CAE Inc (CAE) 2003 Q1 法說會逐字稿

Welcome to the CAE first-quarter conference call. I would like to turn the meeting over to Mr. Andrew Arnovitz. You may now proceed.

Good afternoon and welcome to fiscal year 2004 conference call for the first quarter. Let me begin by reading the following statement. Statements in this conference call that are not reported financial results or other historical information are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. They include for example statements about our business outlook, assessments of market conditions, strategies, future plans, future sales, prices for our major products, inventory levels, capital spending and tax rates. These forward-looking statements are not guarantees of future performance. They are based on management's expectations and involve a number of business risks and uncertainties any of which could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. The risks and uncertainties relating to the forward-looking statements in this presentation include those described in CAE's filings with the Securities and Exchange Commission.

With me this afternoon are Derek Burney, President and Chief Executive Officer, Paul Renaud, our Chief Financial Officer and Gary Scott, who is the group President of Civil Simulation and Training. Derek Burney provided us with an overview earlier today at our annual general meeting of shareholders. Therefore, the format for this conference call will be as follows, Paul Renaud will first discuss financial results for the quarter providing additional context to the performance of each business unit. Gary Scout will offer additional insight into CAE's civil simulation and training business and provide his view of the civil market. Derek Burney will then summarize the outlook for the company as a whole, following which we will then invite questions from financial analysts.

I would also like to remind you that this conference call will be archived on the CAE Web site. Let me now turn the call over to Paul.

When comparing this quarter with last year's first-quarter, foreign currency fluctuations had had an impact across all of our business segments and on our long-term borrowing. Our impact to our earnings from continuing operations was the reduction of $8.4 billion almost 4 cents a share. Excluding the foreign exchange adjustments, revenue would have been $264 million versus the $242.9 million recorded. Earnings from continuing operations $22.5 million versus $15.1 million and operating earnings of $33.6 million compared to $23.8 million resulting in EBIT margins of 13%.

The decrease in the first quarter earnings resulted from a $39 million reduction in operating earnings from $62.8 million to $23.8 million, offset by slightly lower interest expense and a reduction in CAE's tax expense and tax rate. The $39 million reduction in operating earnings is summarized as the following, $10 million related to foreign exchange impact of which 70% resulted from the strengthening of the Canadian dollar relative to the U.S. dollar, with (indiscernible)and is primarily from a nonrecurring gain realized last year on a Euro to Canadian dollar exchange exposure. $10 million due to lower civil equipment sales partially offset by higher civil training volumes, $6 million for lower margins from our military business and the remainder for higher expenses particularly for pension, long-term incentive compensation, research and development operating leases and certain onetime cost for the integration of our civil training business.

The foreign currency impact particularly the 10% strengthening of the Canadian dollar against the U.S. greenback, had a more significant impact on our first-quarter results, the assumption of our revenue recognition policy is a (indiscernible) completion accounting for our long-term contracts. The strengthening of the Canadian dollar did have a favorable impact on our long-term debt resulting in a reduction of approximately $50 million. The majority of our U.S. debt is held in our U.S. subsidiary and is a hedge against our U.S. taxes (ph). As a result this benefit doesn't flow through our income statement but through the shareholders equity.

The increase in expenses on pension related to our change in our investment return assumption adopted last November 1, 2002, to 6.5 % from 9 %. 2003 annual report is in a public domain, I trust we will no longer be singled out as having an aggressive return assumption which appeared more than once in recent newspaper articles on the subject. Perhaps the reverse will occur now being we have moved to the other end of the scale of having the most conservative assumptions consistent with those of Warren Buffet's company.

With respect to long-term compensation CAE (indiscernible) expensing stock options beginning this fiscal year that is before it becomes obligatory. The increase in (indiscernible) results from the $156 million raised through the sale and leaseback financing over the last year. This remained CAE's most cost-effective long-term financing facility in support of capital investments for our rapid growth as our leading training service provider to the civil market.

CAE's tax rate was reduced to 9 % this quarter versus 32 % in the same period last year. The lower tax rate results from recognizing the tax benefit of loss carry forward in Australia. This followed the recent long-term military service contracts signed in that country. When compared to the first-quarter last year the lower tax rate improved earnings from continuing operations by $3.8 million, less than two cents a share. For the year we expect our tax rate to approximate 25 %.

