CAE Inc (CAE) 2005 Q4 法說會逐字稿

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

Thank you. And good afternoon, everyone.

Before we begin, I need to read the following. Certain statements made during this teleconference are forward-looking statements under the Private Securities Litigation Reform Act of 1995 and Canadian securities regulations.

These 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.

Such statements are not guarantees of future performance. They are 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 results or events predicted in these forward-looking statements may differ materially from actual results or events.

For a description of risks that could cause actual results or events to differ materially from current expectations, please refer to the risk factors section of CAE's annual information form for the year ended March 31, 2004 filed with the Canadian securities commissions and the U.S. Securities and Exchange Commission, as updated in CAE's fiscal 2005 Fourth Quarter MD&A dated May 11, 2005, released today.

Any forward-looking statements made during this teleconference represent our expectations as of May 11, 2005, and accordingly are subject to change after such date. We disclaim any intention or obligation to update any forward-looking statements.

Participating in the conference call today are Robert E. Brown CAE's President and Chief Executive Officer, and Alain Raquepas, our Chief Financial Officer.

Following presentations from Messrs. Brown and Raquepas, we will invite questions from financial analysts and institutional investors. Once we have concluded our question-and-answer period with analysts and institutional investors, we will invite questions from 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. Good afternoon.

Alain will take you through some of the financial highlights in a few minutes, but first I would like to provide you with a progress report on our restructuring efforts, and review some of the more notable operating achievements for the past year. I will conclude my comments by sharing our outlook for the balance of the year ahead.

Let me begin by saying that I am pleased with the initial progress we have made since announcing our comprehensive restructuring plan, back in mid-February. We have made some tough decisions, and already have completed some difficult tasks that fundamentally changed the way we are structured -- and the way we do business.

As we said we would do, we now have three clearly defined, yet closely related businesses -- the newly-formed Simulation Products Group, the Civil Training and Services Group, and the Military Simulation and Training Group.

We also told you we would be working together as one company. This meant changing the way we handle functions like procurement. Instead of decentralized purchasing, we have implemented a new, more efficient Global Sourcing function to handle procurement for the entire organization. This is one example of a number of areas where we see opportunities to improve our performance and substantially reduce costs.

Last quarter, we announced the layoff of 450 salaried employees. Most of those have now been completed. In large part, these layoffs stemmed from our decision to consolidate our two engineering groups into one, and to bring together our separate program management groups.

These initiatives will result not only in reduced duplication of effort, but will also help ensure that both Civil and Military technologies follow a shared path.

Our Military Simulation and Training Group have an overarching mandate to service its customers with technological excellence in simulation and modelling solutions. In all of our restructuring activities, we are being particularly careful not to jeopardize our technology.

The Civil Training Group has a mandate to deliver the most cost-effective and competitive training services in the market. To that end, our restructuring activity already has simplified the group's organizational structure, by eliminating its regional layers.

We also have begun the process of redeploying a number of full-flight simulators within our global training network to better align supply with market demand. As well, we are working to rationalize some of our training facilities to streamline our footprint and eliminate inefficiencies.

In addition to training locations, we have closed a number of sites adjacent to our main operating and manufacturing facility in Montreal, bringing work back into the main facility.

The Simulation Products Group is at the center of our entire restructuring plan. In our third-quarter report, we stressed that CAE's cost to produce full-flight simulators were too high, and that the simulators were too customized. Also, the people selling simulators were not directly connected with the people building them.

These issues had serious implications for all of our businesses, and we have wasted no time in taking decisive action. The Simulation Products Group has a clear mandate -- compete effectively and generate a decent return on investment.

Group president Marc Parent and his team are working relentlessly to identify ways to improve processes and lower costs -- and they are making some excellent headway in the early stages of this exercise. We will provide you with further details on how we are going about achieving this goal as we report our continuing progress over the next couple of quarters.

We have covered a lot of ground in just a few months. But there is a lot more work to be done over the balance of fiscal 2006.

We initially provided an estimate of restructuring costs in the range of 55 to $65 million. With $24.5 million of costs already recognized in fiscal 2005 and a number of major first steps completed, we expect our restructuring plan to be at the lower end of our estimate. Now, Alain will take you through some of the financial highlights. Alain?

Thank you, Bob. Good afternoon, everyone.

I am pleased to have this opportunity -- my first as CFO -- to provide you with some comments on our financial performance. The results reported this morning cover the fourth quarter and the full year. I will start by summarizing some of the Q4 financial highlights.

Fourth quarter earnings were $109 million, or $0.44 per share, which includes a $104 million after-tax gain on the sale of Marine, partially offset by an after-tax restructuring charge of $16.7 million. The consolidated EBIT margin from continuing operations before restructuring costs was at 9% in the quarter. Military delivered a 10% EBIT margin, while Civil generated 8%.

Consistent with third quarter results, the greater proportion of Civil's margin performance again came from training services, although the equipment segment improved modestly. With respect to Civil margins, the asset impairment recognized in the third quarter reduced amortization expenses by approximately 3 million in the quarter. Consolidated revenues for the quarter were 263 million.

Our efforts to strengthen CAE's balance sheet have started to gain traction. During the latest quarter, we reduced accounts receivable by 29.5 million and reduced overall non-cash working capital by 66.8 million. Free cash flow reached 65.8 million, compared to 46.4 million for the same quarter last year. The lower dividend and a reduction of 14.5 million in Cap-Ex during Q4 contributed to this improvement, year over year.

