CAE Inc (CAE) 2002 Q4 法說會逐字稿

Good afternoon, and welcome to CAE's fiscal year 2002 conference call. Let me begin by reading the following statement: "during the course of this call, management may make forward-looking statements involving risks and uncertainties. These risks may include but are not limited to quarterly fluctuations in result, timely availability, and customer acceptance of new products and services, the impact of pricing changes, general market trends and conditions, and other risks detailed in the company's annual information form and management discussion and analysis portion of the company's annual report. Actual results may vary materially from projected results."

With me this afternoon are Derek Burney, President and Chief Executive Officer and Paul Renaud, our Chief Financial Officer. The format this afternoon will be as follows: Mr. Burney will provide an overview of fiscal year 2002 results; Paul Renaud will then provide you with a more detailed review of financial performance. Mr. Burney will comment regarding CAE's outlook and we will then invite questions from financial analysts. This conference call will be archived on the CAE website. Let me now turn the call over to Derek.

Thanks, Andrew. CAE completed an excellent fiscal year 2002 with full year earnings from continuing operations as restated up 42 percent from the prior year to $149.3 million or 69 cents per share. Seventy percent of this increase was organic with the balance derived from acquisitions. This represents a 146 percent increase in earnings in two years from continuing operations.

The fourth quarter ending March 31st was another period of solid performance and execution for CAE. This concluded an eventful year of strategic transformation. We made four acquisitions during the year which will enable us to move beyond the supply of simulation and control equipment and become a major provider of integrated training solutions across all core businesses, civil, military and marine. As well, we've established stronger access to the U.S. defense market and broadened the scope of marine's business in the commercial market.

During the fourth quarter, we also delivered on our promise to make substantial progress in our divestment process and we hope to complete the divestiture of our remaining discontinued operations during the first half of this fiscal year. Cash flow also improved significantly during the quarter. As a result, we were able to reduce our long term debt and increase our cash and short term investments while continuing to invest in the expansion of our pilot training network. For the year as a whole, margins rose to 21.5 percent from 17 percent last year and notwithstanding the $7 million charge taken for workforce adjustment cost in Q4. Much of this improvement is attributable to our operations group which has transformed our manufacturing techniques, improving the quality and the speed of our production and at lower cost. We're also benefiting from a stronger and much improved performance by our military and marine businesses, including their own growing involvement in training activities. Military, for instance, more than doubled its operating margins and secured more than $600 million in new orders. Our civil business sustained its dominant position in the competitive full-flight simulator market with 5 sales during the quarter for a total of 22 out of 26 competed sales during the year, or 85 percent of the global market. We also ended the year with 16 of 27 competed visual system sales or 59 percent of the global market. On the training side of civil, revenues and earnings grew substantially in the fourth quarter, partly because of the inclusion of CAE SimuFlite's results for the first time. Its performance, incidentally, proved convincingly that business jet training is the market least affected by 9/11.

Marine also made significant headway in both the defense-related and commercial sides of its business. Of particular note during the fourth quarter were the IPMS controls contract with the Malaysian Navy and the training contract involving Canada's Victoria Class Submarines. The latter builds on marine's success with astute class submarine training for the royal navy, the largest contract of its kind for CAE.

Backlog now stands at $2.7 billion, 40 percent of which is to be fulfilled in the next two years. Over $2 billion of the backlog is military marine and much of it is in the form of long term contracts which also put us in the pole position for additional upgrade work in the future. Our strategic initiatives are also setting the stage for our future performance, creating a platform for more balanced growth.

