Beutel Goodman Speaker Series: In Conversation with CAE Inc.

28 September 2021

CAE Inc. is a prime example of a company that most consumers will not recognize despite likely having some connection to it. The Canada-based company is a global leader in training for the civil aviation, defense and health care industries. CAE owns and operates dozens of pilot training centres around the world, in addition to building advanced simulators for safe, virtual training exercises.

CAE’s stock became a holding in the Beutel Goodman Canadian Equity portfolio in April 2020, when the stock tumbled alongside the broader market response to the COVID-19 pandemic. The company’s leadership has aggressively expanded its core competencies and diversified beyond its original image as a simulator-maker.

Recently, CAE’s President and CEO, Marc Parent, joined Beutel Goodman for an online event with clients to explore how CAE is navigating the pandemic and what the industry may look like in a post-COVID world. Watch to hear more about the company’s newest areas of growth, being an ESG leader and how its latest acquisitions fit into the overall corporate strategy.

This recording took place on September 21, 2021. The following transcript has been edited for clarity.

Beutel Goodman Speaker Series: In Conversation with CAE

VIM THASAN: Thank you for joining our Buetel Goodman Speaker Series event, “In Conversation with CAE.” My name is Vim Thasan. I’m a Vice President and Portfolio Manager on the Canadian Equities team here at Buetel Goodman, and I’ve got the pleasure of being host for today’s event, featuring Marc Parent, the President and Chief Executive of CAE.

CAE is a global leader in training for the civil aviation, defense and security, and health care industries. The firm works to enhance clients’ training and critical operations with digitally immersive solutions to elevate safety, efficiency, and readiness. CAE is a high-tech company with digital immersion to make the world a safer place.

We’ve known CAE for some time and became a shareholder in April of 2020, during the peak of the [COVID-19] pandemic. The company has done an exceptional job of weathering the storm and coming out stronger. And it was a material contributor to the performance of the Buetel Goodman Canadian Equity portfolio.

The man at the helm is Marc Parent. Marc joined CAE in 2005 as Group President, Simulation Products, responsible for the company’s civil simulation-product business. His role expanded in 2006, when he was appointed Group President, Simulation Products and Military Training and Services. In 2008, he was named Executive Vice President and Chief Operating Officer, responsible for all of CAE’s business segments and new growth initiatives. And, in the following year, he was appointed President and CEO of CAE. Mr. Parent has more than 35 years of experience in the aerospace industry, and he was also appointed Member of the Order of Canada in 2020 in recognition of his achievements that have greatly contributed to the development and growth of the aerospace industry in Canada. He also has an active pilot’s license, so he is a man who knows his way around an airplane.

Also on the call today is Andrew Arnovitz, Senior Vice President of Investor Relations and Enterprise Risk Management. He has been with CAE since 2001, and through his leadership on corporate strategy, he has helped transform CAE from primarily an industrial products company into a training solutions provider.

I’m thrilled to have the opportunity to welcome both Marc and Andrew to discuss CAE’s successes, its navigation through the pandemic and the plan for the future. Thank you for taking the time with us, gentlemen.

MARC PARENT: Our pleasure.

ANDREW ARNOVITZ: Thank you, Vim.

MP: Great to be here.

VT: I’d love to start off with a broader, bigger picture [question] about the industry, Marc.

Could you talk about the pandemic’s impact on the airline industry and your business, and what your thoughts were at that moment in time on how to navigate a pandemic without having a playbook of similar experiences in the past [to refer to]?


MP: Great question, Vim. I think the last part of that answer, I perhaps [would] answer from a real conversation I had with a pilot. I won’t tell you what his name is, but you can probably guess it if you ever research it. [He] once was flying a big Airbus airliner over the Atlantic and his two engines, one after the other, flamed out. And he was riding an airliner in the dark over the Atlantic Ocean at night with everything gone. So, I guess I was probably not exactly in that [state of] mind. Maybe [I was] for about 10 seconds.

I asked him, “Well, what thought went through your head?”

He said, “Well, you know, Marc, I thought we were dead. But then you know what? After about 30 seconds, I realized, hey, we’re gliding, and you know what? Where’s the Island? Where’s land?”

So I’m exaggerating for effect. But when I answer your question, obviously, you try to plan for disruption, for black swan events. I mean, this has been the black swan event from hell. Before [the pandemic], who could have ever predicted that 95% of the world’s airliners would be grounded one day to the next? And that’s really what happened to our industry, I think.

We’re still in quite a bit of element of destruction, even today. And for us, obviously, we’re [a very integrated] partner for the airlines in the aviation sector [and] that hit us hard. I never thought in my career that I’d be asking my CFO, “How much cash do we have?” And then looking at that cash balance every single day and maximizing our credit lines extracted, you know. Pulling on any credit line that we could and battening down the hatches and laying off a quarter of our staff, you know. Cutting our salaries at the executive level by 50%.

So that’s what the situation looked like in March 2020 for the industry and for us, in particular. But, as I said, then we realized we’re gliding and, at the time, we didn’t know where the bottom was going to be. So, we quickly found it and that’s what it was. We could see it coming and very, very quickly.