With respect to our remaining divestments we did report in our last call that we completed the sale of our last (indiscernible) business. It closed in early May. No issues arose from the post closing audit with respect to that transaction. That wasn't the case for the sale of Beyss, the German cleaning technology business where additional charges of $1.9 million this quarter were incurred associated with the downsizing of the workforce. That leaves us with only one remaining business, Alpheus, our California-based cleaning technology business for which we have concluded an agreement to sell potentially all of the assets to (indiscernible) of Cincinnati earlier this week.

CAE's net debt defined as long-term debt less cash and short-term investments was reduced by $9.8 million this quarter. The $50 million reduction in debt attributable to foreign exchange previously noted, plus the receipt of $23.1 million from discontinued operations, and $28.5 million from the sale of lease back of two simulators offset this quarter's increase in [non-tax] working capital of $73.9 million and capital expenditures of $25.2 million. During the quarter CAE repaid in full it's revolving credit facility that matured on June 30, 2003.

I will now briefly highlight the results of each business segment. Revenue for the quarter for Civil of $109.1 million was 19 % below last year, excluding the effects of foreign currency revenue would have been 14 % below last year. As Derek already explained the lower sales of (indiscernible) simulators since September 11, 2001 contributed to the reduction. This however, was partially offset by the continued growth in training revenue.

Operating earnings for the quarter of $6.6 million were significantly below last year. The reduction is split one-third resulting from foreign exchange, one-third due to lower equipment offset in part by the training volume increase and one-third from increased costs. i.e., Corporate cost allocations, operating leases with respect to sale and leaseback, research and development and the additional integration cost in Europe and bad debt expense.

Backlog at June 30, 2003, amounts to $339 million. However, it excludes the recent orders for an Airbus, Jet Blue and China Eastern. Revenue of the military segment was just shy of $100 million or 6 % below last year's level of $106 million. Excluding foreign change effects, revenues would have exceeded last year by 3 %. Operating earnings of $12.4 million this quarter compared to $18.7 million last year. Approximately 20 % of the year-over-year change relates to foreign exchange. The balance is attributable to lower margins on the current mix of contracts since we have less mature programs in process from prior year, and higher expenses for (indiscernible)in line with the increased level of opportunity currently being pursued.

Backlog at $1.2 billion is unchanged from March 31, 2003 and also excludes recent contract announced since the end of June. Our Marine Group reported revenue of $34.2 million comparable to last year. Revenue would have exceeded last year by 6 % if you exclude the effects of foreign exchange. Operating earnings for the quarter of $4.9 million were $1.5 million below last year. The reduction is all attributable to foreign currency, otherwise operating earnings would have been 4 % over last year. Backlogs remains above $600 million.

In summary, market conditions particularly for civil equipment orders and currency fluctuations impacted the first quarter. Recent quarter activity and slightly weaker Canadian dollar relative to the U.S. dollar since June 30, 2003, points to a stronger performance for the balance of the year. I will now turn the meeting over to Gary.

It is a pleasure for me to join the conference call today. In my opening remarks I will give you a quick summary of how I see civil business prospects today, my view of the market, our position in the market and our current focus. First let me address Q1. The sharp drop in revenues, earnings in margins reflects the significant fall off in our equipment business driven by more than a 50 % drop in orders over the last 18 months, with pricing pressures by the adverse impact of FX (ph). Current deliveries have now fallen in line with the lower level of activity since 9/11 and have bottomed out. But every order was precious, it came after stiff competition and we had to accept lower margins to secure our win. The good news is though we have secured some important strategic wins over the last several weeks and believe that better times are ahead. In fact we expect our equipment revenues will grow modestly through the balance of this year.

On a brighter note the CAE training business continues to grow and we are now moving into a more stable growth phase, continuing to modestly grow our assets with a focus towards improving our revenues for simulator and continuously improving our efficiency. WE have generally been able to hold our revenue for simulators during these difficult times. If I look at the market I would say that while the situation for many major airlines remains fragile, there are some signs of recovery. Passenger traffic is building again and airline losses are reducing as restructuring efforts take hold. The impact of SARS lingers but Asia is rapidly improving.

Even if the (indiscernible) favorable trends continue however, most experts are calling for aircraft orders to pick up for another year or two with an increase in deliveries expected now in 2006. The exception, of course, is the low-cost in regional airlines which continues to do relatively well even in these most difficult times. This market segment continues to represent the best near-term opportunity for CAE. In addition, we will have more (indiscernible) program opportunities as customers must begin to prepare for their first deliveries beginning in 2006.

