CAE Inc (CAE) 2004 Q4 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the CAE fourth quarter conference call. I would now like to turn the meeting over to Mr. Andrew Arnovitz. You may now proceed Mr. Arnovitz.

Thank you. Good morning and welcome to CAE's fiscal 2004 fourth quarter and full year conference call. 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, assessment 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're based on management's expectations that 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.

Presenting this morning are Derek Burney, President and Chief Executive Officer, Paul Renaud, our Chief Financial Officer. Derek Burney will begin with an overview of fourth quarter and full year results. Paul Renaud will provide you with a detailed review of financial performance for each business unit. Mr. Burney will conclude the formal part of this presentation with CAE's outlook for the current fiscal year.

We will then have a question-and-answer session with financial analysts, following which we'll have a separate Q & A period for members of the media. As always this conference call will be archived on CAE's web site. Let me now turn the call over to Derek.

Thank you Andrew and good morning. CAE today recorded fourth quarter earnings from continuing operations of $15.5 million.

Full year earnings of $67.1 million, both well down from the prior year but more or less in line with expectations. These earnings of 6 and 29 cents per share respectively were reduced 3 cents per share by $10 million in restructuring charges for work force reductions. $8.2 million of which relates to the layoffs following the CF-18 decision with $1.8 million reflecting fourth quarter severance payments earlier in the quarter.

In contrast, our top line held stronger second half revenues left full-year revenues down just 3% relative to last year. Actually up 4% net of foreign exchange impacts. This full year performance was due to an increase of more than 10% in Civil's training revenues, about 20% net of foreign exchange impact, but partially offset the reduced contribution from Civil's equipment business. The decline in Civil's overall revenues was in turn partially offset by a 6% increase in Military revenues. Training represented approximately 60% of Civil's total revenues. Military's revenue and income contributions exceeded Civil's for the first time in company history. Tangible evidence we believe that our strategic moves into training and into the United States defense market are positioning CAE for a brighter future.

Reduced year-over-year earnings and margins in Civil stem from lower simulator production volumes which in turn reflect the small order book of 11 full flight simulators from the previous year and from fierce pricing pressures in a lean market. As expected Military's changing program mix caused its margins to decline from last year's exceptional 17%. Civil, Military, and Marine were all hit by the rapid shift in the Canada/U.S. exchange rate that cost us 3 cents per share in the fourth quarter and 11 cents per share in full year net earnings relative to 2003. Marine would have been essentially in line with its full year earnings relative to last year save for foreign exchange impacts.

In addition to the restructuring charge noted earlier, earnings were also impacted by higher corporate costs arising from increased long-term compensation and pension expenses. The impact of lower EBIT on net earnings was partially offset by lower interest and lower tax expense.

Revenue and earnings generated by all three business units were stronger in the second half of the year than the first. With revenue from continuing operations up 24% and earnings before interest, tax, and restructuring expense up 38%. Notably, Military's fourth quarter EBIT was up 26% from the third quarter. As well, there were notable examples of market success as we execute our strategic plan. Civil's global training network grew to over 100 installed simulators in more than 20 locations on 4 continents with capacity utilization rising to 64%, compared to 60% last year. Civil's expanding and fast growing markets like the Middle East and China, through our joint ventures with Emirates and China Southern. Our cooperation agreement with Airbus paid off this year in a variety of ways and places. In particular, it enabled us to expand the scope of our services into wet training through the use of our Simfinity product and instrumental in our recent win with Quantas.

Simfinity sales actually grew five-fold in 2004 to $16 million. It's true value as a market differentiator for equipment and training sales is, of course, much larger. In the long-term agreement with the fractional business jet operator, Flight Options, represented a major win for CAE SimuFlite over our competition. We believe that the training agreements with Iberia and more recently Lan-Chile bode well for future arrangements with other major carriers who have traditionally met their training needs in-house. And I should add that in the Lan case, we estimate a return on investment well in excess of our weighted average cost of capital.

On the equipment side, Civil has secured 16 full flight simulators orders in fiscal '04 compared to 11 in the prior year. Including key orders to produce prototype simulators for the Airbus A380 and Embraer's 170/190 regional jets. This total also included a 6 simulator order from jet blue which actually covers a two-year time frame.

Civil's 84% full flight simulator market share was nearly matched by a "best ever", 80% share for CAE in the Civil visuals market. Military ended the year with $507 million in new and committed orders. $287 million worth in the second half and that compares to $285 million in the entire prior year. Those second half military orders included valuable new contracts for the U.S. Army's 160th Special Operations Aviation Regimen, the Army special forces. What they did not include as we had hoped was work related to flight school 21 program, or the Canadian CF-18 training project.

Marine completed a strong second half performance with 31% higher revenue and 82% higher operating income than in the first half. Among the Q4 contract awards was a $14 million contract from NOK of Switzerland to simulate a nuclear power plant control system. Disappointing news in the fourth quarter, was the delay of the U.K.'s Astute submarine training services change order in FY 05.

The good news, at least for CAE, is that the Astute change order still lies ahead and will most likely occur in the first quarter. These transactions and trends are positive, as is the reduction of our net debt by nearly $220 million since last year.

Noncash working capital declined, and positive free cash flow increased in the fourth quarter with Civil turning cash flow positive. FY 04 also saw a marked reduction in cap ex with the expansion of Civil's training network continuing to be calibrated closely and prudently to market demand and outsourcing opportunities.

