CAE Inc (CAE) 2006 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the CAE second quarter conference call. Please be advised that 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.

Thank you. Good afternoon, everyone and thank you for joining us today. Before we begin I need to read the following. Certain statements made during this conference are forward-looking statements under the Private Securities Litigation Reform Act of 1995 and Canadian Securities Regulations. These include for example statements that our business outlook assessment of market condition, strategy, future plans, future sales, prices for our major product, inventory level, capital spending and tax rate. Such statements are not guarantees of future performance. They are based on management's expectations and involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed and/or implied from 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 result 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, 2005, filed with the Canadian Securities Commissions and the U.S. Securities and Exchange Commission as updated in CAE's fiscal 2006 second quarter MDNA dated November 3, 2005, released today.

Any forward-looking statements made during this conference represent our expectations as of November 3, 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 the remarks, we will invite questions from financial analysts and institutional investors. Once we have concluded the Q&A period with the analysts and institutional investors, we will invite questions from the media. For your convenience this conference call will be archived on CAE's web site. Let me now turn the line over to Bob.

Thank you, Andrew. And thank you to everyone for joining us today. Alain 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 second quarter operating performance. First of all, I am pleased to report that since our last quarterly conference call, we have been able to maintain the po -- the positive momentum at CAE both in terms of restructuring and the Company's underlying performance. As have you seen from our report, consolidated revenues, margins, and cash flow are all stronger than last year. Revenues, for instance, were up 19% for the same quarter last year, while earnings from continued operations increased by almost 40%. We also have been successful in restoring the health of our balance sheet, with net debt down to $250 million, from $630 million last year. We are continuing to invest prudently in growth opportunities and we have been able to manage our capital expenditures efficiently.

We feel we are making good progress toward reengaging our employees. In mid-October we hosted an open day -- an open house day in Montreal for employees and their families. Approximately 3,500 people had the chance to learn more about the leading edge technologies that underpin our business, giving employees an opportunity to renew their pride in CAE. We have also introduced an improved employee stock purchase plan, one that we hope will make share ownership both more attractive and more accessible. Giving employees a greater opportunity to take ownership in CAE also means giving incentives to management in the most effective manner. I mentioned to you back in February the return on capital and the generation of free cash flow were to become priorities at CAE. Our new EVA based incentive program is now in place.

Fiscal 2006 remains a transition year for us. But we are encouraged by the progress we've made to date. We are already seeing the benefits of our restructuring efforts in our improved results. Looking ahead to next year and beyond, it is apparent that we will have a more solid foundation on which to grow our business. I would now like to review some of the noteworthy recent developments and achievements in our civil and military business segments.

In simulation products, civil, we are finding ways to be more efficient to improve quality, increase standardization, and shorten cycle times. We remain on track to meet our 14-month delivery target for civil simulators by the end of this fiscal year. New orders booked during the latest quarter include five full flight simulators. And with two new full flight simulator orders announced last week, our year to date orders stand at 13. Based on the opportunities that we see ahead of us, we now expect a total of 20 orders for the year as a whole. In training and services/civil, we signed a number of other multi-year aviation training contracts for centers in North America and Europe, including a 10-year agreement with Virgin Atlantic Airways to provide pilot training for the airline's entire fleet of Airbus A340 and Boeing 747 aircraft. I would like to note that in October, CAE and China Southern Airlines jointly agreed that we will be expanding our JB facility in Suhai, China to accommodate future growth. We have also begun the construction of our new northeast business aviation training cent -- facility in New Jersey with completion slated for the middle of calendar year 2006.

In terms of restructuring efforts, we are still working to rationalize our footprint in training. A number of facilities are slated for consolidation an we are working within -- with governments and employees in Europe to move these plans forward. Military orders for the first half of the year are meeting our business plan. And we are involved in a number of discussions related to further orders for the remainder of the fiscal year. With that, I will ask Alain to take you through some of the financial highlights. Alain?

Thank you, Bob. Good afternoon, ladies and gentlemen. I will begin with the big picture and then proceed to look at our Q2 results on the segmented basis. Consolidated revenues from continuing operations grew sequentially by 5% to 280 million, compared to 266 million in our first quarter. Earnings from continuing operations for the quarter ended September 30 were 17.8 million, or $0.07 per shares. Excluding nonrecurring items, earning from continuing operations for the quarter were $0.08 per share, compared to $0.05 for the same quarter last year, and $0.08 in the first quarter this year. Year-to-date earnings from continuing operations were $0.15 per share compared to $0.13 for the same period last year. Excluding non-recurring items, year-to-date earnings from continuing operations were $0.16 per share, which on the same basis compares to $0.09 in the same period last year.