And I think that’s the hallmark of our company. We move quick. I mean, that that’s the way I like to do things: stay nimble, stay agile and play the cards you’re dealt with. And those are the cards we were dealt with and we reacted. I think we reacted very well to it.

But that’s the way we looked [at it] back in 2020. For our business, [we] very quickly just acted upon the realization [that] as long as 95% of the world’s airliners were grounded, well when you start seeing those airplanes coming back up. For example, the actions of government in the United States, which really treated the airline industry as an essential service that needs to keep flying, whether they’re full or not, they’re going to keep flying.

Well, we are an essential partner and we play an essential role in the ecosystem of airlines in the world because, you know, training is like fuel. And that’s lost on some people that don’t realize the ways [of] our industry. As you said, I’m a pilot myself, I’ve got an airline transport rating myself. Not that I’ve ever flown for the airlines, but I could in theory. By the way, I just decided that makes me a great expert on our business. And since I experience our own product, I’m my own worst nightmare to my people as a great undercover boss.

For us, we are an essential part of the infrastructure, of the fabric of this industry. So, you need fuel to fly those planes, you need pilots to fly those planes and those pilots have got to go back to training every six months to a year or else those planes aren’t flying. So, our business [is] resilient from that standpoint. And that’s a bit of the position that we put ourselves in over the past two years as being a global training provider, essential and global as a business.

A long-winded answer to start off with that.

VT: No, I love the answer and it’s a very visual answer. So, thank you for all those details. And you touched on part of that, which is the quick actions that you took. And I was very impressed to see how quickly you acted upon that. At that moment in time, with all this fear, you’ve gone through previous crises where there were also opportunities.

How did you find a way to balance that focus on cash and the balance sheet and the cost structure versus the opportunities that generally present themselves at moments of panic?


MP: First of all, make sure that no matter what happens, as I said, we’re going to deal with the cards that were dealt. The cards that were dealt meant that you can have whatever kind of horizon or forecasts that you think the industry will recover, kick it and make sure that at the end of the day we’re going to be cash-flow positive. And I’m very, very proud of what we did because the action we took after one quarter we were back to being cash positive.

And I think that’s testimony to the actions that we took. And that, by the way, is not by turning off all the spigots. To me, that’s very important because, as you said, in every kind of crisis like that, there’s opportunity. I mean, it’s an overused term, but it’s so true. I mean, look for the opportunity to look for the train wreck. And this is the mother of all train wrecks for our industry and, of course, the whole world.

So, in that we knew – certainly, I was strong believer – that people are going to get back on planes. And we’re seeing that in everywhere where you don’t have border restrictions. Like, for example, in the United States, [where there are no] internal border restrictions, you’re seeing people come back on airplanes in droves. Of course, it gets impacted by things like the Delta variant. I think there’s a new normal that we’re coming to adjust ourselves [to]. But people are not going to not get back on planes. I think one thing here that people are discovering and never gets lost on people is I don’t think anybody’s going to take for granted their opportunity, their right to be able to get on a plane, to travel to other places. Nobody’s going to take that for granted, anymore. That in itself is a catalyst for growth.

But no matter what your forecast is, that’s what we saw and what we did is we picked the IATA [International Air Transport Association] forecast, which to us still looks like a reasonable expectation of past-year traffic growth, people getting back on airlines on a sustained basis. So, that’s what we have. For us, we adapted ourselves to that business. As I mentioned, we contracted our cost structure, but we continue to invest in those areas that are going to be propelled coming out of COVID.

We obviously, like anybody else, had to come up with a new [strategy] plan because clearly the external environment has changed. However, I’ve been in this industry for 35 years. And to me, I’ve been around business jets for that amount of time, as well. 20 years basically doing almost every job at Bombardier Aerospace, since the beginning, when they were called Canadair. I’ve been around business jets [and] designed business jets as one of the jobs I had. I led Learjet at some point in my career. So, it was very, very clear to me that this is going to be a catalyst for people to get on private business travel just because of the sheer freedom. And it’s very, very clear that there’s a lot of potential capacity of people with the financial resources to be able to get on business aircraft that haven’t been. So, that we saw as an opportunity right from the beginning, and that’s panning out.

Do any of us feel that the experience at airports is going to get any easier? I don’t think so. Right now, on top of the security concerns you have, obviously, the health care concerns, the line ups at airlines. It’s going to be a mess for a while. What we’ve seen come out of that is that business aircraft is indeed having, so far, a banner year – a V-shaped recovery. In fact, in the United States, flying by business jets is now higher than it was pre-pandemic. And we’re seeing that catch up and in Europe, as well.

And to me, the very interesting thing about that is the fact that the majority of that new flying of business jets is being done – and that’s more than 50% – is being done by first-time users of business aircraft. That’s very interesting. Once you’ve discovered the freedom that’s associated with flying with business aircraft, and you can afford to do it, my bet is that you’re not going back. And there’s less of a shame factor than there was back in the great financial crisis where all the heads of GM and everybody went to the hearings in Washington on their Gulfstreams, and that didn’t look so good. But that’s kind of worn off. And I don’t see that coming back because of the very real health care benefits of doing it.