As many of you know, on Canada's CF-18 training program, the government of Canada judged that the $271 million bid from [Bombardier] and its American partner represented better value for Canadian taxpayers, than our bid. Despite the fact our bid was priced $44 million lower and had substantially higher Canadian value-added equipment. I continue to believe that this decision was a travesty both for CAE and for Canada. We have challenged the award and in the only available trade tribunal, and the tribual has now ruled that an inquiry is in order. Having found reasonable indication in the evidence presented, that the tendering procedures did not ensure equal access to the procurement, and were applied in a discriminatory manner. The resulting inquiry should take about four months. We know that the tribunal's scope for review is limited, as its authority. Nonetheless we will await the result with interest. The heart of our appeal is that there was bias in the process, such that while we were deemed fully compliant we could not have won even if we had offered to perform the contract for $1.

However, our concerns about this procurement process go beyond the scope of the trade tribunal's review mandate. The fact that the National Security Exemption of NAFTA was consciously not used so that Canadian content or economic value added for Canada could not be a factor in determining value for Canada remains a matter of concern. The two issues, the NAFTA exemption and Canadian content, go hand in hand. For it is generally through the exercise of its explicit right to exempt certain defense procurements that our government gains the ability to promote domestic content, just as our NAFTA American partner does as a matter of course on defense procurement.

The how and why of this government decision is unfortunately not within the purview of the CITT, but there should be questions if not concerns about what this means in terms of fundamental governance in Canada, namely the lack of consistency between defense procurement and national security on the one hand and between defense procurement and technology innovation on the other.

So how I would sum up FY 04? Well, I think it's fair to say that it was a Charles Dickens kind of year. Significant market successes in all three businesses, along with two major military setbacks. Earnings results which were well off the previous year, but were, as I said, more or less in line with expectations. We were caught in a perfect storm earlier in the year, a storm formed by a convergence of adverse civil aviation and currency market conditions. We weathered the storm and remained profitable albeit at lower levels despite the severe head winds. As well, we made significant progress in executing our strategic plan, particularly in the second half of the year. The worst may well be over but the best is still yet to come.

We also know that the currency change is a fact of life as are severe price pressures. That means our priority going forward will be to improve margins, notably in Civil, in order to bolster future earnings. So with that let me turn the floor over to Paul to discuss the results and our financial situation in more detail.

Thank you, Derek, and good morning everyone. You have the press release on our financial results. And listened to the overview on our year-over-year performance from Derek. I would first like to provide some additional comments on the results, the restructuring charges, and the positive cash flow generated in the fourth quarter.

And I will provide more details on our business unit performance, address elements of our backlog by business segment, including the change in method of determining backlog for the Civil training business, and respond to recent inquiries on our exposures to certain airlines, i.e. the US Airways and Alitalia .

Overall, second half results were much stronger than the first half, fourth quarter being the strongest when you exclude the restructuring charges.

As in the prior quarters, the strengthening of the Canadian dollar relative to the U.S. dollar significantly impacted results relative to the prior year. The foreign currency impacts reduced fourth quarter full year earnings per share by $6.4 million or 3 cents a share and $24.6 million or 11 cents a share respectively.

The results of all business segments were affected from higher corporate costs arising from the increase in long-term compensation expense of $6.8 million and pension expense of $2.6 million, the former reflects a combination of the expensing of stock options, costs with respect to the issue, and revaluation of deferred share units issued as part of the company's long-term incentive program. These deferred share units were introduced in fiscal year 2004 to reduce the number of stock options we issued under the program.

In March of this year, the company entered into an equity swap agreement with a major Canadian institution to reduce earnings exposure from the fluctuation in the company's share price relating to these units. The latter, pension expense increase, arose in the change of the rate of return assumption on pension plan assets from 9% to 6.5% that was made midway through fiscal 2003. Interest expense in the fourth quarter amounted to $4.8 million, compared to $4.6 million for the same period last year.

For the fiscal year, interest expense decreased to $23.9 million from $30.4 million in the prior year as CAE decreased its net debt, defined as long-term borrowings less cash and short term investments, by $216.7 million this year to $575 million.

The annual results benefited from a reduction in the income tax rate to 24% as compared to 31% in fiscal '03. This year-over-year decline relates to the tax benefit from tax loss carry forwards in Australia recognized in the first quarter this year. The fourth quarter tax rate, however, was slightly higher than the prior year period, 31% versus 30%. Quarterly fluctuation in income tax rate reflects a change to the mix of income for income tax purposes from various jurisdictions. For next year, we still anticipate an annual tax rate of 30%.

The restructuring charges of $10 million taken in the fourth quarter includes $8.2 million for layoffs announced in April, 250 in Montreal relating primarily to the CF-18 contract decision, and 50 at other locations globally. Most of these reductions have already taken place and are expected to generate savings of approximately $20 million in fiscal '05. The other $1.8 million involves severance costs based on about 100 employees laid off at the beginning of the quarter, adjusting the work force in Montreal to the reduced production volume.

During the fourth quarter, CAE generated positive free cash flow of $54.3 million, this is defined as cash provided from continuing operating activities less capital expenditures and dividends paid. Positive free cash flow stems primarily from a $53 million reduction in the noncash working capital.

CAE was more successful than anticipated in achieving the Chinook helicopter simulator milestone for the government of Singapore, resulting in the collection of approximately $10 million prior to the year end. The company is also on target to achieve the required milestones on the German NTF program that should result in cash receipts of approximately $40 million over the balance of this calendar year.