Despite an even stronger Canadian dollar during the quarter, versus the U.S. dollar, the Euros, and the British pound, we have generally been able to carry over the positive momentum we began to see in the first quarter. Our cash position continued to improve. Net cash provided by continued operations totaled 53.8 million in Q2, compared to 21.8 million in the first quarter. CAE's free cash flow was 18.3 million for the quarter, compared to minus 2.1 million in the preceding quarter. The result is that our net debt continued to decline from 282 million at the end of June, to 250 million at the end of September. Income taxes tend to vary between quarters. In the second quarter, income taxes were 5.9 million, representing an effective tax rate of 25% compared to 22% last year and 33% last quarter. The situation results from changes in the mix of income for tax purposes coming from various jurisdictions. Despite the variability, we are still expecting a 31% effective income tax rate for the fiscal year as a whole.

As I have done in the past, I would like to explain how the non-recurring items have impacted the result of the quarter. Our results include both an after tax restructuring charge of 1.5 million and the write down of 700,000 for different financing costs related to the early retirement of our former credit facilities. These two non-recurring items combined reduced earnings per share by $0.01. So, our normalized underlying earnings per share were $0.08. To date, we have expensed about 30 million related to our restructuring program. While further amounts remain, these expenses can only be recognized as they are incurred.

Let's now look at some financial highlights for our various business segments, starting with our two civil businesses. In training and services civil, there were a number of positive developments during the quarter that maintained the positive momentum we saw in the first quarter. Revenues were 11% higher than -- than the same period last year because of increased demand for training from customers and because we've expended our network by two simulators over the course of the year. Revenues were 5% lower than the first quarter, which is consistent with the seasonality normally associated with the segment. The second quarter is the summary period, and it is -- and -- and it is normally a slower period for training.

Average annualized revenue per simulator was 3.2 million in the second quarter, compared to 2.9 million in the same quarter last year, and 3.4 million in the first quarter. Operating income of 11.6 million was 63% higher than the second quarter last year, because of the higher volume of business going through the network. Lower amortization expenses also contributed to this increase. Operationally, the business is performing better on a year-over-year basis, with an EBIT margin of 14.6%, compared to a single digit a year ago. The declining EBIT, from the first quarter was due to a number of factors. As we have seen, there is a high degree of operating leverage in this business, due to the high fixed costs of training network. So EBIT margins will always increase or decrease due to seasonality another factor which impact training volume.

That said, with the reduction in the revenue, we saw a proportionate drop in income. Then in addition, foreign exchange fluctuation and a higher corporate cost allocation have a negative impact on earnings.

Now, staying with our civil business, but turning to the product side, in simulation product civils, revenues were 6% lower than Q2 last year and 7% lower than last quarter. This has a lot to do with differences in the mix of programs and their stages of completion, as we go through the transition year. Operating income saw a healthy 48% increase year-over-year that is largely explained by productivity gains we have achieved in certain manufacturing activities. This is a direct benefit from our restructuring efforts. Operating income was 3.4 million, or 6.1% of revenues, a decrease from 7.1 million or 11.8% EBIT margin recorded in Q1. The decrease is due to some factors that we anticipated and other that we had not.

There were two items that we expected. First of all, Q2 falls into the summer relative period when there is less activity in the plants because people are on vacation. Second, the mix of program in the preceding quarter was quite different with the higher concentration of deliveries. The first quarter performance also benefited from successfully reaching important milestone on certain program. The one factor that had the single biggest impact on performance resulted from our decision in the second quarter to accelerate the amortization of develop -- of development costs related to PC image generators. This resulted in -- in a non-cash expense, sorry, of about 1.8 million. Excluding this charge, operating income would have been 5.2 million, or 9.3% of revenue, a big improvement over last year.

Now, turning to our military businesses, training and services military revenues for the second quarter were 15% higher than last year and 3% higher than last quarter. Segment operating income of 5.4 million was in line with last year. EBIT margin in the quarter was 10.7%. And in the preceding quarter, EBIT margin excluding a one-time charge of 4.4 was 13%. The decrease in EBIT margins quarter-over-quarter was the result of negative foreign exchange impact. Simulation product military revenues were up 58% from the second quarter last year and up 30% from the first quarter. Performance improvement were due to a high order intake in the first quarter, and the recovery on delays that had been affecting performance on some of our North American programs. The year-over-year increase results from a compe -- competitively higher backlog, including the German NH90 program. Operating income of 9.7 million was up 35% compared to Q2 last year. The segment's EBIT margin was 10.3%. In the preceding quarter, EBIT margin, excluding a one-time charge of 1.5 million, was 8.7%. In Q2, operating income benefited from higher revenues, and cost savings realized on simulator manufactured in Montreal offset somewhat by lower initial margin on NH90 program. With that summary of our financial highlights, I will turn things back to you, Bob.