You will no doubt have seen our reported results for the year, as a whole. We realize that the many non-recurring items complicate the understanding of our operating performance. Section 6 of our MD&A gives a reconciliation of these one-time items. But I will try to summarize them briefly.

Starting with our reported net loss of 200 million, or $0.81 per share, in order to reconcile our underlying operating performance, which was 46.9 million of earnings, or $0.19 per share, you would have to add back to the 200 million loss, the following --

You would have 354 million after-tax, or $1.43 per share, for the non-cash impairment charge in the third quarter.

You would add 16.7 million after tax, or $0.07 per share, for the restructuring charge in the fourth quarter.

Add 5.6 million after-tax, or $0.02 per share, for the pre-restructuring items, related to the closing of our Toronto office and executive severance costs.

And finally, add 8.6 million after-tax, or $0.03 per share, for the write-down of deferred financing costs, triggered by the early repayment of high rate Brazilian financing, and SWAP termination fees.

But this is not the end of the reconciliation. There were a number of special items that contributed to improve the reported results. Accordingly, you would need to subtract these items --

104.8 million after tax, or $0.42 per share for the discontinued operation, including a gain on the sale of Marine.

Subtract 10.1 million after tax, or $0.04 per share, for additional investment tax credits, which were released following completion of an audit by the tax authorities in Q1.

And finally, 23.5 million, or $0.09 per share, for special tax benefits recorded in Q4 accruing from the recognition of unutilized operating and capital tax losses from prior years.

As I mentioned, by taking all of these items into account, we arrive at a net profit from continued operations, after special items, of 46.9 million, or $0.19 per share. This compares to $.21 last year. On a similar basis, the non-GAAP EPS for the fourth quarter would have been $0.06 per share, compared to $0.04 in Q3, and $0.07 for Q4, last year.

This reconciliation does not include any impact from the strengthening of the Canadian dollar over the course of the year.

Before I conclude, I would like to highlight a few points from the full-year results that I believe are particularly noteworthy. The improvement in free cash flow for the year was remarkable. We reach 88 million in fiscal 2005, compared to 10 million last year. We define free cash flow as cash provided by continuing operating activity, less capital expenditure, net of sale leasebacks and dividends paid.

We expect that the sharp improvement in non-cash working capital during Q4, which contributed to the increase in free cash flow, will reverse slightly in fiscal '06.

CAE's net debt, defined as long-term debt less cash and cash equivalents, was reduced significantly to 286 million, down 244 million from the 530 million that was outstanding at the end of fiscal '04. This reduction resulted primarily from the Marine transaction and the free cash flow generated in the year.

CAE's consolidated backlog from continuing operations at March 31, 2005, reached 2.5 billion, up 2.3 billion a year earlier.

I look forward to reporting CAE's next quarterly result on a newly segmented basis, which will provide you with a better understanding of our results. In the meantime, I want to thank you for your patience in this.

Thank you for your attention. Bob?

Thank you, Alain.

CAE won 17 full-flight simulator orders during the last fiscal year, three of which were orders from Qantus and Emirates for Airbus A380 simulators. We've received five A380 full-flight simulator orders since the inception of this aircraft program, and we already have reached a critical milestone with the delivery of the first simulator to Airbus. A second such device is on schedule for an anticipated delivery later this year.

Among a number of new order bookings in the Asia-Pacific market, CAE signed a contract with long standing customer Japan Airlines for a Boeing 777 full-flight simulator. Since this program began more than a decade ago, CAE has won more than twenty 777 simulator orders, accounting for a little over half of the total market.

While Boeing has not yet announced the supplier for the first full-flight simulators for the Boeing 787, I am quite sure that we will not be selected. As part of our new approach, we have put in place a strict financial discipline with regard to contract bids. As well, we did not include in our fiscal '06 forecast any sales for the 787. This reflects the underlying objective of our restructuring, which entails operating with an intense focus on making money.

We fully expect to participate in the 787 opportunities as they arise. Past experience has shown us that on past major aircraft programs like the 777, the 747, or the Airbus's A320, 330 and 340, regardless of whether or not we got the first prototype order, CAE has captured more than 50% of the market, over the life of those programs. Many of CAE's long-standing customers are placing orders for the new Boeing airliner.

And we have already taken steps towards developing a new 787 simulator. Boeing has made absolutely clear to us their interest in making sure there is a competitive market for the supply of 787 simulators to their airline customers.

Given the extensive size and scope of CAE's established airline customer base, and its legacy in the simulation business, it is always a pleasure to welcome a first-time airline customer. This past year, we have received an order for two Airbus A300/A-340 full flight simulators from Etihad Airways, a new carrier based in the United Arab Emirates.

Moving on to training, we saw revenues increase 13% over the prior year, reflecting the growth of our training network to 105 full-flight simulators, as well as improved utilization, which reached 73% for the year. Average revenue per simulator increased slightly to approximately 3.1 million.

Among noteworthy developments in training, we signed an agreement with Chilean carrier LAN Chile to provide training on Boeing 737 and Airbus A320 simulators. The contract is expected to provide some $40 million of revenue over the next 10 years. We ratified a contract with European low-cost carrier easyJet, to train its flight crews over seven-plus years. The value of that agreement is in the range of $50 million.

