CAE Inc (CAE) 2005 Q2 法說會逐字稿

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

Thank you, and good afternoon, everyone. Before we begin I need to read the following. Statements in this conference call and the question-and-answer session that are not reported financial results or rather 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 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.

Participating in this conference call today are Robert E. Brown, President and Chief Executive Officer, and Alain Raquepas our interim Chief Financial Officer, and VP Finance in our military simulation and training division. The format will be as follows. First, Mr. Brown will provide some highlights from the second quarter results announced this morning. Following Mr. Brown's presentation, we will invite questions from financial analysts and institutional investors. In the interest of fairness and to ensure that we address as many people's questions as possible in the time allotted, please keep to a limit of two questions per participant. If you wish to ask more questions, please re-enter the queue or contact me for follow-up after the call. Once we have concluded our question-and-answer period with analysts and institutional investors, we will invite questions from members of the media. For your convenience, this conference call will be archived on CAE's website. Let me now turn the call over to Bob.

Thank you, Andrew. And good afternoon. As I stated in our conference call this past Monday, to discuss the sale of marine controls, CAE continues in the midst of a comprehensive strategic and operational review with the intention to unveil the new plan to the market before the end of the fiscal year. And as you know that I'm in the middle of this review, I will be as open as I can with you today. You also are aware that the current policy of the CAE Board is that the Company does not give guidance but we hope, however, as part of the current review, is to provide greater transparency in how we report, in order to assist in investor analysis.

Our first step towards greater transparency is the provision of the MDNA simultaneously with our quarterly results, with the quarterly press release. It may be that some on today's call were absent from the call on Monday, so I will recap the essence of that presentation. We view the sale of marine controls as the first step in the forthcoming action plan. The sale was consistent with the principals underpinning a viable plan for profitable growth, namely the desire to sharpen our focus on our core simulation training and modeling businesses. And the need to achieve greater financial strength and flexibility going forward. We expect the closing to take place prior to the end of the fiscal year.

The agreement to sell marine controls creates an additional level of complexity in our financial results. Marine controls is now reported as a discontinued operation. Results have been declassified -- reclassified, interest expense, has been allocated to discontinued operations, based on the share of capital employed. And our continuing operations are now the civil and military simulation and training units. Obviously, things will get simpler and easier to analyze once we have unveiled the new action plan. Close the marine controls transaction, and deploy the cash proceeds. With that in mind, I hope the following remarks clarify our second quarter results.

Second quarter revenue from our continuing civil and military operations was up 10% from last year to $235.1 million, including a negative impact of a falling U.S. dollar. The increase is attributable primarily to the improved performance of civil's training component, though production volumes that are higher than last year enabled equipment to also make an increased contribution to the top line. Operating earnings or EBIT from the two continuing operations increased 8% to $22.2 million. This increase is due to the performance of military, which generated EBIT of $12.8 million while restoring its margins to double digit levels. Military's margin improvement was due primarily to cost reductions and a greater contribution from higher margin engineering upgrade programs.

In contrast, civil's EBIT was flat at $9.4 million, despite a stronger contribution from aviation training. Which saw an increase of 10 basis points in capacity utilization of the network to 67%. As you know, our second quarter this summer in the northern hemisphere, when lots of planes are flying, and so it is traditionally a slower period for training pilots. Net earnings from continuing and discontinued operations were $14 million, or 6 cents per share in the second quarter, compared to $15.1 million, or 7 cents per share last year. Delays in the construction of the astute submarine class, the astute class submarine were a factor in causing a relatively lower contribution from our now discontinued marine controls operation.

Year to date, revenue is up 10% including a cumulative foreign exchange hit of approximately $5.5 million. As in the second quarter, the increase in the first half revenue is due mainly to higher utilization of our training network. As you know, year to date EBIT is up substantially from last year, due to the first quarter recognition of ITC's and prior year R&D investments, with much lower first half interest expense. It follows that our first half net earnings are also up $38.3 million, compared to $28.3 million last year.

