CAE Inc (CAE) 2007 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. You may now proceed, Mr. Arnovitz.

Thank you and good afternoon, everyone. Thanks for joining us today. Before we begin, I need to read the following. Certain statements made during this conference including but not limited to statements that are not historical facts are forward-looking and are subject to important risks, uncertainties, and assumptions. The results or events predicted in these forward-looking statements may differ materially from actual results or events. These statements do not reflect the potential impact of any non-recurring or other special items or events that are announced or completed after the date of this conference, including mergers, acquisitions, or other business combinations and divestitures. You'll find more information about the risks and uncertainties associated with our business in the MD&A section of our annual report and the annual information form for the year ended March 31, 2006. These documents have been filed with the Canadian Securities Commission and are available on our Web site and on the SEDAR Web site. They have also been filed with the US Securities and Exchange Commission under form 40-F and are available on EDGAR.

Forward-looking statements in this conference represent our expectations as of February 8, 2007, and accordingly are subject to change after this date. We do not update or revise forward-looking information, even if new information becomes available, unless legislation requires us to do so. You should not place undo reliance on forward-looking statements. Robert E Brown, CAE's President and Chief Executive Officer, and Alain Raquepas, our Chief Financial Officer are participating on the call today. Following the remarks, we will invite questions from financial analysts and institutional investors. Once we have concluded the question-and-answer period with analysts and institutional investors, we will 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, and thank you, everyone, for joining us today. Let me begin by commenting on our third quarter performance and our outlook for the rest of the year and then Alain will provide some financial highlights. I will conclude with some comments about our current position and the way forward.

Our financial results in the third quarter continue to reflect good market conditions and solid performance from each of our business segments. Revenue increased 20% over last year to CAD331 million. Net earnings increased more than 70% year-over-year to reach CAD30 million. This quarter, we received nearly CAD330 million of new orders, and we now have an order backlog of CAD2.7 billion. We generated close to CAD36 million of free cash flow compared to CAD11 million last quarter, and our net debt has decreased slightly to just under CAD190 million.

Now let's look at the business segments and our activities for the third quarter. In Simulation Products/Civil, we signed orders for ten full-flight simulators for customers in Europe, Asia, and North America. Since the end of the quarter, we signed another two orders, bringing our total to date to 29. While only a month and a half remains in the fiscal year, we expect that full-flight simulator sales will reach 33 by the end of March. Revenue this quarter was in-line with a higher level of activity and our operating margin reached 16.8%.

Training and Services/Civil, was awarded more than CAD95 million in new training contracts, including nearly CAD70 million of opportunities stemming from our showing at the NBAA convention in Orlando. Annualized average revenue per simulator was CAD3.4 million on a base of 97 revenue simulator equivalent units. Total revenue was higher than last quarter, and last year, and our operating margin was 16.2%. As you may recall, our second and third quarters are usually seasonally slower periods for training. Our margin was up from the second quarter, but lower than last year, because of some disruption associated with the completion of activities related to our restructuring program announced two years ago. As well, last year's results included a nonrecurring gain following the disposal of some simulators. We redeployed eight more simulators this quarter, and we continue to ramp up others that were previously relocated.

Two more simulators remain to be relocated in 2007. In total we will have moved 28 since the start of our restructuring. For the combined military segments, we received nearly CAD125 million of orders this quarter. We won contracts for operational trainers and upgrades from the U.S. Army, the British Army, as well as the German Navy and Air Force. On the services front, we won contracts for training and support services from the U.S. Air Force and the German forces.

In the Simulation Products/Military segment, we saw more activity on European programs like Eurofighter, and from the orders we received in the second quarter. In Training and Services/Military, the pace of activity was stable. With that, I will ask Alain to take you through some of our financial results.

Thank you, Bob. Good afternoon, ladies and gentlemen. In the third quarter, consolidated revenue was CAD331 million, up 18% from the second quarter and 20% from the third quarter last year. This is mainly due to higher activity in both our Military and Civil simulation product segments. Net earnings for the quarter were CAD29.7 million, or CAD0.12 per share compared to CAD17.4 million or CAD0.07 per share in the same quarter last year. Excluding nonrecurring items, earnings per share from continuing operations were CAD0.13 compared to CAD0.12 last quarter and CAD0.09 in the third quarter of last year. Our third quarter results included a nonrecurring charge of CAD2.3 million after-tax, which represents the last of the restructuring and related costs under the plan announced in February 2005. The effective tax rate was 28% this quarter. With the statutory rate reductions effective in Canada and in the Netherlands and the mix of revenue we have forecast, we expect to conclude fiscal 2007 with an average rate slightly below 30%.