The acquisition of SimuFlite in December means we have become the world's second largest independent aviation trainer with a growing presence in both the commercial and the business jet markets. On the military, we are extremely pleased by our recent success in being designated as the prime contractor the U.S. Army Special Forces "ASTARS" Program, - a prime role made possible by our acquisition of BAE Systems in Tampa. Our objective going forward is to build on this breakthrough contract and meet more of the rapidly expanding training needs of the U.S. military. Of particular promise is the U.S. Army's Flight School XXI Initiative, where we are teaming with Boeing to offer the United States Army a turnkey training solution for Army aviators. This project will involve the redesign of training for all army aviators. On Monday, we announced a major contract to build two Super Lynx simulators for the Royal Airforce of Oman. This consolidates CAE's leadership position in the provision of rotary wing simulation. All of these offer the promise of strong growth into the future for our military simulation and training products and services. On the marine side, CAE Valmarine recently won a contract to provide control systems for two product tankers being built by Jinling shipyard in China; a first for us with tankers. Our visual group is coming into its own increasing its stake in both civil and military contracts. Our new Tropos family of visual systems was a key differentiator enabling us to win an Airbus 330 full flight simulator contract with Eva Airways of Taiwan - a first time customer for CAE. Tropos will be featured later this month in demonstrations for customers and will be a major element of future CAE marketing.

Thank you Derek. Good afternoon everyone. As you will have seen in the press release or gathered from Derek's opening remarks the fourth quarter was another great quarter for CAE, contributing to CAE's record results for fiscal 2002. The company's earnings from continuing operations for the quarter ended March 31, 2002 reached $41.1 million or 19 cents per share, $13.3 million or 48% better than fiscal 2001. All segments reported significantly improved performances against last year. The civil simulation and training segment reported an exceptionally strong quarter, which was bolstered by the recent acquisition of SimuFlite. The contribution from this acquisition and the Schreiner acquisition combined with further productivity improvements, more than offset the $7.0 million provision recorded this quarter for workforce reductions. The military simulation and controls segment completed a strong year delivering outstanding results in the fourth quarter. Productivity improvements on several programs combined with the first quarter acquisition of the flight simulation and training activities of BAE Systems in Tampa, Florida, and the August 2001 acquisition of Valmarine as, in Norway to produce higher results. For the year, consolidated earnings from continuing operations, at $149.3 million or 69 cents per share, reflect an increase of 42% over fiscal 2001. Operating margin, after reflecting the $7 million provision, was 20.3 % for the quarter and 21.5% for the year as compared to 17.4% and 17.0% for the respective prior year periods. This improvement stems from further productivity gains achieved through the reduction of the manufacturing time to build a civil simulator, better execution on several military programs and strict cost containment efforts, which were further heightened following September 11, 2001. The earnings growth more than offset an increase in interest expense. Interest expense in the quarter at $10.4 million, $22.7 million for the year, is higher resulting from four strategic acquisitions to bolster our core businesses totaling $757.6 million and capital expenditures totaling $249.6 million incurred primarily for new training centers in support of our entry into the civil aviation training market. These investments have been financed through the utilization of CAE's cash balances and short-term investments and long-term credit facilities. Consolidated revenue for the fourth quarter reached $349.2 million, up $120.1 million or 52% from last year's level. The growth was realized from the launch of new training centers in Sao Paulo, Toronto, and Madrid, contributions from acquisitions and an increase of activity from major program awards in the military and marine control segment. For the year, revenue at $1.13 billion was 26% ahead of last year. Consolidated net earnings for the quarter were $37.0 million after reflecting a loss of $4.1 million from discontinued operations. For the fiscal year, net earnings reached $150.6 million and include a gain of $1.3 million from discontinued operations, with the gain realized from the sale of the fiber processing business substantially offset by adjustments to the carrying value of the remaining discontinued operations in both Forestry Systems and Cleaning Technologies. The net carrying value of these operations is $83.3 million as at March 31, 2002. We anticipate completing the majority of the divestments in the first part of fiscal 2003. CAE generated $243.2 million of cash flow this quarter, or $180.6 million after funding capital expenditures of $62.6 million. The cash was generated through operations, including a $54.3 million reduction of non-cash working capital reversing the majority of the increase in the previous three quarters and from cash proceeds of $176.7 million from the divestment of the fiber processing business and parts of the cleaning technologies business. The cash generated was used to pay down debt and increase cash and short term investment balances. Order backlog as at March 31, 2002 reached $2.7 billion, up $0.9 billion or 50% over last year and was virtually unchanged from the previous quarter. I will now cover the financial highlights of our business segments. Revenue of $164.9 million for the quarter for the civil simulation and training segment was $51.2 million or 45% higher than last year, reflecting CAE's strategic move into the aviation training service market and increased visual upgrade and support service revenue. Revenue generated by the SimuFlite operation is reported by CAE for the first time in the quarter. For the year, revenue of $545.2 million was $63.7 million or 13% ahead of last year. The increase in revenue from last year primarily stems from the Schreiner and SimuFlite acquisitions combined with the launch of the Sao Paulo, Toronto and Madrid training centers. In addition, higher visual upgrade and support service revenue was realized. Operating earnings for the quarter at $42.3 million, which include the $7.0 million provision for workforce reductions announced in February, were $14.8 million or 54% higher than last year, reflecting the impact of the accelerated move into aviation training and margin improvement through productivity gains and cost containment initiatives. Operating earnings of $152.3 million for the year were $35.3 million or 30% higher than last year.

