CAE Inc (CAE) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the CAE fourth-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. You may now proceed, Mr. Arnovitz.

Thank you. Good afternoon everyone and thank you for joining us today. Before I 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 levels, capital spending, and tax rates. Such statements are not guarantees of future performance. They are based on management's expectation and involve a number business risks and uncertainties any of which could cause results to differ materially from those expressed and/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 factor section of CAE's annual information form for the year ended March 31, 2005 filed with the Canadian Securities Commissions and the U.S. Securities and Exchange Commission as updated in today's fiscal 2006 MD&A dated May 17, 2006 released today. Any forward-looking statements made during this conference represent our expectations as of May 17, 2006 and accordingly are subject to change after such date. We disclaim any intention or obligation to update any forward-looking statements.

Participating on the 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 the institutional investors. Once we have concluded the question-and-answer period with analysts and institutional investors, we will then invite questions from the media. For your convenience, this conference call will be archived on CAE's website.

Let me now turn the line over to Bob.

Thank you, Andrew. Thank you, everyone, for joining us today. First of all I would like to update you on our achievements during fiscal 2006 and review some of the highlights of the fourth quarter. When we adopted our restructuring plan in February 2005, we indicated that fiscal 2006 would be a transition year for CAE, a year in which we would fundamentally change the way we do business. We set out to strengthen the Company's financial position and to build a solid foundation for the creation of shareholder value for the future. We have achieved these objectives and are maintaining positive momentum.

We have now deployed all of our major elements of our restructuring plan with most activities completed or in the final stages of their execution. Our achievements for fiscal 2006 can be categorized into four main areas, financial performance, organizational structure, business and operational processes, and strategic new projects. For the first, financial performance, I would like to point out a few key highlights. We grew our revenues by 12% to C$1.1 billion. We increased our net earnings to C$65 million. We reduced net debt to C$190 million from C$286 million. We generated free cash flow of about C$74 million.

Within the second category, organizational structure, CAE established four business and reporting segments distinguishing between products and services and civil and military markets. The diversification of our business along these segments is both healthy and consistent with other leading aerospace companies. Each segment has P&L and balance sheet responsibility and we put in place key management members to make the new structure work. We also consolidated our program management and our engineering groups and established global sourcing function to improve synergies and eliminate duplication.

In the third category, business and operational processes, we implemented a number of strict measures that emphasize specific financial targets and ensure a leaner cost structure. A notable result is that by instituting change control processes we met our objective of building an Airbus A320 civil full flight simulator within 14 months, compared to 18 to 20 months previously. We also implemented a more disciplined bid review procedure. We realigned our workforce, reduced the footprint of our main manufacturing plant by about 10%, and consolidated training centers in the United States and in Western Europe.

We improved efficiency throughout CAE in fiscal 2006. In our training organization, we focused on revenue per simulator as a key indicator of performance. Restructuring activities now involve the redeployment of 28 full flight simulators to maximize their utilization.

Within the fourth category of strategic new projects, we announced that we would be investing $630 million over six years in Project Phoenix as the largest R&D project in CAE's history. It is intended to ensure that we maintain our world leadership in technology. We are also building a new business aviation facility in New Jersey and are expanding our training centers in Burgess Hill, UK and in Zhuhai, China in response to increasing demand for training in those markets.

Now let's look at the business segments and our activities for the fourth quarter. In training and services civil we announced maintenance service contracts with AirAsia and JetBlue, demonstrating CAE's ability to tailor its services and solutions to meet customer specific needs. CAE is in the unique position of offering a total range of training solutions. This is an important discriminator for us especially in the new and emerging markets like India and China, which require not only simulation equipment but also comprehensive training solutions that include the supply of pilots.

In Simulation Products/Civil we announced orders for three full flight simulators and other training devices destined for the Zhuhai flight training center as well as a contract for the world's first full flight simulator for China's ARJ 21 regional jet, the first aircraft to be completely designed and built in China.