Our cash flow position has improved. Second quarter cash flow from civil and military was up relative to the first quarter, and last year. Cash flow from all operations funded our investment activities while our cash and cash equivalents were down slightly from the end of the prior quarter. We received a substantial cash payment on the German NTF program subsequent to September 30. Once we closed the marine transaction and we received after-tax cash proceeds in excess of $250 million from the sale of marine controls, our net debt, which currently stands at $630 million, will be going in the right direction as well. Backlog was $2.3 billion as of September 30. As we conclude the negotiations in the NH-90 and AVTS program, that backlog number is going to increase accordingly. As for market -- as for business highlights in the quarter, the selection of the military's landmark consortium as the preferred bidder in the U.K.'s 2.4 billion AVTS program was obviously a major development.

Other key military events were the completion of comprehensive upgrades -- comprehensive avionic upgrades on Australia's C-130 flight simulators. The exercise of some contract options totaling $19 million by Raytheon, and the U.S. Navy, and military selection by the Royal Netherlands Navy to upgrade our links helicopter mission trainer -- full mission trainer.

In civil, we inaugurated the JV in Spain with Iberia and announced that we will be opening a new business aviation training center in the northeast U.S. You will recall that we had already announced our intention to locate a new center in the London area. Once these two new centers open in 2006, we will have four centers catering to business aviation training, including the two centers in Dallas and Dubai, that are already in operation. Business aircraft simulators will account for about one-third of our total simulator base. Right now, they generate about 40% of our training revenue, due in great part to the higher contribution from wet training.

The outlook for business aviation training is improving and generally positive. The use of corporate aircraft generally lags the economy and the availability of many pre-owned aircraft in the marketplace means demand for new business aircraft lags demand for training. In our view, much will depend on the U.S. economic prospects. How the second Bush administration addresses the budget, trade, social security deficits, and another factor that must be watched closely is whether higher commercial aviation traffic leads to congestion that improves the business case for business jet travel by busy executives.

Looking out at the commercial aviation market, there have been some positive signs during the first half of the year. International traffic is up nearly 20% since the beginning of the calendar year. Levels are actually greater than in the pre-9/11 period. Pilot hirings in the United States this year are up in the 50% range. Nevertheless, it is also evident that there is an intense price competition in the market so higher traffic is not yet translating into higher yields. We all know that the majors are trying to lower their costs in the face of rising fuel costs. A problem that has a greater impact on U.S. carriers doing business in a falling U.S. environment -- dollar environment, than on carriers earning revenue in rising currencies, like the Euro. And we also know it is still a very tough slug for the higher cost majors on north American domestic routes.

The market outlook is entirely consistent with the recent forecast for new major and regional jet deliveries. With a brighter forecast for the former, particularly as we go deeper into the second half of this decade. And with reduced forecasts in the near term for new regional jet deliveries. It is entirely consistent with the fundamental goal of the new action plan that we will be unveiling before the end of this fiscal year. To meet customer expectations at a lower cost, so we generate increased cash flow, higher earnings at a better return on invested capital.

Alain and I would will be pleased to answer any questions that you may have. Thank you.

Thank you, Mr. Andrew Arnovitz. We are now opening this question period for the financial analysts only. (OPERATOR INSTRUCTIONS) The first question is from James David from Scotia Capital. Please go ahead.

Thank you. Good afternoon. The first question, the convertible simulator, is that a platform you expect will become more popular as you go forward? And the reason I ask is it looks like the list price is about 50% higher than a -- I guess traditional simulator. And so, you know, I just want to know; there any risk of this becoming a trend and therefore, you know, some kind of ovation of potentially selling two units instead of one and a half, in a sense?

Yeah, I don't foe how much of a trend this will become. I think, you know, we have some simulators that can go from the 330 to the 340. We have some in the regional aircraft that can go from the 50 to the 70-seater. But quite frankly, that is not a large trend that we have seen.

Okay. Bob, I respect the fact that you said the Board chooses not to guide. And so I'm certainly not trying to put you on the spot, but in the first half, you know, if I ignore the ITCs in the first quarter, your run rate is about 11 cents consensus, which I am in line with right now as 33 cent, that implies a pretty hefty second half. Given the margin trends on the civil side, you've recovered on the military, as you guided -- as the Company guided earlier, but given the margin trends on the civil side, can you in any way, shape, or form provide some idea of whether or not that consensus number is perhaps too aggressive? I think I am in line with that number as well. Should we be a bit cautious on the margins in the civil side for the second half, if I can ask it that way?