So, we basically adapted our business and then redefined our strategic plan to take into account how are things going to be changed in the world, in our industry, but [also] outside of our industry. And how can we take our core strengths at CAE, our core strengths and technology, for example, our culture of innovation, which is really in the DNA of this company. How can we adapt it to the market and civil aviation airline traffic, [which] might not come back for three, four or five years, who knows, to the same level? It will come back. But what are we going to do in the meantime? We’re going to invest in those areas that will grow, and we are going to take the time during this period that we’re dealt with to make ourselves stronger. So, when it does recover will be a lot stronger.

As an example of that, we took $65 to $70 million of recurrent costs out of the business. And when we did that, we just basically put our teams together and say, hey, here’s a time where we’re not running on the treadmill that’s continuously going up just because the sheer growth of our business. We have an opportunity here to take stock and look at how can we make ourselves better. And we did. And a lot of that’s leveraging the power of digital, the power of doing everything digital. And we embarked on our own digital journey about four years ago, fortuitously just in time, because we were able to literally make 10,000 employees go virtual overnight; literally, overnight. Even I wouldn’t have predicted that we were able to do that. But because investments we made, we were able to do it just in time.

VT: That’s great, Marc. And it’s a great segue into the next question because you describe effectively a post-pandemic environment and [it’s] something we’re all uncertain about the timing of what that looks like. But you described an element of business jets, for example. And I’m curious if you can kind of elaborate on that. You talked about longer lines at airports, et cetera.

How do you see the aerospace and defense industries changing in a post-pandemic world, in addition to the thoughts that you’ve shared around business jets and more technology and maybe the changing nature at airports?


MP: I think there’s no doubt in my mind that, on the airlines, there’s no doubt that travel for tourist reasons will rebound. Personally, I think that will come back and it will come back stronger. That’s my own belief. On traveling for business, I think that will be affected some way. It depends on who you talk to. A number of airline CEOs and people in the industry – everybody believes it to be affected. But in the end, if you look at the quantum of business that’s being generated, revenues that are being generated in the industry, I don’t think that will be affected overall.

It’ll move, but I don’t think anybody thinks that we’re going to be doing Zoom or Teams for business on a sustained basis. Some part will be. But the majority of the business in the world today is still being done by small and medium businesses, and it’s not true that they necessarily have the resources to be able to have a big recurring contract. We can afford to do this on a sustained basis. So, I think I don’t see a material adverse impact from that standpoint.

Business aircraft we’ve already talked about. I really see that as a growth business going forward, taking some of the slack, as I mentioned, out of what’s happening potentially on the airline side from a business-travel standpoint. From a defense standpoint – and this is not really COVID-related, but it’s something that’s been happening that we’ve seen happen over the last few years – is that the military now, and I’m talking about the United States and all their allies around the world, is really gone from dealing with what we called the War on Terror to now, really, the training for the near-peer fight.

And what does that mean? Well, if we go back to what does the military do when they’re not in operations that are in combat, what do they do? They train for it. That’s what they do. They train, they train, they train so that if and when it happens, they’re ready for it and they can react and be able to accomplish their mission and return home safe. That’s what they do.

So, now the whole focus, and if you just saw, for example, the hearings in Congress with the Secretary of Defense, you’ll hear it. It’s all about the near-peer threat and what’s that? Of course, we can guess what that is – basically armed conflict with nation states that are near-peers, where you’re not going to be able to control the air environment. You’re not going to be able to necessarily control the naval environment. Definitely not the space environment or the cyber environment. As bad as Iraq or Afghanistan was, I don’t think anybody was too worried about calling in an air strike on a radio. Well, if you did that with a near-peer, well, you get a missile down your throat because it’ll be tracked immediately to you. So, you don’t control that cyber environment.

The “so what?” for us is that we’re a training company. I’ll talk about acquisitions that we did, taking the opportunity out of the time we have through COVID to make us stronger. We did five acquisitions. One of them is the largest in our history. [It] is the acquisition of L3 Harris’s military training business, which doubles the amount of revenue we do with the United States Department of Defense, putting us at over a billion dollars in defense revenue in the United States defense department.

So, what about that? Think about what does the military do when they’re not a war? They’re training for war. What are they training for? They’re training for the near-peer threat. Now, how do you train for the near-peer threat? Well, the only way to do it really is virtually. You can’t do it for real. It’s just impossible [and] way, way too costly. You can’t go on a desert range and really effectively do it. You got to do it virtually.

And how do you do it? How do you create a realistic environment for that to happen? That’s what we do. That’s what we’re good at. If you think about it, what does a simulator do? And we’re the world’s leaders by far in simulators. What does a simulator do? Well, it’s basically a device where you go into it and we’ve created an artificial world. It is so real. I can tell you as a pilot, I go into it every six months myself. When you go into it, you forget that you’re not in a real environment.

When you get an engine fire, you react exactly like you would to an aircraft engine fire because you’re trained for. And that’s where you get things like you saw a few months ago when you had that Boeing 777 out of Denver that had an engine on fire. You see passengers videotaping and you see it on the news. There’s an engine on fire. An uncontained fire. That’s not supposed to happen. I tell you, from designing airplanes, that can’t happen. But it did.