For the combined Military segments, we received orders during the quarter of $223 million, the majority of which goes to Simulation Products. CAE has had continuing success in its strategy of establishing close relationships with key prime contractors and original equipment manufacturers. During the fourth quarter, EADS, CASA and Lockheed Martin awarded CAE contracts to build simulators and provide training services for the new A330 tanker, the C-295 and the Hercules aircraft platforms. As a preferred supplier, CAE is well positioned to pursue future opportunities on these and on a number of other military platforms including Europe's NH90 and U.S. Navy's MH60s and P3C helicopter programs.

Another important win during the quarter was the award of a $21 million contract by the U.S. Army for database software and tools to facilitate rapid and realistic mission rehearsal capabilities which could become a program worth nearly $70 million if all options are exercised.

For the combined military segments, new orders for the year stand at more than $600 million, resulting in a book to build ratio of 115 to 1 with a fair amount of the activity being realized in fiscal 2008.

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

Thank you, Bob. Good afternoon, ladies and gentlemen. We have made significant progress in terms of financial performance in fiscal 2006. In the fourth quarter consolidated revenue was $284 million, up 8% from Q4 last year. This is mainly due to a revenue increase in simulation products. Net earnings for the quarter were $9.4 million or $0.04 per share compared to $108.8 million or $0.44 per share in the same quarter last year, which included a gain from the sale of Marine Controls units.

Earnings from continuing operations for the quarter were $14.8 million or $0.06 per share to be compared to $9.3 million or $0.04 per share for the same period last year. Excluding non-recurring items, earnings from continuing operations for the quarter were $0.09 per share compared to $0.06 per share for Q4 last year. Non-recurring items in the quarter included restructuring costs and a tax recovery coming from U.S. tax losses.

For the year consolidated revenue reached $1.1 billion, an increase of 12% over fiscal 2005. Each segment contributed to this increase. Net earnings for fiscal 2006 were $64.9 million or $0.26 per share, compared to a loss for fiscal 2005 of $199.9 million or $0.81 per share following the impairment of some assets. Excluding non-recurring items totaling $60 million after-tax, earnings for fiscal 2006 were $0.35 per share, an 84% improvement over the $0.19 per share achieved in fiscal 2005 on the same basis.

In each segment we have improved profitability and return on capital. We achieved our cost savings targets of $14 million for the year as set out in our restructuring program. During the fourth quarter of fiscal 2006 the Company incurred $25.1 million of restructuring charges, most of which are related to the rationalization of the training and services civil segment, the further optimization of the Montreal facility, and the realignment of our workforce.

As we move toward the conclusion of our restructuring program, we have identified some further opportunities for cost savings. As a result, some restructuring charges will be expensed in the first quarters of fiscal 2007. The Company expects to be within 10% of its original target of $65 million.

The appreciation of the Canadian dollar continues to be a challenge. In fiscal 2006, foreign exchange movement impacted our earnings from continuing operations by about $5 million. In addition to our prudent foreign exchange management, our cost reduction program has helped mitigate the impact of foreign exchange movement. We are continuing to focus on innovation and cost reduction to be able to maintain our competitive position despite possible future exchange movements.

From a financing point of view, at the beginning of the year we secured a five-year committed revolving bank facility for US$400 million and EUR100 million, providing us with flexibility for growth and other opportunities. We have improved CAE non-cash working capital position by about $81 million. This has contributed to the reduction of our net debt level to $190 million from $286 million. The net debt to total capital ratio at year-end was about 20 to 80 or 40 to 60 if you consider the $300 million of off-balance sheet lease obligations. This is well within the acceptable ratio for a capital intensive business carrying long-lived assets on its balance sheet.

Our cash position continued to improve. Cash provided by continuing operations totaled $236 million in fiscal 2006, compared to $186 million last year. Free cash flow was $73.7 million for the year. Total capital expenditure for fiscal 2006 amounted to $130 million, the main components of which were ongoing investment in the Dassault and the German NH90 programs. I believe that we have made good progress in the past year in terms of disclosure and transparencies and our financial position keeps improving.

Thank you for your attention. I will now turn the call back to Bob.