I think the way that I would try and answer -- I can't give you a direct reply, but the way that I would try and answer it, I know that the investment tax credits were there, and that they were done as a lump, and I think that we've always explained that investment tax credits are a part of our business going forward. They are the way you do business, except that they should be taken every quarter. They really don't have any visibility. And it is something that, you know, goes on and on. Because it is the nature of our business.

Uh-huh. But I'm just ignoring, not the investment tax credits as a recurring item, just that big lump, if I sort of just take that out, you're at 11 cents for the first half, roughly. And you know, consensus is 33, which means 22 in the second half, I think did you 17 in the second half of last year, that is pretty -- it is like 30% growth. Are you uncomfortable with that, or you know, is the civil margin progression going to be so aggressive that that's reasonable kind of growth rate to expect in the second half.

I think the only thing I would say is that, you know, the patterns of previous years probably will be repeated this year, in terms of us having a stronger second quarter, second half, than a first half. And that's really all I could say for now.

All right. Thank you.

You're welcome.

Thank you. The next question is from Ben Cherniavsky from Raymond James. Please go ahead.

Hello?

Hi.

I will take my option to two questions first. I'm wondering if you can elaborate a little bit more what is happening on the manufacturing side, if we assume, and I'm not trying to put words into your mouth, but we assume that the profitability of training is improving, or at least holding steady as utilization rates rise, in spite of price pressures, then the manufacturing business must be really suffering on margins. Some of that looks like it is mix, and I'm assuming that has to do with things like new simulators like the A 380 versus older programs, simulators, but what else is going on there, what else can you do to address that? Do you see further cost reduction opportunities? Or is it going to be more of a kind of a productivity focus, what kind of a time line are you looking at? Or are you basically stuck in a bunch of money-losing contracts on old simulators that you sold.

Ben, I'm trying to respond to what I've heard and you know, we're really working hard to have more disclosure, and I hope to be able to do that better in the future. I think the only thing that I can say right now is that the training is, you know, doing quite well, and -- on both the revenue and as well on the -- on the margin side. And that the equipment business is positive but difficult. And that I think, you know, if we assume that we're going to continue with lower volumes, on the simulators because of the market and we're going to assume that we are going to be operating in a higher dollar environment, that it is necessary for us to take some very direct action and that is -- will be an integral part of the plan that we have, so that we absolutely have to make sure that we can have a sufficient level of return in the -- in the simulator equipment business, and we're looking at that very closely and that will be part of the plan that we unveil to you later on or early in the new year.

So it is a -- so there's something to wait and hear more about there? It is not -- it is not going to be just business as usual there?

It is entirely not business as usual. It is an area that we're going to attack aggressively, and I really feel that there are some opportunities here to do some things, and we've got to have a very detailed plan and coordinated approach to do it.

And your time line on that remains something like early next year, you will have more to say?

Yeah, I'm still aiming that it will be part of the plan that we come back with.

Okay. Great. If I can just then ask a second question. With respect to cash flow, halfway through the year here, unless I'm miscalculating things, you burned through more working capital and we're again free cash flow negative, this was supposed to be a year and I think even a quarter where that negative trend reversed itself, what -- you may not provide guidance on earnings and so forth, but what would you say about the second half of the year? Where are you going to end up there in the second half? And when are we going to start seeing the rubber hit the road to to to speak?

Well, I think that the cash flow has improved going from the -- you know, first quarter to the second quarter, but it is not where it needs to be, that's clear. I think we also indicated that just after the end of the quarter we received some cash on the -- na program?

The NTF.

NTF where we got --

Long awaited milestone in the (realo 3) division of 18 million bucks has been collected in October.

Unfortunate we didn't have that. And we didn't have it. That's life. But I think this is another one of our top priorities. I would want to have free cash flow. We're concentrating on it. And, you know, I think that we still stick with the -- what was said previously, that we will -- by the end of the year, that, you know, we should be positive, and I think the other thing as well, that we're looking at cap ex very -- very, very closely to make sure that we can control it. And that obviously will have an impact on what we do.