But you hear those pilots, they’re like having coffee. It’s [almost a] relaxed environment. Why? Because they trained for this – an event that will never happen statistically in their whole career. But if it does, these pilots react just like it’s nothing. And they handle it perfectly. That’s what we do. We create these virtual devices.

Over the years, we’ve expanded that capability to putting simulators together, creating mock situations where they interact. We [can] create a virtual war if you like. So, creating this environment where militaries, the U.S. military and their allies, can train and train virtually. That’s what we’re good at. [It’s] another way that the world is expanding for us.

The final part of it is our health care business. We have a small, nurturing business that we have within CAE in health care. What do we do there? We do simulation-based training in health care. Why do we do it? Why are we in it? That is because in the health care sector, just the United States alone, the level of deaths every year by medical errors of all kinds [is surprisingly highly]. Literally, wrong limb – just one example [that] rarely happens, but it happens.

What we do is prevent medical errors. The level or amount of deaths in the U.S. alone, documented by medical errors, is equivalent to two jumbo jets crashing every single day with all fatalities on board. Think about how many of us will fly on airplanes if that happens. None of us. So why is this permitted to happen? Well, I guess it’s kind of like people die one at a time [rather than all at once], so it doesn’t have the same kind of impact unless it’s you or a loved one.

Part of the way to increase patient safety is to train people effectively so that if a situation happens that they need to be very proficient at, just like a pilot, they can react. Basically, they will have the perfect procedure or perfect reaction to whether that pathology or situation happens in operation. Think about non-invasive surgery and [a question] comes to mind, “how do you train for non-invasive surgery?” Well, we provide devices to do that.

So, I strongly believe what we’ve seen during COVID is that the level of focus on everything health care and health training, nursing shortages, by example, requiring more training is going to come even more to the forefront. We’re starting to see it even whilst the medical sector is really still very traumatized. Just think it’s limited access to hospitals, schools still being closed. Yet we’re still active in this sector quite strongly, not withstanding, and that will be propelled going forward.

I’m very proud of the fact that during the pandemic we are able to use the skills that we have in health care. We literally developed from-scratch ventilators. It’s not a built to print. We basically use our skills to completely develop some and produce 10,000 for the Canadian government as part of our response to the pandemic crisis. Anyway, just some of the things that I think we’re going to be able to capitalize going forward coming out of this pandemic.

VT: That’s fantastic, Marc. And you touched on kind of the next thought, which is you have this industry that’s evolving and changing and how CAE has adapted to it. And you touched on key acquisitions such as L3 Harris, the immersive environment. Maybe we’ll see a holodeck like you saw in Star Trek from CAE coming in the future and even the health care business.

Would you mind just talking to us about how, through your leadership, this company has evolved in different stages? And it seems like coming out of the pandemic it is another point of evolution and what will CAE look like five to ten years from now?


MP: Well, to me evolution is a constant, right? Change is a constant. Everybody says that, but it’s true. It’s what it is. When I started at CAE – and I’ve been here over 16 years – when I started, the great majority of our revenue was basically coming from selling simulators to airlines. It was about 80% of our revenue. I remember the first sell-side analyst report I ever read about CAE back in about 2005 or 2004. And it was called, “the Gambler”. I said that’s kind of a funny name for a sell-side analyst report. And I read it and it said [about] CAE stock – know when to hold ‘em, know when to fold ‘em.

It was all to do with picking the cycle. Aviation, historically, has basically had a cyclical growth pattern. So, if you picked when the cycle was going up, buy CAE because they’re going to sell a lot of simulators. But if you smell it is going the other way, dump it because the contrary is going to happen. And guess what? Our stock was [rangebound] for years and years and years. [It could] never reach the next level, even though our technology was fantastic.

Basically, over the years, what we did is really focus on creating a recurrent revenue stream. And that was part of the evolution that we’ve done that and really go hard into, or vertically integrate into, what our simulators are used for. For training, obviously.

So, you saw us grow our training footprint and really focus our vision and mission as being a training company. Being the world’s best simulators, we still have a very commanding leadership position in selling simulators in the world. But now it is evolved in going after the training market. The training market, at the time we looked at, it was a market that was six times larger than the simulator market itself. [And in] a market where, contrary to having 60-70% market share, we had like 25% market share in a market that was growing with passenger traffic growth, which is growing at 3-5% a year.

So, put all those things together. We evolved ourselves as a company, a training company [where we] create the infrastructure. And that was the big evolution that we have had. And we executed well on that strategy. And I think we are rewarded for the last couple of years.

As I mentioned, before the pandemic, we focused on digital. And I think that’s part of the answer to your question about the future of the company because what we did, basically focusing on everything digital just like everybody else did. What does it mean for us? Well, for us, what it meant is we took all of our simulators around the world and [by] leveraging the power of the cloud, we took the data and we basically created IoT [or Internet-of-Things] devices out of every simulator that we have out there in the world, sending us back data in real time.