Dassault Aviation selected CAE to become the exclusive entitlement training provider for the all-new Falcon 7X business jet. This marks CAE's first ever entitlement training contract from a business jet manufacturer.

Military had a banner year in terms of new order bookings at $681.4 million, which represented a 34% increase from the previous fiscal year. The award of a German PFI for the NH-90 helicopter training program was a big addition to our long-term backlog at 120 million Euros.

Even with that, orders from the key U.S. markets still represented more than 40% of new equipment volume. We have broadened our relationship with the U.S. Army's Special Ops with more than $35 million U.S. of additional orders, for a Blackhawk simulator and a variety of visual-system upgrades. The U.S. Navy awarded CAE USA a $60 million U.S. contract for a host of MH-60S training devices.

And just this past Monday, we announced that CAE has been awarded a 15-year $45 million contract to continue providing maintenance and support services for the NATO Flying Training in Canada, or NFTC, program.

Our outlook for the balance of fiscal year '06 is stable. We anticipate that the number of Civil full-flight simulator orders will remain about the same as last year. The low-margin Civil equipment backlog will remain a fact of life over the next several quarters, while Training performance should improve modestly, as we continue to make progress in the market, and as we move through the stages of our restructuring.

We expect the Military Group to continue to deliver low double-digit EBIT margins, and see some incremental top-line growth. New order bookings should be respectable as well. We are maintaining our expectations for $14 million of cash-cost savings this year from restructuring plus an additional $14 million of savings from reduced amortization expenses.

At this point in time, we have really only begun our restructuring. There is still a lot of heavy lifting in front of us, and we realize that successful execution is absolutely critical.

Things are progressing according to plan. But it would be naive to assume that we could change systems, processes, people, the very way that we are structured, without any potential disruption to our business. While we do see some positive signs in our end markets, I wish to reiterate that we regard the current situation as a transition year.

Despite what continues to be a profitless recovery in the U.S. airline industry, there have been some encouraging developments. North American passenger traffic recently surpassed the peak levels seen before 9/11.

On a global scale, passenger traffic is also rising to new heights. And new-business jet orders increased more than 20% during the first quarter of the year, compared to 2004 levels. All this is good news, and welcome news.

But we must continue to organize CAE effectively to ensure we can fully benefit from any market recovery that does materialize. We are working very hard to that end and we intend to emerge from fiscal year 2006 with a solid operating base upon which we can build and prosper in fiscal 2007 and beyond. Thank you for your attention. We are now ready to take questions.

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Thank you. [OPERATOR INSTRUCTIONS] The first question will be from Ben Cherniavsky from Raymond James. Please go ahead.

Hello.

Hi, how are you?

Good, thanks.

I wanted just to ask -- I don't know if you are in a position to speak in any more detail on this, but -- in evaluating areas that you can reduce your costs in manufacturing -- I think this has been brought up before -- but what -- do you see any opportunity or is the option to do outsourcing on the table at all? Like, are you exploring that as a means of maybe lowering your manufacturing costs?

That is one of the things that we are looking at, but it is not on the top of our list. I think it will come a little later. There are many things that we can do inside the shop to improve efficiency that relate to reducing the cycle time.

It also, I think -- we feel there are some things that we can do on the procurement and the global sourcing side.

And there's also things we feel that we can do as it relates to the design of the simulators. And, I would point out that this is an item that we have to have full discussion with the -- with our union colleagues with. And so, I think the areas that we are focusing on first are the other ones that I just talked about.

Can you give any more specific examples when you talk about lots of things that you can do internally?

Well, for instance, one of the things that we've been looking at is the level of inspection that we currently have on -- for product or for purchased items that are coming into the facility. And, we are looking at ratios that apply in other industries, and ratios that apply to ourselves,

And, if we look at the aerospace industry, and specifically they have to -- they have quality standards and requirement for inspectors, that are in place to meet the requirements of the FAA and airplanes that fly, and our simulators don't fly. And we found that our ratios in that area, for instance, have been out of line.

So, that is an area where we can move very, very quickly. We are doing something on the A-320. As another specific example, we built about 50 of these in the past, and what we are doing here is we are -- we put very strict change order controls in place so that we can have more repeat-ability and less hours of change in the machines.

And I think that that is something that we can do very quickly. We, as well, have -- another example would be the closing of the ancillary facilities, the four facilities that I talked about, that are close to the manufacturing center here in Montreal. We are closing all of them down, so there is no requirement to move components and keep track of them and going back from one location to another.

Another thing that we have done is, we have now taken the action to group together all of the procurement functions and we have a very strict control on who can purchase. And, we are having a strategy in terms of dealing with the key suppliers, so there is only one conversation that is going on to establish a global sourcing approach. And then, procurement can be done by the various area, but we are making sure that we can maximize on all of the areas that we are looking at.

Another thing that we have done is, we have put in place an ERP -- we're starting to put in place an ERP system -- that is going to give us the financial systems and the manufacturing process systems that are going to allow us to achieve a number of gains. And we expect that that is going to, by the end of the year -- is going to start to bear fruit.

And I can tell you that the changes that we've already made in program management and engineering, in terms of pulling the two groups together, have really started to pay off in terms of having a more efficient management structure, and a more effective way of managing the organization -- being able to follow costs. And, I would point out that the changes that we've made in program management, and giving them P&L accountability has played a very large -- is a very large factor in terms of our very low working capital requirements at the end of the year. I think that that has worked very, very well. So, I think that gives you some idea of the things that we've been doing.