Thanks, Alain. In my earlier remark, I focused on how we have been working within CAE to improve our profitability, cash flow, and return on capital. I would like to provide some additional outlook for the balance of the year and comment on the market environment. Market conditions continue to be strong for business aviation and despite lingering uncertainty over the financial condition of legacy carriers in the U.S., the civil aviation market is continuing to show signs of improvement. Airbus and Boeing's combined orders so far this year have passed the 1,000 aircraft mark. While we use a more conservative figure in our own forecasts, it is conceivable that both OEMs will see demand for aircraft in the range of the last cycle peak.

Overall, international air traf -- air traffic is up, some areas, such as South America and the Middle East, are recording double digit increases. This is noteworthy given that Middle East carriers alone are now account for about 7% of the total world backlog for large commercial aircraft. Even in the U.S., there is some good news. U.S. mainline passenger traffic is growing in line with normal historical long-term growth rates. And passenger traffic for regional airlines has continued to climb at a robust clip.

Oil prices continue to be a cause of concern for the world airlines. IATA now predicts that losses could now reach $10 billion this year if oil prices average 70 -- $70 a barrel. However, these losses are likely to be concentrated at a relatively small number of large U.S. airlines. While we don't know precisely how long it will take for a more financ -- for a more financially healthy U.S. airline market to emerge, it is hard to imagine a situation that gets much more urgent than one with three quarters of the legacy carriers in Chapter 11. I should note that U.S. legacy carrier fleets are relatively old, and they should eventually need to reeq -- reequipped to be competitive. Particularly with the strain of high oil prices.

Military budgets globally are generally expected to remain stable, with modest increases in some countries in the range of GDP growth. In the United States, by far the world's largest defense market, budgets are under increasing pressure following years of significant increases. The U.S. Department of Defense 2007 budget request is approximately $430 billion, still a massive budget, but only 2% higher than in 2006. A positive trend, however, for the simulation and training market, is the U.S. military's increasing acceptance of simulated training over live training. Simulation is usually more cost effective and generally provides a more effective training experience. Also, with the U.S. military's high operational demands, fewer real aircraft can be allocated for training purposes. This is not only translating into more demand for new simulation based training products but also means we are seeing more and more near-term opportunities in the simulator upgrade market.

From a services standpoint, we see a continuing trend among defense forces globally to outsource non-core activities while focusing their personnel on operational requirements. We believe CAE is well positioned to secure training service and professional service businesses -- business as we go forward.

As for the balance of our fiscal year, I said earlier that we now expect 20 full flight simulator orders. We said last quarter that the company would record a lower EBIT margin than simulation product/civil in the second quarter and we did. We also said that EBIT margins should trend back into the low double digits by the time we exit the year and this is still our view. We are encouraged by the progress that we've made in training and services/civil, and we will continue to drive efficiency gains throughout our network. All things considered, we expect EBIT margins to improve from the second quarter over the balance of the year.

In the military segments, we have a good number of active bids, and we expect that we will win our fair share of programs. At the outset of our restructuring we emphasized the need to protect our technology leadership. We will continue to work hard toward our goal to sustain low double digit EBIT margins in military. But this will be challenging, since a certain amount of R&D spending is necessary to maintain our technological edge.

On that note, I will wind up my remarks by repeating that our strategy remains in intact and our first half results are consistent with our initial outlook for the year. We have already seen some positive results from our restructuring, but physical '06 remains a transitional year for the Company. More work remains to be done and we continue to expect some sizable restructuring charges during the second half of the year, particularly during the fourth quarter. Going forward, our success will depend on maintaining a disciplined approach and continuing to build on the current positive momentum. Simply put, that entails implementing sound business processes and sustaining a stronger balance sheet through free cash flow while protecting our technological base. Our underlining goal, in all of this, is to provide a solid, restructured earnings base that will service a platform for growth and the creation of shareholder value in fiscal '07 and '08. Thank you for your attention, I think we're ready to take questions now, Andrew.

Operator, we'll take our first question from investors and analysts.

Thank you, Mr. Arnovitz. There will be two question periods. The first one will be for the analysts only and the next one for the media. We are now opening this question period for the financial analysts only. (Operator Instructions) The first question is from Ben Cherniavsky from Raymond James. Please go ahead.

Good morning and congratulations on continued improvements. My first question, let me just start off with a -- with a clarification there. You mentioned that there was a -- a charge, if I heard you correctly, of $1.8 million for accelerated depreciation of your image generators. Is that part of what you normalized into your $0.08?

No.

Alain will answer the question.

No, Ben, I've not normalized that item. It would have been a regular operating expense. The fact that I've -- that we've changed the estimate over the number of IG to be sold is, you know, is simply normal natural operations. So no. The answer is --

But it -- but it -- sorry, but it doesn't -- that doesn't mean there's an extra 1.8 million in the future, does it, per quarter?

Absolutely not.

No.

Okay.

This is a case, Joe, I'll make sure we -- we explain it here, that we're the technological leader in this particular segment. And we're continually upgrading our -- our IG's and so what we've done here is we've re -- reduced the number that we're going to sell with this particular technology and given that we have an install base, we feel we're going to be able to do that, but we also are developing new technologies that we're providing to the market. So it's just a one-time adjustment that we're making.