And because, just by sheer definition of who we are – the largest training provider in the world, by far, five times our nearest competitor – we have mountains of data coming at us. Now that’s important. [Telling us] objectively how pilots you’re doing. So, I can go to a CEO of an airline or head of operations or something, and I could say, “Hey, we can tell you objectively how your pilots are doing relative to all the other pilots flying that type of aircraft around the world.” Or comparing low-cost carriers to other airlines, “Would you like to know how your pilots are doing?”

Yeah, I think the answer is yes. Still, today, in a lot of areas, the way pilots are training, even though they’re training as set on a regular basis every six months; the way that pilot skills are assessed to make sure they just have the skills and can retain their license. Because that’s what we have. Your license is on the line every six months – [that] is subjective. There’s an inspector behind pilots looking at how they’re doing. [They’re] writing down, are you on air speed? You’re on glideslope. Did you execute that engine failure maneuver well? All these kinds of things and then you get a pass/fail. It’s just integer and it’s subjective.

Now we have all this data we use again, our analytics tools to now give you data-enabled insights into your business. How valuable is that? I think that’s pretty valuable. People are telling us that’s valuable. And how do you get it? Well, short answer: train with CAE.

I think that is part of how we’re going to continue to grow in this business, continue to basically seize on the opportunity out there in the world, where still a good proportion of world’s airlines are still doing the training by themselves. So, to me, that’s still a big opportunity for us to continue to evolve that mark, the same way that years ago, I think, when EDS started IT outsourcing. Nobody saw what was going to come. Maybe Ross Perot did at the time. But that’s kind of the way I look at things in a different industry, but I think the same applies [to us].

The expertise that we derive ourselves as being this premiere training company that provide you all these insights really leads itself to why should you basically do your own training when you can outsource it? And if you look at, even historically, the way this industry can be created again on the airline side.

Historically, as the airline industry came to be, airlines had their own catering businesses. They had to create their own engine maintenance companies because they didn’t exist. They had to create it for themselves. But now, of course, most of that’s been broken down into pieces or outsourced by different providers. And ours is one of those industries that is still somewhat at that point.

We have created ourselves over the years and have only become stronger in this pandemic. [We are really] the only large international alternative option for you to train your pilots.

That has an impact in the defense sector as well, because militaries are looking at how can [we] reduce costs to invest the money that [we] have on developing better technologies for the war fighter? Well, one of the very large costs is the cost of personnel. In fact, the largest cost, usually in the military, is the cost of personnel. So, if [military organizations] can rely on private contractors like ourselves to be able to do that, well, that has a huge value. And I can see a lot of [organizations in the] future doing that.

We convinced, for example, just about four years ago, the U.S. Army to let us do all of the training for their fixed-wing pilots. And that’s a large amount of training that’s being done. We created the facility. We bought a peanut farm back in Alabama. We put the training centre there, we put the equipment, and the U.S. Army, they outsource that completely to us. I see there’s still tons of opportunity on that road as well.

So again, as I look at the future, I see a world where – I won’t go too far out, but maybe just put it in investment terms – I’ve never been more excited about the growth prospects of this company. Because, if we’re objectively [looking at] ourselves, [and let’s] be honest about our performance – although, I think we’ve done pretty well on executing a vision. But when we look at the growth that we’ve had right up to, let’s say, March 2020, we went up.

I think in February 2020, we were at the highest stock price that we had. We had a [price of] $42 a share. And again, we’re [the] pinnacle of where we are just based on the execution of our training strategy. But again, being honest, really, that was considering three major businesses – civil, defense and health care – we really rode that rise on civil.

In defense, we were doing okay. But our margins, our return-on-investment capital, I wouldn’t say it was anything to crow about. Not at all. And health care, you know, some people call it “Marc’s science project.”  [It’s] not really contributing to a lot of dollars and cents. Now paying for itself, by the way, from a cash standpoint.

Coming out of this, remember, in this COVID period, we’ve taken $60 to $70 million of permanent cost, no matter what the volume, out of the business. So, the volume doesn’t even have to come back to the same level in airline for us to do very well. That’s number one.

Number two, we did five acquisitions, the one I talked in about defense, I could talk about it more. But I think that’s pivotal -buying L3 Harris’s military training business, because that by itself puts us at over a billion dollars of revenue in the U.S. Department of Defense. It makes us the largest non-OEM training provider in the U.S. Department of Defense at a time when they’re looking for the skills we have to create these virtual environments.

By putting our two companies together, there’s almost no overlap. They’re extremely good at fighters. We’re extremely good at refueling aircraft for transport aircraft. They do bombers. We don’t. We both do surface ships. They give us subsurface submarines, on and on. So, no overlap. [It’s a] perfect kind of melting of cultures together because, although they were part of L3 Harris, the division we’re buying, Link, that’s what they do is training.

They’re now quite happy to be in a company that, as I tell them as a CEO, when I wake up in the morning, I worry about how much training we’re doing. Obviously, that’s what they do. So, that becomes much more exciting if you’re an employee of the company that we’re buying. That’s why if I look in defense coming out of this crisis, we’re in a much better position. Really, one plus one is the proverbial three in this sector.