That is excellent. That is very encouraging.

Can I just ask you to clarify then that -- the $14 million of savings that you directly link to the restructuring charges -- that is really more head count reduction and things like that? Like the initiatives you are talking about here, although it may take more time to see the dividends from them, that is, sort of, over and above that 14 million, right?

That is right. But the things we have moved on -- we moved within days. It was all done, virtually, within a week, the layoffs that we made -- that was the first part. There were a few other smaller items that we moved on, but that's the bulk of what we've had, and that's why we signaled that, you know, that there would be a further charge for this year.

Right. Okay. Great. Thanks very much.

You're welcome.

Thank you. The next question is from Marco Pencak from GNP Securities. Please go ahead.

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In your disclosure you talked about the utilization rate for the year of 73%, in your training business, and I just want to make sure that as I go to try to calculate the fourth quarter number, I don't make a mistake. Can you actually share that rate with us?

The quarter, Marco, was 74% for the fourth quarter and it averages out to 73% year to date.

I can take you through all four quarters. Q1 was 73, Q2 67, Q3 we reached 75, and Q4, 74. Which averages out to about 73 for the year.

Okay. I just want to get a quick reconciliation from Alain perhaps.

In terms of your EBIT excluding one-time items, if I go to the fourth quarter tables that you guys disclosed, you know, subsequent to your first press release, you get the 10.8 million Civil, you get the 13 million in Military, and then in the press release, you talk about the 3.1 million of charges that are essentially buried within there, right?

Right.

Which gets to you 26.9. And then in the press release, you talk about, sort of, a clean number of 27.2, so I'm missing 800,000 of operating earnings somewhere.

It is 3. -- yeah there is another -- the sum is really 3.9, Marco. So -- and that's included in the EBIT margin. So, if you want to get to the normalized margin, you would have to add to your 10.8 and your 13 million from military, the 3.9.

Okay. And how should -- can you just give us, how we should split that number?

Yeah, the break down, I thought you would ask, so it is 1.6 in civil and 2.3 in military.

Okay. Just one other financial point, in your balance sheet, your other assets went up by $30 million from Q3 to Q4. Is there something unusual going on there?

Well, there is at least one answer that I could volunteer, is the IDCs -- the tax credit that we are registering, you know, that we're not using as quickly as we earned them -- are building up on the balance sheet, so that's the first item I would point to your attention.

And the -- as you know, also, coming out of FIN 46-R, Marco, are the new accounting announcement on ECG-15. And we did capitalize the following this announcement the --- so there was fully another 30 million 3-something million added up to the balance sheet for the simulator that has been now brought back on the balance sheet.

Okay. Just in terms of -- Bob, you gave, sort of, an outlook, you know, and obviously some cautionary notes given some of the, you know, the situation with the airlines, et cetera.

Just as we look at the orders that you are getting in terms of equipment, you talked about how you expect the units to be stable in terms of the competed market and you also talked about some of the more challenging equipment still in your backlog, that is going to flow through.

You can give us some sense of how you see the new orders coming in and how we should think about that, in terms of prospective margins, as those start to flow through?

I think that we are in active discussion with quite a few customers right now, and I think we will have -- over the next three or four months, we will have some announcements to make.

And I think that the -- well, the deals that we've done are going to have a positive margins on them, I guess is what I would say -- that would be much better margins than the ones that are currently in the backlog.

And then what would you attribute that to? Is it the fact that your competitor or competitors are, sort of, not as -- not as aggressive as -- or is there -- what sort of a drive is it? Is it more a supply or demand -- ?

No, I would say that the pricing remains still very tough.

But the actions that we're taking inside the company and the progress that we're seeing in terms of, you know, some of the cost cutting measures that I talked to and related to the first question that was placed to me by Ben Cherniavsky -- I think we're seeing some progress on that, that is going to allow us to feel quite confident that we're going to have margins on these simulators, going forward.

Okay. And my last question, and I will get back in line, with the potential of this new entrant on, certainly, on at least the 787 simulator, have you seen them -- and I'm thinking of Rockwell, specifically -- compete in any other types?

I don't follow your question.

Well, the prototype order for the 787, I guess it is anticipated that the likely winner of that is going to be Rockwell-Collins?

I have no idea. I think, you know, what we have to wait for them to make the selection. I just feel quite sure it is not going to be us.

But have you seen them show up as a bidder on any other simulator types, like for any other aircraft types?

You mean NLX?

Yes.

And specifically. I think they're in most of the competitions that we have. We haven't tended to see them, for instance, on the 380 or some of the larger aircraft but, you know, we see them in some places.

Thanks.

You're welcome.

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

Good morning. Bob. Or good afternoon, Bob.

Good afternoon.

A question on pricing of training. Have you seen any improvement in the pricing at this point? And do you think that the pricing environment will improve over the next 12 months?

We haven't really seen any improvement in the pricing. I think that where it is going to -- the activity has been very robust in the whole business aircraft segment.

And, you know, I think that as the levels of utilization increase, there could be some opportunities there, but quite frankly, we're not counting on that, in terms of the way we structure ourselves for the year.

And in terms of utilization, do you expect that you can improve from the 73% level?