As Derek mentioned CAE's net debt, defined as long-term debt less cash and short-term investments, decreased by $216.7 million compared to March 31 '03. The reduction was accomplished from the receipt of $122.5 million from sale and lease-back transactions and approximately $168 million net of fees and expenses from the issuance of common shares. This was offset by lower cash from operations resulting from the lowering earnings and an increase in noncash working capital as compared to last year. Increase in noncash working capital of $107.2 million this year is related to lower accounts payable and accrued liabilities of $56.4 million, due primarily to lower Civil equipment activity meaning less material purchases.

In addition, higher accounts receivable of $21.3 million, mainly from unbuilt sales on certain Military programs, for example the German NTF program previously mentioned, and Marine programs, and an increase in inventories of $19 million primarily from the advance build of certain simulators. Capital expenditures for the year amounted to $94.5 million, well below initial estimates in the prior year total of $238.9 million.

Regarding the performance of the individual business units, Civil generated operating earnings of $12 million for the fourth quarter compared to $10.9 million in the third quarter and $29.5 million in the prior year.

The majority of the year-over-year reduction relates to the foreign currency impact on the equipment selling prices and the translation of the U.S. dollar training results.

Fourth quarter revenues of $128.9 million were 15% higher than the third quarter, so 6% lower than in the prior year period, excluding foreign currency impact revenue would have increased by 8% in the quarter.

Civil full year operating earnings were $39.4 million, compared to $116.2 million, while full year revenue decreased 11% to $461.8 million. The reduction in revenue is attributable entirely to foreign exchange, otherwise revenue was consistent year-over-year. The mix of revenue did change, however, as training revenue represented approximately 60% of the total revenue. Excluding foreign currency impact training revenue increased approximately 20% year-over-year.

The growth in training was offset by a decline in equipment sales with the current year performance affected by the significant reduction in full flight simulator sales in the post-9/11 market.

Military generated fourth quarter operating earnings of $15.9 million compared to $12.6 million in the third quarter and $22.1 million in the prior fiscal year. Fourth quarter revenue of $131.2 million was 6% higher than in the prior year. The increase in military earnings relative to the third quarter on lower revenue is attributable to the mix of programs. In particular, the third quarter margins were diluted by the impact of the significant revenue contribution from the low-margin German nighttime flying helicopter simulation program. The lower margins, as you recall, on this contract stems from the large subcontracted component of this program.

Full-year earnings of $52.6 million compared to $73.6 million in the prior year, while full-year revenue increased 6% from last year to $472.8 million. Excluding the effect of foreign currency, Military's revenue would have increased by 11% year-over-year. Operating earnings were reduced by 10%, approximately $5 million as a result of foreign currency.

Marine generated fourth quarter operating earnings of $9.2 million on revenue of $39.2 million compared to earnings of $8.9 million and revenues of $50.7 million in the prior year period.

Decline in revenue relative to last year, reflects delays on the Astute training program following from delays in actual submarine construction as well as a beneficial impact on last year's results of the German frigate 124 program completion. Despite the lower revenue, Marine generated higher earnings. The increase in margins reflect the benefit of increasing product standardization, further integration of the commercial naval units, and outsourcing more activity to its operations in Bangalore, India.

Full year operating earnings on revenue were $29.6 million, $158.6 million compared to $31.8 million and $167.6 million respectively in the prior fiscal year. Excluding any foreign exchange impacts, Marine would have generated revenues and operating earnings essentially in line with last year's results.

CAE has adjusted the method for reporting the backlog of its civil training business to include expected revenue under training contracts. In the past, only guaranteed minimal commitments were included. As a result, the backlog for CAE as of March 31 2004 totals $2.9 billion compared to $2.7 billion last year on a comparable basis. The backlog consists of approximately $200 million for Civil equipment, $800 million for expected revenue from training contracts, about $1.3 billion for Military, and just over $600 million for Marine. For Civil, the training backlog includes expected revenue under committed contracts.

The company will generate close to $100 million of revenue under these arrangements in each of the next two fiscal years. Examples of expected revenue included in this amount are the long-term training contracts with Iberia, China Southern, Air Wisconsin, Frontier Airlines, Mes[a] Airlines, Flight Options ,TAM, to name a few. This excludes any recurring business we obtain from our existing customers that is not covered by long-term contract.

For instance, most of our business jet training and a significant portion of our training in Europe. This should provide better clarity with respect to our near-term performance with this unit.

Military ended the fiscal year with $507.1 million in new and committed orders raising the funded backlog to almost $1.3 billion, nearly 40% of this backlog is for the manufacture of simulation equipment, the majority of which will be delivered over the next two fiscal years. Services, which includes the initial 20-year contract for the medium support helicopter training contract with the U.K. MOD and maintenance and support contract make up the balance. The medium support helicopter backlog covering the remainder of the initial contract which runs to 2018, totals $600 million and currently generates revenue in excess of $60 million annually.

The balance of the service backlog consists of a ten-year $70 million service agreement that provides support services for the armed services in Australia, announced earlier this year, plus various maintenance and support service contracts in the U.S., Germany, and the U.K. The maintenance and support services contract generates more than $100 million of revenue annually.

Excluding the long-term agreement with Australia, these service contracts are awarded annually through the exercise of options under existing agreements and/or annual contract renewals. Together, the current equipment backlog, the long-term medium support helicopter training contract, and the annual renewal and maintenance of support service contracts provide CAE with a solid revenue platform for the near term. Marine's backlog remained about $600 million, down modestly from last year. Two-thirds of the backlog is for a 30-year training services and maintenance contract on the Astute submarine program.