Although you're still pursuing new growth initiatives from using your capital to pursue new growth initiatives and spending money.

Well, I think that I really don't see myself as having done that. The -- what we have done I think maybe are you referring to the northeast center in Liberia, both of those were commitments that were made before my arrival. The northeast was basically done as a result of a contractual obligation that was made to that -- when that particular contract was signed and the Iberia one was basically in cement when I arrived so --

So you think you will take a different approach though to this?

We're going to look very, very closely at our capital outlay and the ratios and what we can afford, and, you know, we have to find a way to make investments, but it's got to be at the right level and the right way, and at the end of the day, it's got to be done in such a way that it doesn't seriously impact our positive cash situation that we're seeking.

Okay. Then just quickly, to be clear then, you still think that as you said previously, you will finish this year generating cash from working capital and being free cash flow positive?

That's clearly our goal, yes.

Okay. Thank you.

Thank you. The next question is from Cameron Jeffreys from Credit Suisse First Boston. Please go ahead.

Good afternoon. Just wondering if you could help me out with the tax rate here. Obviously, I think you guys were guiding to 30 for the year previously, and now, obviously, this quarter is down at 22. Is that -- do you expect to go back up towards 30 for the back half of the year?

Cameron, it is Alain. I checked that specifically with our tax group and effectively at this stage of the game, we do still expect to get back to our average 30% tax rate by year-end. The first half, the mix of income and where it was coming from in the world has given us the average tax rate that you've seen, 22% in Q2 and I think we will have 27 in Q1. But I think 30% is still what we're expecting the tax rate for the year.

Okay. And secondly, can you just help me with the foreign exchange, obviously the dollar continues to go up here. Versus the U.S. Can you just give me a sense as to your -- your sensitivities on, you know, assuming what, you know, the hedges that have you in place at this point?

Yeah, I think it is very good for this year but I will let Alain comment.

Yeah, the sensitivity that I've seen, Cameron, is for every cent of the Canadian dollar taking up, it is roughly speaking $750,000 in tax on our bottom line. That's with the basket of program we have inhouse and the hedges that we've put in place on these programs. It doesn't effect the competitiveness issue obviously on the one that we're bidding, but at least I can tell that you the sensitivity around the actual -- around the actual backlog is roughly three quarters of a million -- percent of increase.

Thanks. I will jump back.

Thank you. Your next question is from Ted Larkin from RN Securities. Please go ahead.

Thank you. And good afternoon, gentlemen. Just looking at the utilization rate that is sequentially improving, at the commercial training operations, can you tell us the reasons behind that more specifically, whether it is related to new contracts, whether it is related to -- it doesn't sound like it but any pricing changes, any other trends that might be impacting that level of improvement?

I think, Ted, it is strictly -- there has been an increase in the number of people that have been using -- there's just more flying that's going on and there's more people using the facilities. It really is nothing to do with the many major changes in pricing at all.

Okay. And second question, sticking with the commercial business again, out there, have you people been in any discussions with airline companies, specifically with respect to managing their simulation assets, their simulator divisions?

We have started to develop some models from that. We've had some preliminary discussions with some airlines. But that's part of the review that we're doing to see, and track how we could do that, and we have some specific initiatives under way to study how that might happen, but there's -- I don't think there is anything in the near term that might happen here.

It is preliminary. Okay, I will get back in the line. Thank you.

Thank you. The next question is from Pierre-Yves Therisse from Desjardins Securities. Please go ahead.

Yes, good afternoon. First question, Bob. Going into civil, you got a one-time revenue recognition of 13 million. Can you maybe provide a little bit more color of what happened there? And could there be more -- that type of revenue recognition in Q3 and Q4 of this year?

Alain will reply to that.

I can take this one. This 13 million of revenue that we booked in the civil business is a result of a put option that air bus has exercised on us, and it is when we purchased the BAE business, three, four years ago.

In Tampa?

In Tampa, we had the civil business at that point in time and they had built two simulator that the -- they sold to air bus, and we were unable to take the revenue on this at that point in time because air bus still had the put to give them back to us. That condition expired. They decided to keep them. And at that point in time, under GAAP, we're forced effectively to defer the revenue until effectively the condition was cleared up. So in this quarter, we've been forced to take this out but effectively all of the costs were deferred, also, and it was a transaction without any margin.