Right. And so if you want to go get a -- a read of -- of margin trend, do you have to sort of normalize for that?

Yes.

Okay. And any comment on your utilization rates in the commercial simulation training business?

Yes, we're down a little bit in the second quarter. I think down around 74% versus the -- the 75, 76 we were at in -- in the last -- last quarter. But ,you know, that's quite frankly, it relates to seasonality, but it's less of an impact than -- than we expected to have.

So year-over-year, you're still out.

Yes.

And finally, good to see your -- your cash flow, particularly your free cash flow, falling back into the black. Any -- do you -- do you see yourselves in a position to be more acquisitive, and is there any -- if so is there anything out there generally speaking that -- that interests you?

Not at this point, Ben. What we're -- we're still focusing very much on the -- on the restructuring that we're doing. And how we can position ourselves in the market from a -- from a cost point of view, and improve efficiency in the -- in the training area and I think maybe by the time we get to the end of the year we'll be able to comment but right now all of our priorities relate to execution and making sure that we have a solid base going forward.

Great. Thanks very much.

Thank you. The next question is from Robert Fay from Canaccord Capital. Please go ahead.

Great, couple of questions. On the military side, you mentioned that your R&D spending is going to go up by the -- over the back half of the year. Do you have any numbers for that that we can expect to see in the results?

I don't have specific numbers, Bob. I -- you know, we're still -- we still stick to our low double digit margins, particularly as we get to the end of the year, but you know, this business is a bit lumpy, and it will depend on the -- the contracts that we win and -- and the contracts that we're executing during the -- during the period. So, we stay very much with the -- the objectives that we -- we've laid out, but we're -- we're not -- I don't think we'll provide a specific R&D numbers.

Okay. Thanks. On the NH90 program, you're in the construction phase of that program now. Can you talk a little bit about how this program specifically is going to affect your equipment revenue and your training revenue and the timing that that's going to come into the numbers?

We have two involvements, as I think you're aware. One is as a prime. And the other is with -- is in the -- we have a build consortium that we have with Dallas where we actually build the simulators. So you're going to see -- there's a number of orders that are coming forward, I think Germany is the first one, but there's others that will come, particularly from European countries initially, so you'll see an uptick, probably starting next year, as it relates to the -- to the NH -- NH90, in a modest fashion, and then building up as we get in -- into future -- into future years. So yes, I think it's going to have a positive impact but not in the immediate short term.

Okay. But when you look at it initially, the equipment build, and the revenues from that versus the training, could you give us an idea how that's going to time out? As we go forward?

Well, the equipment build will depend on the winning of -- of contracts and it will likely will be over a -- a three-year period.

Okay. And then the training contract, when does that start to click in on the -- on the NH90.

That normally comes after the award of the -- of -- of the hardware that you will normally have the award of the -- the training contract. So it will be in sequence with that, but followed -- probably follow over the three-year period and -- and going on beyond that.

Okay. And a question for Alain. There's a note in note 3 about -- that on November 2nd, you received a notice from the buyer of the forestry systems.

Yes.

What -- what's the situation with that?

Well we've -- we've got the package yesterday, Robert. It was the -- the end of the earn-out period. So the buyer notified us that as per their calculation, there's no amount to be paid to CAE, so we going to investigate that in the next couple of months and we'll report back to you in Q3 in regard of is the receivable still valid or not.

Okay. Okay. Thank you.

You're welcome.

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

Thank you. I just wanted to follow-up on the NH90, Alain, you made comments earlier when you talked about margins that as you get -- you're in the early stages of the NH90 and therefore the margins are lower at this point in time, when would you expect them to sort of get to normalized targeted levels?

Okay. What we meant by that, Marko, was in the build phase, we're prying (ph) with Dallas on manufacturing the equipment. There's other member also that participate in that program so because of our prime role, we cannot apply our full margin on that, so that's why to a certain extent we've made the comment about the margin, and when we get into training then we'll get the regular margin we're used to see in training in three years like Bob said a few minutes ago.

Got it. Okay. That's fine. Just wanted to -- Bob, when had you initially outlined your restructuring plan, you identified certain -- you know, the savings and amortization, as you wrote the assets off, and also some expectations in terms of what you might achieve from manufacturing efficiency initiatives. Can you sort of give us a sense of where you are in that process, how much of those gains that you had initially hoped to get you've already seen, and how much is sort of still to come?