The business aviation market slump continues but appears to have bottomed out also, with the best opportunities connected to the most new models recently or soon to be introduced which has been our focus. While Aircraft orders remain the primary drivers for our simulator equipment it is important to remember that the highly regulated training market is driven in large part by the assault fleet. In fact, as airlines reshuffle their fleets they increase training demands. In addition as airlines look to reinvent themselves, focusing more on their own core competencies, they may increase their interest in using third party training providers. Accordingly our investments in training and training technology are now clearly paying off. This is not true just in the training business but in the equipment business as well. Our recent equipment orders from Airbus in support of the A-380 (ph) and from Jet Blue for their A-320 (ph) and ERJ-190 (ph) purchases were clearly enhanced by our latest training equipment technologies, broad sweep of training products and our growing training expertise.

CAE's through our fully integrated suite of products can enhance our customer's training quality and reduce their cost at the same time. This is our value proposition. This is clearly the competitive edge that we bring to the market today. So our battle plan is to continue to invest in training technology, products and services while growing the training portion of our business. In addition we will continue our focus on improving the business fundamentals.

On the equipment side we will aggressively pursue the limited but improving opportunities in the slowly recovering equipment market, offering total integrated training solutions including full flight simulators, fixed training devices, integrated procedure trainers and desktop system trainers. In addition to our design for quality and cost improvement initiatives we will strive to further improve our product quality while lowering product cost to preserve margin. We expect as has been said earlier, that our equipment orders will exceed last year's level and original estimates that we gave for this year.

In training we are targeting to improve the revenue for simulator of our existing assets by expanding services to existing customers, in effect, adding more Web training and adding customers to existing assets. Our cooperation agreement with Airbus and our own expanding product line courseware are key to this effort. Our network of training centers allows us to offer Web training at locations convenient to our customers, actually lowering their overall cost. We will continue to add assets to our network but at a modest rate.

In addition we have a major initiative focused on increasing operation efficiency through product, process and system standardization. We will standardize our product line around our Synfinity (ph) based products. Our simulator engineering and maintenance practices across the business and our scheduling and record-keeping systems throughout the network. This will reduce our overall cost for simulator helping to improve margins. Again we are targeting 65 % simulator utilization this year and expect a 20 % year-over-year growth in revenues.

In closing let me say that I believe CAE is in the best position to serve the needs of the aviation training market today. CAE provides the essential edge in training solutions that brings value to our customers and to us. This concludes my remarks. I will now turn it over to Derrick.

I believe I covered a lot of ground in my remarks at the annual meeting earlier today. In terms of outlook, I will simply summarize what I said then. The first-quarter results are disappointing especially because of unanticipated foreign exchange adjustments, but they are not indicative of what we expect for the full year. Recent full flight simulator orders, the increasing contribution from training, the more certain timing on some major military programs and the prospects more generally for new military orders are among the positive factors we see for the year as a whole.

There are some signs of recovery in commercial aerospace, including specifically the recent orders from Airbus from Jet Blue to China Eastern. If there is not yet a light at the end of the tunnel we at least now feel that the tunnel has a floor. In short we believe that the worst may be over in commercial aerospace. While pricing pressures will continue across the board we expect that the second half of the fiscal year will be stronger, and that in particular we will see more from our civil business unit. As I said in my remarks at the annual meeting having secured nine of the ten competed full flight simulator orders to date, we expect to exceed last year's total and our initial estimate of full flight simulator sales for this fiscal year. And as Gary has said, we also expect to sustain the 20 % increase in civil training while increasing capacity utilization for training to 65 % for the year as a whole.

Cost containment and cash management are priorities for all at CAE. We will also continue to strengthen our balance sheet, pursuing financing opportunities that are efficient and involve no execution risk. With that we will now welcome your questions.

(CALLER INSTRUCTIONS) Scotia Capital, Mr. James Davis.

Paul, I'm sorry just quickly, I didn't catch what you said for the full year on the tax rate.

We are expecting about 25 %.

25 including the first-quarter.

(inaudible) That is on an annualized basis.

Absolutely. Okay. You identified the foreign exchange impact on the percentage of completion accounting method with respect to military the impact was 4 cents. Is that a 4 cent one time kind of catch up as a result of having to make the adjustment to --.

It wasn't just on military, David. That was a combination across all of the businesses and that is the impact when you compare the earnings this year versus last year, the overall change was equivalent to 4 cents a share or 8.4.