The other exciting opportunity that I talk mainly about [is the] U.S. Department of Defense. But the company that we bought really did 95% their business in the United States. But we ourselves in our defense business, we’re a Canadian-based company. So historically, we’ve had much more revenue coming from outside of the U.S. DOD. About 60% of our revenue can from outside. And so now we’re getting all this extra revenue from U.S. Defense Department, making us much more relevant to the U.S. war fighter and the U.S. DOD. But now we get the opportunity, because if we have boots on the ground in all these countries around the world, we’re now in an opportunity to help the folks at Link, which we acquired, to get them to sell their products overseas, both on their regional equipment and in aftermarket. So, all those F-16s around there, where there’s literally hundreds of simulators out there, and doing the aftermarket on those are selling more. So, it just gives you an opportunity.

Going back to civil, we took the opportunity in the business to consolidate people that are out there, the competitors. We took out a Textron business, a great contract with Textron that they thought, well, this is the time to get out. Great, we were able to do a good deal there. We took out a competitor on the training market with a training centre, a great business that we knew well because we sold them all the simulators in Amsterdam. And the other great thing about that is that they had a great cargo business, which, if you’re like me, you’re getting a lot of Amazon Prime packages at your house.

A lot of that business is coming by air and training for cargo is going up. So that makes us better. And at the same time again, in the paradigm of investing for what we think will grow in the future. We basically acquired small companies that give a foothold in a crew resourcing market where we’re basically expanding what we do with airlines – we’re their training partner. But now, getting into crew resourcing, we move from being a training partner to more and more of a technology partner, building and growing those resources. Those links that we have, they are so strong and so sticky for the world’s airlines.

Bottom line is we got to $42 a share riding on civil alone. I see costs taken out of the business. I see five acquisitions making us much stronger, both in civil and in defense. I see a great boost in business aircraft training. Business aircraft training is a great business for us, and we’re a leading provider in a market, which is really a duopoly. So, for all those reasons, I’m very, very confident in growth prospects of this business going forward.

VT: That’s fantastic, Marc. Not only did you touch on kind of where this company is going, but also what is not part of the pre-pandemic world of CAE on defense, on the digital immersion, and also the pain point of our doorbell ringing all the time for Amazon Prime packages. So that’s very comprehensive. And I wonder if we could take that a little bit further because you talked about L3 Harris, and this acquisition as being very meaningful, and you’re being very thoughtful about the cost opportunity and the revenue opportunity.

The other part of capital deployment is the capital return to shareholders. And I wonder if you can share your thoughts around the dividends that were cut as part of the pandemic relief and preserving cash and how you think about the factors that may allow you to reinstate that dividend or capital allocation to shareholders?


MP: Well, yeah, obviously, it’s a topic that we constantly discuss with our board of directors. Dividends have been part of our story for years. Ever since I was [named] CEO, we’ve increased the dividend every year, obviously prior to the pandemic. So, for sure, it’s something we’re discussing all the time, and we’ll continue to have that discussion.

But right now, let’s be honest, we’re not out of this [pandemic period] yet. There’s still a ways to go. We’re still operating at a much-reduced level in terms of our end markets, like the airline markets, than we were prior to the pandemic.

I think although things have improved quite a lot, there’s still a road to grow [where] we can confidently go back and think about reinserting the dividend. Because of, number one, we’re not back to where we were and as well, there’s so many opportunities for us to have very profitable growth. That’s always been our number one priority.

We’ve always had three main capital priorities. The first one was always growth, and this is where we’re at and returning cash to shareholders was also priority, but not ahead of growth. Now, obviously, we always basically benchmark any growth opportunities with what does this mean? How would I compare with buying back our shares, for example. We haven’t done much of that, but we basically use it to neutralize dilution the last few years before COVID. But we’ll benchmark dividends as well.

We haven’t run out of ideas for profitable growth, and our return hurdle, by the way, is pretty high. If we invest in, for example, in our network for which we are, we’ve announced that we’re growing the amount of capital that we’re going to deploy this year. Because we can see the opportunity to deploy capital, a lot of that’s going to business aircraft, a lot of that’s going to basically airlines, which we’ve convinced now to do more training with us rather than invest at a time where, you know, basically they’re certainly not back to normal.

And, you know, they would glad they take the opportunity for us to do the training. We’ll put the capital in. We’ve proven it, to have a very high returning profile, generating basically 20-30%[1] returns after just three or four years of deploying that capital. So, we’ll do that all day long. Again, we’re going to go back to question the dividend is a continuous dialogue. I’d like to be in a position that the whole world is back, which it’s not, to be able to have to really have an honest conversation about returning dividend.

VT: That makes sense and we always like you to focus on kind of how you grow the overall earning power of the company. So, it makes a lot of sense, and it’s very much aligned to how you protect the balance sheet and manage cash flows.

Marc, I wonder if you can pivot a bit and talk about what has become very topical around ESG and also about CAE’s role as an ESG leader in Canada. I’d love for you to share CAE’s ESG journey, how it began and how it’s evolved, to understand your lens and your view on this topic.