Due to the delay in the manufacturer of the submarine, the center will now become operational in fiscal 2008 and will generate on average over $15 million in revenue a year annually.

Lastly we have recently been fielding questions based on the financial situation at two of our customers. For US Airways we are building an ERJ 170 simulator at all times due the manufacturing of this simulator up until delivery, we will have received consideration in excess of our costs incurred. The contract for a potential second simulator, a CRJ 200, has not yet been finalized at this time. With respect to Alitalia, the customer is and always has been current with respect to outstanding accounts receivable and has a balance outstanding today of approximately $650,000 which represents nearly one month's activity.

For CAE, this concludes a challenging fiscal year. To amplify Derek's earlier comment, our priorities remain on improving margins to bolster profits for each segment and to generate positive cash flow to further strengthen the balance sheet.

I will now turn the meeting back over to Derek.

Thanks, Paul. Let me offer some thoughts on the way ahead. We see a civil aviation market that is stabilizing but still fragile.

There are signs of growing stability in the commercial aerospace market, the legacy airlines, particularly those in North America, continue to struggle. Higher oil prices have become the most recent aggravation.

The outlook is brighter for the discount airlines, as well as for most in Asia and the Middle East. Air travel is finally returning to pre-9/11 levels after three lost years. U.S. pilot hirings are up, results from major airlines are improving. Not with profits, but with smaller losses. As a result we see continuing price pressures and a buyer's market for Civil's products and services through calendar year 2004.

With new airline capacity expected to come on stream only next year, we see continuing soft simulator market. Of course, even this projection of a modest recovery into the medium term depends on the absence of another shock that could shatter investor or consumer confidence as well as airline performance.

For our civil business, this outlook means we intend to maintain our 75 to 80% share of a sluggish equipment market. We also need to continue to grow training selectively and profitably, reducing our costs and improving our yield, all with a view to increasing our margins and our return on net assets. We believe that the outsourcing agreement with LAN Chili meets these tests. We know, too, that we need to get "better and wetter" [pink]. Improving our value proposition and customer satisfaction, even as we improve our operating margin by reducing our costs.

However, the best assurance of margin improvement and a stronger return on our training investments would be a real recovery in commercial aerospace and a better market balance between buyers and sellers. For our military business, we anticipate another year of $500 million plus in orders.

We look to additional orders from the U.S. special forces as well as for our C-130, C-5, and P-3 capabilities. We are pursuing helicopter prospects in Europe as well as additional orders on our Euro fighter business. The NH-90 program, on which we are teamed with [Talus], is taking shape more slowly than we would like but some elements should be concluded during the fiscal year.

As Paul mentioned, training and service contract renewals are expected to generate more than $100 million. We know, too that maintaining our technological edge through focused R&D and developing our product niches is essential to future market success for our military business.

For Marine, we intend to capture more dividends from our all-important Astute contract and we'll target new commercial ship markets like China, Korea, and Japan. At the same time, we need to expand the scope of our Marine product line.

Finally I'd like to pre-empt questions about my succession. What I can say is that the selection process is in its final stages. An announcement should be made in the near future, and I expect the change-over to occur at the time of our annual meeting in August , after which in order to ensure a smooth transition, l will serve as Vice Chairman of CAE until my formal retirement October 31st.

Thank you, Derek. I'd now like to open the call to questions from financial analysts.

Thank you. We will now take questions from the telephone lines. If you have any questions, please press star 1 on your telephone keypad. If you're using a speaker phone please lift the handset and then press star 1. If, at any time, you wish to cancel a question please press the pound sign. Please press star 1 at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for your patience. The first question from Richard Stoneman from Dundee Securities. Please go ahead.

Good morning, Derek. Couple of questions. Utilization rate in the fourth quarter for the Civil training group what would that have been running at?

67%.

Do you expect that to be maintained at this level or to drop back in subsequent quarters?

Well, as you know, Richard, there is seasonality in training, which in the past has been most evident in the second quarter. I can only tell you that our objective is to increase it on an annual basis while recognizing that there could be some fluctuation between quarters.

Second question, the pattern of earnings in the second half was stronger than the first half. Do you expect the first half to mirror the first half of last year or to continue on the trend line that it's on now?

Well, my objective would be to continue the trend line but I can't give you an assurance that that's the way it's going to work out. Obviously that's our objective, and I think the message both Paul and I are trying to get across is that we are determined to improve margins for the year ahead, and we know that we have to do that by a combination of more aggressive marketing on the one hand and pretty drastic cost reductions on the other.

Final question. The decision to exclude the CF-18 contract from NAFTA, would that have been a bureaucratic decision or a political decision, Derek?

As I'm no longer in government I can't really give you an explicit answer, but I could give you a hunch some night over a beer.

Thank you.

Thank you. The next question from Cameron Jeffreys from Credit Suisse First Boston, please go ahead.

Good morning. Couple of things. First, Paul, the 11 cent foreign exchange hit you indicated in the year, is that a net number with the hedging gains and so forth included in there?

Yeah, that's a net number.

Thanks. Secondly can you just talk about the advanced build of simulators that you indicated as of, you know, the reason for inventories building a little bit? Did any of those revenues find their way into fiscal '04, or is it all going to be in fiscal '05?