73 is a very good level, you know. I think you may see fluctuations month to month, but it will -- you know, I think over a period of time, I think that that is quite a good level.

Thank you.

You're welcome.

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

Thank you. Good afternoon, Bob. You talked about the simulator network now being at 105. I thought they were at 108 at the end of Q3, or a little bit past that.

So in the re-shuffling, some of the shut down, have you taken some capacity out? And then, where would you -- what are the plans for, let's say, the end of fiscal '06? Will we be at 110 or are you going to, kind of, try to keep it in that 105 range?

I think there is, like, a couple of factors, and I can't give you a precise answer here, but yes, we have, I think, taken at least one out of the system. And the other thing is, when we put simulators into our joint ventures, we only account a portion of the simulator as being ours. So, you know, we can give you a -- that's something that we can follow up on and -- And Ron, we're actually at 107 today. We're at 105 at the end of March.

That's the physical count.

Right.

When you take into account what Bob just explained, the full-time equivalent simulator-generating revenue would be 100 or 99, to take into account the GV's and the partial revenue we are recording, as Bob explained.

And as we look to -- out to the end of the year, you know, we really haven't taken decisions yet on what we're going to do for our own system, because we're trying to build our model and our structure, based on a conservative basis.

And so anything that we would add in would, you know, would have a positive benefit, but we're -- I am just not in a position to give you that -- where we are today.

Okay. So if I want to continue, kind of, tracking on a quarterly basis how efficient the simulators are from an annualized run rate or what they're generating, I should be using a number such as 107 right now? Is that the number? Or was it 105?

I think if you want to get to the average revenue, per simulator, you are better to use the 100, which is the full-time equivalent.

Okay. Thank you.

Ron, you asked a good question here and I think what I would like to do to make sure that we're giving you the right answer here, and we will get it out to everybody, I want to make sure that we give the calculation in the right way so that everybody is calculating it on the right way, okay?

Yes. Fair enough.

So we will get back to you on that.

Okay. Thanks.

Thank you. The next question is from Fred Larkin from Orion Securities. Please go ahead.

Thank you. Good afternoon, gentlemen.

Good afternoon.

I wanted to ask with respect to your more disciplined pricing, on the full flight simulators, whether you would view yourself as potentially setting up a pricing umbrella.

If you can create value for the CAE shareholders by providing outstanding equipment at a price that that represents, do you see any people taking a place below you, and can you tell us where pricing fits into the total scheme of things, in terms of making the buying decision versus brand loyalty and performance of that equipment?

Well, I think first of all, we -- Ted, we're not sacrificing our technology here. We're continuing to develop our technology and improve on it.

And we're investing in this area, so we're going to continue to be -- that will be a differentiator for us. And the second thing is that, you know, each market is different, whether you're doing it for producing simulators for our own system, you're competing against -- for business aircraft simulators, or you're competing for the very large ones. And I would say, in each segment, we're, you know, we're sizing up the competition, and we're sizing up what we can bring to bear, and the number of simulators, for instance, that we produced in the past and how we can leverage that.

So it is a combination of all of those things, I think, that where we're trying to build a competitive advantage ourselves, in terms of what we're going to do. And I think in doing that, it is going to result in better margins, particularly given the aggressive action that we're taking to reduce our costs, and, I think, that the ability that we have to do that, relative to some of our competitors.

Okay. Thank you. And you can just tell us, with respect to the level of bidding activity, you mentioned that it is fairly active out there, at the present time.

I was just wondering if you can put some color on that with respect to the geographic activity, look at the low cost carriers versus legacy carrier? And is there much activity coming from independent flight training centers?

I don't see a lot from the independent flight training centers. Asia is quite active. Middle East is quite active.

And you know, it basically focuses around some of the new products. We don't really see anything from the legacy carriers in the United States. So that would, sort of, be my quick survey of the situation.

Okay. And just with respect to the United States, where there is a fair bit of turbulence, obviously, potential mergers being discussed, possibly additions to the group in Chapter 11 -- are there any opportunities whereby CAE can provide some cost effective solutions to some of these folks who are looking at ways of reducing their operating costs on a partial basis, perhaps looking after the flights, you know, specific types of aircraft? Have you been exploring any opportunities with some of the air carriers in the states?

Very, very preliminary stages exploring it ourselves, but not really talking to anybody. We want to see how this is going to firm up going forward, but potentially an area of interest, not built into our plans at all.

Okay. And then my final question, just with respect to entitlement training, you have done a great job with the Falcon folks, [inaudible] on the Falcon 7X. Are there any other opportunities with respect to new types, like the Hawker Horizon or the Eclipse 500 or the Adams people, that you are looking at, with respect to entitlement training?

I don't think so on the smaller ones but you know, I think you are aware of the people who are launching aircraft, whether it is Bombardier or it is Embry Air or others like that. I think there are opportunities there.

Thank you, Bob.

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

Good afternoon, everyone.

The first question, Bob, in your press release, you mentioned, on page three, that the civil equipment backlog will present some challenges over the next several quarters. Can you be a little bit more precise on the time frame, or when do you expect to burn that depressed backlog?

Pierre-Yves, I think it is going to take us the rest of this year.

But, you know, obviously, these simulators we have will have different levels of margin on them, depending on the model and, going forward, but you know, that's -- nothing has changed -- nothing has changed there at all, from what we initially indicated, the confidence that we have, that we're incrementally going to be making, you know, progress during the year, and that by the end of the year, I think we should be in a good position.

