CAE Inc (CAE) 2006 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the CAE third-quarter conference call.

Please be advised that this call is being recorded.

I would now like to turn the meeting over to Mr. Andrew Arnovitz. Please go ahead, 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 about our business outlook, assessment of market conditions, strategies, future plans, future sales, prices for our major products, 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 risk and uncertainties, any of which could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. The results or events predicted in these forward-looking statements may differ materially from actual results or events. For a description of risks that could cause actual results or events to differ materially from current expectations, please refer to the risk factors section of CAE's annual information form for the year ended March 31, 2005 filed with Canadian Securities Commission and the U.S. Securities and Exchange Commission, as updated in CAE's fiscal 2006 third-quarter MD&A dated February 14, 2006, released today. Any forward-looking statements made during this conference represent our expectations as of February 14, 2006 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 their remarks, we will invite questions from financial analysts and institutional investors. Once we have concluded the question-and-answer period with analysts and 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 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 third-quarter operating performance.

First of all, I'm pleased with the progress that we've made since the launch of our restructuring program one year ago. We've worked our way through quite a few challenges over the past year, and we've continued to maintain positive momentum, both in terms of restructuring and the Company's underlying performance.

On a year-to-date basis, our revenues up almost $100 million over the first nine months last year. Excluding the nonrecurring items, we have nearly doubled our year-to-date earnings to $0.25 per share. Our operating margins are improving overall, and we are demonstrating that we can generate free cash. Net debt of $209 million is less than 40% of what we owed at this time last year. These are all good accomplishments, but we're still in a transition phase with a great deal of work ahead us.

Our restructuring has already addressed the way in which CAE is organized, the way we operate, and the business processes we depend on to maintain our competitive edge. Even though we remain cautious, we are encouraged by the results we see. The reorganization of our business into four reporting segment is paying off. We are now doing more with fewer people at a lower cost. We also see more synergies and better alignment with our four groups. Each segment is now responsible for meeting performance objectives around its own P&L and balance sheet.

During the quarter, we announced the launch of a six-year, $630 million R&D project called Project Phoenix. It is the largest R&D initiative ever launched by CAE. The goals are to improve our current leading-edged technologies and to develop new ones in order to maintain CAE's position as the world leader in simulation, modeling, and related services. This initiative effectively replaces a number of similar development programs that had earlier run their course.

I'm pleased to announce that CAE has been awarded a contract to provide a full flight simulator to Saudi Arabian Airlines. This brings the total number of simulator orders won during the third quarter to six for a year-to-date total of 17. We expect to sell a total of 20 by the end of the current fiscal year. We achieved a key milestone; we met our target of building an Airbus A320 full flight simulator within 14 months, compared to the usual 18 to 20 months previously. We are now extending these new processes to other simulators.

We also improved our organization by reducing our footprint in our main plant in Montreal by nearly 150,000 square feet, or about 10%. This represents savings as well as increased efficiencies for the Company and we believe will have a positive impact on employees as they work more closely together.

In the Training and Services Civil segment, we continue to make inroads in the Asian and Middle Eastern markets for which we have made a series of announcements. CAE is in the unique position of offering a total range of training solutions. This means that we have the ability to customize packages to suit customers' specific requirements. This is an important discriminator for us, especially in new and emerging markets like India and China that require not only training solutions but a supply of pilots as well.

In our training centers around the world, we are redeploying part of our simulator fleet in order to better meet client demand. The overall objective is to improve our revenue per simulator while offering even better service to our customers.

We are advancing well in the construction of our new business jet training facility in Moorestown, New Jersey, slated to open by the end of 2006. We are still working to rationalize our footprint in training. The consolidation of some training centers constitutes a good portion of the restructuring that remains.

On the military side, CAE launched its new Medallion 6000 Series visual system, which has already been sold to the German Armed Forces. Notable upgrades in deliveries also involve the U.S. and Australian Armed Forces.

With that, I will ask Alain to take you through some of the financial highlights.

Thank you, Bob. Good afternoon, ladies and gentlemen.

Consolidated revenue of 277 million was in line with the second quarter and was up 7% from Q3 last year. Earnings from continuing operations for the third quarter were 17.5 million or $0.07 per share, also in line with last quarter and compares to a loss in Q3 last year when we announced the impairment of some of our assets.

Excluding nonrecurring items, earnings for the quarter were $0.09 per share, compared to $0.04 for the same quarter last year and $0.08 in the second quarter. On a year-to-date basis, the underlying EPS reached $0.25, which compares to $0.13 generated last year.

Our cash position continued to improve. Net cash provided by continuing operation totaled 91 million in Q3, compared to 54 million in the second quarter. (technical difficulty) -- free cash flow was 37 million for the quarter, compared to 18 million in the preceding quarter. We have therefore continued to strengthen our financial position, reducing the net debt at December 31 to 209 million. This represents a further reduction of 21 million in the quarter and a total reduction of 77 million since the beginning of the year.

I will now explain how the nonrecurring items have impacted the results of the quarter. Our 17.5 million earnings include after-tax charges of 4.2 million for our restructuring program, 2 million for the early repayment of the [Fortis] (indiscernible) fleet and a net foreign exchange loss of 1 million triggered by a reduction in our investment in certain self-sustaining subsidiaries. Our results also benefited from a 1 million after-tax gain coming from our exit of the Dornier aircraft training business. Taken altogether, these nonrecurring items reduced EPS by $0.02, so our normalized underlying EPS was $0.09.