Find their way hopefully in fiscal '05 as contracts are signed. Again these are things we started, I think we noted on the last call, we've actually geared back on that but these are for, you know, the common aircraft types.

Final question on the simulator network you indicated you're going to be growing it slowly and, you know, profitably, I suppose. You got 100 Sims in there now. Is it kind of similar kind of growth to what you saw in fiscal '04, maybe 5 to 10 simulators added if warranted?

I think 5 to 10 is a reasonable guess.

Okay. Great. Thanks.

The next question from Pierre-Yves Therisse from Desjardins securities.

Thank you. Good morning. Couple of questions. First of all, is it possible to know the split of your wet training revenue between the business jet and commercial? Do you disclose that?

Well, all business jet training is wet.

Yes.

And the majority of commercial training is dry.

Okay. And on a percentage basis if you look at your revenue base, your commercial revenue base would you say like 10% is in wet training and we're aiming to be at 15 or 20% at the end of '05? Do you have any specific target on that?

I think about 50% of the training revenue in '04 was wet. That's a rough guess. And our objective is to increase that by more than 10% this year.

Okay. Because I look at your numbers for the full year and it seems like your EBIT margin went down significantly into training. So I was trying to reconcile those numbers.

Well, I don't think we break out the margins for training versus equipment.

No, because you mentioned on the second quarter conference call that this year in '04 your margin on the equipment side was somewhere in between 8 to 12%, so if you engineered back those numbers, you find margin for your training business that seems to be sharply down compared to '03.

I'd want to check on that number. It doesn't -- that doesn't square with what I know, but can we check on that and come back to you?

Sure that would be greatly appreciated. Couple of other questions. First of all, what's your lease operation at the end of March? Because it was at $492 million at the end of December. Where does it stand now?

Really wasn't much change other than in the payments that transpired during the quarter. Hang on one second, I'll get you the exact number. There was no new sale and lease-back, so what you have is a continuation of the payment.

Okay .

I'm sorry, are you finished?

Okay -- moving on, if we look at your marine margin, you mentioned some explanation to why the margin went up, margin was up like 20% quarter to quarter while revenue were down close to 30%, so just like to understand, you said you had standardization of product outsourcing, and what was the other element that contributed to margin expansion?

Further integration of our naval and our commercial unit and outsourcing more to our Bangalore, India operation. On the lease commitment, total lease obligation at year end is $480 million, annual lease payments for next 12 months is about $45 million.

So 25 or 45?

45.

25. Okay.

45. With respect to the marine business, when you look at year over -- the fourth quarter this year versus fourth quarter last year, last year we did have the benefit of completing the German frigate program which in the end was a lower margin contract than what they typically have so that had more of an impact last year.

This year the benefit from what I said, also they had, believe it or not, one division that had a bit of a benefit in Q4 from currency in that a lot of their contracts are in pounds, and so it has a turned out in the fourth quarter, the Canadian dollar against the pound weakened, so this happened to be the only quarter and the only segment that had a bit of a plus in Q4 in addition to the comment I said.

Okay. All right. And if we go through the cash flow statement, first of all, in your cash flow from investing activities, you still have some deferred development costs, deferred pre operating costs, and other assets. Can you --.

Yeah, on the deferred development costs what you're really looking at is about an equal split between the Airbus A380, the investments we're making in the military that Derek alluded to, and the investment in the visual systems, so probably split pretty equally between the three in the quarter and on the year to date basis.

What about the pre operating costs?

You're getting ahead of me. Pre operating costs, the two main drivers in there is the pre operating costs in connection with FAS, which is the joint venture putting that together, and the other one is the Iberia deal, the joint venture in Iberia.

Those are the main elements in the pre operating costs both for the quarter and the year, and on the other assets, there's a whole list of things in there in terms of investments, further investments in CVS air crews, items falling out of the pension calculation, things of that nature.

One last question on the cash flow. Cash flow from operation you got an investment tax credit negative by 6.4 million. Can you give me the explanation for that please?

Well, it's at the end of the day, investment tax credit again is you don't get the money until you file your tax return with the government, so I believe it's just an add-back. When we get the money from the government that's when you -- it will show up in the non-cash working capital line and you only get the money from the government once a year when you file your tax return and they assess it.

One last clarification. Did you say that you expect to deliver like 10 simulators this year, in '05?

No, I said we expect to add to our training network -- I said that -- a guesstimate of between 5 to 10 in terms of expansion in our training network was a reasonable assumption.

5 to 10. Okay. Great. Thank you very much.

Thank you. The next question from Brian Morrison from TD Newcrest. Please go ahead.

Good morning. Back to that question about adding capacity of 5 to 10 simulators in FY 05. Is that a combination of through both joint ventures and internal or just through internal?

It's a combination, Brian, that's the point I'm trying to make.

Back in the first quarter Derek you alluded to production levels of 23 units guidance for fiscal '04 can you tell us where that came in, and of the 14 sims that were added to the pilot training center in fiscal '04, is it correct that 6 were taken on through the Iberia JV and 8 were added internally?

I can't give that you answer off the top of my head. I know the number came in very close to 23 for the year, could have been 22, but it was very close to 23. While for sure it's 6 that are coming in from Iberia only this year, and --.

6 from Iberia, a couple from business jet and some in Dubai but the bulk came from the Iberia joint venture. At the end of the year that's when we really jumped up to over 100 simulators.

Thank you.

Thank you. The next question from Marko Pencak from GMP Securities. Please go ahead.