Civil's backlog at the end of March was over $600 million, unchanged from where it was a year ago. In the military and marine segment, revenue of $184.3 million for the quarter was $68.9 million or 60% above last year, primarily driven by the acquisitions of BAE Systems Flight Simulation and Training in Tampa and Valmarine as in Norway and activity on major programs awarded earlier in the year (i.e. the Astute, Eurofighter contracts). Revenue for the year surpassed last year's results by $171.4 million or 42%. Operating earnings of $28.5 million were more than double last year's $12.3 million level. For the year operating earnings at $90 million were $55.1 million or 158% above last year. These exceptional results reflect the significant improvement in performance on major programs, including the E-3A airborne warning and control system program, the Astute submarine program, the C-5B weapon system trainer, the NATO flying training contract in Canada and the Medium Support Helicopter Aircrew Training Facility, in addition to the Tampa and Norway acquisitions and, finally the continuing impact of productivity and cost saving initiatives. Backlog at a record $2.1 billion, almost doubled last year's amount and includes two new major programs: the Eurofighter Visual System and the Astute Class Submarine Training Program. In summary, a strong quarter for earnings and cash flow and a record year in many respects. At this time I will turn the meeting back over to Derek..

Before discussing the outlook, I thought it would be useful to offer some more detail on training to try to provide a clearer context for your analyses. For the commercial aviation market (as opposed to the business aviation market), we had 36 full flight simulators in operation in fiscal year 2002, 20 of which came to us from the Schreiner acquisition. We plan to add about 18 more this year, which would take us to 54. We regard 5500 - 6000 hours annually as practical capacity for each of these simulators and our objective is to get to 75-80% of that for each with short and long-term contracts. The utilization and the pricing varies depending on the location and the type and age of the simulators. As a result of September 11, we did experience a 10% drop in demand in general from November through February, but we see normal levels returning in parallel with the recovery in the airlines business. What is, I believe, more important is that we did not experience pricing pressure in this segment because of customer commitments, the quality of our product and service and the healthy mix of simulators in our fleet. For business aviation training, there were 23 simulators in operation for us in the final quarter at CAE SimuFlite. We plan to add 5 more this year and 3 more in Dubai next fiscal year. For these, we regard 4000 - 4500 hours annually as practical capacity even though the service is usually provided on a "per course" as opposed to a "per hour" basis. There was no appreciable impact from September 11 on business aviation training except for some delays in the training of a relatively small number of foreign, i.e. non-American pilots who now need to register in advance. It is a capital intensive business initially although it helps when you also manufacture the simulators. Once the initial costs are incurred, however, the cash flow increases substantially for the thirty to forty year life of each simulator offering training. Our expansion plans are determined by calculations of demand which, in turn, are derived from assessments of the number of given simulators available for different aircraft types. For competitive reasons, we do not divulge price estimates or price ranges for training. The name of the game in pilot training is capacity utilization; and, as I said, we expect average utilization in our commercial simulators to reach normal levels later this calendar year. Business aviation simulators are already on track with our objective.

