes for the Civil margin outlook given the drop in utilization, and also asked about the drivers of the strong Q1 Defense margin and its implication for the rest of the year.

Answer

On Civil margins, COO Nick Leontidis cited improved utilization and cost controls as drivers for the second half. On Defense, Interim CFO Constantino Malatesta explained that the strong Q1 margin was due to the timing of contracts rolling off and on, and reiterated the unchanged annual guidance due to potential quarterly volatility.

James McGarragle from RBC Capital Markets asked about CAE's positioning regarding potential tariffs and whether they have impacted customer decisions. He also questioned the drivers of the strong Defense margins in Q3 and the outlook for future margin expansion.

Answer

CEO Marc Parent stated that no material short-term impact from tariffs is expected, as most revenue is from in-country services and CAE can adapt its supply chain if needed. On Defense margins, Mr. Parent, Interim CFO Constantino Malatesta, and COO Nick Leontidis attributed the strong performance to excellent execution, risk reduction on programs, and a favorable business mix, rather than one-time items, expressing confidence in continued expansion.

James McGarragle of RBC Capital Markets asked for drivers of the expected second-half Defense margin increase and whether the announced $20 million in savings is incremental to future guidance. He also inquired about the magnitude of restructuring expenses beyond Q2.

Answer

COO Nick Leontidis attributed the second-half Defense margin improvement to both cost savings and execution of a higher-quality backlog, noting the savings add confidence to the forecast. CFO Sonya Branco stated that upcoming Q2 restructuring costs will be mostly cash-based, are factored into the free cash flow guidance, and have a payback period of approximately 1.5 years.

Asked for an outlook on realized pricing in the Canadian market for Q3, the expected trend for cost of goods sold, and an update on the status and potential conditions of the federal loan support application.

Answer

The Canadian realized pricing discount versus the US is expected to remain around 40% in Q3. Cost of goods sold should be similar to Q2. Discussions with the federal government for loan support are very active, but the company declined to comment on specific details or potential conditions.

James McGarragle of RBC Capital Markets questioned the outlook for realized pricing in Q3, particularly the 40% discount in Canada, given the 50% U.S. tariff was only partially in effect in Q2. He also asked about the Q3 cost of goods sold forecast and the status of the federal loan application.

Answer

CFO Rajat Marwah stated that the pricing discount in the oversupplied Canadian market is expected to remain around the 40% mark in Q3. He also projected that cost of goods sold should be similar to Q2, with a potential seasonal increase in Q4. Regarding the federal loan, CEO Michael Garcia described discussions as "very active" and characterized the engagement with the government as positive, but declined to share further details.

James McGarragle questioned the outlook for cost of goods sold in Q2 given the EAF ramp-up and cost initiatives, and also asked about the potential impact of recent U.S. auto tariff developments on Algoma's pricing power and demand.

Answer

CFO Rajat Marwah projected that the overall blended cost of production should improve to the CAD $1,020 to $1,040 per ton range in Q2, down from Q1 due to lower utility costs. CEO Michael Garcia explained that the recent U.S. auto tariff announcements provide more certainty to the supply chain, which could support volumes, but he does not expect it to create an opportunity for Algoma to increase its prices.

Asked for guidance on the direction of cost of goods sold for Q2 and the potential impact of recent U.S. auto tariff announcements on Algoma's business.

Answer

Executives guided that Q2 blended cost of production should decrease to the CAD $1,020-$1,040 per ton range as high winter utility costs abate. The recent U.S. auto tariff announcements are seen as neutral on pricing but positive for volume stability, as they provide more certainty to the automotive supply chain.