CAE Inc (CAE) 2006 Q1 法說會逐字稿

Good afternoon ladies and gentlemen. Welcome to the CAE first quarter conference call. Please be advised this conference call is being recorded. I would now like to turn the meeting over to Mr. Andrew Arnovitz. you may now proceed, Mr. Arnovitz.

Good afternoon everyone, and thank you for joining us. Before I begin I have to read this lengthy statement. So bear with me.

Certain statements made during this conference call 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 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 and/or implied by the forward-looking statements. The results or events predicted in these frame may differ materially from actual results or events.

For a description of risks that could cause actual results or events to differ from current expectations, please refer to risk factor section of CAE's annual information form for the year ended March 31, 2005. Filed with the Canadian Securities Commissions and the U.S. Securities and Exchange Commission as updated in CAE fiscal 2006 first quarter MD&A dated August 11, 2005, released today.

Any forward-looking statements made during this conference call represent our expectations as of August 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. Please note that a slide presentation accompanying today's remarks is being webcast simultaneously.

Following the presentation we will invite questions from financial analysts and institutional investors. Once we have concluded the question and answer period with analysts and institutional investors we will invite questions from the media. For your convenience this conference call and the slide presentation will be archived on CAE's Web site. Let me now turn the conference over to Bob.

Thank you, Andrew and thank you to everyone for coming today.

We have varied from the normal format of the telephone conference because of the new segmentation, and we wanted to be available to as many people as possible to be able to answer any questions that you might have. So I will take you through some of the financial highlights in a few minutes, but first I would like to update you on the continued progress of our restructuring initiatives and review some of the highlights of our first quarter operating performance. I will conclude my comments by sharing our outlook for the balance of fiscal '06.

As will you see when Alain reviews the numbers, CAE's first quarter results are positive and are consistent with our initial outlook for the year. Revenues and earnings from continuing operations both improved and the underlying performance of the Company's various business groups was good. CAE earnings from continuing operations for the three months ended June 30, 2005, were $20.8 million or $0.08 per share. That compares to first quarter earning of $18.9 million or $0.08 per share in the prior fiscal year. Excluding non-recurring items, earnings for the quarter were also $0.08 per share which on the same basis compares to $0.04 in the same quarter last year.

At the same time, we have continued to make progress with the implementation of our comprehensive restructuring program, which is designed to foster synergies between our various business units, achieve a more competitive cost structure, improve our return on capital and restore shareholder value. You will recall that one of our first major initiatives in that regard was to strengthen the balance sheet.

The Company's net debt as of June 30, 2005, amounted to $282 million, down sharply from the year ago level of approximately $680 million. Following the end of the quarter, another significant element of our strategy was put in place when we completed the refinancing of our revolving unsecured term credit facilities with a new agreement for a committed revolving credit facility of $400 million U.S. and $100 million Euro; a syndicate of 15 Canadian, U.S. and international banks showed confidence in CAE by oversubscribing to this financing and we were encouraged by its five-year commitment.

On other fronts, we have instituted strict financial discipline and are continuing to streamline our business processes. Our businesses are now organized more effectively with a clear path to improvement and we also are delivering on our commitment to communicate more effectively with analysts and investors. And provide more disclosure.

As of April 1 we began reporting CAE's financial results in four segments. To that end, I would now like to briefly review some of the noteworthy first quarter developments and achievements in each of the four segments.

Let's begin by looking at the progress we have made in Simulation Products Civil, which designs, manufactures and supplies civil flight simulation training devices and visual systems. During the first quarter we completed the consolidation of virtually all of our development and manufacturing activities including engineering, program management and global procurement. This will substantially reduce our costs associated with manufacturing simulators while eliminating duplication and promoting synergies in key areas.

We have also been very busy reviewing our manufacturing techniques from end to end, finding ways to be more efficient, improve quality and shorten cycle times. A strict change control process for the manufacture of simulators has been initiated. By standardizing our approach to full flight simulator development in general, we believe we are on track to meet our fourteen-month delivery schedule by the end of our fiscal year.

Meanwhile the team is working relentlessly to the identify further ways to improve processes and lower costs. During the first quarter of fiscal 2006 Simulation Products Civil announced the sale of four full flight simulators. I'm pleased to say that we received two additional orders in the same period, details of which we will make public once we have customer approval.