I think the first one I could talk about, I mentioned briefly in my remarks, was the cycle time, where I'm -- several simulators, we were at about -- at about 20 -- 20 months. And I feel quite confident now that we're going to be at our 14-month target by the -- by the end of the year. So that's, you know, that has a lot of impacts relating to -- to working -- working capital, and just generally to cost. We've also now have in place a very strong team in the program management area, manufacturing, and in our global sourcing. So we've sort of have taken the -- what I'll call the -- the items that we could attack initially in our wave one, which I think that we have done now, and we're getting very well organized as it relates to the global -- global sourcing activity to see what we can do to -- to reduce costs. So, I don't want to say exactly what we've done, but you're seeing the benefit of some of that in -- in -- in the results that we have -- have reported, and I think that there's still quite a way to -- to go here in terms of improvements that we can make.

Okay. So it sounds to me like you put the building blocks in place, but given that that takes time, you haven't actually seen the full benefit because you're still talking about like an exit rate number, so like Q2 doesn't really have a lot of the -- the financials flowing through as more, you're getting yourselves set for that. Would that be fair?

I think it'd fair to say we've grabbed all the quick stuff we can and we -- at the same time we've been putting in place the building blocks to be able to -- to improve on the result going forward.

Okay. You mentioned I think in your comments, I want -- I just want to check this, that you and China Southern agreed for an expansion of the Suhai facility in October sometime?

Right.

So this would have been subsequent to your August 25th press release of the simulator for that. Or is that sort of in conjunction with that?

It -- it sort of relates. I mean --

But you guys are -- that was a 10 base facility, was it not and now it would have been your 10th in there, so are you now expanding it to more base?

Yes.

And how many would that be roughly?

I don't know exactly. I think these are very -- I think it is maybe six to eight base, something like that.

On top of the 10?

Right.

Okay.

But let us get back and verify that for you.

So that's a pretty substantial commitment then?

I think there -- yes, it is quite a commitment we're making.

Okay. My last question, and I'll get back in line, your -- your orders came down this quarter versus last one, I know it's -- your military business is very lumpy, and you made comments about that, but I noticed that the deposits on contracts ballooned. And if I'm correct in my numbers, I don't think you've had such a high level of deposits going all the way back to Q1 fiscal '03. Was there some like singular unique payment that in contract that happened or is there some trend that is starting to develop that we should be aware of?

There's no -- there's no specific balloon. It's a -- a discipline on our part in terms of the way that we are -- are contracting in general. And the focus, the change that we've made in the culture in terms of focusing on -- on cash.

So this is a new higher level for you?

It's a new higher level. It's an approach that we hope will continue in the future but something that we're paying very close attention to and monitoring our working capital.

Congratulations. Well done. Thank you.

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

Morning, Bob. Bob, I'd like -- I'd like to follow on with Marko's question, in terms of the deposits on contracts, back in '02, deposits on contracts at CAE were in excess of $200 million. They fell to under 100 million. And so far, this year, you've taken them up approximately 50 million. Is that 50 million in the commercial area or the military area? And do you think you'll continue to trend back towards where the Company was three or four years ago?

Alain.

Well, the first clarification maybe to help everyone is deposit on contract represents all the sum we've received ahead of the spending curve. So it's not necessarily the first payment, but as you know, as we get milestone, if we've not spend that cash, that what would be represented in -- in that account. So, as a first point, and the amount you see on -- on the balance sheet, Richard, is for the fourth segment. What I could point out to you is when you go and send product Seville, you now see that their working cap has now went to a negative position, which is very good, and it's more in line with what we were used to see in this business. So reinforcing the point that Bob made earlier on, it's -- it's the discipline in managing the cash and the installment, and-- and , billing and collecting at the right time. And meeting -- meeting the milestone also helps.

Thank you. Second question relates to some of the major programs that are out there. In -- in particular, the Airbus programs, the 350, the 400M, we haven't seen any simulator orders there. Bob, when -- when do you think you might see the industry bidding on those programs?

I'm not quite sure, Rich. I think that we may see some -- I don't know. My only -- my -- my estimate would be towards the end of this year, but more likely the first quarter of next year.

Thank you.

You're welcome.

Thank you. The next question is from Cameron Doerksen from Versant Partners. Please go ahead.

Good afternoon. Just a question on the simulator network. Just wanted to clarify that the -- the revenue simulator equivalents at the end of the quarter was -- was at 98?

Let us just check our -- our numbers here. The equivalent number of simulators, Andrew was --

I believe that was 99. Give my one second.

Or do you think -- could you go on to your next question, please? We think it's 99 but we'll come back and check and verify, that okay?

Okay. And I guess on a related point, just wondering where you think that will be sort of at the end of this fiscal year?

I don't know exactly. Let us check that and if we can get that during the call, we'll -- we'll give you the number, okay?

Okay. One other question, just to I guess if you can maybe expand on the opportunity you have, you partnered with EADS on the -- on the U.S. military LUH helicopter program, bidding for that. I'm just wondering what the potential opportunity is for CAE, I guess from a -- from a revenue point of view?

I'm sorry, I can't give you a good answer on that. I'm not familiar. I don't -- didn't prepare for that today. But that's -- I'll ask Andrew to get back to you on that if I can as well.