And do you guys have an internal target, and can you share that with us, in terms of what you think you can make in terms of margin on the equipment side?

Well, we obviously have a budget that we're aiming for, but we can't share that with you.

No, but in terms of margin targets.

No, I don't really want to talk about the margin targets, because I think that would be -- that would be providing guidance, I think, and we don't want to do that.

All I can tell you is, all of the actions that we're taking on the cost side, and I feel that we're making very good progress there, as I said in my remarks.

Okay. Well, let me ask it differently. The last few simulators that you've won, is it on target, in terms of margin that you think you can generate on those new equipment?

I would say that it is on targe, relative to where we are in our budget process. Evolving towards a -- being at the end of the year in a very good situation.

Okay.

Second question is, to go back on the capacity issue. And I would just like to understand, maybe you can clarify some of the dynamic of the model here, but I look at the capacity and it is up, year-over-year, 69% in Q4 of last year, compared to 74% of Q4 of this year. But essentially, the margins are flat, year-over-year, while supposedly it was a business model where there is a lot of leverage because there is a lot of fixed costs.

So can you maybe, you know, clarify what is happening, or maybe explain furthermore the business model, because there's something I'm missing here.

Well, I think it is very much in line with what we've said in the past, you know, that utilization indicates a trend. It is hard to translate that, because it relates to pricing.

And it relates to the different segments, you know, there is three different segment, there is regional aircraft, there is business aircraft, and there is the large civil aircraft. And they all operate on a different basis in terms of calculating the -- in terms of calculating the percentage.

And so, you know, we've -- I think what we've said is getting a wetter or having doing the courseware and the instruction is very important for us, in terms of going forward, and that basically means the business aircraft, and that's been doing well. But then you've got to look at the pricing in the other two areas, and I think that's perhaps where it's been a little weaker.

Okay. And is that the type of information you're going to start providing in Q1?

Well, we have been, I think, talking about it in terms of the way that we've been doing the calculation of utilization, and I have no trouble sharing that. Alain, do you even have that, now, in your --

No problem at all.

The revenue per simulator, Pierre-Yves, is probably a very good matrix, that's been on track. And I know my training colleague are keen on it, so that is something we should make available to you. And if we're going to make progress in getting [weather], you will see it eventually being translated into more revenue per simulator. Which is the key to making money in the upper level of return on our -- or in that business.

Okay. Just two more quick questions here.

First of all, Alain, do you expect to be free cash flow positive in '06?

I am fighting to get there, Pierre-Yves. So that's the commitment that we've made to you in the past, and we're looking actively, we're dedicated to deliver free cash flow --

But I think, Alain, we're being very direct here. Pierre-Yves, it is going to be difficult to be at break-even.

135 million of committed CapEx, like we have explained and the road show is heating up in a way.

I think we want here, to be very clear, it is -- this is a transition year, and it is very tough, we're going to try, but I think -- I think it is going to be very difficult.

And one last question about your training business. Are you willing to share the split between business jet training and commercial training in terms of revenue?

It was, Pierre, this is Andrew, it was about 50% from commercial, and the balance from business.

So 50/50?

Roughly speaking.

Thank you.

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

Most of mine have been asked. I just have one.

Bob,you indicated in response to a previous question that you think a lot of the margin on the civil equipment side or the improvement there is going to come largely from cost reduction and not really from kind of pricing power or pricing increases in the industry.

Is it safe to say that the same type of scenario is going to play out on the civil training side? That with utilization rates where they are, it is more of a -- becoming more efficient in providing it rather than getting some better pricing out of the industry going forward over the next, say, couple of years?

I think it is -- I would agree with that, but I would say as well, it is trying to get your simulations wetter, and doing more courseware and instructors -- getting more, you know, a mix more in that area.

Okay. Great. Thanks very much, Bob.

You're welcome.

Thank you. The next question is from Cameron Doerksen from Dlouhy Merchant. Please go ahead.

Good afternoon. Just I guess two questions from me.

First, a question on military revenue, in fiscal '05, the first couple of quarters were significantly lighter in revenue than the second two quarters. I know it is difficult to say with this kind of lumpy business, but is that your anticipation for the current fiscal year, for fiscal '06 that it is going to be more back end loaded?

I think all I can say is it is going to be lumpy.

We anticipate that there could be something in the first half, but it is -- it is so hard to predict because of the -- because of -- you're dealing with governments. And, we've had an election in the U.K., we may have one here, but it is -- I really don't want to forecast, except to say I think we feel confident that we're going to get there by the end of the year but it is very hard to predict quarter by quarter where we're going to get to. I'm sorry I can't give you more than that.

Fair enough. Just to -- just secondly, relating to the sale of marine, there's still some assets and liabilities on the balance sheet as of the end of the year.

I'm just wondering, you know, what the timing is on I guess selling the rest of that business, and is there going to be -- cash in, is there going to be any more of a gain on that?

Well, I think that the cash is in, that we've got, they have paid, and there is a few things like the fast debt that again, it is governments that have to give the approval, so you know, I think --

We are continuing to work hard to finalize the transaction, Cameron.