Levels of utilization fluctuate depending on demand, obviously, but also on the time of installation, the age of the simulator, the aircraft type, the location, etc. The larger our overall network, the more efficient we can become at managing utilization. Our objective is to get margins in the 30% range for aviation training and a return on invested capital above 15%, after tax. More generally, I can only say that the demand for simulator training time around the world is solid and is expected to increase, especially given pilot demographics and plans for fleet changes by many airlines. Moreover, the charter and fractional ownership category is very much on the increase these days, and that will fuel growth for our business aviation segment. CAE has a strong platform today to serve all segments of the training business, including a leadership position in PC-based training, where we have just recently received FAA acceptance for a B737 new generation Simfinity-based training program in our Dallas training centre. We also have plans for expansion which parallel our expectations of growing demand in this market, plans which will make full use of our next generation full flight simulator - Sim XXI. So to summarize, in fiscal year 2003, we intend to expand our installed base of simulators from 59 to more than 80. We expect that revenue from training will triple this year's result. That in itself will demonstrate how CAE is being transformed and how our future growth will evolve in a more balanced, more certain manner.

Apart from the growth we see from aviation training, we expect to capture 15-20 commercial full flight simulator orders this fiscal year. Obviously, the pace will depend on the speed of recovery in the airline business. Keep in mind, too, that the smaller size of the competed full flight simulator market reflects the fact that two of our former customers are now owned by CAE. We look to continued strong growth from our military and marine businesses, building on the highly successful year each has had in fiscal year 2002. We see potential for more training activity here as well, involving fixed wing and rotary aircraft, marine vessels and, possibly, landbased simulation. Our basic objective will be to deliver double-digit top and bottom line growth overall this year while sustaining margins in the 20% range. As the military component assumes an increasing share of our overall performance, that will inevitably generate some downward pressure on overall margins. We are determined, nonetheless, to sustain productivity improvements and contain costs in order to meet our target. We also intend, as a matter of priority, to strengthen further our balance sheet by concluding outstanding divestitures and by tightening discipline on working capital management and capital expenditures. In addition, we will continue to consider additional sources of financing to support our growth plans.

As of today, we have a plan which we believe will enable us to meet our goals. We have done that and more in each of the last two years, having demonstrated, as well, an ability to overcome the impact of unforeseeable and uncontrollable events such as September 11. Our strategy is working and will, we believe, continue to deliver a performance which brings value to our shareholders.

Operator, we'll now take questions.

We are now opening the question period for the financial analysts only. CALLER INSTRUCTIONS) Our first question will be from the National Bank, Neil Linsdell.

Thank you. Good afternoon. looking at your overall tax rate and thinking about the U.S. tax credits that you'd have carried forward. What's the effect of that over the next year or two?

We expect the tax rate to stay pretty much at the same level, 32 percent.

Can you tall me how many tax credits are left?

You mean carried forward? Off hand, I can't tell you, but still a significant amount, so that's why I'm comfortable at least over the next couple of years that we'll maintain the rate and obviously the more businesses we do in the U.S., the greater our ability to use those up quicker.

Our next question is from company Nesbitt Burns, Andreas Hoppe. You may now proceed.

Good afternoon. Derek, can you give us a little more information perhaps surrounding the joint bid you're doing with Boeing in terms of timetable for the bid and when one could expect a contract to be awarded?

We're expecting - - keep in mind this is a government contract - - but we're expecting the bid to be determined in the first quarter of the next calendar year or the final quarter of our fiscal year.

Okay, and do you have a real loose ballpark estimate as to what the potential size of the c contract could be?

No, I can't give you that even if I have it because of the nature of the contract still being defined, the scope of the contract still being defined. You can simply, I hope, take my word for it that it will be significant or substantial, take your pick.

Thanks for the additional information on training with the view that you want to triple revenue next year. Can you tell us what revenue was this year for your training?

About $100 million.