And 6 cents in terms of the year-over-year decline would be related to the operational issues identified. What I'm trying to do is get a handle around civil margins, last year in the first quarter I mean they were around 27, 28 %. Now you are at 6. Two-thirds of that is non-FX. So it is roughly 1400 basis points. Is there anyway I can start to think about the margin progression as the year goes? That is a fairly significant decline year-over-year.

In terms of the again when you look at it, and again the first quarter is affected by the loss of the volume of the equipment so you have to look at the number of orders logged into backlog which certainly bodes better for the future. Secondly when you look at margins year-over-year you got to take into the impact of the increased level of sale and leaseback that we have done that really pushes the burden of the operating expense up the line into the margin line. So there is a combination of factors but more importantly as well as affected by some of the cost items that we mentioned as well.

We expect a substantial improvement in civil margins during the balance of the year. One thing we won't have is disproportionate FX impact but more to the point as Gary said, we do see a pickup on the orders, so he is looking for increased revenue and earnings from equipment and he is also looking to sustain the growth that we see in the first quarter in training.

Okay, thank you.

(inaudible) The next question is from Curtis Risk (ph).

First question, Paul, would be on the four cents FX I think you commented on prior calls that I think for every one penny move you had about a half $1 million in net income. Not sure if I'm comparing the right numbers here, but by my calculations that only gets me to about a penny and a half with the 6 cent move in the quarter, wondering if you can reconcile the rest or am I looking at the wrong numbers.

What we were doing is comparing the $79 million reduction year-over-year change so you have to look at the movement of the Canadian U.S. dollar that was in reference to. The other thing is we have about a $4.6 million onetime gain last year on our Euro Canadian exposure which we did not repeat this year so that was non-recurring. You got to do a combination of that. In terms of looking at the one cent movement between Canadian and U.S. in terms of looking at the impact, the number turned out to be closer to 4600,000 than $500,000 and that is assuming at the time we did that last year using a 32 % tax rate. If you now put that on an annualized 25 % tax rate will probably get you closer to between $650 to $700,000.

With respect to your hedging those numbers you are just throwing out there, the $600,000, is that including interest rate hedges or is that just FX.

Those numbers are really around the Canadian U.S. dollar and our hedging is a combination of forward contracts on certain dollar cash flows that we know, plus we do borrow a lot in the U.S. and as much as maybe 85 % of it goes to U.S. assets, about 15 % of it or more that is a hedge against our debt U.S. dollars that we receive on our contracts. So you got a bit of a mismatch in timing because you mark to market the debt each reporting period on the cash flow they do get spread out over the year. When you look at some of the foreign cash flows in terms of our businesses they are really based on contracts that we have yet to sign going through the books.

Do you have the numbers by chance, of the overall impact of all of your hedging, how much is in Q1 and how much impacted Q4 on a sequential basis.

I don't have it on a sequential basis but again in terms of what we looked at, I guess when we compared Q1 versus Q1 last year, it is about an $8.4 million impact. But I couldn't tell you on -- I would have to get back to you on a sequential basis.

Okay. On your staffing levels in Montreal and your simulator manufacturing, you have won some decent contracts lately, if the military contracts that are coming up in the next say six odd months, if those do not go your way would you anticipate having to potentially downsize some of your staffing levels in Montreal? Are you taking into account that you may win one of those contracts with the current staff you have?

If we don't win the major military programs will that have implications for our staffing and it will have implications for our staffing, and it won't be confined to Montreal. We don't take a negative posture on this, we expect to win some of the major military programs and that will strengthen in the overall our employment prospects. The point I am trying to make is I think I'm answering your question is the employment impact is not confined to Montreal.

On your capacity utilization on our manufacturing in Montreal where is roughly right now, and I guess part B of that question is, do you plan to add the 10 or so simulators to your training base this year or is it too early to tell that yet? Thanks.

What do you mean by capacity utilization in Montreal?

Well, how many simulators just on the manufacturing side for simulators, what is your capacity versus where are you at right now? Are you at 40 %, are you at 50, 60, that type of percentage if you had that?

The way I look at it very differently is that, again, you've got to recall we have an integrated operation in Montreal.

I mean military and commercial combined.

What we are seeing this year is a lot more hours on the manufacturing side being spent on the military Marine and less on the civil side.