MP: Well, thanks for the question and basically recognizing our leadership in that sector. If you look at our activity report in the past year, which I’m very, very proud of, you could see how we treat the subject, which basically we’ve been doing way before it was called ESG. Part of it is just because it’s really part of the noble purpose that we have as a company.

If you think about what we do, we make air travel safer. We do that on the civil [side]. We do that in the defense [sector], we’re making sure people can carry out the mission and return home safely. We do it within simulators, just by definition of the activity that we have, we’re eliminating a lot of potential greenhouse gas emissions just by the training in simulators. Obviously, [we can further reduce emissions] the more that we can get people to not do training in real aircraft, believe it or not, that still happens quite a lot, especially in the defense sector. Getting people into simulator, well that’s in the spirit of goodness in that in regards.

We’ve been very transparent about the numbers we’ve had. Basically, if you look at, in addition to the GRI, the global reporting initiative and the carbon disclosure product that’s out there, we’ve introduced a new section in our disclosure in our activity report, basically comparing ourselves to what the Sustainability Accounting Standards Board recommends. So, we’re very objective about what we have done.

There are some tangible things that I’m very proud of, that we did during the pandemic: we basically became carbon neutral. That’s a commitment that I made before COVID, and I challenged our team to do. And we honored that commitment. Even in the depths of COVID, we said we’re gonna do this. It’s gonna be a statement. And obviously, we’re not a net-zero emitter. So that costs us money.

First of all, we started by taking real, tangible action. So, wherever we could around the world, in any one of our 75 training centres, we’ll basically convert to using renewable energy. That reduce emissions from that standpoint. So, we took tangible actions to reduce our emissions. But, at the same time, we said that whatever we can’t neutralize, we invested into renewable energy certificates and carbon offsets. And we’re celebrating those in communicating those actions to our employees, what we’re doing, specifically, and that really resonates so strongly to our employees. And that’s part of being an employee of choice.

Young people starting careers, they want to be in companies that really take social purpose seriously, not just numbers in a book or trying to repackage your operation to create a better story than you really do – the real stuff.

And I’m also committed to converting over half of the aircraft that we use. This is surprising to some people. We actually have hundreds of aircraft ourselves that we fly because, in addition to being a simulation-based training provider, we’re I think the largest trainer of pilots in the world through our network of training schools in the world. The largest one is in Phoenix, in Arizona. So, we use hundreds of aircraft to do that. I’ve committed over the next five years to convert – at least that’s the big audacious goal that I put out – convert over half of those airplanes to either an electric or hybrid source of propulsion.

Again, [it’s] to reduce our emissions and as well it’s good business sense, it’s a lot cheaper to operate. But of course, there’s going to be investment to be able to do that. And what we’re doing here by all of these things is setting a standard and setting an example. We are the first aerospace and defense company in Canada to become carbon neutral, sending message to others that, hey why don’t you do it yourselves and get on the bandwagon.

VT: That’s phenomenal activity and you talked a lot about the environmental part.

I think one portion I’d love for you to talk a little bit more about is the social dynamic and kind of your key focus areas around the social [factor] that may dovetail into the governance [factor of ESG]. Would you touch on a few more points around that dynamic and how you’re tackling the ‘S’ in the ESG?


MP: Well, I think to me it’s about being authentic in leadership. And a lot of that comes from diversity initiatives. We’re very, very strong. And the reason we do it is not to satisfy some expectation out there that you need to be diverse. It’s just, again, making great business sense.

One thing that I’ve learned that is a mantra to me is that it’s all about the people in a company. I say to people, you take our employees out of any one of our businesses at CAE, [what] you have [leftover] a nice building with a sign on it. But you take those employees and put them anywhere else in the world and you have a company. And [they] walk in and out of the door every single day.

You have to engage people on a continuous basis, and you have to engage people who are not with the company to get them to join your company. And you’re going to be able to do it by appealing to the social purpose that you have. And that means being representative of the society that we’re in. That’s what diversity is about.

And again, that makes great business sense, because everywhere in the world, we’re in a war for talent, and it’s not getting easier. It’s going to get harder. Those companies that will succeed [are] those that will attract and retain and engage [a] workforce that is proud of working there. And that means being representative of your community.

We put together employee resource groups that I’m very proud [of the fact] that every one of my EMC leaders, my direct reports, are leading one of those employee resource groups. We launched one just yesterday, coincidentally, which is our Veterans Employee Resource Group. Our Head of Defense, Dan Gelston, is leading that group as a veteran himself. And that’s hugely powerful, engaging our employee workforce and basically putting the word out there that, hey CAE is a great place to work at. And it’s a company that has a very strong social purpose, and that’s where you want to work. That’s great for us.

VT: Absolutely. This kind of is a dovetail into one more question I had. We just finished the Canadian elections, and geopolitics becomes really topical [at these times].

As a Canadian company with global ambitions and the kind of scope and depth that you have, can you comment on the evolving geopolitical landscape and what that means to a Canadian company with global ambitions?


MP: I don’t think it changes much. I think we’re a Canadian-headquarter business, but if you look at where our revenues come from on any given day, I don’t have latest numbers in front of me, but it’s less than 10% [coming from Canada]. So really, we are a global business. Over half of our employees, actually probably more like 60% of our employees, are outside of Canada. So, it’s no exaggeration that we are a global business and we really try to act locally with local leadership.