Okay. Paul, a couple of questions for you, if you don't mind. Just a nitpicky one on the balance sheet. You have $138 million "other asset" line which is quite large. Can you give us some sense as to what that is?

What that included is some - - deferred development costs of the SIM XXI is a big element in there. The other big element in there is the note we took back on the sale of cleaning technologies and the other element in there would be some deferred costs associated with the MSAs that have been there for awhile as well as some of our existing training centers.

Okay, thanks. Last question, cap ex came in quite a bit above, I think, where you were pointing to for the quarter. Can you give us a bit of an outlook for fiscal `03?

Yeah, from - - I'll give you the outlook for maybe even the next three years. In total, based on what we see, is probably about a half a billion dollars over the next three years and I would say 50 to 60 percent of that next year and trailing off after that. That's mainly, again, in support of the growth initiatives on the training side.

Okay, thanks. I'll let someone else go ahead. Thank you.

Our next question is from Capital Octagon, Mr. Jacques Kavafian, You may now proceed.

Good afternoon, gentlemen. I have three questions. In commercial flight simulation and training in 2003, you think overall revenues would be - - you'd have an increase or it would be relatively flat given that simulator sales would be down, training would be up.

We're still looking at an overall increase in revenue from civil.

Okay, thank you. In you opening remarks you mentioned a lot about the margin improvement and how that came about. You did not mention the fact that flight training contributed. Is it because flight training is not yet contributing to increased margin?

Well, don't forget that we only had one quarter for the year from SimuFlite and we had a bit more than that from Shriner, but I think the comment I just made to Andreas was that we got in total about $100 million in revenue from civil training during last year. So while it obviously made a contribution in terms of earnings, given that the margins expectation we had were in the 30 percent area, we think that the overall improvement margins has come primarily from our internal productivity improvements and the changes to our process. But I don't discount the fact that the margins in civil as a whole are higher than the margins in the other segment of our business and since training, not just the training we required, but the training we generated ourselves, contributed about a quarter or 20 percent of that. It made a contributing.

Okay. The final question is for Paul. My quarterly earnings EPS numbers don't add up this year. Could you run from what the quarterly EPS were?

I guess the only thing I could do for this year is get back to you, but I'm assuming it's just a rounding issue, how you round out each quarter, Jacques.

Paul doesn't usually have trouble with double figures, Jacques.

Our next question is from Credit Suisse Boston, Mr. Marko Pencak, you may now proceed.

Good afternoon. You mentioned some of deprograms on the military side, but was there some specific timing issue that caused the revenues to be so strong in the fourth quarter?

On military? No, I think that they have to do with the timing of the contract awards and in some cases they represent a slippage from what we might have assumed would happen in the third quarter, but I can't think of any other particular reason than that. There is no real logic to the timing on government contracts and we often see military programs losing traction in terms of what we anticipated at the time for our bid to be awarded and the actual time. Take the Canadian helicopter program as just one example.

Okay. You mentioned in terms of things you are going to be focusing on is a focus on working capital. Your accounts receivable, your days of sales outstanding were going up sequentially during the course of the year and then they dropped quite a bit in the fourth quarter. Was there some specific receivable that you collected or has there been any structural change in terms of the payment terms which maybe caused by the shift in the composition of your business towards training?

I think, in part, number one, it's a CFO telling these guys to get their act together and we had problems in the first quarter that - - you know, we had a bad first quarter, a bad start to the year. But I think part of it is certainly a much better discipline towards it. Secondly, there was a couple of lump sum payments on a couple of the military marine programs that came in and again, that's one thing with the military programs - - the payment milestones tend to be farther in between but much more significant when the amounts do come in.

Okay, my next question has to do with - - you made some comments with respect to your expectations for getting rid of the rest of the discontinued operations. It seems to me that tat slipped a little bit from a timing standpoint. You previously commented on your expectation of valuation. I'm just wondering whether you've made any changes in terms of what the realizable value of the remainder might be?