No, I understand that. I just wanted the total capacity utilization, not just for civil but for the whole plant, assuming the mix -- I know the mix will change as it has this year versus last year.

In terms of unit of production, we are looking at roughly a similar number of units of production across the board this year versus last year. I think the difference is maybe one unit. However, as Paul as indicated, what is significant is the change in the mix, whereas last year the vast majority of the production units in Montreal were civil. This year increasing proportion will be military and Marine and a lesser proportion of civil. That has impact on revenue flows, obviously.

I understand.

Which is why the revenue is not constant, even though the unit production year-over-year is.

I understand. What I'm trying to get at is how many units are you capable of producing in the Montreal facility across all of your businesses total? I mean, I know that you maybe produce military and commercial at different rates, but can you produce 60 units total in Montreal and you're now doing 25? I'm just throwing numbers out, but --

With the current workforce working the number of shifts they are working, we are running at full capacity. If we got more orders, which we anticipate, we will increase the number of shifts with the current workload, and if we need, we will add more people.

Okay, thanks.

(indiscernible) Capital, Tom Vurnish (ph).

I think he's vanished. Next question.

Raymond James, Ben Cherniavsky.

I just wonder if you can give us an update on the pricing environment for your training time. You note that your utilization rates are up. Presumably, that has to do with maturing of your centers, but in terms of the price per hour can you give us some kind of commentary on that?

I would say that in general across the market, there is continued pricing pressure. There is excess capacity out there. However, we have positioned ourselves well or aligned ourselves with the customers, and I think you have said in many cases now, those centers are maturing. So we have been able to hold our revenue percent. We have been able to hold our price pretty much, and continue to work on reducing our cost and improving our operating efficiency.

But your revenue per Sim(ph) staying about the same, is that a combination of maybe some price weakness with improved utilization?

Yes. I don't want to imply this, but a lot of price weakness there, though. (indiscernible) the utilization and kept our prices pretty firm, relatively firm.

But there is pretty stark evidence of excess capacity out there for training.

It tends to vary, though, from market to market and simulator to simulator. It's not a general trend.

No, absolutely it will differ. And certainly in the business training market, that was an area that I think was under more pressure than others. Is that -- are there any trends there you can note?

I don't know that there is a trend, I would just say that there is continued pressure in the business aviation segment and that there is no letup on the part of our competitors and maybe they have turned up the wick a little bit.

Interesting point is with the new models that is where we are seeing the growth and that is where we are not seeing the same degree of pricing pressures in the business.

Our growth and our focus has been on the more recent models that have been introduced or about to be introduced and that is where the yields are holding.

That is good news. There has been talk for a longtime about a trend toward outsourcing from airlines, I would think now more than ever that would make sense to my knowledge, unless I am missing something. There has not however, been a lot of evidence of that. Is there something you can point to that would account for resistance on outsourcing training during the times when the airlines want to get rid of just about any cost center they might have?

I just made a couple of comments, one is that you are right, I think there is an increased interest in outsourcing or training outsourcing airline training. Really it is more of an increased business for them to focus more on their core competency. Secondly, I think that the airlines many of the airlines are so involved in reinventing themselves and working on major cash flow emergent cash flow issues and working on union contracts, et cetera, they just haven't gotten to directing the training issues. Thirdly, there are still is some resistance if you want to call it resistance within the traditional flight op community who want to hang on to this piece of the business that they have owned. But that resistance is waning as well. It is all moving in the direction that we expect it will and as you mentioned earlier in your question.

Okay, thanks very much.

Our question is from GMP Marko Pencak (ph).

You made a comment about cash management, I noticed that all of your line items on your balance sheet from working capital sampling seem to be pretty much in line with the (indiscernible) section in your Accounts Payable. Can you just give us some insight into what is happening there in the quarter?

I think it is sort of what we expected in a way, coming off of the cash generated in Q4, where we had a much higher than we would typically see on Accounts Payable so what you are seeing is a bit of the reversal of what we saw during Q4 of last year. We anticipated to be negative this quarter. But again that is consistent with prior year and in fact not as negative as were the prior year, and we see now that the balance of the quarter is being positive and hopefully we plan to be positive for the end of the year.

Okay. Secondly, Derek at the annual meeting you made a comment about bad debt hit on (indiscernible) Can you just quantify how much that was?

I'm sorry.

Bad debt, what was the dollar value of that.