The impact of foreign exchange movement is a complex issue, but allow me to highlight some of the main elements. First of all, roughly 55% of our year-to-date reported sales were concluded in U.S. dollars, 25% in euros, 10% in Canadian dollars, and the remaining 10% in British pound and other currencies. We have subsidiaries around the world, including Australia, UK, Germany and the US. All of these operations are translated back into Canadian dollars, as the Canadian dollar has strengthened against all of the local currencies in which these subsidiaries operate. A portion of local currency denominated growth has been reduced by the translation of the subsidiaries' results into Canadian dollar.

In the case of products sold from our main plant located in Montreal, revenues are mostly in euros and U.S. dollars, but a significant portion of our costs are in Canadian dollar. We hedge all of our contracts to protect ongoing margin. In addition, we are continuing to focus on innovation and cost reduction to be able to maintain our competitive position despite future foreign exchange movements.

Now, moving onto our restructuring program, we've incurred today 41 million pretax of restructuring and other related costs. We are tracking within our originally estimated range of 55 to 65 million. Major restructuring items remain, including the cost of rationalization of the civil training business with the relocation of over 25 full flight simulators, as well as costs related to the re-engineering of (indiscernible) embedded in our ERP project. We expect that the majority of these expenses will be incurred shortly. (indiscernible) in Europe, the Maastricht training center will be closed by the end of this fiscal year, and operations will become consolidated within our Amsterdam and Belgian training centers. In Spain, we are consolidating three facilities into one. Our smaller Dallas training center, not to be confused with (indiscernible), will be closed once we have opened our business (indiscernible) training facility in New Jersey later this year. We have recently begun the conversion and the expansion of our military facility in Burgess Hill, UK in order to accommodate civil training as well. This will extend our civil footprint to perform on contracts involving [Dassau], Virgin Atlantic, Easyjet and others. So restructuring is well underway.

In the third quarter, CAE received TPC funding for Project Phoenix. A large portion of that funding is recorded against R&D expenses for (indiscernible) product and the rest is recorded against assets. TPC contribution will be variable and the (indiscernible) TPC contribution included some (indiscernible) funding for Q2 as well.

I will now review some of the key take-aways from our segmented performance, starting with our two civil segments.

In Sim Products/Civil, revenue was 63 million, improved sequentially and year-over-year because of increased order activity, particularly at the beginning of the year. Higher market demand, combined with [fee's] global reach, has enabled us to gain ground in markets outside North America. Operating income of 10.4 million improved as well because of volume increases, better program execution, increased synergy, and the impact of Project Phoenix. The operating margin was 16.5% in the third quarter for an average of 11.7% year-to-date. We continue to expect to exit the year with a low double-digit operating margin.

In Training & Services Civil, third-quarter revenues of 78 million was in line with the prior quarter and Q3 last year.

From a year-to-date perspective, we saw an increased level of activity at these training centers. Revenue has grown 6% year-to-date, even though we had the same number of simulators and despite the impact of foreign exchange. Average annualized revenue per simulator was 3.1 million in the third quarter, compared to 3 million in the same quarter last year and 3.2 million in the second quarter. In the third quarter, we had 100 revenue simulator equivalent units in operation.

Operating income in the third quarter was 14.3 million, which includes a 1.8 million pretax, nonrecurring gain coming from our exit of the Dornier program. On a normalized basis, the operating margin was 16% for the quarter and 17% for the year-to-date.

In Sim Products/Military, revenue of 83 million was in line with last year but less than last quarter when we benefited from recoveries on delays involving some North American programs. The lumpiness of the military business is par for the course.

Operating income of 6.3 million and an operating margin of 7.6% are in line with last year but down from last quarter. The Military segment is ramping up on some new programs, including the long-term NH90 project. Year-to-date, the operating margin was 8.3% or 8.9% after nonrecurring items.

In Training & Services/Military, revenue for the third quarter was 53 million, a sequential and year-over-year improvement as a result of more services activity on German and U.S. military bases. Operating income of 8.4 million was also stronger on a quarter-over-quarter and year-over-year basis. On a normalized basis, the year-to-date operating margin was 13.2%.

We decided to segment our military business into products and services to provide better clarity on how CAE manages this business and to improve its public disclosure. However, we must recognize the fact that the (indiscernible) of these segments are very much related. Military programs also involve sales of both services and Simulation Products, the latter usually leading the ramp-up phase. Therefore, any review of military performance should also be conducted on a combined basis. Briefly, in the military business as a whole, revenue for the quarter for the combined segment was 136 million and operating income was 14.7 million, for an operating margin of 10.8%. This is essentially in line with our objective of a low double-digit operating margin in the military market.

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

Thanks, Alain.

I would like to provide some additional outlook for the balance of the year and comment on the market environment. We continue to expect our restructuring and related costs to be in the range of 55 to $65 million. Given the time required to negotiate with authorities in Europe, some of our training center consolidations will progress into fiscal year 2007. We are making every effort to get through the major elements of our restructuring plan by the end of this fiscal year. We expect market conditions to continue to be strong for business aviation and we will be even better placed to serve this market with our new training center in New Jersey.

Looking at the commercial airline industry, global air traffic is up, and some regions like Europe, Latin America, the Middle East and Asia, are returning to profitability. In the U.S., the Legacy carriers still have a way to go, but [IADA] now predicts profitability for the global industry, including the U.S., in 2007.