Last fiscal year, we received 17 full flight simulator orders and we are on track to match that performance this year. While there are positive signs coming from the aircraft marketplace, this business is backlog driven, and I want to reiterate that our current Simulation Product Civil backlog will likely to deliver lower margins over the next several quarters than what we have seen in the first quarter of this fiscal year.

Simulation Products Military, designs, manufactures and supplies advanced military training equipment for air, land and sea applications, the segment maintains a strong market presence in the United States and in Europe. With a recent contract to supply sensor equipment to the U.S. Navy multi-mission maritime aircraft, the segment is well-positioned to garner future business from Boeing.

This is important given that going forward, our relationship with OEMs will be crucial to our future development. As I have previously stated, in all of our restructuring activities we are being very careful not to jeopardize our technology, and this is particularly true with regard to the military market segment.

Through focused R&D programs, military continues to raise the bar by providing customers with highly realistic and cost-effective simulation equipment. This was exemplified in a contract we won during the first quarter for which we will be providing a new database architecture, expected to become standard on all future mission rehearsal and training systems developed for the U.S. Special Ops command.

Our third segment, Training and Services Civil, provides business and commercial aviation training and related ancillary services including operational management, maintenance and engineering support. In this area, our emphasis has been on moving into the wet aspects of training which involve our supplying not just the simulator but a full suite of training services, including instructors, course curricula and so on.

One such example is the segment's recent selection by the Federal Aviation Administration to provide initial and recurrent training to more than 150 FAA pilots on a number of different business aircraft. The mandate of Training and Services Civil is to deliver highly cost-effective and competitive training services. To that end, our restructuring activity already has simplified the group's organizational structure by eliminated its regional layers.

We are also in the process of redeploying a number of full flight simulators within CAE's global training network to better align supply and market demand. At the same time, we bolstered our global sales force in order to be closer to our customers. We are striving to be more responsive, delivering what customers actually want, rather than what we might perceive they want, and the changes have been welcomed by our customers.

We have observed certain market improvements, particularly in business aviation and we believe that this can translate into good opportunities for our new training center scheduled to open buy mid 2006 in New Jersey. We have also been continuing to build our presence in the Middle East and Asia. Through our joint ventures in Dubai and Emirates and in Zhuhai with China Southern, CAE is already well-positioned in these regions.

Training and Services Military, supplies military tactical and nontactical training solutions and contracted logistic support as well as modeling and simulation software solutions. Our leading edge technology reinforces our position in the military market, and we are working to leverage this specialized know-how by seeking out opportunities in nontraditional markets such as Homeland Security.

Terrex, a leading development of simulation software is an acquisition that will leverage the portfolio on a very sophisticated -- a very sophisticated CAE technologies that we are able to pick from and package into cost-effective, off the shelf solutions for our customers. This will be particularly useful in increasing our penetration of the mid tier market.

As you may be aware, the UK Ministry of Defense decided to change its approach to the British armies AVTS program and proceed with a conventional incremental procurement strategy. However, given the preliminary stages of the contract negotiations, CAE had not included the AVTS program in its revenue forecast.

There are also been some positive news, Training and Services Military landed new orders totaling $88 million during the quarter. These included a $45 million contract for the NATO Flying Training in Canada, or the NFTC program; and a $23 million contract to continue providing avionic software upgrades, integrated logistics support, and data management services for the Canadian Force's CF-18 aircraft.

On a corporate level, we have also been pausing ahead with plans to implement an enterprise resource planning, or ERP, system and we are currently in the final stages of negotiating with potential suppliers. In addition to proceeding with a consolidation of some training locations we have already closed a number of sites adjacent to our main operating and manufacturing facility in Montreal, bringing work back into the main facility.

To sum up, with regard to restructuring, we have covered a lot of ground in just a few months but there is still considerable work to be done. With that I will ask Alain to give you some thoughts on our financial situation. Alain?

Thank you, Bob. Good afternoon ladies and gentlemen.

Consolidated revenues from continuing operation reached $266 million compared to $230 million in the first quarter last year. The 15% increase spans mainly from higher simulation products revenues in both the civil and military segments. Net cash flows provided by continuing operation activities reached $21.8 million in the quarter. While this is lower than the $66.9 million generated during the immediately preceding quarter, it represents a significant increase from the $3.7 million recorded for the same period last year.