Okay. That's great. That's all I had.

And if I can confirm that, it's 99 simulators that -- the equivalents that we have right now.

The average at the end of the second quarter.

Okay. That -- that's all I had. Thanks.

And before the next question, if I can -- I think Marco Pencak asked the question, the new facility is slated to house six simulator bays in Suhai.

Thank you. The next question is from Robert Fay from Canaccord Capital. Please go ahead.

Just one more question, Bob. Generally talking about the civil aviation, or civil sim business right now, we've seen Tallis (ph) becoming a little more aggressive and they were successful with the -- the contracts with Boeing and Alteon (ph). What -- what do you think are the longer term implications of that for CAE?

Well, you know, I think it's -- but it's a competitive market. They're -- they're a good competitor. And I think that we've had a very good part of the market here, and I see it being competitive, but I -- I really feel that we're going to be able to -- to hold our -- hold our own here, and, if I look at the 787 as an example, we've already launched our 787 simulator, and we have assurances from Boeing that they want to have two competitors and that they want to make sure that -- that we're involved, and our customers are also telling us the same thing. So I think we'll just have to see where it goes. But I don't see it as a big concern.

Okay. Okay. Thank you.

Thank you. The following question is from Marco Pencak from GMP Securities. Please go ahead.

Yes, thanks. I just wanted to push on the -- the military side, again I know that there are a lot of variability, you've talked a little bit about the U.S., what about prospects outside the United States for -- in terms of military contracts?

I -- I think there's some good possibilities for us in Europe. We've seen some developments in -- in Asia as well. But I think the -- the U.S. market is certainly very -- very strong for us, and there may be some modest opportunities for us here in -- in Canada.

So would you antic -- I mean I know that one of your -- the strategic focuses of the Company going back quite a ways and even one that you rearticulated was to increase the share -- or the proportion of the U.S. business in your -- of your military overall, would you continue to anticipate that the U.S. market would be an increasing proportion of your overall military business going forward?

Well I think the U.S. is about half of total world military expenditures. And right now, in our business, it is about 40%. So we still got a little bit to -- to grow to, if you want to look at that -- that particular -- particular ratio, but probably not see the very large growth that we've seen over the last three or four years.

Okay. Thank you.

You're welcome.

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

Thank you. Just one question for me. Bob, when you talk about in your MDNA at the end of this year, looking to rationalize the training wet -- network, that's not new, but have you guys come any closer to being able to give us a sense of the 108 simulators you have out there, once you rationalize it, will it be down 10%, whatever the number might be? And -- and a guesstimate as to what might be involved from a cost perspective? Which I would assume would be a one-time item, in Q4, or perhaps Q1 of '07.

I think that assumption's right, Ron, except that I think what you'll see is a rationalization of buildings and locations, not of simulators. I think we've already done the -- already done the simulators.

Okay. Thanks.

Thank you. The next question is from James David from Scotia Capital. Please go ahead.

Thank you. Good afternoon. Just on the military front, in the -- in the quarter, we saw a decline in the backlog, and you did -- you did mention some -- not -- I -- I suppose I'll use the word caution on just that the second quarter was exceptionally good on a -- on a revenue and margin front. Are you -- are you at all reflecting in your comments any concern about the timing of new awards, because we are in a -- in a period where you've had a -- a revenue burn in excess of -- of -- of order activity.

No, not at all. I think here that we're -- it's just -- it is a quarter where you're having to burn a little bit more than you take in, but given this business, that's not unusual at all. There's no special signal being sent here at all. I think it'll all even out as we get through the complete year.

Okay. So would it be fair then, Bob, to say you have reasonable visibility on a -- on a -- I mean you've talked about your strategy to go not so much aiming for the large contracts, but you know, sort of the U.S. military in the -- in the range of 40 to 50 do you have enough visibility there that I don't have to worry about the backlog progression through the balance of the year?

Well, I -- I think what I would say is we've got enough visibility on the work that we have, and the -- the bids that we have in place, and our -- our opportunities to have a certain win ratio in doing that, that should allow us to be able to -- to meet our target for the end of the year.

Okay. Thank you. And just as a follow-up to that, in terms of the bidding activity you're seeing, specifically with respect to the U.S., what -- what is your impression of the -- the nature of the competition right now? Is -- are there more -- more chasing less? Is there the same chasing less? What --what is the dynamic there and how is that translated into your -- into your expectation for pricing on -- on in -- incremental contracts?

The way I see it, I mean it's the -- the same people chasing the contracts. What we have done is we have reinforced our marketing and sales group, and we're -- we're chasing and -- and making more bids than -- than -- than we have in -- in the past, and you know what we really experienced is that the biggest factor may not be price, it's technology. And I think that here, we have a distinct advantage over a lot of our -- of our -- of our competitors. So you know, I -- I see that we've -- we've -- we've got a very good shot here as it relates to the -- the rest of the year.