It is a question of whether you want to include the amounts outstanding with Air Canada that preceded the quarter or whether you want to just look at the amount in the quarter. If you're looking just at the amount in the quarter its less than 2 million, if you are adding Air Canada it is over 4.

Okay. You are referring primarily to the 747 business, right.

We are referring to the business that we were doing before they went into whatever you characterize the situation they are in now.

That dollar amount you still currently have as a receivable, that has not been.

I said in the fourth-quarter.

Got it. Okay. The tax loss carry forward that result in the 25 % tax rate for this year, how long do they run and what should we be thinking about going into next fiscal year?

Right now in terms of the tax loss carry forwards in Australia, and the other area where we have some unrecognized tax loss carry forwards is in the U.S. And we have not looked yet. And I think I can't get a definitive answer but it obviously depends on how we do in the U.S. and so for example, there is a lot of U.S. programs that we talked about on the military side, so that could change it. So I could see the rate stand for the foreseeable future. But this will be dependent upon our continued success in growing our U.S. earn.

So just for modeling purposes, should we be modeling more 25 for fiscal '05 or should we --

I would said that is probably okay. (inaudible)

A question regarding the disproportionate effect of the percentage of completion accounting on the long-term contracts. Can you just give us a sense of what that profile might look like as we go forward?

It is disproportionate to the third quarter -- simply because you have got to do (indiscernible) using percentage of completion accounting. So at the end of last fiscal year we were 50 % done, now we're 70 % done. You got to realize you have to deal with cumulative adjustment for the 70 % and that is what makes it disproportionate. So if you are assuming that the rates don't fluctuate that much on a going forward basis you won't nearly get the distortion. So overall probably not that over double the impact this quarter than what you would typically see.

So should that be working assumption that we go under then?

It is higher in third quarter and in fact, today I would say from the euro the dollar has gone the other way. So if that continues we will see a bit of a reversal (indiscernible) saw in the first quarter.

Which is another reason why we're assuming stronger margins on civil.

Just going back to earlier questions about your capabilities in your Montreal facility and the change in mix. Is it reasonable to assume that some of the civil equipment orders that you are getting your going to be able to roll through faster than previously just given the fact that last year you were building so many for your own training centers?

We have reduced the manufacturing cycle time quite dramatically down from 32 weeks to closer to 12. Gary would probably confirm that in order to get the cost target that he wants in order to price aggressively simulators in the market, he wants to see a further constriction on the time of manufacture, more importantly the cost of labor associated with the manufacture. So you can assume that we will continue to push to reduce the overall time and to reduce the overall cost because that is one way we can help conserve some of the margin erosion coming at us on the pricing side.

Okay. The last question for me is you do outline some of your foreign exchange deals outstanding at the end of the year in your annual report, are there any unrealized gains that you guys have from those? Because it strikes me that some of the transactions you did on the right side of the trade, but I was trying to get a handle on whether that is sufficient to offset some of the operating --.

It is not (ph) sufficient to offset some of the operating, but we are on the right (indiscernible) of the deal.

But there is no other unrealized gain.

No.

Thank you.

Ihor Danyliuk (ph) of Merrill Lynch.

I wanted to get a better idea of your civil simulator sale margins versus pilot training margins. You do now disclose be it indirectly but we can back out what those revenues were for the two operations. If you could comment on those margins; I estimate that your just for the sake of starting I estimate that your civil simulator sale margins declined from about 33 % to 17 % year-over-year, while your pilot training margins are close to breakeven. Are those reasonable estimates?

I guess I won't comment on your estimates. My own input would be we make money on training, so we're not in a breakeven mode, we make money on training.

In terms of the 6.6 million of operating earnings in that those operations what percentage of that is coming out of simulator sales versus pilot training?

We don't give that separation. It is a combined total for the civil business and there is not really much we can add to the pressure on margins that is in the comments that Paul made and that Gary made in indicating it is coming from a variety of sources on equipment. It is coming from the lower volume, it is coming from FX, it is coming from pricing pressures. On training as I said in my remarks at the AGM, the reason that the earnings did not match the growth in training on revenue were a combination of factors including foreign exchange, operating lease costs, some integration costs, both in Europe and the United States rising from our acquisitions and some bad debt. So you have to take it in the overall terms of the description we gave and the margins are what they are. And as I said we expect a substantial improvement in those margins in the balance of the year. The important point is what Gary said, both businesses remain profitable.