Well, on the timing, these things tend to slip because sometimes we're dealing with investment banks as suppliers and you know what they're like. But in all seriousness, we're trying to be as candid as we can on the basis of where we are with the remaining assets and I can only say to you, in terms of the additional adjustments that were reported in the fourth quarter, we feel that we're now in balance with where we expect to come out given the negotiations that are underway for each of the remaining assets. And there are negotiations underway at this time for each of the remaining assets. Whether we get them done in the first quarter, as the CFO said, or the first half of the year as I said, we're taking bets between us as to who's going to be right.

My final question - - based on the cap ex that you talked about, your growth initiatives, Derek, you commented that you may seek additional financing to support the growth strategy. Should we interpret that that would be required to support your capital in the cap ex that you referred to or would that be for incremental opportunities you may pursue?

I think you could interpret it both ways.

Our next question is from Odlum Brown, Mr. Ross Turnbull, you may now proceed.

I just wanted to focus back on the balance sheet. You had mentioned that you want to make some efforts to strengthen the balance sheet this year. I know you don't focus on debt to equity per se, but do you use an EBITDA interest expense or fixed charge coverage ratio that .

Yeah, you hit on it. Per se is the key test or the interest coverage ratio against EBITDA, that's where we focus.

Do you have a target in mind?

Lower.

Certainly the thing is in our bank office, that's for sure and give us ample room for any possible turbulence that we may hit. Those are the key things we do look at.

Okay. Just stepping back, with Flight Safety, I know you're not going to be selling simulators to them anymore. Have you had any feedback on what they're going to do in response to that?

Are you talking about Flight Safety or Flight Safety Boeing?

Flight Safety International.

Well, we've never sold simulators to Flight Safety International. They make their own. We have sold to their joint venture with Boeing, Flight Safety Boeing, because Flight Safety International is more or less not in the market of the wide bodies simulators. But even there, given that Flight Safety Boeing is now a competitor of ours in the training business, it's not necessarily in our interest to be selling to them.

Our next question is from company Merrill Lynch, Mr. Ihor Danyliuk, you may now proceed.

Thanks. I've got several questions Derek and Paul. I guess first of all, with regards to the U.K. the medium support helicopter facility you have there, I'm wondering - - are you guys satisfied with the usage that you've had out of those simulators? I'm also hearing that there may be some dissatisfaction with the visual systems there. Is Seven Sutherlands on the hook there or have you guys, is that your problem?

Can I take those first two? We're more than satisfied with the usage. We're not only getting strong usage by the royal airforce, we now have, I think it's three, third party customers for the simulators, so I would say that we're quite satisfied with the use. We're also quite happy with the fact that we're already getting upgrade service contracts in support of what's there. With respect to the visuals, you're right in a sense. The visuals we were obliged to use, that was Sutherlands visuals as part of the contract award, they were experiencing a good deal of difficulty with their new visual systems called Harmony and they had to use an interim solution which, thankfully, the royal airforce accepted on an interim basis. My understanding, Paul can correct me, is that the problems that Evans & Sutherland had been having with Harmony either have been reconciled or they are in the process of being reconciled and I'm not aware of anymore recent problems associated with it. But there were never problems in the simulators that were being used for training. As I said, an interim solution was provided and accepted by the customer and to the best of my knowledge, was well received by those taking the training. But Paul, do you have more to add to that?

No, that's it and as soon as Harmony has been accepted, and I believe it has been on one, the plan is to do a conversion on the other simulators.

Does that mean the facility is living up to your expectation?

Oh yeah, more than.

Can I go back to - - you had mentioned a 10 percent drop in demand between November and February. What are conditions like? I know you said they've improved, but have they come back to pre 9/11 or is it still a tough competitive.

Well, I think what I sad is that we expect them to get back to what we regard as a proper level of utilization later this year. So I think you can assume from that that we think we saw the trough in November to February, we're beginning to see the climb out in March and April. We're not there yet, but we see the trend and certainly the most recent statistics, Ihor, especially in Europe, are that traffic is returning at a more robust pace than perhaps here in North America but even here in North America, I noticed a report yesterday sating that there are about 90 to 95 percent of the flights are now back in service in the continental U.S. There's still like 10 percent reduction in the load compared to the previous year, but I think the general trend, and I'm not trying to say this as my view, I say it's a general trend we're observing, is that a recovery is taking place and it's probably slightly faster than people had originally predicted. We're certainly seeing signs of that on the side of the training because where I think there was perhaps an overreaction and now they're trying to catch up.