Thanks Alain. As I said earlier, we have accomplished a lot in a short period of time. We are now working through the final phases of our transition with actions that are specifically intended to enable CAE, its customers and shareholders to benefit more fully from the unique array of solutions that we provide. The civil trading market continues to be competitive and pricing is generally stable. Market conditions are strong for business aviation and trends in the commercial airline industry continue to improve particularly in the growing South American and Asian markets. Demand in Europe is currently outpacing North America.

We believe the current cycle could extend especially if the U.S. carriers eventually come back into the market to reequip with new, more fuel efficient aircraft which appears all the more imperative given the current price of oil.

There are a number of initiatives underway within the training network in fiscal 2007. First of all we will finalize the redeployment of 28 simulators in our training centers. However, since some simulators will be out of service during relocation, the average number of simulators generating revenue in fiscal year 2007 will be comparable to fiscal 2006.

Secondly, having reduced our manufacturing costs, we will equip our training centers with new additional simulators to meet market demand. Thirdly, we will finalize the consolidation of some training centers in Europe and as well open our new Northeast training center in the U.S. We will also complete the expansion of our training centers in Burgess Hill, UK and in Zhuhai, China. We will start to the benefits from these initiatives in 2008 when the number of revenue generating simulators is expected to rise by about 10%. We are always looking for new market opportunities which may arise over the course of the year.

Within the Simulation Products/Civil segment, we met our sales objective with 21 full flight simulator orders. We expect to sell a greater number of simulators in fiscal 2007 and fiscal 2008, commensurate with higher aircraft deliveries worldwide. However given that a number of new aircraft platforms are being introduced, the timing of simulator orders will become more predictable as the year progresses. Approximately 75% of expected simulation product civil revenues for 2007 is already in backlog and we expect an increase in operating income within this segment.

Global military budgets are expected to remain stable with modest increases in some countries and ongoing budgetary pressures in others. We continue to anticipate modest topline growth in our military groups. We are now well-positioned with OEMs in a number of major military aircraft platforms. The timing of contract announcements is often hard to predict, but we can more easily estimate revenue generated mainly from backlog. Approximately 85% of expected military revenue for fiscal '07 is already in backlog. We are maintaining our expectation of a low double-digit operating margin in the combined military segments.

Capital expenditures in fiscal 2006 amounted to $130 million, a bit lower than planned due to the timing of certain projects. We have been successful in relining our cost base, our cycle times and the reliability of our products. We have also demonstrated that at this level of CapEx we can generated free cash. Given the current favorable market conditions including a record number of projected aircraft deliveries and the opportunities presented by pilot shortages in emerging markets, roughly the same level of capital expenditure would be required in 2007 to maintain our market position.

Having strengthened our balance sheet and reduced our costs, we are now ready to consider a range of new growth initiatives. We have several excellent opportunities to extend our training activities and joint ventures with first-class partners in rapidly developing markets such as India and China. We will review each opportunity carefully, proceeding where it makes sense and remain within our capital structure objectives. We will be using internally generated cash as well as nonrecourse debt to finance these initiatives. As these opportunities begin to materialize, we will update you on the progress we make.

Having essentially completed the restructuring plan, we are realigning the responsibilities of senior management to prepare CAE for the future. Don Campbell becomes Executive Vice President of CAE Inc. His overall responsibilities will include broadening CAE's market presence around the world or on the world as well as maintaining close relations with the governments and regulatory authorities in all markets. He will continue to assist the military segments in an advisory capacity.

Jeff Roberts will continue to lead CAE's global training organization with a particular focus on increasing CAE's presence in emerging markets such as India and China. He will also be responsible for establishing a companywide group devoted to innovation. As you know, innovation is critical to our business and CAE is considered a world leader in this field. With the establishment of innovation function, we believe that CAE will be in a position to identify and respond quickly to market opportunities.

Mark Parent will now be responsible for all simulation products and for military training and services. This will ensure the continued building of synergies and transfer of knowledge between groups.

In summary, we will continue to implement the changes realized in our restructuring and as we go forward, we will carefully consider new opportunities related to growth in our area of core competencies.

Thank you for your attention. I think we are ready to take questions now. Andrew?