One time.

And it is a one-time revenue. No repeats. And it is at -- it is a result of the way the transaction was structured three, four years ago.

And is there other such as simulator with puts like that with existing customers?

I'm -- not to my knowledge. We can double check that. I can double check that for you, and we can get back to you on this but I'm not aware of any other.

Okay. Second question, would it be possible to have a split in your civil revenue between training and equipment?

As I told you, that's something that we're working on Pierre-Yves, and I think I've given some additional color to what's happening in those two businesses today. But there are a lot of considerations that we have to be careful -- we have to carefully consider before we do that. I'm very much going to try and do that. But I need to do some more work, and I think perhaps the next time we come back to you.

Okay. So if I may ask a second question that could be answered, Bob, in terms of pricing pressure on the equipment side, and on training, can you give us a sense or a range of what type of pricing pressure or price decline you see on equipment, and do you see any pricing pressure in training?

I think training, the training business is operating as it always has. We don't -- you know, it is all priced in U.S. dollars, basically. I don't really see any -- I don't see any major changes in the pricing there. It is very competitive on the equipment sales side. Essentially because there is not a lot of business going on. We've been successful so far. We've taken seven of nine, I think, so far this year. But it is very competitive. And we've got to attack, you know, that's the reality. We've got to attack our cost base.

Okay. Thank you very much.

You're welcome.

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

Hi. Good afternoon, Bob.

Hi, Richard.

Couple of questions. First one is yield per simulator. You said you had 100 simulators, more than 100 in the system. You could give us more accurate number in terms of the number in the system so we could get an idea of what the yield is running this year?

It is about 107.

Second question, as utilization rates increase, do you expect you will be in a position to increase pricing or do you think that that will lag for another 6 to 12 months?

I don't know the period that it will lag. It may not be that long. But there clearly is going to be a lag, because there is a certain capacity utilization issued, I think, you know, there is -- there is some capacity that has to be met.

And just a clarification, Alain mentioned the number of dollars involved in that German contract and there was some noise and I missed the number.

Sorry.

Oh, the cash we received on NTS?

Yes.

$18 million. Canadian.

Canadian. Okay. And final question, when you strip out the nonrecurring item, the margins were about 10.6 in civil. Is that the type of margin we can look at going forward?

Alain?

Well, I hope not -- I hope that we can improve that, that level is obviously in my mind not acceptable and that's what we're working on to improve.

I think you will have to wait, Richard, till we come back, but we don't -- we clearly feel that that is not acceptable.

Thank you very much.

Thank you. The next question is from Marko Pencak from Griffiths McBurney & Partners. Please go ahead.

Yes, good afternoon. You can tell me what your split between wet and dry training is right now?

Oh, I'm sorry, Marko, that is one thing I do not have today. What do you think?

About 50/50.

About 50/50, yeah.

Okay. All right. 50/50. Okay. And just following on your comments about the state of the training market, and the sort of pricing being okay, I mean do you find within your sort of commercial versus business -- jet business, that there is a difference in trend? In other words would one of them be relatively healthier on a U.S. dollar price basis than the other right now, and which one might that be?

I don't think there that there has been any major movement there at all but not that I'm aware of, no.

All right. Thank you.

Welcome.

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

Sure, hi. Two questions, I guess the first one with regards to the civil margins, I know, Bob, you mentioned that, you know, in your MDNA that traffic is up, pilot hiring is up 50%, utilization has gone from 57 to 67%. Your revenues are up. I'm at a loss as to why your margins are actually down year-over-year. And you know, what you're going to do -- if you could just -- why they're down and what in the action plan is going to get them back, you know, back up?

I think that -- I think the explanation is what I gave at the start a little bit, Ihor, in the sense that, you know, we've currently got our training business mixed with the equipment business, and, you know, as I mentioned, the equipment business is having -- is having difficulty, so it drags down the overall return for civil. And I'm hopeful in the future that I'm going to be able to provide you more clear -- you know, more disclosure and transparency in this area but that's basically the explanation.

Bob, you had mentioned earlier today that the equipment sales were also up year-over-year.