During the third quarter, we've generated CAD78.7 million of net cash from continuing ops. Net cash from continuing ops was CAD35.1 million higher than the second quarter because we've invested less in nonworking -- in noncash working capital. Free cash flow was also higher at CAD35.6 million. Growth capital expenditures this quarter was CAD33.3 million, mainly related to our Dassault and NH90 programs. Maintenance CapEx was another CAD9.4 million for a total of CAD42.7 million of CapEx. Total CapEx for the first nine months of the year was CAD124 million, and we expect to conclude the year at about CAD170 million. At this time, we anticipate a similar level of capital expenditure next fiscal year.

Lastly, I would like to say a few words on the new accounting standard for stock-based compensation expenses known as EIC-162 which we adopted in the third quarter. The standard applies to all public Canadian companies and requires retroactive application. We have restated our prior-period numbers to account for minor adjustments resulting from the new standards. The total impact for CAE was CAD3.1 million, and the total to-date for the current fiscal year was immaterial. .

On that note, I'll turn the call back to you, Bob.

Thanks, Alain. Two years ago, we embarked on a major restructuring effort which is now complete. We are pleased to have succeeded in restoring CAE's financial condition and improving our competitive position. We are confident about the future, and we are now turning our efforts to growing the Company and consolidating our global leadership position. As Alain mentioned, we are investing some CAD170 million in capital expenditures this year and we see opportunity to main this pace into next year. Two years ago, we told investors that we thought the current cycle would be longer and that there would be important opportunities in emerging markets. So far this appears to be the case. Based on the forecast aircraft deliveries and demand for infrastructure in the emerging markets, we think the current upswing will be sustained through the end of the decade.

Additionally, we expect to see some important changes in the U.S. airline market, but timing is not easy to predict. We have not yet factored the potential of a U.S. commercial fleet renewal into our plans. When most people think about the cycle, they concentrate on aircraft orders. We look at aircraft deliveries, which ultimately drive simulator orders. This is an important distinction, because aircraft deliveries are what ultimately drive demand in our civil products business.

The profile of CAE's business today is different. We are well diversified between markets and between products and services. We know the most cyclical part of our business involves selling civil flight simulators and we are determined to grow earnings by accelerating our growth in areas we believe can generate earnings that are more predictable and more durable. All of our investment decisions involve a discussion about our balance sheet. We evaluated our capital structure to determine what is best for CAE. Specifically, what is the right level of debt to support our growth initiatives and protect us against unforeseen events? We have concluded that the company should be ideally capitalized with 40% debt, which includes off-balance sheet obligations and 60% equity. We feel this ratio involves the right amount of leverage to adequately utilize our assets while still preserving the high quality of our balance sheet. We intend to keep our solid financial base by taking a measured and disciplined approach.

Looking at how this relates to our business segments, I will first discuss Simulation Product/Civil. We intend to maintain our leading market share as the premier supplier of Civil Simulation-based Training Products for the competed market and we plan to do this by continually working with our customers to deliver innovative solutions that enhance safety and help improve the efficiency of their operations. Our CAD630 million R&D program, Project Phoenix, is well underway, and we are continuing to improve our product portfolio while lowering our cost base. We have been making investments to strengthen our technology leadership, and enable us to improve the way we serve the various segments of the market.

In addition to product innovation, our strategic priorities include maintaining our lead in India and China and focusing on deepening relationships with customers and OEMs. Improving the safety and efficiency of our customers operations is equally the mission of our Training and Services/Civil segment. We intend to be the industry's most-trusted partner, the standard for training and services in aviation. In Business Aviation, activity remains strong with nearly 6300 aircraft expected to be delivered over the next five years. As a result, we anticipate that the global installed base of business aircraft will grow about 40% and notably, a higher proportion of aircraft than usual is slated for delivery outside of North America. That's why we are expanding our business aviation network. Last month, we inaugurated a four-bay expansion of our Burgess Hill training center in the U.K. and announced plans for another four-bay expansion in the U.S. Our new North East Training Center is now opening for training.

In Commercial Aviation, we see positive signs as well. Aircraft orders hit record levels over the past two years, translating into more than 6,000 commercial jets expected for delivery over the next five years. Growth is especially strong in the emerging markets like India and China, which account for nearly 40% of all new aircraft deliveries forecasted in the period. Last week, we announced that we will open our first training center in India and we expect to train up to 1,000 pilots annually there when we become fully operational.

Another priority is to address demand stemming from crew shortages through our pilot provisioning initiative and the CAE Global Academy. A sizable portion of our capital budget is for investments in new simulators to continue growing our Civil training business. We plan to increase the number of Revenue Simulator Equivalent Units in our network by an average of about 10% per year in order to maintain our position and address new market opportunities. We are developing our training network to address primarily the long-term steady stream of recurrent training. By building our business that way, we will be less dependent on new aircraft deliveries to drive revenues. We expect these new simulators to begin impacting training revenues in fiscal year 2009.