Record aircraft orders this past year are signs of confidence in the future of air travel. Given the proportion of new aircraft types with lengthy lead times and large order books, like the Boeing and 787 and Airbus A350, deliveries will be spread out over several years. This could lead to an extended cycle, especially if U.S. carriers also come back into the market. In terms of how this translates into business for CAE, we focus on aircraft deliveries, rather than orders, to gauge the timing of our business opportunities.

Global military budgets are expected to remain stable with modest increases in some countries and ongoing budgetary pressures in others. The recently proposed U.S. defense budget for 2007 is higher, and of particular interest to CAE is the proposed increase in the size and capabilities of the U.S. Special Forces.

From a services standpoint, the trend for defense forces globally to look closely at outsourcing training services fits well with CAE's capabilities and strategic direction.

I will now comment on what we expect for the balance of the year. As you have seen, we generated free cash flow up to this point but we expect some reversal in Q4 to the end of the year slightly positive. Our CapEx budget for the year is 135 million, which means we will be making more investment. As well, there are more restructuring costs to come. We are encouraged by the progress we've that made in the Simulation Products business and in Training & Services/Civil, and we will continue to drive efficiency gains through our network.

In the military business, we expect to have more order announcements in the fourth quarter. The total amount of new orders for the year should be greater than the revenue generated from backlog, so our book-to-bill ratio should look fine. We are maintaining our original goal of a low double-digit operating margin.

In conclusion, we will continue doing what we said we would do a year ago. We're trying to improve the quality of our products by increasing efficiencies while cutting our costs. Our underlying goal in all of this is to provide a solid restructured earning base that will serve as a platform for growth and the ongoing creation of shareholder value in fiscal '07 and '08.

Thank you. We are now ready for questions. Andrew?

Operator, we will first take questions from analysts and institutional investors.

Thank you. (OPERATOR INSTRUCTIONS). Jacques Kavafian, Research Capital.

Good afternoon. I didn't hear it correctly. How many (indiscernible) you said will be displaced I think Alain mentioned? Was it 25?

Yes, it was 25.

Thank you. The next question I have is that, in the press release, when you talk about Training & Services/Military, about the increase in operating income. you talk about increase in cost recovery resulting from (indiscernible) rate negotiation, and the Training & Services/Military investment in the UK. Could you explain that for me?

Yes, let's start with the rate. I mean, every year, the Canadian government is coming here to finalize the negotiation on rates, so normally it's not been in Q3, so which we've had in the quarter. It's part of the normal (indiscernible) of the Canadian government to come (indiscernible) our rate. This has given us, roughly speaking, an adjustment of 800K in the quarter. We expect to be able to maintain these rates on an ongoing basis with the Canadian government.

That's what the first [guy] said?

Until the review next year and then --

From the third quarter.

And the second one was on the dividend, I guess, huh?

Yes, yes.

So, in MSH or in the project we have for the British forces in the UK, the way it's organized, there's two projects. There is an operating company and there is a financier for the assets. We do own a portion of that financing company; we own 13%. On every quarter, when there is cash in the project finance structure, the dividends are paid to the owners, so we've got the 800,000 dividend in the quarter coming from that structure.

Okay, thank you very much. I have one more question; it relates to a press release that -- from (indiscernible) that was forwarded to us announcing that they will buy two CAE-made flight simulators. Has that been -- we haven't heard anything from that point on. The intent of the press release was that [Air Decante] is announcing it but we don't announce orders until they are signed, so I guess it hasn't been signed yet?

Yes, we don't announce orders until we are signed, Jacques, but that's what we stay with.

Okay. Do you think that you're going to sign that before the end of the year? Is that why you are confident about getting 20 simulators?

We have a number of projects that are under discussion.

Okay, thank you very much.

Ben Cherniavsky, Raymond James.

My first question is if you can maybe just comment on the recent announcement at Rockwell Collins acquiring Evans and Sutherland's simulation visual systems business. Does that change the competitive dynamics at all the way you see it over the next few years?

I don't think so. You know, I think Rockwell Collins is an excellent company; it's probably a good move for them. They've always had access to the E&S technology in the past. I guess it will be closer, closer now. But you know what? I think we really need to focus on here is the fact that we have an excellent visuals capability in our company; we have over half of the market in visuals and we continue to invest. We have every intention, as part of our new Phoenix program -- this will be one area in which we will be investing going into the future, and you know, we are very fortunate, relative to some other companies that are in the Simulation Products business who don't have their own visuals. So you know, I think that we offer our visuals; they will probably offer their visuals. In the end, it will really be the customer that will decide the configuration of the Sims and what they want to have. So I think we will just move forward on the same basis as we've moved forward in the past.

Well, I recognize historically you've had the premium visual system, but I just wonder if Rockwell Collins now can -- if maybe their intent or their ability is to lift the robustness of [E&S] system to another level and maybe get more competitive with you for your dominant share.

Well, I wouldn't say that we have a dominant share; we have a very good share, as I said, around 50%, over 50%. You know, I'm sure that, given the nature of their company, that they will be doing everything they can to improve the technology. All I can tell you is that we have a very good system, and you know, our Project Phoenix, the $630 million investment program we have over the six years -- part of that's going to be dedicated to the visual system, so we won't be sitting quiet and you know, we fully expect we will have competition. That's part of life.