Yeah, they are, but if you take out the one-time contract that was just mentioned by Alain, I think you will find in fact they are flat.

Okay.

That's, I think it was 13 million in there or something.

Yeah, on the top line. In the equipment.

In the equipment business, yes.

Okay. So I mean last year at this time, you guys disclosed the revenue break down, so we can assume that the simulator sales were about 50 million unchanged from a year ago? I mean you disclosed that last year. I'm not asking for anything that wasn't disclosed last year.

I think that's something that we want to check on. I don't -- I'm sorry, the two of us were not aware of that and I think we should look at that and get back to everybody.

Okay. That's one. I guess the other question, can you just -- small point, but why -- why is there a statement in operating earnings from a year ago, a year ago at this time, the civil EBIT was 9.9 and military was 11.8.

Sorry, the statement? Can you explain that a little bit more? We're not --

I mean last year at this time when you guys disclosed your second quarter results the EBIT from civil was 9.9, and the military was 11.8, and just when -- this time, when you -- you know, on a comparable basis last year's number actually comes out to 9.4, an military 11.2. Why the decrease from a year ago?

We could check that and maybe before the end of this phone call, Ihor, we can get you the answer. Otherwise, we will will put it on the web or we will call you back. I don't not have it at this stage the answer with me. I'm sure there is a good reason. Might be with the discontinued operation, or some cause that that will be reallocated following the marine disposition.

Let's look into it.

Thanks so much.

You're welcome.

Thank you. The next question is from Claude Proulx from BMO Nesbitt Burns. Please go ahead.

Thank you. Good afternoon.

Good afternoon.

First question is, you know, if you were -- do you have a number of flight simulators that are -- where you've done sales and lease back transactions that are off balance sheet. If you were to bring back those on your balance sheet, can you tell me what would be the impact on your income statement? I mean we look at the MDNA, and it says that, you know, your margins could be 800 basis points higher. I mean would there be any impact in terms of the pre-tax margin? Would it be positive, for instance or --

Well, right now, obviously, the EBIT are carrying the cost of the lease, including the interest, so obviously if we put them back, you would probably have an immediate benefit because you would carry on the depreciation, and it is roughly speaking 500 basis points, the impact of that.

If we look at it at the pre-tax line, after the interest expense, I mean would it be positive or neutral?

You know, I would have to look into this further. Three days on the job, I can not pretend -- with that specific of an issue, I have that specific of an answer but I can promise to you I can get it.

That's fair. And another question maybe probably is easier to answer, if we look at the military business right now, is there any large contract out there that you're bidding on, or, you know, could become available, I mean that you could bid on, in the near future?

No I think the one that we're focusing on is the NH-90 primarily, you know, where we're involved in that in Europe, and I think we're waiting to see, you know, I think there is some preliminary results coming out on that in December, and they're looking for contract award sometime in June of '05, something of that nature.

But you've already been chosen as part of the --

Yeah, we have for a role. But the role hasn't been specifically defined and we can't identify the specific -- defined and we can't identify the specific, you know, the revenues that would be associated with it. You know, there's some other things that are coming on. There are smaller things like, you know, the special forces in the United States, has a few things go coming on, the C-130. I think there's nothing that is really what I would say was large, like, you know, the flight school 21, or that we were looking at previously. We're focusing very much on some smaller orders, but when you add them all up, they can be -- they can be substantial, and there are niches that we can play in where we can make -- I think make some good money.

Okay. Thank you very much.

You're welcome.

Thank you. The next question is from Cameron Jeffreys from CSFB. Please go ahead.

Thanks. Just, you made comments with respect to the fact that traffic is up in the airline business, and that the pilot hiring is up as well. Recently, we've seen some airlines particularly in the U.S. announce that they're going to be cut be their capacity next year. Can you just comment, you know, on that, I guess?

Yeah, I guess we've seen some of that as well. But, you know, if you look at the smaller airlines, and the regionals and some of the low costs, I don't see many of them cutting back their capacity. And you know, I think we've got to wait and see what happens with the economy, and you know, if that -- that all can change. I personally don't think that there is going to be a big change.

Okay. Thanks.

Welcome.