I guess I can move on in terms of I know you discussed this during your (indiscernible) but if I could ask, in terms of your major military programs that you are bidding on, can you give us an updated timing on when we expect to hear about the awarding of flight school 21 the AVTS program NH9D (ph) and the CFAT (ph)?

I will do my best but as you know, these are moving targets and what we say today may not hold for another month. But as of today our best guess is that flight school 21 is likely to be the first one to be decided, it is expected toward the end of September. That could slip into October but currently the procurement agency in the U.S. military is holding firmly to an end of September date. The CF18 which is another one in which is fairly precise we are expecting the decision in January. The important point to make is the bids are all in, all of the presentations have been made, so the decision rests now with the procurement agencies in both countries.

With respect to ABTSs (ph) that has been delayed further, the latest information we have is that the Down Select (ph) that is the selection of the preferred (indiscernible) is currently expected to take place in October. The actual contract award will flow some twelve months thereafter. We do not know what the reasons are for the additional delays on ABTS. As you know that is a program that was expected to be decided in terms of the selection much earlier this year and we have been given no explanation by the British authorities as to the reason for the delay.

In the case of NH90 there are a variety of moving pieces that play on NH90. Their major contract is in Germany. As you know our Consortium has been selected. What remains to be worked out is the manner in which that training agreement will go forward. In other words whether it will go forward under a PFI model or some alternative. There are other NH90 programs emerging in Europe and my best sense is that it is a bit of an (indiscernible) guess on whose team they are going through in terms of whose going to make the first decision and then the others will take their cue from that. We certainly expect that that decision in Germany will take place before the end of the year because they are running smack into their training requirements as they delay it much further. But the most imminent, the most determined of the four flight school 21 at the moment are flight school 21 and the CF18. Together they are worth over a billion dollars.

In terms of your percentage of those revenues, can you break that down on a contract by contract basis and over what time period?

I think the estimate for flight school 21 is based on the first 12 years of what we think will be a twenty-year contract and that is both for equipment upfront and the training. As we are (indiscernible) we will consolidate the total number in our favor. Similarly with the CF18 if the $225 million program over, we will get you the number of years in a second -- I think it is ten, but I'm not absolutely sure. But it is again a combination of equipment upfront plus a revenue stream on the service side of so many million per year. It is 8 to 10 million per year, so I think it is about ten years. But I can clarify the timing of CF18 for you.

That is fine. ABTS?

ABTS is estimated at 1.7 billion and that is a thirty-year contract.

Is that your portion the 1.7?

Again we are the prime and the Consortium, so we have more than a 50 % stake, so we would consolidate the entire revenue and earnings projection from that if we were to be successful.

Thank you.

Robert Faye.

The production I just want to make sure that I understand now, given the reduction that you are having in your own in-house sales, and the delay in the military you still expect to match last years' production levels?

We are talking production levels, production units. As I said, did you hear my earlier response?

No, I was cut off.

What I said, Robert, was the overall unit number is going to be 23 this year versus 24 last year. The difference is that civil will drop from 23 down to 16, military increases from 1 to 6. So the production level on a unit basis during the fiscal year is roughly the same. What changes is the mix.

Okay. On the training side again you have talked about the bad debt issue and the issues with Air Canada and some of your other clients. Basically are all of your clients paying upfront now? Have you migrated to that system yet? Or are you still basically being paid after the fact?

What we have done is that for those customers who are having financial difficulties, we have reverted to more of a paying upfront. Other customers who are on solid ground we are sticking with our standard terms. It is really a case-by-case.

When you talk about standard terms what are we talking about 30 days, 60 days?

Basically a thirty-day.

So it's fairly tight. The revenue per Sim -- you talked about this a while ago the revenue per simulation is now been fairly constant year-over-year but you've had about a 3 % lift in utilization. Does that mean that pricing has dropped about 5 % on the training side?

Pricing has dropped by 5 %, no, it just means that we are generating on the average about the same revenue -- when we use terms like the same we have minor, minor variations and also very depressed segment. But when you look at it in total our revenue per simulator is holding. Our yields in terms of the revenue per simulator are holding.

The yield is holding and you are up about 3 % in utilization.

Yes.

4 %.

Okay, thank you.

Steve Arthur of RBC Capital Markets.

First on the marine business, it seems to be down pretty significantly quarter over quarter after pretty steady growth trend. Is there something in particular that happened in the quarter or what kind of a pattern should we be looking for now?