Okay. A second question -- congratulations on getting your turn times to -- reducing your turn times to a level where you were targeting. Can you just elaborate maybe on how much this helped your margins? I mean, overall, your margins and your civil simulation products were very high, and you know is that -- how much of that is sustainable, do you think, having your EBIT margins at those levels where they ended up this quarter?

Well, I think that there's a whole series of things that have happened in Simulation Products. You know, the A320 that we did by itself really didn't contribute all that much. I think it's more a demonstration of what we can do with some of the other models that we have. So, we are taking what we learned there and will be applying it to the other Sim projects -- excuse me -- that we have. But you know what? It's a total system. It's the way we are approaching manufacturing. It's the way that we are sourcing; it's the way that we are contracting. It's a whole series of things that are really giving us the benefit here. You know I think that the margin is a bit high this quarter, from what we can do on a sustaining basis going forward. I think you know what Alain has said, that we're saying our low double-digit margins is where we will be. Our original plan, I think you'll recall, was that we would exit the year at around 10%. What I'm saying, with low double-digit margins, I think we can do a little bit better than that and we're doing that faster than we had anticipated.

Great. Finally, on the training side/Commercial, what's your utilization rate right now?

It's about 77%, so up what -- a point from the last quarter or something like that.

That's a pretty good utilization rate as I understand it. I'm just wondering how you are achieving a rate like that if so many of your Sims are still destined to be reconfigured and your centers are being reconfigured. I mean, it sounded like what you were talking about, there's still a lot of opportunity to get your training facilities up to a higher utilization rate -- (multiple speakers).

I think, Ben, part of the problem is, you know, when we talked about the utilization rate, Sims that are turned off when they are being moved or they are taken out of the system, they are not counted in the way that the utilization rate is done. So, you know, I would say that, as a general trend, yes, it is very good, but you know, it's based on a slightly lower number of Sims than we would own. But they are not there because we're not operating them.

So that utilization rate, if you took all the Sims in your system that you own, would be below 77%?

It might be down slightly. I think we've only taken -- started to take a few out, so again I would just use this as an indication of trend more than anything else. Then of course, you know, as we're going to be moving some over the next period, it will be hard for us to specifically track and say, you know, that this utilization rate is precise and the one that we should use. But I think it's a good sign and it shows that, with the Sims that we have that we are operating, we're still doing it very well.

James David, Scotia Capital.

Good afternoon. Just going back to the simulator products on the Civil side, the margin issue, I think, if I back out the sort of roll-over from the second quarter in terms of TPC, that the margin was probably around 14.8% or so. Assuming that government participation is pretty much a permanent fixture, why would -- Bob, why would margin sort of expectations be low double-digit, since it would certainly appear that you've got more -- certainly there's room for them to be more robust. I guess the question is was there something unusual in the quarter that put them up at 15%? Because I just want to understand why we should be expecting something lower and certainly as we look to fiscal '07.

I think I wouldn't disagree, James, with the way you've done your calculation. But you know, there's a whole series of things that we're doing in terms of realigning the plant in the next quarter, and you know, there's still a lot of things that we're doing as it relates to the restructuring. So, that's why I think we are being prudent with regard to the way that we're talking about the margin in this business. As well, you know, it also relates to the mix of programs that would be -- we will be working with over that period, which will be different than the ones that we have been working on. So, that's why we are ending up where we are.

So I shouldn't take that necessarily as conservativeness but maybe that this was a positive aberration in the quarter? If you are restructuring stuff, those are kind of like background issues that don't really relate to the underlying strength of the business, so --.

Yes, I wouldn't use the same terminology that you are using at all. I would say that they had a very solid quarter and we are really making progress, and you know, that's -- you know, we are always aiming to get to that level. I just don't want to leave you with the impression that we're going to be there immediately.

Okay, fair enough. On the Military side, Bob, I asked about this last quarter. On the simulation side, you had another sort of soft book-to-build in the quarter. I appreciate you're probably going to do well on the N\H90 front. I'm curious, on the U.S. front, again the strategy is to focus on smaller, manageable, 40 to 50 million contracts that burn over two to three years. Are you reasonably comfortable that at least within the next two or three quarters we could see something on that front and see a more robust backlog build?

Yes, I think I've said, as I've said in my remarks, that I expect, in the fourth quarter, we're going to see some orders. They won't be just from the U.S. I think that there's a chance that -- you know, unfortunately, it's hard to control the way and the rate at which governments make decisions. It seems that a lot of this tends to fall into the -- to the fourth quarter, but you know, I think we are quite well-situated on a number of upcoming programs.

Okay, and sorry, just on a related question, the NH90 -- who sort of is on the radar screen in terms of stepping up, aside from Germany, at this point?

The NH90, I think that the only one that I'm really aware of is I think the Scandinavians are looking at potentially getting involved in the project.

Okay. Many thanks.

Daniel Kim, Paradigm Capital.

Going back to the NH90, Bob, in the past, you've given us sort of loose guidance of when you expect a material revenue ramp (indiscernible) programs continue to ramp. Can you provide any more specific timing of when you might expect first material revenues from that program, please?

You're talking about new programs that might come on?

Right.

Or new technologies?

Correct.

Yes. Do you want to clarify the -- (multiple speakers)?

Daniel, you're asking specifically about NH90?

Right. In terms of that program, I think the revenue ramp in the past has been loosely guided to be happening sometime next year. Now that things have progressed, I'm wondering if you can give us a little more specific timing of when you might expect to see that.