Okay. Many thanks.

You're welcome.

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

Sure. Thank you. Two questions. First of all, with regards to the -- do you expect sizable restructuring in the second half of '06, Bob, does that include the -- the consolidation of the civil training facilities? I know you said some of those may be in '07.

Yes, we're trying to get as much as we can done before the end of the -- of the year. That's what it relates to primarily, and it also relates perhaps to some processes that we're putting in place in the Company.

So thi -- those will be -- those will be broken out as one-time restructuring charges?

That's correct.

Okay. With regards to the historic numbers that you provided on depreciation and amortization, why -- why the difference between the -- the quarterly results -- the histor -- past quarterly results that were disclosed in the second quarter, the difference between that and the ones that were disclosed in the first quarter? There -- there -- some of them have -- let's say Q -- the -- the fourth quarter training civil depreciation numbers were considerably different between this quarter -- between the numbers that were disclosed this time and the ones that were disclosed in August.

In term of -- in term of amount?

In terms of amount. Like this quarter, it said it was 10.4 million and last quarter you said that number was 15.3 million.

Okay, well I'm not too clear.

Can you give us a page on that that we can refer to?

Certainly. If you look at -- hang on for a sec, it's in the -- it's in the MDNA under the civil -- let's see now, the civil training discussion, whatever page that is. Okay, it's on page -- this quarter it's on page 26, Q4 '05, 2.4 million depreciation and amortization, and then last quarter, if you go to page 26 is that same number is 15.3 million.

Okay. Well --

And they're -- they're all different by and large, but I mean this -- this -- this difference is considerable.

Honestly, you are at a stage -- I'm not too sure but we'll look into that and we'll get back to you one --

Or we'll put a -- put a note out to everybody to explain it.

To explain that if there's something significant there.

Okay. Okay. And Bob, finally in terms of the military products, you said that the -- the second quarter number, while high may -- won't be as sustainable in Q3, what -- what's a reasonable estimate, somewhere between Q1 and Q -- and Q2's number?

I think we still have a shot at the -- you know, the -- the -- the double digit. It's just the --

I mean the actual revenues itself. Not -- not the margin.

The revenues, I can't really -- I can't really predict. It will depend the rate at which we do the -- the -- I guess the completion of the work. What I'm focusing on more now is where we're going to be at the end of the year, and I think that we're going to have quite a good number.

Okay. Lastly, in terms of cap ex, Bob, what -- what's a reasonable estimate for -- for this year? I know you said it picks up in the back half of the year. I'm at -- I'm at 135. That seems high given what the -- what the first half is.

Yes. I know that we're lower than we expected to be at this stage, but you know, this is something we've been managing very, very carefully. We -- we said we would do that, I think you're going to see a pickup in the -- in the back end of the year. I'm still staying with the number of 135 but it will have a lot more visibility when we report Q3. I think I'll have a -- a better idea of where we are. We're not going to go over the number. I can tell that you.

Okay. Thanks -- thanks so much.

You're welcome.

Thank you. The next question is from Alain Walieu from ASC Capital. Please go ahead.

Thank you. My question is on the impact of exchange rates. You've indicated that the U.S. dollar and the U.K. pound and the Euro have gone against you recently but were you protected by hedges so my question is, as those hedges expire and assuming exchange rates remain where they are, what could be the impact on earnings? Thank you.

I don't think that there's a big impact here. We basically they've moved 5 -- each of them has moved 5 to 6% in the last quarter against the -- the dollar and we've been able to -- to absorb that. All of our contracts are hedged, you know, at the time that -- that we signed the contract, so that's not going to be a factor. It's -- it's basically bidding on new -- new -- new work. We have to take into account the -- we have to take into account the exchange rate at the -- at the time. So it's really not going to have a big impact on the results. It's more on -- on future activity going forward.

And is that an issue in bidding for contracts at the current exchange rates?

Well, it's a reality of life and what we're doing is working very hard to reduce our costs so that we can maintain the -- and improve on the margins that -- that we have. It's something we have to accept and live with.

But you will have reduced your costs anyway, so my question is, does -- does that affect your business plan for the next 12 months, let's say?

No.

Not really?

No.

No. Good. Thank you.

You're welcome.

Operator, we have time for one more question before we turn the call over for journalists.

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

Yes. Hi, Bob. You mentioned that you had started work on 787 simulators. Have you got any orders for 787 simulators as yet?

No, not at this point, no. I think, you know, it takes -- it'll take a little time, Richard. I don't see that as being an issue.

Thank you.

You're welcome.

Operator, thank you. We'll now turn the call over for journalists.

Thank you. So we're not -- we are now opening the question period for the media. Again, please press star one for any questions. If you need to ask -- if you wish to cancel your question, please press the pound sign. The first question is from Mahi Tison from Le Pres. Please go ahead.

Hi, Mr. Brown.

Bon jour.