But a word of caution is called for here. Remember this is is a transition year. We would welcome positive cash flow on the year as a whole; however; as we have said, this is unlikely given the Capex budget and the restructuring charges that we have already committed for this fiscal year. Free cash flow for the first quarter of fiscal 2006 was near break even and substantially higher than the first quarter last year. During the first quarter, the Company utilized $21.5 million for the capital expenditure and other capitalized costs compared to $46.8 million during the same period last year.

As Bob mentioned, after tax earnings from continuing operations in the first quarter amounted to $20.8 million or $0.08 per share. Normalizing for non-recurring items earning were $19.9 million, and also $0.08 per share. Let's now look at how non-recurring items have affected the Company's results. In the most recent first quarter we wrote down post selection project costs on certain military programs, totaling $5.1 million.

Nearly $1 million of restructuring charges were incurred; offsetting these one time items with a foreign exchange gain of $6.7 million coming from a release of the currency translation adjustment account on the balance sheet. When you net all of these one time items out you still arrive at $0.08 of EPS on a normalized basis for the first quarter. Similarly you will recall that the first quarter of fiscal 2005, sorry, in the first quarter of 2005 we recognized additional investment tax credit of $10.1 million after tax and that normalized EPS performance for that period was therefore $0.04.

The key take away is that on a normalized basis, we see underlying profitability improvement on both the sequential and on a year over year basis from $0.04 to $0.06 to $0.08. The company's backlog at the end of the first quarter was $2.5 billion. Total new bookings in the four segments amounted to $344 million during the quarter.

Before we take a look at the segmented results I would like to clarify the way we account for inter-segment transactions. They are not recorded as sales. Products that are built by CAE for use in our services businesses are transferred as actual costs.

The sum of the revenues and operating income in the four segments is therefore equal to the consolidated numbers that we report. We create value to these inter-segment transactions only when we generate returns on investment above our weighted-average cost of capital. And our new EDA-based compensation system helps ensure that all segments work together towards this common goal.

I will now talk briefly about the first quarter performance in each segment and I will point out some of the key trends we have identified over the past three fiscal years. My intension is not to do a deep dive on the historical, but rather to provide you with what we believe are some of the key takeaways.

Simulation Product Civil: Simulation Product Civil's first quarter revenues of $60.2 million were 28% higher than in the prior year. The segment generated an operating income of $7.1 million in the first quarter compared to $11 million in the first quarter last year. Segment operating income was 35% lower than the first quarter last year, but on a normalized basis segment operating income was actually $5.9 million higher than in the prior year's first quarter.

It's important to point out that the higher operating margins attained this quarter benefited from achievement of key milestones which enabled us to release this provision in our estimated completion process. As Bob said, we expect the segment backlog to deliver lower margins over the next few quarters.

Looking back we see that peak revenues were actually achieved in fiscal year 2001 and 2002 when we had sales in excess of $440 million in each year. At that time we were generating 30% plus operating margin which continued into fiscal year 2003 as you can see on that slide. The high margins were the benefit of high production volume stemming from both external and internal demands which helped absorb overhead. We also saw many repeat type orders during this same period. The Canadian dollar trading around $0.60 did not hurt us either.

Simulation Product Military: Simulation Product Military's revenue of $72.7 million was 30% higher than the first quarter last year, owing primarily to the NH-90 program. Segment operating income for the first quarter amounted to $4.8 million. Normalizing for non-recurring items segment operating income increased 58% over the first quarter last year.

From an historical perspective, we see that this segment has been stable. While backlog has been improving slightly, the challenge here has been great. Margins of around 10% reflect where we see the business going forward. The unusually high margin of 20% in fiscal 2003 was the benefit of efficient program execution, particularly in the later stages of several repeat builds. That same year also saw the benefit of profitable engineering upgrades, early completion bonuses, favorable effects and the benefit of the already high volume going through the Montreal facility.

Training and Services Civil revenue amounted to $83.8 million, 5% higher than the first quarter last year. More specifically, revenues on wet training rose 10% in the first quarter. The first quarter is usually seasonally strong as flight crews train in preparation for the subsequent busy summer travel period.