The worst would be at the end of this year, but obviously, if -- and when we're going to get the consent of everyone, it is a complex deal, it was a project-financed deal that we are passing through all three, so nothing that we see so far is giving us difficulty. It is just taking time, bringing the banks on board, the MOD on board and everyone.

And in regard of the gain, because it was a business that we were building up, it was still -- we're still in the construction phase. Therefore, there was not a big portion of the transaction, of the gain of the transaction that was attributed to the remaining assets, and the remaining portion that we still have on the balance sheet.

So to your question, you should not expect another gain coming out when this transaction is going to be completed.

Okay. Great. That's all I had. Thanks.

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

Sure. Most of my questions have been answered.

But with regard to the -- you mentioned the simulator training revenue break down was. I believe. 40/60. That is correct?

Yes.

For the year? What was the break down in terms of EBIT, Bob, for the year and for Q4?

EBIT?

Yes.

If you can keep your question, Igor, for Q1, obviously you will see all of this, and you will see it for the last three years. So --

We're doing -- we're doing all of the calculations now and I don't want to give you a number that is wrong. We have a pretty good idea, but given that we have to restate the past three years, we want to make sure that we have all of the --

Let me ask it another way then. In Q3, you told us that it was the simulator portion was roughly break even, and that would back out the training portion at roughly 20% before the 3.1 million adjustment, or the 1.6 million.

You can assume the same, Igor.

Okay. That's fine.

I hope that helps you.

No, that helps and then Bob, in terms of margins, I know you gave us, you know, your sort of outlook in terms of training, improving modestly, simulators not much in the next several quarters. When do you see margins having a -- you know, a meaningful improvement? I mean 500 basis points, somewhere along those lines?

Well, I can't comment on the amount, but I think that, you know, we have always said that by the end of the year, is when we want, you know, when we put through the backlog that we have. When we should start to see it.

Okay. Thank you.

You're welcome. Thank you.

The next question is from Jacques Kavafian from Research Capital. Please go ahead.

Hi, good afternoon. I was trying to keep track when Alain was going through the reconciliation on the earnings, I don't want to ask you to repeat that, but can you send that to me in an e-mail?

Sure. In fact, the remarks either are on the Web site already or will be very shortly but I will send it in an e-mail, Jacques.

Thank you very much. That's all I had.

Thank you.

Thank you. The following question is from [Greg Hannon] from [Hopeman Capital]. Please go ahead.

Good afternoon.

We applaud your streamlining efforts in terms of shedding unnecessary overhead like the Toronto office and so forth. We're just wondering in terms of the size of the opportunity and your ability to change the culture of the company.

Are we in the third inning here or the eighth inning here? For example, we look at this press release, and see there's three contacts, a communications person, a public relations person, an Investor Relations person. It doesn't leap out at us, you know, that this is a lean and mean organization.

And so I wondered if you could provide a little more color in terms of how the company is changing?

Well, I think it is pretty lean and mean in terms of the approach we're taking. And I can tell you that we are being very, very aggressive in terms of everything that we're doing in the company, and particularly in the operations area.

You know, the other thing that we are doing, and when we did our investor survey, and I met with a large number of the analysts one on one, there was a request that we make a real effort to be able to communicate clearly -- communicate more often, and you know, we have been making a real effort to be a lot more transparent, to be accessible, in terms of what we're doing, and I hope it is seen in that light.

I can assure you that we are doing everything that we can to reduce our cost base.

Great thanks.

Thank you. The next question is from Greg Smith from Haywood Securities. Please go ahead.

Good afternoon, just a quick question here for Alain. What is the current level of the off balance sheet debt and interest expense on that?

What we have in the recent road show, Greg, was if you take the NPV of our off balance sheet operating leases, at 6%, you would get close to 300 million.

So that's the amount of off balance sheet debt, if you wish. And I am not including into this the nonrecourse debt under project finance structure.

So this is the sum of all the QTEs, the operating leases, we've done in the past.

Okay. Thank you.

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

Two modelings questions. What should we be using as a prospective tax rate effectively?

I would continue to use 30 to 31%. We are finalizing this for next year. 31 is probably on the safe side.

Okay. And just in terms of interest expense, given what's transpired here in the quarter, what should we be modeling as sort of an effective interest expense rate?

Depending on the level of interest, we will capitalize next year for the asset under construction. I would say anywhere between 18 and 20, Marco.

Million dollars?

Yes.

Okay. Thanks.

Operator, that's all the time we have for the investment community. We will now switch over to the media question-and-answer period. Thank you.

Thank you. We are now opening the question period for the media.

[OPERATOR INSTRUCTIONS] The first question will be from Scott Peterson from the Please go ahead.

Hi, good afternoon. You mentioned briefly about markets increasing in the Middle East and Asia, not so much in the U.S. Could you maybe provide some detail as to why that might be, and why the U.S. might continue to be a little flat in the next -- in the upcoming year?

Well, I think -- what I was talking about is simulators, and I guess that relates to activity as well. You know, in the United States, I think the loads have been very strong. They're at actually pre-9/11 levels. However, given the state of the legacy carriers, they're not ordering a lot of equipment, and they're not ordering flight simulators as a result of that. I think they're maximizing the system and the equipment that they have.

If you look at the -- at Asia, I think China is an excellent example, what is happening on -- with commodities, for instance, commodity trading going into China, and the increased level of activity that you are seeing there from a business point is being translated into an expanding market for airlines.