In our military business, we intend to sustain our technology leadership and strengthen our position as a provider of modeling, simulation, and training system solutions to militaries and governments. Among our defense customers worldwide, we see greater use of simulated environments, not only for basic operational-type training, but increasingly for highly realistic mission rehearsal. Essentially, our customers want the ability to train the way they fight and they also want to train where they fight. This means that our technology leadership continues to be vital to our ongoing success. We need to provide realistic training solutions that can be networked and even deployed remotely right into the theater of operations.

Broadening relationships with the defense OEMs is a key strategic priority. Additional priorities include increasing our presence in the U.S. defense market and positioning ourselves to pursue outsourcing opportunities for training services. Our military growth strategy also involves modeling and simulation, an area where we intend to continue leveraging our capabilities across all departments of defense organizations. We are creating and selling Customer Off The Shelf simulation software and providing simulation-based professional services to defense R&D agencies, experimentation centers, and OEMs for systems design and testing. So far our progress in this business has resulted from R&D investments through Project Phoenix and a series of small, strategic acquisitions.

As we conclude the current fiscal year and look ahead into fiscal 2008, our focus will be on setting our growth initiatives into motion. As we deploy and ramp up our new investments over the year ahead, we should be begin to see appreciable and sustainable benefits in the following periods. Our real challenge now is to execute our growth plan as successfully as we executed our restructuring. We are well-positioned to continue benefiting from the strengths of the aerospace and defense markets and we are confident the time is right for CAE to invest in growth. We are working from a solid financial base with good cash flow. We have a competitive cost structure, and we offer a portfolio of market-leading products and services. We intend to follow a disciplined and measured approach to investing, and we expect to grow CAE with greater earnings stability into the future.

Thank you for your attention. I will now ask Andrew to take questions.

Thank you. Operator, we'd now be pleased to take questions from analysts and institutional investors, and following that, from the media. Before we open the lines, let me first ask, in the interest of fairness, since I know that we have quite a few participants today, that you limit yourself to one question. If you have additional questions and time permits, please feel free to reenter the queue.

Thank you, Mr. Arnovitz. [OPERATOR INSTRUCTIONS] The first question is from Ben Cherniavsky from Raymond James. Please go ahead.

Good morning. My question is about your outlook for simulator orders. You're talking about 33 simulator orders by the end of this year, you've got 29 so far. Correct me if I'm wrong, but the last quarter you were still talking about 25 for this year. Of course, I recognize the market has been very strong, but I'm just wondering what's changed in your outlook in that relatively short period of time to result in that substantial of an increase in simulator sales for this year?

Ben, I think what we've had here is some things have come together quickly, more quickly than we anticipated. You can never control the rate at which the orders are going to come and we've been very pleased with the way that the market has developed. I think that, as people have seen some of the order activity that Boeing and Airbus have been having, I think it's really encouraged people to accelerate and move forward on some of their decisions. I think that the ongoing discussions that we have are related to finalizing the 33 and moving forward into next year. The level of activity is quite good.

So as a follow-up on that point, would you venture to comment on what you think next year you'll have for sales?

We're not quite ready to do that. I would say the activity level is good. I think as we get to the -- let's finalize the year and meet the target that we've laid out, and then as we've done in previous years, we'll be giving you a target. But I really don't want to do this yet until I see exactly where we're going to end this year.

Okay, fair enough. Thanks a lot and congratulations on good results.

Thank you.

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

Thank you. Good afternoon, all. Bob, hypothetically, if you kept your military output out of Montreal somewhat static, not to say it would be that, but just hypothetically, I'm curious, what is your capacity for the production of Civil units? Where can you go without having to really invest in further capacity?

This is not a concern, James. I think that we have the capacity to move up substantially. You've got the orders that we're taking in in the competed market. You've got some that are coming from military, you're assuming they're static, and you see we've made some comments of what we're adding into our network. All of that is being done without any investment, any additional investment from what we've done in the restructuring, and we feel that we still have capacity to increase the throughput in the plant, if we had to. We're basically right now working at about a shift and a half, something like that. So we can very -- we really streamlined the process. We've cleared out the facility so that we can put the units through more efficiently. So I don't think that would be a concern.

Okay. You might just have some variable in the form of rehiring, but outside of that, no major investment?

I don't even see that we'd have a whole bunch of rehiring. Maybe a little bit, but not much. We continue to make progress in our cycle times. I think we're well positioned.