You mentioned the delay in the Astute program and you thought it might come in in Q1. What would be the estimated revenue impact on a quarterly basis if that, in fact does, come through?

I don't think we can give you an estimate yet because the range is quite -- the expected range is pretty substantial, Marko, and rather than give you a tight projection I'd rather wait and get the number. I think because it's still a matter of negotiation I don't think we want to advertise even the range in advance but it won't -- I don't think you'll to have wait too long to get it.

Okay.

And once we get the order we'll be in a better position to give you a projection of when we expect to see it.

And would you -- I mean, your margins you commented on a few reasons why they improved so dramatically, and they certainly did so sequentially in the Marine business through the year. Is the sort of level you reported, I mean, you mentioned some foreign exchange gain in there. Is north of 20% a level that you would anticipate you can sustain, or do you think the Astute addition to that would bring the weighted average margin down?

Well, I would certainly encourage my Marine division to at least maintain the strong margin performance they had in Q4, but I'm sure they would take the other view about the impact that initially Astute is likely to have on them, but that will be a debate for us going forward.

Okay. You don't -- I know you don't split a profitability in your training business for us, but wondering if you could tell me directionally, were your margins in the fourth quarter in training better than last year in Q4 and how do they compare to Q3 of this year?

You are tempting, but the allure is not yet strong enough for to us respond. We just don't get into that kind of granularity. I can tell you that our objective -- I think what's more important, Marko, is that our objective is to double the margins for our Civil business across the board in the next two to three years. I've said that that's predicated on a reasonable recovery in the airline business, as well as a more reasonable balance between buyers and sellers. So those are two qualifiers, but it's much more important for me to say to you that our objective is to double both our return on net assets and the margins in our Civil business as a whole.

And when you hear what I'm saying about the a continuing sluggish level in the equipment market, and the prospect that severe price pressures are likely to continue, I think you can extract from that an assumption that we're going to have to make up the yards in the training segment of the business more than on the equipment side in the short term.

Okay. Paul, question for you. You talked about change in method for determining backlog in Civil. What -- on an apples to apples basis what would it be? I'm just trying to determine the impact of the change.

Well, I think you compare the 2.9 to the 2.7 on a comparative basis. So on a year-over-year basis, probably the biggest event this year on the Civil is coming from the Iberia deal that we signed. So compared to a year ago.

Okay. But that wouldn't account for $200 million.

What's that?

I said that would not account for $200 million.

No, what I'm saying if you look at the 2.7 versus 2.9, you've got to look through each division, Military last year was 1.2 billion, now it's 1.3. Marine was unchanged, and so I think the main ingredient to the increase will be some from Military and most from Civil training on the equipment side we're probably pretty level on a year ago.

Okay. Final question for me, just back to your deferred development cost and pre operating costs can you give us a sense on when you expect that investment level to come off, presumably once you open up your training centers that will sort of cause your pre operating costs to fall dramatically. Is that right?

That's exactly correct. I mean, the level of investment, you know, is certainly slowing down. Both -- in both categories on the development cost and the pre operating cost so.

If you really think of what's going on this year it's more been the Astute program that's caused it and the Iberia. Really those two items. And so if you're -- if we don't do any sort of significant Iberia type deal next year, that will fall. On the development side on a going forward basis most of the visual, a lot of that is probably the impact going forward will be on the Airbus 380, which we're still in the early stages on.

So in aggregate, would you expect that line to stay flat or go down?

We expect it to the go down. In fact, I think we even indicated when we lost the CF-18 program we are intending that our research and development next year on a discretionary basis that we will spend will be 10 to 15% lower next year.

Thank you very much.

Thank you. The next question from Ross Turnbull from Odlum Brown. Please go ahead.

Thank you. Good morning. Paul, Capital expenditures, can you give us some guidance on what to expect FY 05?

I think if I were to give you guidance I think my guidance would be from 100 to 125.

100 to 125. And sale/lease-back transactions, what do you expect?

Not planning any right now.

None, okay. As far as your staffing levels now do you feel like the staffing levels you have in your manufacturing operations are where they're going to need to be going forward or are there further adjustments you guys are going to have to do?

We still to have complete the ones that were announced in April. Most of the ones -- well, I think all of the ones in Montreal have already taken place but some of the ones that are offshore take a little longer.

In terms -- if you're talking specifically about the production -- or about the manufacturing operation in Montreal, all we can say, Ross is that we make adjustments on a regular basis in response to the demand for our products, and I don't -- in the near future I don't anticipate any further adjustments but we make adjustments from time to time up and down depending on the volume of production that we have.

Okay. And, Paul, did you say that the training revenues were up year-over-year 20% excluding the impact of foreign exchange?

[In]cluding the impact of foreign exchange.

Including the impact?

Excluding. So if you did it on a level basis, assuming the same exchange rate as last year our growth would have been 20%. Obviously our actual growth is less because of the FX.

Okay. Thanks. That's all for me.

Thank you. The next question from Ihor Danyliuk with Merrill Lynch. Please go ahead.

Sure. Given the margins that you had in Marine in Q4 and I know you've gone through them, Paul, what kind of margins and I know Marko refused to it as well with regard to this Astute but what kind of guidance can you give in terms of margins for Marine in '05 as well as for Military?

We hope to sustain the level of margins that we had in FY 04 in to FY 05. That's the minimal objective.

That's -- Derek, that's for both Marine and Military?

Yes. That's the objective.