Demand was competitively robust in the first quarter this year, compared to last year, which is commensurate with the increase in the demand for air travel more generally. Average revenue per simulator reached $3.4 million compared to $3.3 million in the first quarter last year. Segment operating income for the first quarter amounted to $16.9 million, representing a 63% increase over the first quarter last year.

Training and Services Civil operates within a mainly fixed cost structure and incremental revenues above a certain level provide significant leverage to profitability. Segment operating income was favorably impacted by a 2% increase in revenue per simulator, combined with a 4% reduction in cost per simulator against the prior year.

In addition, profitability was announced by a reduction in amortization expenses by approximately $2.5 million following the as asset impairment of last year. Also, operating leases expenses were reduced by the reclassification last year of a certain asset backed lease pursuant to the adoption of new accounting pronouncement.

Looking back, we see that that segment are revenue was grown steadily since fiscal 2003, and operating margins bottomed in fiscal 2004 commensurate with the market downturn for training. Fiscal 2005 EBIT growth outpaced revenues despite a greater proportion of sales and lease-back.

I also wanted to show you this business on a quarterly basis to illustrate the effect of seasonality on the segment. We see quite clearly that our first and fourth quarters are the strongest. We saw the same pattern in our analysis of previous years as well.

Revenues for Training and Services Military amounted to $49.3 million in the first quarter, relatively stable compared to the first quarter last year. Segment operating income for the first quarter amounted to $2 million, 67% lower than first quarter last year. Normalizing for non-recurring impact, segment operating income was $6.4 million or 5% higher than the first quarter last year. The underlying increase in profitability is the result of efficiency gain on certain services programs.

Looking at the historical we see that fiscal 2003 revenues and operating income were adversely impacted by FX. Although the same conditions prevail in fiscal 2004 the segment had good program performance in Canada and in Australia. In fiscal 2005 the segment again had strong performance on certain support and maintenance programs combined with lower selling and marketing expenses.

With that I will turn things back to you, Bob.

Thanks, Alain. Looking back on what we have achieved during first quarter, I think it's evidence that CAE's financial position is improved as reflected in our cash flow and reduced debt load. Moreover, we are starting to do what we said we would do, and we are making head way with the implementation of the restructuring program we first discussed with you in early 2005. The program is on track and on budget.

We have implemented strict business processes. Our businesses are now organized more effectively and our cost structure is better. Looking ahead we are encouraged by the general level of activity we see in the commercial and business aviation markets. Although the high cost of jet fuel is cause for concern, airline passenger traffic in both the international, and to a lesser extent the key U.S. market has been on the upswing.

First half deliveries of large commercial aircraft rose more than 10%. New airliners order are now outstripping deliveries and outlook for the business aircraft market remains positive. Things do look a little brighter.

And as we have accomplished a lot in the past few months in terms of court of responding to new market realities, enhancing our overall competitiveness, strengthening in our leadership team, and taking concrete measures to re-engage our employees. That said, we continue to regard fiscal 2006 as a transition year for our company. Rather than relying on the ups and downs of the marketplace to improve our fortunes we will be sticking to our game plan.

If and when the recovery of the airline industry does materialize so much the better. It would be a bonus and a leaner, more competitive CAE will be in a position to fully benefit from any upswing. Meanwhile, we are focusing on the job at hand. Successfully completing our restructuring and putting in place the solid operating base, positioning the company to generate meaningful growth and cash flow and enhanced return on investment for fiscal 2000 and beyond.

That's my presentation for now and I think we would be ready to take questions. Andrew?

Thank you, Bob. [OPERATOR INSTRUCTIONS].

Ted Larkin, from Orion Securities. Bob, in the first quarter and specifically on the civil operations of simulation production, can you give us an idea, and elaborate for us the reason for the margin going from 2.5 last year to 11.8 on an apples-to-apples basis? And specifically these key performance risks that were mitigated and the integration savings. Could you elaborate on that, please?

What we did last year actually, we split the task in two parts. As you know, we felt that a number of the program or the contracts that we had had quite low margins. And so we have a specific program to address what can we do with the contracts that we have underway that still have time for us to be able to have some impact in terms of hours and in terms of the way that we acquire.