Thank you. The next question is from Ron Schwartz from CIBC World Markets. Please go ahead.

Thank you. Two quickies. Alain, I don't know if you can comment on this but would you be able to give us kind of the cash from operations from the continuing activities for Q3 and Q4 of last year? I think a lot of people kind of look to see how the cash flow evolution is going with the restatement. It is kind of difficult now to track that.

Okay. Well, I'm familiar with the cash position, I've looked into that carefully -- for the first six months, but for the restatement last year, again, I could not answer that right now. I can tell you from a civil point of view, their cash flow from operation in -- in the first six months were around 60 million, and they were at minus five in civil in term of the free cash flow. And as you know what we're shooting for, for year-end, is make sure that we are going to get free cash flow positive.

In both civil and --

In both. Particularly in military, but in civil, also. They will deliver positive cash flow. Free cash flow by the end of the year.

So at some point before the year is over, is there going to be the opportunity for us to get some restated statements at all or --

Yes.

Okay. Perfect. And then my second question is, just weeding through the MDNA, I mean even though the division is technically sold, it looks like $400 million, and I might be doing the math wrong, has disappeared from the backlog within marine, where you guys talk about backlog being $265 million, it was like 645 at the end of last year, or sorry, at the end of Q1.

Yeah, the order of magnitude, the backlog was around 600 million, with -- that's true, of the long-term services coming from fact. So obviously, it did include the long-term services, so what should that have been pulled out of CE backlog after discontinued, there is something around 600 and change. Millions, obviously. And I've just got the answer. The -- in regard of the restated Q2, so it is 20.6 versus 21.7, and there was a 1.1 reclass, reallocation of some of the corporate costs necessary under GAAP related to the marine divestiture. So the corporate costs have been capped, and obviously, lowering the margin of the remaining business. So that's what I got, and I just got confirmation from it.

Okay. Thanks.

You're welcome.

Thank you. Again, do not hesitate to press star one for any questions or comments. The next question is from Ted Larkin from RN Securities. Please go ahead.

Gentlemen, just back to the -- the six large legacy carriers in the United States, that are going through some challenging times right now, can you quantify for us the amount of annual revenues that you generate from those six companies and if not the revenue number, then some idea of the percentage of your commercial revenues come from those six carriers?

Well, I don't know if we've got it for the six. We've got something on that Andrew?

Um --

I don't think we have it for all of them. We looked at a few, but I would rather check and come back to everybody with the number on that.

That's fine. And just a second follow-up, just with respect to entitlement training, you broke through with a major -- with a new contract on the Gasteault with the Falcon 7X, this is a new airframe and I'm wondering whether or not you are working with current OEMs on current models to be able to do entitlement training on aircraft currently being produced.

No, I think, you know, I think that we were very pleased to get with the Gaseault one, but I don't -- there is a couple that we've been looking at, but there is nothing on the near-term horizon.

Okay. Thank you.

Operator, we would like to -- or I'm sorry, Mr. Brown -- please go ahead. Operator, we would like to open the Q&A session to members of the media so that we have sufficient time for them.

Perfect. So we are now opening the question period for the media. So please press star one at this time if you have any questions. The first question is from Francois Shonham from the Montreal Gazette. Please go ahead.

Yes, hi. I'm wondering if you can clear up something. I'm not quite sure I heard the figures correctly about the backlog that came from the marine control site -- division. Was it 600 million dollars and therefore, will your total backlog will diminish by that much?

Alain will give you the number here. He is just going to get it. But I think that what we would see, you realize that this backlog was over a 30-year period.

Sure. Including long-term services, I understand.

But what's the number?

The number at the end of September, including the slip-in GAAP, the new contract that we were awarded, at the end of year end, it was 618, and their backlog at the end of the fiscal year was 853. But that's including the most recent slip in gas, (inaudible-papers shuffling) for the S-2 contract.

What is CAE's backlog then, stripping out that part of it?

Okay, if you look at the restated backlog as of September 30, 2004, if the military backlog is 1.2 billion, the civil backlog is 1.1 billion, for a total of 2.3 billion dollars.

Can you --

Canadian, yes, sorry. That does not include, you know, the , -- AVTS and it does not include the NH-90, because they have to be finalized.