Operator, we would now be pleased to take questions from analysts and institutional investors. Following that we will open a session for the media. In order to give everyone a chance to participate in the Q&A session, we would request that each person ask only one question and for additional questions to please reenter the queue. Thank you for your cooperation.

Fred Larkin, Orion Securities.

I would like to know, Bob, first of all could you give us some idea on the military side of the simulation products, you've got a great backlog their right now. Can you give us some idea as what sort of activities will be taken to enhance the EBIT margin going forward as has been done on the commercial side?

You've seen that we have realized some of the responsibilities from an organization point of view, Ted, and I think that what we're trying to do is take some of the lessons that we've learned and see if we can transfer them into that side the business. So I think that there will clearly be some synergies there.

The other thing that we have done is we now have a formal bid review process that we have put in place with delegated authorities at various levels. Everything above $25 million basically comes to myself and a group that we have, Don Campbell will be the Vice Chairman of that group as well and we are reviewing all bids now and looking at how we can best realize the profit on the backlogs that we have and the new bids going forward.

Okay, Bob. Thanks much. I'll get back in the line.

Ben Cherniavsky, Raymond James.

I just wondered when you report the $25 million of expenses that were incurred for the restructuring charge, restructuring plan, was that all taken below the operating line? In other words when I look at the way you present your segmented results, are all of those numbers before any kind of restructuring charge in the various divisions?

I'll ask Alain to answer that.

Yes, and it is below the segment operating income, and it is included in the EBIT, so when you get to the EBIT number, the restructuring charge is already taken into account. But if you looked in the MD&A where you have this big flag with the result of the four segments, the restructuring charges excluded from the margin that you see in these tables.

So with the exception of some more accelerated depreciation charges on the image generators, is the right?

Absolutely right. The accelerated IG depreciation has been less in the ongoing margin of the two segments that were impacted in the quarter.

In that is predominantly in military products?

Absolutely. There was a charge of roughly speaking $2.5 million in military and close to $1 million in sim products for that in the quarter.

Great. Thank you very much.

Ihor Danyliuk, Merrill Lynch.

My question is with regards to the civil simulator margins. On page 34 of your MD&A, I guess your guidance is somewhere -- that civil simulator margin will be somewhere between 11.8% and 31.5%. Before I ask my question whether you could narrow that down for us, the 31.5%, you attribute that high margin to the competitive pressures combined with the strength of the Canadian dollar. Was it not also attributable to the fact that you had so many civil simulators built for your own internal deliveries?

There was no intention of trying to indicate that the 31% was something that we thought was achievable in the current market positions. I don't think we have ever said that or even intended to indicate that. Clearly in 2003 there was the dollar and there was you recall that there was quite a backlog that existed before that that had been taken basically some of it even before 9/11 and there was a high demand in that area, so pricing was quite good. And as well there were some simulators that were going in from -- for the internal networks, so there was a whole series of factors that were related to that.

Okay, so really the number we should key off is the 11.8 and the 31 is --?

I think there's a couple of things. In the quarter as well we also, the image generators affected the margin in this particular area. I think that there is still some room for improvement but we do want to give any impression that we're going to 31%.

How much room do you think there is for improvement, Bob?

We don't provide specific guidance on that, but I think that the performance that we have had during the year is an indication of what is possible on a continuing basis and you have to realize as well that in this year and we have now pretty well put through the simulators that had the lower margins when we started this exercise of restructuring.

Okay, thank you.

Claude Proulx, BMO Nesbitt Burns.

One question that I have is when I look at the price -- if you could comment on the pricing for a civil simulator? I mean on the one hand I see that you and I guess your competitors are all working very hard to reduce your costs and that will I guess part of it will translate into lower pricing. I can see that there's new players coming in the market. I can see also some of those players in one case in Montreal is coming up with I guess a cheaper product and that probably will put some pressure on the pricing of all simulators. And on the other hand, I can see that there is much stronger demand and that will improve pricing. So when you net all of these factors and you may want to comment on these factors, where do you see the pricing evolving?