Yes, I don't have the specific answer for you on that today. Perhaps we can give an update to you. I think it's going to -- there's two elements. One is the actual increase in the program, and then I think the other element is any future orders that might come from other customers, but I'm afraid I can't give your answer to that today.

Okay, that's fine. With regard to your restructuring, Bob, you suggested that a bulk of that is going to come in Q4. Any chance you can give us a slightly greater clarification in terms of quantifiable dollar value of facilities consolidation versus other of what might happen in Q4?

Yes. I think in Q4, what I see -- we're going like crazy to try and get the consolidations done in Europe, and that relates primarily to Spain, Western Europe and the UK. I think what you know -- so far, I think we've said we've spent about $41 million. The remaining portion, part of it will be cash and part of it will likely be asset-related. I still think that we're going to be in the range of the $65 million. So that's what we're trying to do for this year. There may be a little bit that spills over into next year, depending on the approvals that we get from governments in terms of what we're doing with the facilities, particularly in Europe and in Spain. So, those are the only pieces that I think potentially could go into the following year.

Okay, so the balance of the restructuring bulk will be cash for the facilities consolidation or most of that will come in Q4?

Yes, but it will not all be cash. All right. I can't give you the actual breakdown. Part of it will be cash; part of it will relate to balance sheet, which will be non-cash.

Great. One last question -- just with regards to your lower turns, you suggested you're going to be using this system now on new platforms going forward. I guess two questions -- can you give us a sense of which platforms you may be targeting next? And how long will that process take to unfold in other new platforms, please?

Yes, well, I think you have to realize that the A320 is a platform that the there's quite a good quantity on. Another one would be the -- (technical difficulty) -- the 737, and you know, we will have to see other high-volume platforms that are coming forward.

How long would that take to get their turns down in those next platforms?

We are working on a program of 12 to 18 months.

Great. Thanks very much.

Fred Larkin, Orion Securities.

Bob, you mentioned Project Phoenix and if I look at $630 million over six years, that's roughly a little bit below 10% of revenues in any given year, and that is historically a pretty impressive number. Can you give us some view as to potential non-Aerospace applications that you might be looking at?

Yes. We've been careful here, Ted, because we don't want others to know exactly what we're looking at. So you know, the new programs I'm really not going to talk about. I think, you know, if you're looking at the existing technologies, the one that I've clearly talked about is the visuals, where we're going to be spending some money. Other parts that relate to aircraft development platforms, you know, how it could be applied to help people reduce the cycle time, reduce the risk of developing new aircraft. We have some things we're looking at in urban simulation. It's things of that kind.

Okay, maybe just one more kick of the can on that. Then without the folding specific applications, if one were to divide them into two sectors, Aerospace -- i.e. what you're currently involved with -- and non, which roughly, speaking what percentage of it might go to nontraditional, from CAE's perspective, technology?

The vast majority will relate to what we know are core competencies in the core Aerospace area.

Okay. One other question -- just with respect to the tying up of your facilities in the Montreal area, the footprint as you call it, can you give us an update please on the labor relations situation and the mood amongst the troops and the timing of contract expirations?

Well, I think, you know, we've got a very dedicated group of employees here at CAE who have been doing a great job. I think what we've been trying to do is to communicate our vision, our strategy, so that they understand where we're going. We're trying to talk about the competitive landscape in terms of how we have to go out and win, and we're giving them regular updates, all of our employees regular updates on the results that we achieve every quarter. So you know, I think we're trying very hard to improve on the employee engagement. All I can tell you at this point in time is that -- and I circulate and I see a lot of employees that, on the basis that I'm seeing people, I think that morale is improving. Clearly there's a lot more that we need to do, but my feeling is that people feel a part of the team and they want to win, and I think we're seeing some real progress.

Okay, Bob, thank you very much. The last question for me -- just with respect to bidding activity, can you give us a sense of the amount of activity that your marketing team is involved with at the present time?

I can't give you the exact number, but I can tell you that we have quite a few number of projects that are underway and we are involved in discussion.

Cameron Jeffreys, Credit Suisse.

I just wanted to go over a couple of things, a follow-on to Jacques' question, just so I make sure I understand this from a modeling perspective. The Canadian government rate adjustment that you had in the quarter -- that's something that you'll get kind of every quarter, I guess reviewed every third quarter but they are payments you get or rate adjustments you will get in the quarters in between, correct?

It's a review that's done with the government. Normally I think it's always taken place in the third quarter, and they just review the rates for the contract that we have with them. Basically, once you have it, it's then normalized, so we carry it forward, but then will have to do it again with them next year. So that -- I think what I would interpret from that is that likely the scope of work is being expanded slightly because we're getting more money, so that we are doing a bit more work and therefore we can charge more. But we stay within the parameters that are established by the public works people in terms of the profits on a project of this kind for a military contract.

Okay, so it's not a catch-up going back for prior quarters or anything -- (multiple speakers)?

No, it's established once a year; that's it.

Okay. On the dividend side, is that an annual-type thing that happens at this time of year, or again, is that something that you might expect to kind of get -- is that a quarterly thing where you might receive a payout from that finance company?

The way I describe it, it's on a regular/irregular basis.

Regular/irregular basis?

Irregular basis, so -- (multiple speakers).

So don't model it in but just it may come up from time to time?