Okay, and then my second question is about your action plan, I guess, that you're going to come up with by the end of the the fiscal year. Is it going to concentrate mostly on the equipment side? And is there also some rationalization or some improvements to be gained to be had on the training side? And if you could expand a little bit on the problems with the equipment side, with the simulator side.

It is going to cover all of our business. Not just the simulator equipment business. We have to -- we have to focus on everything from overheads to processes to, you know, to how we operate in the training business, how we operate in the civil business, how we operate in the military business. And you know, I think part of the issue that we're dealing with here is that, you know, the economy continues to be difficult, it continues to be difficult for some of the civil -- on the civil airlines side, but I think, you know, business aircraft is compensating to a certain amount for that. We're clearly operating with lower volumes. And as well, the value of the U.S. dollar is a challenge for us as well. And so there is no one specific area we're going to focus on all areas to see what we can do.

Okay. If I may, another question, would be about the -- what is the goal of this, do you have a target in mind in terms of reducing operating expenses?

No, I don't have a goal yet, bought I want to look at the whole exercise to see what we can do but the whole focus of the exercise is to remain competitive from a quality point of view, but it is clear that we have to figure out not only how we can do things for less cost, but how we can do them better. And so, you know, we're going to be looking at all of that in order that we come out of this exercise with a very much improved possibility of improving our cash flow first, our earnings and our return on investments all of those are the things that we must do and that's the only way that we're going to be able to, be able to have a suitable return for shareholders.

Okay. Thanks. My real last question was -- if you permit me, is it is again a detail. I want to make sure that I understood you correctly. Will your after-tax proceeds from the marine controls total $250 million? And your net debt currently stands at 630. Is that right? And therefore, you will apply the 250 to that 630? Or did I misunderstand?

There's two elements to it. I will ask Alain to reply.

The proceeds, the cash that we announced, the 275 million Canadian, before tax, will be applied to the debt. Initially. And there is a small amount of cash debt that we will need to pay on that transaction down the road that we estimate to be around 20 million. So at least there's a good 255 million to apply against our net debt.

Can be applied or will be applied?

And the fact that we have in the U.K., will be assumed by the buyers, or it is going to disappear from our balance sheet, also. On top of what I just said

And the amount of that, Alain?

It is 52 million Canadian. 52 million that the purchaser is assuming in debt from the marine control, right? Yup. Plus we're taking the cash we're getting and that we're applying that against our long-term debt.

And what's your long-term debt?

I think I said it was -- let me go back to the balance sheet. The long-term debt right now is, at the end of -- you're right, 615.

615.

615?

Yes. What did I say in my remark?

You said 630, I think. Without the long-term debt, and you have obviously the --

It is on page. What page is it on in the MDNA?

So I'm right in assuming then that your debt will be cut to about 350, 350 million, is that right?

Absolutely. If you take out the 52 plus the 275, there will be at least 320 million of long-term debt going out of our balance sheet.

Okay. So then we're talking a net debt of about $300 million after the exercise?

Yup.

Yes.

Okay. Thank you.

You're welcome.

Thank you. Again, do not hesitate to press star one for any questions or comments. The next question is from Peter Kitchen from Canadian Review Magazine. Please go ahead.

Yeah, my question is, with regard to the -- let's see, the selling off of the marine system division, what exactly was the rationale behind that? Was it more of a focusing on the core business in the aviation sector? And also, with respect to the privately-financed initiative that you had going on there, on the astute submarine program, how will the divestiture of this division affect your privately-financed initiatives in other areas, including the helicopter program in the U.K. as well?

Well, first of all, it was very much a move related to making sure that we were focusing on our core competency, which is simulation and modeling, and as well, training. And at the same time, it was a move to strengthen our balance sheet. So those were the objectives that we have. And as it relates to the PFI, it really does not have any impact -- there is not a relationship of one to the other at all.

Okay. Fine. Thank you.

You're welcome.

Thank you. The next question is from Marko Pencak from JMP securities. Please go ahead.

My questions have been answered. Thanks.

Okay. Thank you very much, operator. That's all the time we have for today. I would like to remind everyone that a transcript of today's conference call is available on our website at CAE.com. Thank you.

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