I think that the first thing you have to look at is we're really I think the only company that provides the full array of products from a simulator to training services and that has really served us well particularly in emerging markets. I think the second thing is that we have been successful in this market segment over a long period of time because we have had very close contact with our customers and we have been basically designing products of very high-quality and fidelity that they have wanted. There has always been some low-cost low fidelity players in the market. It has generally been around 5 or 6%, so that has not changed. Clearly as the market grows, there is more opportunities for them. But I would not assume that that's an area of the market that we're not going to address going forward would be one thing.

And the second thing is that what we're hearing from our customers is they want the quality and fidelity and our product for less cost. They don't want less for less. So that is something that we're focusing on very carefully. We have as well outlined an R&D program. Part of our Project Phoenix is very clearly dealing with this and I think, I hope you'll see that in the restructuring that we have very clearly adapted ourselves and realigned ourselves to meet customer requirements, reduce our cost, improve the quality of our products, and do all of that in a way that we can make money. We are focusing on making money. That is the most important determinant as well as meeting the requirements of our customers.

So I think we have to accept that the market is going to continue to be tough. You look at what is happening with the airlines. They are going through difficult periods, so we have to find a way to make sure we can deliver the quality and reliability for a lower cost and still make money and I am quite confident that we can do that.

But if you were to say like in the last couple of years or the simulators that you're selling today relative to two or three years ago, is it a lower price, a higher price?

I'd say that over that period probably the pricing is lower and we have adjusted ourselves so essentially when we started this restructuring exercise you saw that we told you we did not have a margin on our Simulation Products/Civil and now the segmentation you're seeing the benefits of what we're doing and we're just coming out of the restructuring and you've seen the progress we have made. I think that we will continue to make progress.

Thank you very much.

Cameron Doerksen, Versant Partners.

I just had a question on the relocation of the simulators within your network, the 28. I realize that some of these have already been moved and some are in progress, but what sort of time line on and in which quarters are the bulk of these simulators going to be relocated? Is it going to be spread out fairly evenly throughout the year or is there any specific quarter where it may be more than the rest?

Of the 28 there's about eight have been done, so the remainder have to be done during the current year. And I would say hopefully the bulk of what we have there will be done by the end of the second quarter, maybe a few in third quarter. And as I said on an average basis we should be back to about where we are in terms of the total number of simulators we have hand and you see that we are adding into the system and we said we would have about 10% more by the end of the year.

The only thing I would say is I think that people in civil training have done an excellent job and even with the redeployments that have occurred, the revenues have gone up and the revenue per simulators have gone up as well. So I think that we foresee that we could consider -- we could continue to make progress during the year as we go through this final transition of our restructuring activities.

Okay, thank you.

Horst Hueniken, Westwind Partners.

Bob, you mentioned that you're establishing a companywide group devoted to innovation. Are you able to expand on this initiative? Specifically I'm interested to know what market segments you are contemplating entering into and how quickly might this initiative have a meaningful impact on your firm's revenues and EPS performance?

Yes, what we have done is its going to be led by Nick Leontidis who has worked in marketing and sales area, done a great job there. He also has worked in engineering, has a wonderful knowledge of the company. We are going to have a group of about five people and Nick will be reporting to Jeff Roberts. We have allocated this year just over $3 million that we're going to invest in the activity and they are looking at all areas -- areas where we think that modeling and simulation and training can reduce risk in terms of a market segment. So it could be Homeland Security, it could be the medical area. It could be other areas where simulation is going to be used with -- there is a whole series of ideas that we have got that we want to examine.

This is something that we're looking at that is not going to give a quick return over the next year but I think over the next two to three years you're going to see that we can find some areas where we can use the technology that exists inside the company and be able to apply it to other product areas. So I hope you would see from this that we're applying resources in terms of people and money to do it and we are also linking it to the Phoenix project that we have in terms of R&D efforts that we're making.

Great, that's helpful. Thanks.

Marko Pencak, GMP Securities.

I just wanted to catch one number and then ask my question. Can you tell what the utilization rate was in your civil training division per quarter?

75% in the quarter.