The second task is to make sure the bids that we are making, we can do it on a competitive basis and still have a margin going forward. So we have reviewed every single contract that we have from a program management point of view. We've put in place a strict change control process and now it's very, very limited who can make a change in terms of the manufacturer of the simulator. We have all of the gains, all of the changes that we made in terms of taking people out of the organization. We've been able on a disciplined basis to make sure that those hours are saved in the contracts that we have underway.

So it's those kinds of things that we have done that have allowed to us make the progress that we've achieved. Now it also has to do with the mix of contracts because are not all the same, obviously. And that's why I'm being cautious as we go into the rest of the year in terms of how we are going to perform in this specific segment. It may be a bit bumpy.

I feel confident that over time we are going to be able to improve on the 12% margin that we have there, but it's going to be a bit variable over the next couple of quarters.

If I can follow up with a second question then. This is with respect to look at the EBIT overall for the organization, there is a $5.1 million number that is other income net. Could you elaborate on what that is?

I think the line has to do with the HDGS

What we've recorded into that line is the foreign exchange gain coming from the reduction or the translation of our CPA account.

I would add that the reason it's higher than normal, we do this every quarter, but because we did the restructuring and the impairment we found that it was, happened to be higher this quarter. And we have now a very disciplined process where we pull all the cash back into the company and it was basically because initially the cash went out at a lower Canadian dollar and comes back at a higher Canadian dollar, simply that. I don't think you are going to see it as much as you see on this quarter.

That's why on a normalized basis, I've shown it specifically to highlight the fact.

We wanted to disclose it because of the size of the item. Richard?

Richard Stoneman, Dundee Securities. Bob, a question on the civil side, non-recurring engineering costs for new simulators such as the A-380 and the Embraer 190 Chinese Air Inc., are they causing a problem in terms of the margins right now and will they, will they decline with time or are they just part of the business?

I think, Richard, they are just part of the business right now in terms what we're managing, burning as we get through the system. I'm very encouraged I think with what Mark Parent and his team have been able to do in the first quarter. As I said I'm cautiously optimistic we are going to be able to continue to do things in the following quarters but I think we have to earn our way here quarter by quarter as we go through this restructuring.

Second question is utilization rate in the quarter. What was that?

Utilization rate was 76% for the training services and, which was up a few points. And I think, however, what we were also trying to focus on is the revenue per simulator where I think you've seen that that's gone from 3.3 to 3.4 on a comparable basis with the last quarter as well. So that means we are doing more wet, which is the objective we've had.

Thank you. Jacques?

Yes, Bob, you mentioned, my question is regarding the average revenue per simulator, 3.4 million a quarter sounds high.

No, I don't think so. You take your wet simulators, you take your dry simulators and it's basically the average. And because business aircraft has been so strong, there tends to be more revenue per simulator. And so as a result of that, where the mix would have been from a revenue point of view it would have been 50/50 in the past, almost 60/40, now, something like that and that may normalize or over the period I don't know but because of the strong performance in the business aircraft segment that's why it's improved.

Can you.

I would also add that people are improving their cost.

Second question is relating to the backlog in training. I think I saw $800 million or so. How do you calculate the backlog in training?

Those are ongoing contracts that we sign with customers. Some were longer term, some were shorter term, it's an ongoing activity that we have.

Every dollar that we book in the backlog of training is supported by a contract. Either an exclusivity contract with the cost number without the number and therefore the team is estimating what the value is. Or there's a specific value attached to that contract. But every dollar we show in that backlog has a contract to support it.

Is there an average life cycle to that.

Sometimes it's one-year, two-year, sometimes it's longer term agreement we have with the customer.

We will get back to questions from the room in one minute. I'm just going to take a couple of questions from callers.

[OPERATOR INSTRUCTIONS]. First question is from Ben Cherniavsky from Raymond James. Please go ahead.

Bob, I think you spoke about cycle times for simulators like the Airbus simulators and that, I think your goal was to get that down from 14 weeks? Can you comment as to where that is at the moment?

I think actually it was from 20 months to 14 months.

I'm sorry, yes, okay.

I think as I said we are on track to get to that, on a normalized basis to get to that cycle time and we specifically have an A-320 that we've put in that we are now measuring very specifically in terms of internal objective of the organization and we are making very good progress to get to that fourteen-month cycle time number.