Okay. Then in terms of the --.

the one we want to bolster is Civil.

Right.

That's the one that needs attention.

Okay. In terms of -- I know you said you want to double them over the next two to three years. What's a realistic margin for Civil in '05?

Better.

Okay. In terms of backlog, you're now including expected revenues. How's that -- how's that determined? I mean is there an actual contract there that says we will pay you these revenues? How do you determine what's expected and what isn't in those revenues that you're including in backlog now?

Per the contract, and obviously it's based on experience that we have with them and knowing what they've got in their fleet and what's required. Don't forget it is a regulated industry so you've got pretty good insight in terms of what their needs are going to be.

I think what we were trying to do is provide more clarity in the near term and I think that number, as much as it gets long term, take comfort that based on what we see in that is $100 million in each of the next fiscal years based on what we have today, and that is hoping to try and address some of the questions in terms of some near-term visibility with respect to some of the long-term nature of our backlog. The same goes with military to try and get some more insight in terms of the replenishment and the longevity and when it will convert into revenue.

The 800 million that you have in there, what kind of time period is that going out to Paul?

Some of the contracts, as you know, I think China Southern is a 10-year? 15-year deal. Iberia is a 10-year deal. So those would be the longest tag. Some are shorter.

Some are seven.

Seven, five, whatever, but they're supported by a contract. And so we have them locked up in terms of doing their training.

Okay. Thank you.

The next question from Adam Clark from BMO Nesbitt Burns, please go ahead.

Good morning. I was just wondering if you could give us the break down between the pension expense and the long-term compensation expense that you expensed in FY '04 versus FY '03.

It's incremental. The incremental expense for compensation was $6.8 million. And the incremental pension expense was $2.6 million, so you're looking at almost, you know, just under $10 million combined.

Okay. That's the incremental.

That's incremental. So when I'm comparing fiscal '04 against fiscal '03, the FY 04 results incurred incremental costs higher than what we had incurred last year.

Directionally what can we expect for next year?

Pension will be pretty much flat because the main -- we're not anticipating any changes of our pension assumption so I think that will stay pretty much on par, because, in fact, the pension increased on the year-over-year basis all was in the first half as we changed the rate.

On the compensation expense, I would like to think that the amount will go down a little bit, on the basis now that we've hedged the fluctuation on the share price on our DSU, because, you know, the share price over the year climbed significantly, and you have to mark to market on a quarterly basis. So now that we've got a hedge in I think we've flattened that out so I'm not expecting it to go up. Hopefully it might go down a little.

Also, is it possible to give us some flavor on the AVTS process and how that's going?

Will it surprise to you learn that it's being delayed?

Okay.

We had hoped for May but the latest indication is that the decision on the selection may occur in July. That's the latest intelligence.

Okay. On your Civil side how do you intend to improve your margins?

Well, by 'getting wetter and getting better' is the slogan we use and I think you know what both terms mean. We want to see more -- we want enhance our capability to provide wet training throughout our network and we want to -- so that will help us get a better yield on a per-sim basis, and we want to reduce the costs of operating each of our simulators in the network so it's a combination of reducing costs and improving yield, and that's the simplest equation as to how we're going to improve our margins.

By reducing your costs is it more through processes or perhaps through labor?

No, it's more standardization. I mean, don't forget we acquired some training facilities as well as built our own, and we're still relatively new in the business.

So we are streamlining our operation. The management of the training operation, and we're introducing much more standardization throughout the network in order to -- because we see that as a means of reducing costs. And other boosts to the margin obviously would be some improvement on the price side of the equation, but we know we can't depend on that.

Okay. Great. Thanks.

Thanks.

Thank you. The next question from Ron Schwartz from CIBC World Markets. I'm sorry, Mr. Schwartz just pressed the pound key. We will follow up with Robert Fay with Canaccord Capital. Please go ahead.

Thank you. Couple of questions. To go back to the military side, you indicated that about 40% was equipment or sales over the next two years. 60% were your services. The 60%, the $100 million that you get annually that does not include the $60 million from the medium support helicopters, right?

It does not include the medium support.

So you've got 160 locked in pretty well every year at a minimum, and then with the 400 plus of equipment contracts you should be able to be close to 400 million already in the books over the next two years roughly.

Yeah.

So that's sort of a minimum level for a military.

Yeah.

On the Marine side the 30-year contract on the as Astute that is just purely the training contract and you're saying that won't begin coming into the revenues until 2008?

Correct.

Okay. So then you've got 200 million really in backlog over the next few years. How much of that is tied to the Astute, either the equipment or the training facility of that 200 million?

Very little to the training. A little bit goes to the -- training, but less than 10%.

Okay. Good. The last question, your working capital, you're going to get another $40 million in through the year on the military contracts. What do you think you're going to do on that over the whole year? You know, given that it was 107 million outflow this year, how much can you reverse that this year?

That's the message that we're trying to signal. We missed it this year, we missed our goal, but this is short-term stuff, it's tied to hitting milestones so we expect our working capital to be positive next year.

Do you have any order of magnitude?

No, but it will be positive.

Okay. That's good. Thanks.

Thank you. The next question from Richard Stoneman from Dundee Securities. Please go ahead.

Getting back in the queue, Derek, two questions. The savings from the layoffs that you've made over the last few months, what do you think they'll annualize at next year?

I think Paul said something in the order of 20 million for this year, and what about going forward, Paul?