And, you know, just a lot more people are flying, so you would find, for instance, that our joint venture with China southern is going very well.

And so I think it really has to do with, you know, the economic activity and what is happening, and the state of the airlines in those specific areas.

An what's your prognosis for what's going on in the Middle East? Same sort of scenario?

I think in the Middle East, what we're seeing there is, you know, very much the joint venture that we have with Emirates there, you know, they are clearly establishing themselves as a transfer point for people that are coming out of India, and also a vacation location and also an investment location, a safe haven for money in the Middle East,

So, we're seeing, you know, with the increased activity that is taking place in India, for example, and, you know, with Etihad, who is our partner there, we are seeing increased levels of activity and you can see that through the purchase of equipment as well.

Just one final clarification.

In regards to the U.S., and I guess maybe specifically about Boeing although you can correct me on that, you said they are maximizing the systems they have there, and yet on the other hand you say Boeing is interested in making sure that there is continued competition, I believe, for the newer simulator.

Is that a contradiction, or are they going to continue to look for other suppliers?

No I think that, you know, any airplanes that Boeing is going to deliver -- I think this airplane starts to deliver in '08 or '09, something of that order.

Right.

And so it is, you know, it is farther out in time. And I wasn't really talking about Boeing maximizing their systems. I was talking about the airlines and the training facilities that they have that they use for training their pilots.

Okay. All right. Thank you.

You're welcome.

Thank you. The next question is from Robert Melnbardis from Reuters. Please go ahead.

Good afternoon. How are you?

A quick question for you, it took 2.5 hours for you folks to get some detailed numbers out on the Q4 results. I wonder if there was any specific reason for that given that you want to be a little more transparent, as you say.

And also, I wonder if you can give us a break down of how you see the simulator market for this year. I think you mentioned that you expect, overall, the units to be flat. I wonder if you can break them down between military and civilian and give an idea of what sort of pricing pressures you're seeing there.

Go ahead.

When we put out the release, you had the yearly result, and there was a link with the MDNA where there were some quarterly results as well. But we received a couple of calls of people asking for more, so right away, we did add the tables,.

It was a question of the [when we would be] putting them out. But you already had some of that detail in the MDNA with the link on our Web site.

But I think maybe we could have done better here and we will try and do that next quarter. There was no specific reason for doing it that way.

Okay. Thanks very much.

In terms of the orders, I think that we said that we would be basically on the civil side, basically in line with where we have been in the past year, where we've done I guess 17 orders, so we see something in that particular range. And I think I have talked about where I think I see the orders coming from, again being strong and in Asia, in the Middle East, and some in Europe as well.

And some relating to the new product that is coming into the market from the OEMs. I think on the military side, we really don't talk about -- we haven't talked in the past about the number of simulators that we've had there.

I think -- I'm going to ask for your patience until the next quarter until we start to break out that information. But, the civil side is the main focus for where most of the simulators will come from.

All right. Thanks very much.

You're welcome.

Thank you. The next question is from Francois Shalom from the Montreal Gazette. Please go ahead.

Hi. A couple of things.

Returning to the Boeing 787, I am not quite clear on why it is that you are so sure that you are not going to get the prototype order for it. Is that simply the way Boeing does business?

You were in on the prototype for the Airbus 380. And also, are you negotiating with Embry Air for its light jet and superlight jet simulators, and also with the Bombardier for their C series?

You got a lot of questions there, Francois.

That's me.

That is you, okay. I think you can assume that we are talking to everybody, okay, in terms of any product that is coming forward -- would be the first thing.

And so, that, I think answers the latter question that you had. The other question that you had related to, you know, the 777, and Boeing --

787.

787, yes. Sometimes we've been involved in doing the prototype, sometimes we have not. And I think, as I said in my remarks, in the end, as you look at these programs, we have had slightly more than 50% of all of the simulators made over the life of the programs, whether we've done the initial prototype or not.

And, where we are in our restructuring, we are being very, very careful, not to get in a situation at this particular stage where we load our backlog with orders that could be difficult.

And I guess the way that we're getting to where we're at -- Boeing hasn't announced yet but I think in communication -- various communications that we had with them -- I think we will have to wait and see what they're going to announce, but as I said, I don't think we're going to be selected.

Okay. So you're saying -- and as for the latter part of my question -- I can assume that you are talking to everybody, but this would be a new segment for you in terms of full flight simulators for the super light jet and light jet market is, that right?

Well, I think, you know, the super light -- sorry, I didn't mean to interpret it that way. I think the super light ones are hard for us to compete.

But , as we get to what I would call the light segment, I think that there is a possibility that we can do something there, so we're exploring that area. But I didn't want to give the impression that we're doing things in the ultra light area. I think that's a bit out of our area of expertise.

Okay. Thanks.

Lastly, if I could ask, also, Andrew, if he could send by email -- I'm also interested in getting all of that with the subtractions and the additions, the reconciliations in the financials if, -- just the way I think Alain said, with the number of additions, and the number of subtractions?

Yes, trying to get back to the planes [inaudible] .

We will get all of that on the wire to you shortly.

Thank you.

Okay, thank you operator. That's all the time we have for questions from media.

We would like to thank all participants for joining us on our fourth quarter conference call and remind everyone that a transcript of today's conference can be found on our Web site at CAE.com. Thank you.

Thank you Mr. Andrew Arnovitz. The conference has now ended.