In terms of - - just along those lines, I know the increased number of older aircraft that have been parked, has that impacted any of the older simulators that you acquired?

We didn't' acquire very many older simulators and even if we had some, and we may have one or two, the answer would be yes and no. Keep in mind that with an older Sim, you can make money with lower utilization and even at lower prices. So we don't have a lot in our fleet and we know that those we do and those who have a substantial portion of say 727s and DC9s and DC8s, for instance, they have seen a sharp drop in demand for training and even with discounts, it's not as east for them to get those levels back up because the planes are parked in the desert or if the engines have been taken off them like has happened to Air Canada's DCs, there's not much point in getting training. We do not have those kinds of simulators.

I'll be quick. Just a couple more very quick questions. With regards to the debt, Paul, at the end of - - I'm just trying to do a quick - - given the cap ex that you have and I guess the divestitures you have left, is it reasonable to assume a slight drop in say 50, 60, 75 million dollars at the end of `03 compared to `0-2? Is that a reasonable estimate?

Ihor, the other way around. We actually predict a cash positive going forward, but that's predicated on the cap ex. We will continue to evaluate the most cost effective means for CAE to finance these. As you know, we've done a couple of sale and leaseback transactions, or QT deals that are proven to provide CAE with very attractive long term financing. So we intend that we will still continue to do that and finance at least some part of the capital expenditures going forward on that basis.

Okay. With regard to - - I can anticipate your answer already, Derek, but I'll ask the question anyway. Can we expect some kind of an announcement on a partnership between yourselves and Airbus in the near future?

What do you think my answer is going to be, Ihor?

I don't know. I was hoping it would be different than the last time I asked you this question.

Which is, when it happens it will be announced?

It was something like that.

Well, I'll stick with that one.

Okay. In terms of productivity per employee, last question, can we squeeze more out per person, say in Montreal?

Since some of them may be listening on the line, I guess I shouldn't say absolutely. But in a more serious vein, this has been a real bonus for CAE in past year - - the terrific improvement in productivity in Montreal. Can we squeeze more out? Yes, we certainly intend to because for the reasons I mentioned about the downward pressure on our margins, we have to. We intend to and given that they've done as well as they've done in the last two years for us, I'm quite confident that they can meet the new objectives we're setting.

Our next question is from Dundee Securities, Mr. Richard Stoneman, you may now proceed.

Thank you. Derek, a couple of questions. The first one is, margins in the military? You've held them over 15 to date this year. Do you think you may be able to hold them at that level, 15 plus over the next year?

That's our objective, Richard. It's not going to be easy because as you know, with military programs, it's easier when you're coming to the end than when you're beginning, and as you know, we're picking up a lot of new orders, so we're going to be moving into the early stage. But absolutely, we are committed to maintaining the margins in the 15 percent category. That's the commitment I have from my military folks and I'm convinced that they're going to be able to deliver it as they have in such a strong fashion this year.

The after tax impact of the layoffs, about 2 cents per share?

Yes.

Next question is on programs that are currently being bid. NH90, CF18 and the armored training facility in the U.K. Any idea when there may be an award in those major programs?

Your guess is as good as mine, especially with the Canadian one. It should have been about two years ago. We're hopeful that we're going to see all three in this fiscal year. That's about as much as I can say, Richard, because these things - - if I gave you my educated guess today, I'd have to revise it tomorrow.

That's probably the earliest of the three.

And on the S18s, do you have a JV with Boeing on that as well?

In Canada, yes. Not just Boeing. I think we have some other partners as well, but Boeing is the principal partner we're bidding with.

And a question on the C130 retrofit program in the U.S., is there a JV on that as well?