Okay. My question is you have talked about, Bob, I think you said that your CapEx for your fiscal '07 will be roughly the same level as fiscal '06. You also in your disclosure talked about how your free cash flow is going to be calculations will be split between maintenance CapEx and growth CapEx. Of the $130 million, how much of that would roughly be sustaining maintenance and how much are you looking to devote towards growth initiatives?

I think what we are seeing is to maintain our position in the market and that includes some of the initiatives we already have underway like the NH90. It includes the Dassault project, the Northeast project that we have underway. So just to maintain our position in the market is around $130 million. And what we are saying is we right now have many very good opportunities in front of us and what we're going to do is look at them and see how we can finance them going forward and what we are saying is that around 130 million we should able to generate cash perhaps just slightly less than what we've generated this year. And because of the increased credibility of the company in the capital markets because of what we have done, we feel that we're going to be able to do some nonrecourse financing as well.

So we are going to be looking at opportunities above and beyond the $130 million level of CapEx, but we're going to do this on an incremental basis and we're going to be following very closely the cash that we generate quarter-by-quarter, how we get the nonrecourse financing in place and all of this is going to respect the capital structure that we have set up in the company where our debt to equity -- our goal is to go to 40 to 60. That is including the off-balance sheet financing that we currently have in place.

So on the front end we will be a little higher than that, very marginally higher, but quickly we can stay in line and we have the capacity to be able to look at projects and the other thing I would emphasize here these growth projects are all inside our core area of competency and they are all internally generated initiatives that we would take. So we're not looking at big acquisitions. We are not looking to go outside of our core area of competency. Now that we've got our costs aligned, we've got an R&D program going, we think that there are some areas that we can expand into quite quickly.

Okay, but that may include some of the tuck-in or small specialty acquisitions that you have been doing in the past year for example?

Yes, I think that what we are looking is when we identify the areas we want to exploit we're looking for capability as opposed to -- and quality as opposed to volume. So that we can more quickly penetrate the segment. So yes, we would be looking at small ones as opposed to large ones.

Great. Thanks very much.

Steve (indiscernible), [Landmark Capital].

You have answered pretty much most of my questions here. Just if you could maybe just provide me a little bit more clarification on obviously we've been talking about new growth opportunities going forward. I'm just trying to see in terms of the training -- I'm assuming that would involve more wet training versus dry training. And also if you can give me a sense as to potential magnitude of those growth opportunities going forward, I would appreciate it. Thank you.

Yes your assumption is correct. It is going from dry to wet in a number of areas. I really don't want today to give you an order of magnitude. I would prefer to do it as these ideas unfold and we have got a number of them underway. So we would do that more as they come forward. But you can assume here it is going to relate to emerging markets. It is going to relate to pilot provisioning. It is going to relate to the robust growth in the business aircraft area. It is going to relate to the accelerated deliveries coming out of the two main OEMs and it is going to come out of the innovation initiative that we have. So we are very much trying to prioritize where he can occupy the ground and realize the benefits quickly. And as each of these initiatives comes about, we will inform the market of the investment required and the potential revenue increase and earnings that we will have over a period of time.

It seems like the magnitude over time could be fairly meaningful.

That is our intention.

Thank you.

Richard Stoneman, Dundee Securities. Mr. Stoneman, your line is now open.

Your revenue per simulator equivalent unit in the fourth quarter was $3.4 million if you annualize it. What would you like that to be two years out?

Very hard to say. I hope we can grow it incrementally, but I think it will depend very much on the market, Richard. Our plans call for growing it, but I really don't want to say how much we would be able to do it. But I would tell you that we have very much an emphasis on going from dry to wet. That is where most of the gain is going to come from. And you'll see I think in the last year we were able to make a gain of about 5%, something like that in increasing the level of wet training that we're doing.

Bob, in the UK, the new Hawk program, there is a simulator requirement there and in the MFDS program. Are you involved in either of those programs as a bidder or supplier?

Are you aware of that one, Alain?

Yes, I think the Hawk program there is a PFI that is going to put around it. It came on the market recently and in regard of MFDS, that is the big procurement school, it's a big PFI. We are not the prime but we're teamed with two teams on the big MFDS program but we are not the prime on this big one.

To my knowledge there were only two teams, so would you be with both of them?