It's sort of the same, Richard, because at the end of the day you assume you've taken these people off the payroll, what's the payroll cost close to? A lot of it is sort of indirect or overhead or whatever, so a lot of that will fall to the bottom line. But this is in response to, obviously, you know, what's happening in the marketplace and the volumes that we have.

Okay. So there will be a savings of around $20 million in fiscal '05?

That's the payroll savings from the actions that we took.

Okay. And then additional savings from overheads, et cetera. The second question is backlog. I want to make sure that I understand the commercial equipment backlog at year end was about 200 million versus 200 million last year. Have I got that correct?

I don't have the last year but I think the last year's number was around that, maybe a little bit higher. I'm not sure, Andrew. do you know offhand?

Richard, we'll get back to you with that.

I think it was pretty close to that, Richard.

So we're dealing with the same amount of equipment backlog basically going into this year as we had last year?

Roughly.

Thank you.

Operator, I think all the analysts have had a chance to ask questions. We'll now close the session to the financial community and move to the media session.

Thank you. I would like to remind all media that they can ask a question by pressing star 1.

So welcome to all the members of the media. It's pleasure to have you with us today. Mr. Burney and Mr. Renaud are now ready for your questions. Please proceed.

Thank you. We do have a question from Paul Vierra from Financial Post. Please go ahead.

Paul Vierra. Thanks. Maybe Mr. Renaud can answer this but I'm still not clear about this swap that took place with the unidentified financial -- I guess institutional investor regarding the deferred share units. I just wanted a little more explanation as to what exactly happened and this is a hedge against the stock option?

No, it's a hedge against the deferred share units we have out there. So if -- which in turn there's a price of the CA common share so. what we -- what we currently have been doing is if the common share price went up a dollar, we had 1,000 options out there that would -- the expense we would incur is $1,000. What we have done now is we no longer would have a dollar expense.

What we have done is we pay a borrowing cost out of options out there, like a -- like on the equivalent shares out there. It takes out the volatility so in a year where your share price went from $3 to $6, that has a lot of volatility and what we now do have is pretty much a fixed cost based on the total amount of these units we have out there.

Fair enough. Just on the whole CF-18, I guess, controversy, or the letter writing campaign is there any concern that the investment -- with the investment community that after losing out on this CF-18 deal, is there any questions, or how have you tried to persuade the market that CAE will be able to win contracts in Canada? Big military contracts.

Well, it's obviously difficult when you're a victim of friendly fire, but, you know, the fact is that we continue to bid on contracts in Canada, and we continue to expect that our chances will be favorable, it's not a big market for us at any -- in any given time, the Canadian market for all of our businesses is in the order of 10%, but if what you're suggesting is do we think we've hurt our chances on other programs I would say that there's no basis for that.

In fact, you know, some might suggest that because of what's happened to us on the CF-18, we may have better luck next time, but those are speculative views that I wouldn't report.

We are currently performing a number of programs for the Department of National Defense including the [PP]-140, the Aurora, and that's going ahead. We're bidding on other contracts, we're even bidding on other contracts in company with Bombardier, so it goes on.

Are you at all providing any comment as to the likelihood of the trade tribunal overturning the Bombardier L3 award?

No. First of all they don't have the power to overturn the award. That's one of the points I tried to make. They have a very limited authority. They could make a recommendation to the government but that's as far as it goes.

I would refer you to the remarks I made to the analysts. They were very precisely phrased, and I'm neither trying to make predictions one way or the other. I said we know now what it is that the tribunal has agreed to hear. We're obviously mustering our case to the best of our ability, we expect to get a fair hearing and we're going to wait with interest the results of that hearing but I'm not making any predictions one way or the other on the outcome.

Okay, fair enough. Thanks a lot.

Thank you. The next question from Craig Wong from Canadian Press. Please go ahead.

You talked about improving your margins on your Civil side what are we talking about in terms of how you're going to do that?

Well, I guess two things that we control. One is by making our wet training programs more extensive. In other words, increasing the number of simulators that we can provide a wet training as opposed to a dry, rent it by the hour program, so that would help us increase the yield coming from each simulator.

And the second is to reduce the costs of operating our training network, and the combination would help produce better margins.

On top of that something, we cannot control, but something we hope will happen in the near future, is if and as recovery of the airline business takes place we would expect to see some relaxation on the kind of price pressures that we have been experiencing in a much leaner market. So if there's a better balance between buyers and sellers, in the next two to three years, we would expect that that would have a positive impact on our margins as well.

When you're talking about reducing your expenses for your training centers are we talking about jobs here?

We're talking about reducing the operating costs that begins with the cost of the simulator itself. We make these simulators. We're determined to continue to reduce the costs internally of manufacturing simulators. That's something we've been fairly successful at over the years but we know now in a fierce price pressure market, we've got to do even more on an annual basis in terms of productivity in reducing the costs of our simulators. I mentioned as well to the analysts, that we want to standardize the manner in which we offer training throughout our network.

Some of this network are businesses we acquired, some of is it greenfield business that we established, some of them are joint ventures with airlines, so you take it as a group, and you try to come up with the most streamlined method of operating your network that you can, so that you reduce the cost per simulator while you're increasing the revenue per simulator.

Thanks.

Thank you. There are no further questions at this time. I would like to turn the meeting back over to Mr. Arnovitz.

Thank you operator, and thank you participants. As always, a copy of today's remarks can be found at our web site, cae.com.

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The conference has now ended. Please disconnect your lines at this time. Thank you for your participation and have a nice day.