[Speaking in French]

[Speaking in French]

[Speaking in French] Merci.

Thank you. The next question is from David Pedens from the Canadian Press. Please go ahead.

Yes, I just wanted to get more of an update on the restructuring and you mentioned there that there will be a lot of activity in the second half, mostly in the fourth quarter, it sounded like. And I just wanted to double check, related to the announcement of 450 jobs that was made in February is, that completing that? Or is it something beyond that?

Yes, I think in terms of our restructuring program, we signalled in February when we made the announcement that we would have about 55 to $65 million of expenditures related to restructuring and we have subsequently said we would likely be at the lower end of that, the 55 million. We announced 450 layoffs associated with that. And all of those layoffs are completed. So all of that has been expensed. What it relates to -- what I'm signalling again to confirm to the market what we already said previously is that there are further rationalizations to take place, that we talked about previously, were related to some redeployments of -- of simulators and the rationalization of a number of -- of sites in the United States and in Europe. And that's what those -- that's -- I'm just confirming and reminding people that that's going to take place in the fourth quarter.

Yes, so that -- that part was more the -- the locations rather than people or equipment?

That's it exactly.

And have you said how many locations?

No, well, we've talked only I think about -- about Dallas. There's one facility there that -- the old Shriner facility that we're going to be closing, and we have not been specific in -- in Europe.

And on market opportunities, in Canada, maybe we could deal with it both from a civil and a military point of view, you said that there's some small modest, I guess the word was, opportunities in Canada. Can you be more specific?

Yes, what I was talking about there is the -- the military there's the -- the CSAR, the reconnaissance aircraft project that's coming -- coming up in the next period of time, I think -- and there's some smaller -- smaller services contracts related to -- with the servicing of simulators. That's basically what I was talking about.

And on the civil side, what opportunities might there be with Air Canada, West Jet, or the other --

They're bo -- they're both very good customers of ours. And I don't see anything specifically. But --

Well, Air Canada is working on buying new Boeings and the timing isn't too clear of what -- what they'll get but would you bid on that after they make their order or what?

Yes, I would -- I would assume that that's -- I just read about that yesterday as well. I would assume that that's what we -- what we would do. But our relations are good with both of the -- of the customers, and we'll -- we'll do what we can.

Okay. Thank you.

You're welcome.

Thank you. Your next question is from Peter Adical from The Gazette. Please go ahead.

Good afternoon. I'm just wondering if you could -- if you -- if you look ahead, Mr. Brown, given your concerns about the health of the commercial airline market, particularly in the United States, do you see more -- more of the growth coming from the military side of the business or the commercial?

I think, Peter, we have a chance on all sides. We -- we have not had an order for a simulator from a legacy carrier in the United States since September 11th. And so we have built our business, and all of the growth that you've seen has basically been from Europe, Asia, South America, a little bit in -- in -- in Canada, and from the low cost carriers in the United States. So I think, you know, there's a couple of things to -- I think that that growth will continue in the civil segment. And I think as well that the legacy carriers at some point are going to have to get organized as Air Canada has done to -- to lower the -- you know, to lower their cost, particularly given the price of -- of -- of oil, and to find a way that they can reequip, and so it's more a matter of timing of when that's going to occur, rather than if it's going to occur. So that's where some potential growth could come from in the civil segment.

I think from the middle -- from the military side of the business, we have to be practical here, we are in Canada, it's a -- we're bidding based on our technology into -- into foreign markets. And here I think that we can -- we see see some modest growth. So I see -- I see growth in all of the segments, but you know, I think that the civil segment and particularly the business aircraft segments that are areas that could be potentially strong for the next couple of years.

Just one follow-up if I could. You talked about your desire to improve basically profitability and execution on contracts. Can you talk about the subjects of margins in general and where you want to see margins go?

Well, you know, I think that we've outlined in general terms the margins that we're looking for in all of our businesses. The military business I think having a low double digit margin, the 10% that we've been achieving, if you look at other military businesses you'd find that that margin is very, very good, normally -- and that's because of our technology, we're able to get that. You'd find generally they would be in the 7, 8, 9% range with other large military contractors so I think we're doing quite well there. On the civil side, if you look at the simulators, you know, this is a business that a year and a half ago basically we weren't making any margin at all. And Mark Beton (ph) his team have done a great job in the first quarter. We got back to a 10, 11%, we've gone down a little bit, but on a normalized basis, we're around the same. I think we'll make some incremental improvements there. And in the training business, as well, with -- with Jeff Roberts, I think that he has done a -- a -- a very good job, and you're seeing some of the -- the efficiencies that we've built into -- in -- into our training business, are starting to -- to pay off, and we've been in margins around the 20% or slightly less.

Thank you.

You're welcome.

Operator, I think we'll close the call at this point. I want to again thank all participants for their time and to remind everyone that a transcript of today's remarks can be found at CAE's Web site at www.cae.com.

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