There was three in (indiscernible), Richard.

Let's verify that and get back to you, Richard. I don't have the precise information and I would rather make sure we give you the right information than just go on past information.

Okay. I appreciate it, Bob.

Benoit Poirier, Desjardins Securities.

Could you maybe comment on the trend related to electromechanical motion for full flight simulators versus the typical hydraulic system? I'm just wondering what about the demand right now, the impact on pricing and also on your operating costs and also the live duration, is it similar to the typical systems?

I think that there is very much a trend towards the electrical mechanical as opposed to the hydraulic and we are aligning our systems and our R&D programs to that in the way that we provision. Clearly there is a cost savings for the airlines because there is less equipment to be procured. I think you are going to see more and more of this as we go forward and we are well-positioned to participate in this initiative.

Okay. Thanks.

Ihor Danyliuk, Merrill Lynch.

Just wondering with regards to the [CASA] statement going forward in '07, Bob, you're working capital, what kind of working capital needs you are projecting?

The working capital requirements in '07, sorry I missed the first part of your question. The working capital requirements (multiple speakers).

Do you see yourselves continuing to generate cash out of working capital?

I think that we made very large gains last year and we have intentions to improve, but it won't be as large because this year because we made a lot of the gains this year. But I think fully we'll hold onto the gains and we will try and get a little bit more this year.

Okay, thank you.

Marko Pencak, GMP Securities.

Can you give me some more insight into why it is that your operating margins in the military training division are so erratic? You're making great sequential progress during the course of the year and then it just sort of fell off a cliff in Q4 here. And I'm just trying to figure out how I can improve my forecasting ability on that.

I think this is frustrating for us as well. I think that basically on these military contracts, the services area you really have to look at the full year. It is going to vary quarter-by-quarter. I think if we look back previously in time we would find that the same kind of thing would occur. If you look back over time it is all over the map quarter-by-quarter.

If I may help here, Bob, a little bit. If you recall, Marco, in Q3 there was two things that happened in the quarter, the rate adjustment that we get probably once a year and also the dividend that we repatriated from the training center in the UK. So that explains the swing from Q3 to Q4 and for the year as you recall there was the EVDS write-down of the deferred bid costs that has impacted the margin this year. So on a normalized basis your margin in training military would be above the 10% I think it is 11-point something.

So if we just exclude the rate reset that you referred to because I certainly appreciate that help with your Q3 results, would it be a fair expectation, Bob, with the contract review process that you referred to earlier on the call that that sort of volatility and all these sort of one-timers that are coming out from the woodwork should be minimized or does this just mean that from sort of a normal economic perspective you think you will have better control on your bid process but there still will be these various resets that affect this division going forward?

I think that there won't necessarily be resets but I think there will be a fair bit of volatility quarter-by-quarter, but over a four quarter basis I think that it should be able to normalize around the numbers that Alain has just talked about.

Okay, thanks.

(OPERATOR INSTRUCTIONS)

Operator, if there are no more questions, we will take calls from the media.

There is one more question from the analyst. Horst Hueniken, Westwind Partners.

Just a quick one. You mentioned that you'll be incurring some restructuring costs in the first quarter and I would imagine in subsequent quarters. Could you just review for us your expectations as to what sort of non-recurring charges you're expecting to put through?

I think we have said that it should be around 10% of the total we have had, so say it's going to be around $7 million, something like that. The only comment I would make is we've talked about cash cost savings in '08 of $30 million. That cash cost savings should increase by about the same amount as if on a percentage basis as we have gone over. So where we had 30 before it should be around 33 million, something like that. What happened here is when we got into the last half of the year, we identified a couple of opportunities where I'll give you one example. The sheet metal shop that's on Monte [Dalias] just beside our plant, we decided to bring all of the back into the main plant in order to improve efficiency and cost going forward. So that was an additional initiative that we took a couple of additional initiatives in order to prepare ourselves for the future. That is why we're spending a little bit more but we will realize more savings in doing that as well.

Okay, great. Thanks a lot.

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This is Nathalie Bourque speaking. Thank you, everybody, and have a nice day. Goodbye.

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