That's how we get paid, and that will occur every now and then, or every year, I think, basically, but we don't know whether -- which quarter it's going to come in because it's determined by the profit that's made inside of the entity and a decision is made to distribute that amount of money. Alain?

Yes, you are right. Because it's a project finance structure, cash is driving the dividend, so when the cash has accumulated in the structure, then the dividend is paid out. So, it's part of our normal course of business, and like Bob said, we are a bit uncertain of the timing.

Okay. Can you give me a sense as to what kind of TPC royalty payments you have been making, on average, on a quarterly basis in the past couple of years? I know you indicated you made 1.7 this quarter. Is that a fairly steady --?

That's probably a good number to use, yes.

Going back historically as well? That's typically what you've kind of done? Okay.

For instance, in the quarter, there was 1.7 million of royalty charges in the quarter.

Right, right, okay. My last question will be just on following up on Ben's question with respect to the E&S visual systems. What percentage, if any -- I imagine it's very small. What percentage of your simulator sales have an E&S visual on it versus (indiscernible)? Like what customers pick your Sim but their visual I guess if you will?

I don't have a number for you, but I don't think it's a lot.

Very few. I can't think of any outside of North America. I guess maybe there are a few, but it wouldn't be a very big number.

Okay, great. Thanks. That's it for me.

Cameron Doerksen, Versant Partners.

A question on the relocation of the 25 simulators in your network that you expect to take place over the next 15 months or so. The costs and expenses of doing that, is that all going to be included in the anticipated restructuring charges that you're going to take?

Yes.

Okay. It sounds fairly disruptive. I mean, I guess it's roughly 25% of your total network of simulators. I'm just wondering what kind of impact you anticipate this will have on the revenue line, and when -- I guess which quarters do you think it will have the most significant impact?

I don't think it will have a big impact in the sense that some are already done, some we have -- we're going to try to phase it over time so that it doesn't have a big impact and -- right? Yes, and so, you know, I think yes, I don't think it's -- there's no one specific quarter I think that's going to be impacted.

Just on that -- I mean, you've outlined the consolidation at your Sim centers over the next 15 months. Beyond that, is there anything that you think you need to do more beyond what you've already outlined, or is that going to be pretty much done at that point?

Well, in terms of the consolidations, probably, but as it relates to productivity and innovation, you know, this will never end for us. It's a part of the culture now of the Company, and this is something -- you know, we know the only way that we are really going to control our destiny is to continue to be -- to deal with cost and come up with products that have high-quality, are reliable and are innovative. So you know, I think it's a way of life. We have to just keep doing what we're doing, and hopefully do it for a lower-cost.

Okay. Just one final question from me -- just in terms of simulator deliveries, I'm just wondering -- and maybe it's in the MD&A, but I'm just wondering if you're able to disclose how many Sims you have delivered year-to-date.

We don't actually look at it quite like that, because -- Andrew, what do we have?

Total deliveries -- (technical difficulty) -- for the year would be in the range of 25.

That's internal and -- or sorry, external and for your own network?

Correct. That's both military and civil.

Okay, perfect.

Robert Fay, Canaccord Adams.

A couple of questions -- just getting back to the Project Phoenix, two things about it -- number one, how much additional R&D spending are you doing under this project than you were doing in the past, on an annual basis?

I don't have an answer, a precise answer for that for you, Bob. I would have to look -- it's a fair bit more than we've been doing in the past, but I don't have a number for you. It's something we can look into and get back to everybody.

Okay. Would the difference, though, be the funding that you're getting under TPC? Would that be a fair --?

Not entirely. A lot of it would, but don't forget this program is replacing other programs that we've had in the past that have relinquished now or that we've finished.

In fact our fifth TPC program.

Yes. I'm just trying to get an order of magnitude of the changes that are occurring on an annual basis.

When I looked at the MD&A, there was an indication, though, that there was a net contribution from Project Phoenix to operating income on civil in the quarter.

Yes.

I guess there was a catch-up in that. Do you have the amounts of the catch-up and the amount that that contributed in the quarter?

Yes, I've been looking at this. It's complicated but let me just try and take you through this, okay, if I can? And this covers two quarters. I think if you looked in the MD&A, you will find a number of $7.3 million, something like that. Then to the balance sheet, you have to take about 1.7 that basically goes against capital expenditures, so you are down to 5.6. Then, you know, we have the royalty that we talked about, the $1.7 million. It will take you to about 3.9. When we get TPC, there's a reduction of the investment tax credit that we get. So, it's the same number, $1.7 million. That takes you down to about 2.2 million, and then that's over two quarters, so it's around $1 million.

So, it's just 1 million in this quarter and then -- so are you restating the second quarter, or are you going to go back and take -- (multiple speakers)?

No, it's -- (multiple speakers).

Year-to-date, the numbers are okay and due to the materiality, at best it would add 1 million to the EBIT of the segment in Q2, so year-to-date, the numbers are okay. We put our claim in in December, so there's no need to -- (multiple speakers).

Normally, the TPC we would disclose on an annual basis, but because of this, because of the -- you know, we've just started it and there was a bit of an anomaly here. We felt it was best to make sure we disclosed it so everybody understands exactly what's happening, and it relates to how you try and figure out what the margin for Simulation Products/Civil should be going forward.

Just looking -- so, going forward, it's about 1 million a quarter?