If we’re in the United States and in the defense market, we’re a defense company. We’re a U.S. defense company. CAE USA is a U.S. defense contractor and it’s seen that way. So, geopolitics from that side, it doesn’t really affect us adversely, I should say.

Obviously, we definitely have to navigate, like any other company, the big geopolitical shift that we see happening with Asia [as an example]. And we know who that is and that’s something that we have to thread. There are negatives associated with that. There’re positives. I talked about the need for the militaries to train for, hopefully something that would never happen.

At the same time, we do a lot of business out there. You know, we monitor those things, so hopefully nothing will change too dramatically over the next few years. But again, for us, we’re a Canadian company, but really [we’re] a global technology company.

VT: Yeah. And I think that’s a realization that people don’t appreciate how global CAE is and how dominant it is across a number of verticals, as well. So, thanks for sharing those thoughts.

You touched a lot on this, about what is misunderstood about CAE, especially pre-pandemic to post-pandemic. But just wondering if you have any additional thoughts on what people may misunderstand and [what they don’t] appreciate about CAE and any closing thoughts that you may have, Marc.


MP: Well, I think a lot of people [don’t fully understand us] – especially as we saw at the beginning of the pandemic, where we saw a stock at $42. Well, when the bottom fell out of the airline market, you saw our stock go to the lows of $14, $15 overnight. And I think you see a lot of people still misconceive us, like we should be put in that bucket of airline stocks, if you like. Well, I think we demonstrated we’re far from that. So I think that’s the first thing that sometimes still misunderstood.

I think when you look at the situation today, I think even in the past few months, I’ve seen people say, “Well, you see people getting back on planes in droves, and therefore your training activity must be picking up dramatically.” It is in the United States, and that’s a great opportunity. The rest of the world is still pretty locked down. Being in Canada, you feel that a lot more. If you go to the Far East, you’ll feel literally we see some of our training centres are literally shut down because you can’t get to it.

I think the realization that we’re not [just] in airlines is very important, but the fact is when you see the market, you see how quickly our fortunes grow as people get back on planes and the training activity that’s going to happen as airlines have got to ramp up. We’ve seen this and we’re seeing it now the United States, how airlines have to ramp up their training activity quickly to train the number of pilots to be able to seize on the opportunity of people getting back on planes.

That’s something that we call the training bubble. I think that’s misunderstood by people. This pandemic has exacerbated the amount of pilots that have gone to take retirement, for example, around the world. [They’ve] figured out that for themselves this career is too much up and down for [them], and it’s creating a seismic shift. And what that means is, as we’re seeing today in the United States, where there has to be a delta amount of training just to cater for those pilots that are retiring.

And the fact [is] that most airlines operate on a seniority basis with very strong pilot unions. As a pilot retires or pilot switches airplanes because they reduced their fleets, for example – which they’ve all done through the pandemic – the most senior pilots are going on to different airplanes and pilots becomes co-pilots, et cetera. All of those moves create a large training event for us. That’s what sometimes is missed.

Yes, you got to go back to training every six months approximately. But when you switch airplanes or switch seats, you’ve got to go back to school to learn that aircraft. And that’s not a couple of days. That’s more like a month. That’s a lot of simulator rides. And the world has literally not got enough simulators or enough capacity to be able to handle, you know, everybody just coming in and saying, “I want my pilots trained.” Airlines have got to plan and sometimes they don’t plan perfectly. So, I think this creates a delta opportunity for us.

As the world starts going back to normal, as borders reopen, we see less restrictions to travel and people get back on airplanes, we’re going to see a spike in training. And the interesting thing that happens [is that] every time we don’t have a steady state, that [spike] happens to us. So, I think that’s not understood as well when people look at the stock. That’s the kind of story I see very often.

VT: Yeah, I agree with you, Marc. And despite what happened to the stock, we were really happy as value investors to be able to become owners of such a fantastic franchise. And Marc and Andrew, we’ve had a great opportunity and thank you for a phenomenal discussion and all your thoughts and insights for being a great part of the Canadian fabric as the leading franchise. And thank you to those who dialed in to listen to this conversation and feel free to reach out to your relationship manager to provide any feedback or additional questions that you may have. So, thanks again to Marc, Andrew, and everyone on the line and have a phenomenal and fantastic day. Take care.

MP: Thanks, everyone. Thank you. Bye.

[1] Please note: Mr. Parent misspoke during the event when quoting return on capital employed, initially remarking a range of 30-40%.


Related Topics and Links of Interests


©2021 Beutel, Goodman & Company Ltd. Do not copy, distribute, sell or modify this document without the prior written consent of Beutel, Goodman & Company Ltd.

This is a recorded conversation with Marc Parent, President and CEO, of CAE Inc., and is disseminated with the company’s express permission. This document is not intended, and should not be relied upon, to provide legal, financial, accounting, tax, investment or other advice. This is not an invitation to purchase or trade any securities. Beutel, Goodman & Company Ltd. does not endorse or recommend any securities referenced in this document.