But you wouldn't want to see where you are right now, what your run rate is?

No, well, I think what I would say is by the end of the year I think we will be to the 14 months.

Okay. Fair enough. Do you think, this is more of a broad question, but do you think that you are ahead of where you thought you would be three months ago? I mean you had a pretty cautious tone three months ago about expectations in the near term but this quarter clearly had a lot of good news to it and encouraging developments. Is that kind of consistent with what you were expecting three months ago, or do you think things are moving a little better than you originally thought internally I'm speaking specifically?

The only thing I would say is the new segmentation was a huge exercise to have the numbers ready for today. That's why we stretched it as long we could in terms of when we have to report. And we are not just doing the first quarter, we've had to restate essentially the past three years and we've done some of it with quarters. So we are only seeing the result of some of these things more recently. We also just only recently completed our full review of every single program from a program management point of view. And so while I feel good about the result that we've had, you know, I think by nature I'm cautious here and I feel that when we get through another quarter and we see that it's I will feel a lot better I feel today. So I still want to be cautious.

We will go back to taking questions from the room.

Marko Pencak, GMP Securities. Two questions, just following up on that, I think when you announced your restructuring back two quarters ago you identified $0.04 in amortization savings which we've seen. I think there was another $0.04 or $0.05 in terms of operational savings. Related to the previous question how much of that $0.04 or $0.05 do you think has already flowed through your financial thus far? Have we not seen any of it simply because you instituted the initiative but hasn't had time to take routes?

I think that's the part that related to the $14 million for this year and the $30 million by '08. I think we are making good progress on the 14. I don't want to be two precise on it but we are aware where we should be at this point in time.

My second question is more big picture, two years ago it was at the Paris air show, Emirates placed a huge order for the A-380, and people sort of were skeptical whether that was real and I don't think there's any question about that today. The air show this year, we saw a slew of orders coming from Indian carriers. We've heard examples of pilot shortages in that country, airlines poaching pilots from each other, aircraft deliveries, financed aircraft deliveries being deferred because there aren't pilots to fly them.

How are you guys looking at that from a strategic positioning to take advantage of that or are you sort of, do you have enough on your plate today that you can't sort of contemplate something like that?

I think if you looked at the orders that came out of Paris you would find about 70% of them related to India. And Asia. And so we are well established in Asia with China Southern. We are expanding that relationship. And we are looking for ways now, we are not sitting back. We are looking for ways that we can participate in the Indian market. We agree with you that the opportunity is there.

Thanks.

Cameron Jeffries, CSFB. Just wanted to follow up on Ted's question, quickly, in terms of the Civil Simulator margins, is it something where you would expect mid to high single digits might be a more normalized number to look at going through the rest of this year, or was the impact of the first quarter risk mitigation and sorts of things was it more significant than that or can you give us a little bit of color on where margins might be on a normal basis right around now?

I think by the time we get to the end of the year we should be about where we are a little better but I think for the next couple of quarters it may be a little lower than what we've done.

Okay. Thanks.

James Hardwick, AGF.

On Training and Services Civil, it looks to me like your EBITDA margin actually fell in the quarter year over year and I'm just wondering it looks like expenses are up $5.5 million versus revenues up $4.4 year over year. Could you explain that? I'm talking about cash expenses as opposed to including amortization and depreciation.

So quarter over quarter or?

Year over year.

Year over year, so Q1 versus Q1?

Yes.

The margin, you are after an explanation of the margin?

I'm curious, I see expenses appear to have risen $5.5 million -- the cash expenses.

The data I'm looking at which is the quarter over quarter in Q1 '05 I have operating margin at 13% and they were at 20 in Q1 '06. From 10.4 to 16.9. So maybe I'm not looking at the right thing but --

That's in training Q1 '06, I guess it's Q4, '05, that's really the difference.

Okay. And the improvement, the margin is still improved from 16.8% to 20.2% where in absolute turns segment income was 13.3 to 16.9. So the trend is favorable.

Because you got $5 million less amortization, no?

No, the amortization was $ 2.5 million. The impact of the improvement was $2.5 million in the quarter. But I just want to reminds you that in Q4 '05 also we had the benefit of reduced amortization. So because we've done the impairment as of the end of December you already in Q4 '05 have benefited from the reduced amortization. So really from an improvement standpoint and comparing Q1 and Q4 you are comparing apples with apples on depreciation and the rest of the parameters.