No, I didn't say that. I said -- I explained to how we got to where we are now. Don't forget that it's complex because it depends on the amount of R&D work that we would do; it would depend on the projects that we're doing; it depends on how it would be split between Civil and Military. It would also depend on where we are in terms of the ramp-up of our Project Phoenix. So, I think we're going to have to get a couple of quarters under our belt to really be able to give you an idea of where we are going here. But I wanted to explain how we got the number that we have here. But I think you're going to have to think through how that should be going forward.

Okay. Working capital, since you've reduced the cycle times by about four months, is that a major reason why the inventory number went down in the quarter?

Well, the cycle time relates mainly, again, to this unique project on the A320. I think -- so I wouldn't say it's that. We're making cycle-time improvement across the board, but I think it's just good, solid management and managing all of the aspects related to dealings with customers, collecting receivables, the way that we do our sourcing. It's a whole series of things; it's not any one by itself.

Okay, but this assignment of full flight simulators to contracts awarded during the quarter -- how did that impact the inventory?

I'm sorry, can you help me? What page are you looking -- is this in the MD&A, Bob?

Yes, on Page 24. You said that the decrease in inventories --.

Yes, what's happening -- there's some of the simulators that we've started to build in [advance], so the sales have been taken during the prior quarter on that. So as soon as you get the contract, you can assign a portion of your inventory to that contract and then take your sales, which has continued to the depletion of the inventory. That's what we referred to in the MD&A.

Essentially what we're doing here, Bob, is we are -- we've anticipated some high-volume areas where we can have gains inside the plant by building a couple of units. We are doing it on a very, very low basis but it gives us a very good competitive situation. Of course, that's financed in our assets when we do it, and when we realize the sale, we take the gain. Given the fact that we're doing some of these with lower cycle times, it works to our advantage.

Okay, so the working capital is a sustainable number now? (multiple speakers).

I didn't say that; I said that it's something that we're working, but it's a real focus for us and you know that we put in place the economic value-added system for compensation for bonuses for the management, and cash is important on that; return on investment is important. So we want people to continue to focus on the balance sheet as well as the top and bottom-line, and I think what you're seeing on the cash is a result of that.

When you're looking at the cycle, you were looking at an extended cycle in Aerospace right now, on the Civil side, where do you think the peak deliveries could be for your full flight simulators? Or I guess what I may ask is, in '07 how high do you think your deliveries are going to get on the Civil side, based on what you see in the market right now?

Yes, I'm not sure here, Bob. I think what you have to look at is the deliveries that are coming from Boeing, specifically Boeing, Airbus, Bombardier and Embraer. It seems that even with the increased order intake and in spite of the fact that it looks like orders may continue to be strong this year, I don't think that the production rates -- certainly it's not been announced yet but the production rates are going up. You know, that's what I think you've got to look at. So, you know, I think it could be good for quite a number of years, but it will depend really on how Boeing and Airbus attack this situation where they've had very, very strong demand for their products. You know, people don't want to wait a long time to get them, so I think we'll have to keep our eye on that very, very closely.

The last question on Civil training, two things -- relatively stable in your installed base, but you do have some opportunities going forward in the next year or two. How many -- based on just firm orders in hand to date, how many simulators will you have to add to your network right now over the next, say, 12 to 18 months, to meet those new contracts?

I don't quite under -- you mean, into our own system that we manage ourselves?

Yes.

Yes, I think that we are likely going to have to add in three to five a year.

In terms of run rate (inaudible). Thank You.

Operator, we have time for just one more question and then we will open up the call to the media.

Thank You. The last question is from Marco [Pensak], JMP Partners.

Great, thanks. Two questions -- first, on Page 24, you talk about, one, full flight simulators for an undisclosed airline. Can you tell me what type of aircraft that's for?

Which one is that? Page 24?

(inaudible)

Is that the --?

(inaudible).

It's an A320.

Okay. The second thing, I just want to follow up on your comments about the sort of profile of the cycle. I certainly understand that the production rates at the airframe manufacturers are going to be more perhaps moderated than the huge surge in orders that we've seen this last year. But more importantly, with respect to the changing composition of aircraft types, where you do have the introduction of the new types, how are airlines and the airframe manufacturers positioning themselves wherein, you know, when you introduce a new fleet type, clearly you've got to train a whole new cohort of pilots. So even though deliveries of a 787 or A350 or A320 are spread over a multi-year time frame, you know, you've got to get that sort of base of pilots trained up. What I am really just trying to understand is have you seen a change in dynamics where some of the initial training, the airframe manufacturer is throwing in as part of the aircraft purchase? How are you sort of positioning yourself to benefit from that?

Yes, well, I think that's always been a part of life, or a part of the game or -- OEMs is when they are selling aircraft. So, I don't think anything has changed there. I would really put it into two categories. You know, the airlines very much have a lot of leverage when they purchase airplanes, in terms of what they're going to pay for data, parts and equipment, things of that kind. So they also have installed bases with equipment from certain manufacturers; we clearly have the largest number of installed base out there it's like any other products; dealing with one company and having a single spares system, a single product-support system clearly makes things simpler. So we're working very closely with people to make -- with the airline, as well as the OEMs.

The other thing is that OEMs want to have, I believe, competition, as do the airlines, in terms of who the supplier of their equipment will be. So that's the more traditional customers. When you get into places like China and India, you have to take it back even -- you have to move back from just training pilots; you have to create pilots. You have to put these schools in place for the initial training. We've been doing that. We have a school in Portugal, and we're looking at what we can do in certain markets to make sure that we are providing pilots, specifically in the Chinese and the Indian markets, so that the real advantage that we have going into those new developing markets is we're really the only company that can offer the full gamut of products, from the provisioning of the pilot to training of the pilot, to the provision of the simulator. That I think is, as you saw at the Dubai airshow, we basically won all of the orders that were coming out of India. I think the main reason for that was because of the line of products and services that we can offer.