Now which one is that you're talking about? C130 retrofit with whom?

Boeing.

Yeah, but what program are you talking about?

On the C130s that are getting retrofitted in the U.S., the 525. Is there a JV on that program?

I don't believe we're in a JV on that one. I can check on that for you because that's not one I'm right up on top of.

In terms of when we'll see some segregated numbers for training, do you plan to segregate the equipment and the training programs over the next year?

No, I don't think so because those are units - - see there's a training component in each of the three units and they were vertically integrated within those units so while I will continue to try to provide the kind of flavor I've provided today, just to try to give a little more information about training, I don't think we plan on segmenting it in the future.

Thank you very much.

Our next question is from CAE, Mr. Gus Papageorgiou, you may proceed.

I'm actually from Scotia Capital.

Well I wondered if you switched uniforms there, Gus.

Quick question, Paul, on the EBIT margins. We saw the EBIT drop a little bit from last quarter, from 23 to 20 roughly. Can you just talk a little bit about what caused that?

Well the main thing was the $7 million one time provision, so if you take that out, I think you'll see the EBIT margins pretty much where we said they would be. So that's reflected in those numbers and its all been allocated, Gus, to - - it's all been absorbed by the tipple side.

Just on the guidance - - Derek, you said double digits. IF you're looking for simulation training to triple from roughly $100 to $300 million, that in itself would add about 18 percent on the top line assuming simulators are going to be a little bit weak but military strong. Are we looking for something closer to 15 to 20 percent rather than the 10 - 15 percent on the top line.

We're looking for better than 10 and lower than 99. I'm sorry, I'm not going to say more than I have. I've got enough concerns, but you have to take what I said, and I mean it. Can I just give a further reply to Richard before you get to your next question? I'm being advised by my experts around me here, Richard, that the program you're talking about doesn't have a training component. It's simply an upgrade for the aircraft which Boeing has. Bt there is no training component as yet. Go ahead, Gus.

Okay. One clarification - - you said on the margins on the training, 30 percent. Are those EBIT margins?

Yes.

Please do not hesitate to press * one for any questions or comments. Our next question is from UBS Warburg, Mr. Peter Rozenberg, you may now proceed.

Good afternoon. The organic growth you noted was 7 percent. How much organic growth was there on the military side of the business?

Peter, I said seventy, 7-0.

The organic growth was 70 percent?

70 on earnings, yes. Seven zero percent. The number that comes after 69. And your question was?

Organic growth on the military side of the business?

Well, we don't break it down by individual business unit. That's an aggregate number of the overall earnings for the company. I haven't got it segmented by business unit.

Okay, would most of the organic growth come from military?

No, most of the organic is coming from civil. It's the largest contributor to our earnings by far.

What is your outlook for commercial sales during this year? DEREK BURNEY 15 to 20 full flight simulator sales.

Sales - - deliveries?

No, orders. Orders.

And for military, are your sales projected at about $700 million this year?

I didn't give a number.

Our next question is from CIBC World Markets, Mr. Ron Schwartz.

Operator, this will be our last question.

Thank you.

Thanks. Derek, I know you're not giving out any numbers, but is it fair to estimate or - - kind of, if you look at the numbers fiscal `03, you'll be close to equally balanced between military and civil. Is that kind of in the ball zone?

Well I think we are - - this year, it's pretty close balance on the revenue line.

Well, I would think that the trend you're seeing this year over the previous year is going to be sustained which would suggest that it could be a little stronger on military.

Paul, can you just give us a dollar value of what SimuFlite contributed in the quarter or is that not going to be disclosed?

No, that's not going to be disclosed.

Then just last question - - what's the overall average interest rate? Just so I can get that right this year on the overall debt.

Under 5.

That's all the time we have for questions. Thank you, Derek and Paul, and thank you listeners for taking time to participate in our fiscal year 2002 conference call. Today's remarks and additional information about CAE can be found on our website located at CAE.com.

Thank you for using Bell Conferencing Services. Have a pleasant day.