50 million in depreciation for Q4 and then 10 million in depreciation for the first quarter. Maybe I have a different than you.

Maybe we can take that off-line after the meeting.

We have some questions on line. I think we will take those first.

Our next question is from Cameron Doerksen from Versant Partners.

Good afternoon. Just two quick questions. First on if you can update us on what the Capex plan is for the current year and could you also tell us what you expect the restructuring charges for the remainder of the year are going to be?

You saw relatively low Capex in the first quarter, around 21 million. We still stay with the target number 135 million. That will be more skewed towards the ends of the year. And on the restructuring very small charge of $1 million, we still feel that we will be at 55 million or slightly lower than that.

Okay. Thank you.

Next question is from James David from Scotia Capital. Please go ahead

Thank you. Good afternoon. Just on the Training Side, Civil, Bob, what would you consider? I know your different customers have different kind of training dynamics, but what would you consider a peak utilization level and what kind of margin implication might you see if we assume steady price in currency?

I think that when you get to around 80% you are basically at full utilization.

Okay.

So we are very close to that now.

What kind of operating leverage implication might you get if you had to ballpark a number basis point?

I don't know how I would do that quite frankly.

Fair enough.

We will think about that if there's something we can add to it but I don't want to give you an answer off the top of my head.

That's fair. On the military side, I mean a couple of years ago we had some good visibility on major contract activity. Now as we get to hear we are looking outside Germany for the NH-90 and possibly re-bidding the AVTS.

But there seems to be less visibility, at least less discussion on military visibility, so I'm just curious, given the amount of distance would you have to replenish could you speak to any potential contracts that aren't I guess obvious to us at this time?

Well, I think we've changed the approach on the military side very clearly. We are now getting 40% of our business, our backlog from the U.S. market so that's a dramatic increase from the past. And we are very much focusing on bread and butter, 80, $100 million contracts, $50 million contracts. And I think part of the issue with the past is there have been very large expectations created on large programs and there is also very large risks with large programs. So we are trying very much now in the period that we are in to improve on the backlog, modestly increase the sales and maintain the 10% margin that we have. If we see any major programs that are coming along we will be talking about them but I don't think there is much use to creating expectations that perhaps couldn't be met.

Just on-- in that sort of context do you see and clearly there's -- the PFI it's not a model in the U.S. so the capital risk is lower. Do you see decent visibility in terms of these 50 to 100 million type contracts that you can maintain a flat revenue pace, at worst case?

Yeah, we have very good visibility and I think you've seen the performance in the first quarter. They have actually surpassed the budget that we had for the first quarter from an order point of view.

That is all for me. Thanks.

Thank you.

Next question from the floor.

A couple of questions, Alain. In the quarter the contingency you released on the civil margin what was the dollar amount of that in the quarter on the civil side?

I would not have it with me. I think what happened there, like Bob mentioned, is we reviewed the program and for the program where we've reached a level of completion more than 90%, where the risk in bringing the simulator on-site were -- disappeared when we have done the integration, so on these program where the engineer has reevaluated the estimate we let it go to the POC, but the precise amount I don't have it with me. It's significant. It's not half a million but.

I think the way I would answer it, Bob, is that again we are at the early stages in the restructuring and all of the work that we've done and the initial review of all of the programs was very good. The performance against the programs was good. I want to get another quarter at least under our belt before we start talking because you can assume that we have been cautious in what we have done here. We are not going to get ahead of ourselves and that's why I don't want to talk about specific numbers.

Just to clarify you are looking for 16 orders for full flight simulators this year,

I think it's 17, actually, yes.

When you look at the full flight simulators and also when you look at your training what has gone on with the pricing if we look apples-to-apples in the last year and what you are seeing right now on just pure training without the mix variable and also on the full flight sims, what's going on with the pricing in the competitive environment there?

The activity level is quite good. We have a number of discussions underway that we are finalizing; that you are going to see. I would say that the pricing has been very tough. But with all of the measures that we've been taking we can bid competitively and have a margin, and that's been a goal and we are doing this in three phases in terms of the way that we are organizing work in the shop.