Okay, thanks very much.

Thank you, operator. That's all the time we have for this segment of the call. Thank you to the investment community for joining today's conference call this afternoon. We will now open up the Q&A session to the media.

Thank you. (OPERATOR INSTRUCTIONS). Alain [Swist], Canadian Press. Please go ahead.

You've mentioned that you were announcing a simulator sale of Saudi Arabia. Is this a new announcement?

Yes, it's a new announcement for us. I think actually -- yes, it is a new announcement for us.

Could you give more details in terms of which one, which Sim it is?

Yes, it's an Embraer 170.

Okay, and it's going to which airline?

Saudi Arabian Airlines.

Arabian Airlines, okay. do you know the value of this, or a list price?

Pardon? Yes, I think we've been using $50 million. Is that U.S., Natalie?

No, Canadian.

Okay. How is CAE doing in China? I know there is a competitor making inroads there at the flight training school but how is CAE doing in the overall market?

We are clearly the leader in China. We have the largest undertaking there. We have a joint venture with China Southern. We've just announced, actually, that we are -- we are doubling the number of bays that we're having there; we're adding six bays onto the facility that we already have. I think our investment is in excess of $100 million. It's a very, very successful joint venture that we have. We are clearly the leader in China.

Okay. Finally, there's 25 simulators to be displaced in training centers. Has the been a news release about this, exactly where -- which centers are being involved?

No, and we would not tend to do that because, you know, it's a competitive issue in terms of where we are -- because we try and manage our customers so that they can go to some of our same facilities in different locations while we're doing some of the changes.

Could you just tell us what you can tell us? Like, you mentioned one is closing in Texas; there's a new one opening in New Jersey. Anything else that you --?

Oh, yes. Okay, sorry. There's two different issues here. One, we're moving simulators to put them closer to customers so that we can improve the profitability.

The second issue is that we are consolidating centers. We're going from a larger number of centers to a smaller number of centers to reduce our footprint, to reduce our asset base and therefore reduce our cost. So for instance, in Dallas, we have two facilities that are within probably a couple of miles of each other, maybe five miles of each other, so we are consolidating into the simuflight facility. We are also opening up a new center in the Northeast United States where, you know, I think about half of all the business aircraft that are flown are within a 150-200 mile radius of New York. So we will be displacing some of our simulators to that location.

In Europe, we are looking at expanding our facility at Burgess Hill, which is just beside Heathrow. In Madrid, we have three facilities there that are probably all within 20, 30 kilometers of each other and so some of them very close together. We are consolidating all of them into one facility.

In Western Europe, we are consolidating from three facilities to two. So there's two very different things we're doing. One is consolidating facilities; the other is putting simulators where they can best serve the customer.

Western Europe, and these -- where are these located, the three you're moving to two?

We are closing down Maastricht and we're keeping the locations in Brussels and Amsterdam.

Okay, well, thank you very much.

(indiscernible).

(French)

(French)

(French)

(French)

(French)

Oui.

(French)

(French)

(French)

(French)

(French)

(French)

(French)

Oui. (French)

(French)

Oui.

(French)

(French)

(French)

(French)

Doug Alexander, Bloomberg News.

Robert, a couple of questions -- one is just looking at your sales by region, it looks like your biggest market in the United States has fallen by 13% and sales to Asia and the Middle East have gone up. I'm just wondering whether you're expecting that trend to continue through the calendar year.

Yes, the market is very dynamic. I think, you know, if you look that after 9/11, you would find that basically I don't think the Legacy carriers have ordered a simulator since 9.11, so our business has very much been built up on the Middle East, Asia, Europe. Also with some low-cost carriers -- JetBlue, for instance, and we've completed all the deliveries, I believe, to JetBlue. So, you're likely going to see that. What it will depend on, I think, is what happens with the Legacy carriers. You know, when they exit from Chapter 11, you know, what's Northwest going to do? What are the plans of USAir? So you know, I think that we will have to wait and see how they organize themselves and what they're going to do. So you know, I don't think that there will be a lot more activity, quite frankly in the North American area in the short period of time. So I think the same pattern will prevail for a little longer.

Out of your four segments, what sector do you expect to -- or what segment do you expect to post the biggest gains this year, or this calendar year, and why?

Well, I think we've made gains across all of our segments. The one that I think has improved the most since the start of the year, since we've done our restructuring, is the Simulation Products/Civil, where you know I think that we've done a major turnaround in terms of the way that we design and develop our simulators, our whole manufacturing system, and the way that we procure our global sourcing system, the fact that we put all of our engineering into one organization. So I think that's one area that you're going to see gains.

As well, we've done quite a bit of rationalization in the Civil training area, in terms of the consolidation of locations, taking out a level of management. We've done a whole series of things, but if you are looking at one segment, I think it's the Simulation Products/Civil.

Okay, thank you very much.

Thank you. (OPERATOR INSTRUCTIONS).

Operator, in fact, that is all the time we have for today. I wish to thank everyone for joining us today and remind you that a transcript of today's call can be found on CAE's Web site, www.CAE.com. Thank you.

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