No, the decrease is all foreign exchange. I think as Paul said in his remarks if you exclude the foreign exchange adjustment they are ahead of last year, both on the revenue and on the earnings side. They are not ahead in the double-digit manner which is being what they have done more recently. But if you took out foreign exchange they are still showing growth, so we are not disappointed with their performance by any means.

I know they are ahead year-over-year but it was 43 then 50, then in Q3 and Q4 down to 34. So it was a drop off greater than I expected there.

That is the trouble with quarter by quarter comparisons. There is not seasonality as such in the marine business. And we are more concerned about the performance through the year, and I can tell you that they are running in accordance with our initial plan, the only caveat is that the foreign exchange adjustment, we haven't contemplated. We have introduced new targets for each of our units as a result of the foreign exchange wack (ph) in the first quarter, and I can assure you that we're trying to keep marine backs where they were.

One thing mentioned in Q4 they finished a big program in Germany, the F124, and that gave them a big wack of revenue at the very end. So it is probably more of an anomaly in Q4 we saw a real step up there.

Terms of the original plan then for marine the double in three years objective.

That objective holds. That doesn't say that half of it is going to come in the first year by any means.

The other big item I found in working capital was a jump in inventory, should we see that trend down again over time, would you expect or is this --.

Yes, it will come down a little bit in terms of going down on the simulator side.

In terms of the cleaning business you sold this week, should we expect meaningful proceeds from that.

No. (multiple speakers)

The service revenue on CF18 is over 15 years, the equipment revenue is over three.

Richard Stoneman.

The question is the number of questions focused on losses through bad credits on the training side, were there any losses due to bad credits on the equipment side?

No, I don't think so. Just looking at my partners here and they are saying, no.

The revenue from the equipment side, I estimate was around $29 million in the quarter Civil. What would you expect that to be for the year?

All I will tell you, I can't give you any specifics on the number in the quarter but I think we are looking at it instead of a 50-50 ratio at the end of the year, we are looking at a 60%-40%, 60 % training, 40 % equipment. So whatever number you're putting out as your total you should use that formula to come to a distinction between training and equipment.

The only thing I would add as I mentioned in my remarks our revenue, our production is now sort of caught up with our lack of orders over the 18 months. So we see this as sort of the bottom of our revenue and as we expect it to modestly improve as we go through the year.

You were anticipating somewhere in the area of 11 orders this year, I read that earlier. What sort of numbers do you think would be possible now with these large bulge orders?

I think what we said is more. We are -- that is all we're going to say right now. We should do better than our previous estimate.

In terms of equipment commercial deliveries in the second quarter would you expect that to be about the same as the first or would it start to show improvement in the second quarter?

As I said a moment ago it is going to modestly improve as we go through the year.

Thank you.

Robert Winslow.

Just a quick question on the installed base of simulators that are currently through the sale and leaseback program, is that up to 29 now?

Yes, we have added two since year end.

Perfect. What about your plans going forward for '04?

Our plans are to our target was to raise about $100 million this year, we raised just under 29 so we are still planning to do that, so you can look at anywhere from 4 to 6 more Sims (ph).

Great. How do you characterize the end market for those sale leasebacks? For example your counterparties are you seeing reluctance on their part to enter more agreements? Is there any kind of dynamic out there that is changing?

I think we have said in the past it is getting more difficult, but it is not to the point where we can't do it, and it is still the most cost efficient financing for CAE. We are right now -- it works best for U.S. assets. And this is where our focus is on some of our U.S. assets, but at the end of the day don't expect us -- we said we would not go much higher than about a third of our total fleet.

Okay. I hate to beat this FX thing to death but I am going to anyway here, the 4 cent EPS hit that you have talked about, do you break that out in terms of what is translational versus transactional? And the reason we ask is trying to understand maybe going forward how a stronger Canadian dollar could impact the margins?

I will interpret your question as translational results of our foreign denominated operations versus currency dealing with transactional i.e. dealing with selling in US dollars and a lot of your labor costs in Canada, the majority of our FX is transactional.

It is. Okay, thank you very much.

Thank you Derek, Paul and Gary and thank you listeners for taking the time to participate in our first quarter conference call. Once again today's remarks will be webcast and additional information can be found at our Website located at CAE.com.

At this time we would like to think all participants for joining us today. The conference has now come to an end. Thank you for choosing the Bell Conferencing Solution and I wish you all a good day.

(CONFERENCE CALL CONCLUDED)