We are very much, as I said before, we are focusing on immediately what we have there now, what we are bidding on and what we can do to come up with a more modularized repeatable model that we can have that is going to make us even more competitive going forward. On the training side, I think that the -- particularly in the business aircraft segment the pricing has basically remained the same and we've been able to get our share of the marketplace.

Go ahead, next question.

Just back to the depreciation question. I noticed I guess there's three divisions where quarterly depreciation tends to move around. The commercial simulator, the civil training --

What page are you on, please?

Page 20. Let's see.

I will bring it up here. We can maybe put it up on the chart here.

Of the NDA?

26 for the civil training as well as the military training, albeit it was an unusual item in Q3 now that we see it. Can you speak about depreciation policies in these divisions? What dictates, what gets expensed notwithstanding I know some of the write-offs and that's been less but it still moves around a fair bit each quarter.

What I could say about training is the depreciation over the simulator has taken over a twenty-year period in average, depending on the nature of the beast as a starting point.

Not a per hour.

No, no.

It should only grow as you build your base.

Yes.

That begs the question about Q1, I guess, or Q4.

Training, what we will do is we will look into it and as we find the right answer to the same question I will be pleased to put the answer on the Web.

I want to make sure we understand the question. You want to know what our depreciation policy is on simulators that we use internally?

Across these three divisions. You can't have -- know.

Well it really, first of all we take the simulator, we take it from our simulation products. We are not doing any right now, but we've done some in the past and we will be doing some in the future. They get transferred over at cost basically and we would only take profit over the period of time. And we do the depreciation over, generally speaking a twenty-year period. And you will recall in the past that was 23 years was it?

It was a bit longer than that.

And as a result of all the consultations we did and we've looked at the market and we've gone at a shorter period.

I could say that as we've reported in the annual report, simulator is normally straight line over the expected life of the asset and normally I mean we see in the report it's between 5 and 25 and most likely now it's on new assets, on new simulator that we would deploy in the network, we would take depreciation over 20 years and over a shorter period if we don't feel that that platform is going to be in the air for 20 years. If you go to machinery and equipment which is more depreciation that you would find into the simulation product segment then obviously it's subject to a different policy, and again it's declining but the rates are normally between 20 and 35% so it's a write down over four years.

It was moving around a fair bit in the last five quarters.

Is it anything to do with the impairment?

There was obviously a big impact of the improvement in Q3 last year when we wrote down many of these assets. So when you looked at the following depreciation after Q3 it would be normal to see that line going down, the asset or a portion of the asset having been written down. So that would be.

You look at page 23 -- 3, 3, 3, 4, 2.3 I can understand/ Two, three, three, four, two, page 20.

And you are in --

That's right, the manufacturing.

So. Yeah, the depreciation seems to, Q4 seems to be an anomaly of 4.3.

Same for Q1 of 2005. Anyway if you can.

We will look at it and we will have Andrew make sure you all know, make sure there's an explanation. We don't happen to know it today.

We have a question on line.

Our next question is from from Claude Proulx from BMO Nesbitt Burns.

All of my questions have been answered. Thank you.

I think we are just about out of time and will want to open up the question and answer period now to members of the media.

Dave Patton, Canadian Press. In relation to your Capex spending plans and your restructuring plans for the remainder of the year could you discuss them in terms of people and sites or locations you have, particularly in Montreal, or distinguish between what's going on in Montreal and other parts of the world?

Well, I think first dealing with the training area in civil we have looked at the closing of a number of sites or rationalization of a number of sites. We've already talked about Dallas and discussions are ongoing there for the, what was the old Shriner facility. These obviously take a little, that's why you are not seeing the costs associated with them at the start of the year. We have other places that we are looking at operating more efficiently, but we have to follow certain processes which we are doing.

As it relates to people I think that it will be determined on the marketplace, but also it's going to determine what we have to do to make sure we improve our competitive, our competitive situation. And here we are looking at the implementation of productivity measures that we have underway right now and we will be taking actions on those. I don't have specific comments to make but you can be certain that we will be taking some actions over the next period to improve our competitive position and lower our costs.

If that's all the questions we have I will thank you very much ladies and gentlemen and reminds you that an archive of today's discussion can be found on our Web site at CAE.com.

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