Okay. Second question. On your long-term training plan objectives of growing your RSUs at 10% a year, can you maybe provide some idea of what type of -- the number of builds you might be looking at over the next one, two, three years, three, four years. I know you said your CapEx would remain the same, so presumably in that CapEx number, you're easing off on the military spending you had to do for the NH90?

That's exactly right. We have some capital expenditure, on the military [on add] this year, maybe around CAD60 million, something like -- maybe a little less than that. So going forward, I think we're very encouraged that even predicting where we are on the CapEx, as you've seen, we're at CAD142 million at the end of the third quarter, and we've been able to generate free cash flow, I think we'll be in the same position at the year end. So we're able to support the growth through basically internally generated cash and that we have and the non-recourse financing that we have access to. So I think that you can basically just do the math and see that we're going to be adding the more units in at approximately the rate that I've laid out to you.

Okay, perfect. Thank you.

You're welcome.

Thank you. The next question is from Daniel Kim from Paradigm Capital. Please go ahead.

Good afternoon, thank you. Bob, I was wondering if you could address, please. With regards to the factor that your order rate for full-flight simulators is ramping, at what rate can CAE ramp its delivery schedule of your full-flight simulators?

I think that it depends on the -- the way I describe this, it would depend on the model and it would -- of simulator we were taking in, and it would depend on the progress we've made on the cycle time with that particular model and whether or not we were doing a few of the models together. But I think one of the things we see as being a real competitive advantage is the shortening of the cycle times that we have, and therefore the ability for us to be able to ramp up a more quickly. I'm sorry I'm not giving you a precise answer here, but I hope that gives you an idea of where we're trying to head to.

Could you give us a sense of what your current capacity throughput would be in your facilities today?

Well, I think you would -- if you look at where we're getting to, you would see that we're probably putting in the mid-30s through the plant right now, something of that order of magnitude. There's no reason why -- again, I would go back to what I told James David. This is really not a constraint in terms of what we can do. Either in ramping up or in meeting the market requirement.

Okay. Just in the related area, can you hazard to guess what your market share is today in full-flight simulators? You know what the industry order rate is for the year?

I don't think we have that right -- we'll come back to you on that. We're doing very well, but we haven't tracked it precisely. We'll have a look at that.

Thank you very much.

You're welcome.

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

Thanks very much. Just a couple of housekeeping items, if I could. Number one, just on your -- in one of your charts, I can't remember which table is, but it says about the income received from the Project Phoenix, but I know you guys offset that against R&D, is that a clean offset in the quarter, I think it was CAD14 million a quarter in income, is the R&D the exact amount, or was there any kind of differential there?

No. I think the way it works, there's a -- it accounts for about 30% of the R&D, so as a number, I think. And also you have to net out -- there's adjustments in the investment tax credit as well when you do that. So you can't do a straight calculation on that. Alain, do you have -- ?

Maybe if I can help here, Cameron. We do accrue the grant as we spend the R&D dollars. So there's a proper matching in the period, if it was the sense of your question.

Last quarter, there was CAD1 million of benefit or something, it was just a small number. I was wondering if it was a similar thing this quarter, whether it was pretty much a match.

We're almost in sync.

Almost in in sync. Okay. And second question would be utilization rate for the civil training.

The utilization is, I think, around 72%.

Okay. Great, thanks very much.

You're welcome.

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

Good morning, Bob. Question is, where do you expect the RSEUs to be at year end?

At the end of this year?

At the end of fiscal '07?

Yes, Richard. We have to add back in a couple of the -- we're doing the redeployments. We've got a couple more of these to do, I assume it's going to be around 100, just under 100, something like that.

And how many would you expect to add next fiscal year, Bob?

I think the way I would approach it is just to use the percentages that I've given you.

Thank you very much.

You're welcome.

Thank you. The next question is from Steven Riccio from Landmark Capital. Please go ahead.

Hey, guys. Good job. A question regarding the possibility or maybe the likelihood of the average age of pilots -- retirement age of pilots going up. Do you think that will impose a higher standard of screening for those older pilots? And what will it possibly do to the demand for your training network?

Well, the first comment I would make is I think it's an indication that there really is a pilot shortage and that something has to be done. The second thing is that -- you know, with the pilots going from 60 to 65, I don't really think there'll be a change in the regime related to recurrent training for those people. I think they're all well qualified people and I don't see any change there or variation. But with these pilots remaining, perhaps, in their jobs, it's going to require the people that are at the lower levels to go and be redeployed, perhaps into some of the growing markets. I think there's all kinds of opportunities here, and so we see this that it could possibly have a positive impact for us as well. Because most of the shortage that's occurring is not really in the North American market, it's outside of North America. So I don't think it's going to change things much for us in terms of what we have planned on the pilot provisioning side.

Okay. Can I ask one other question regard, I guess, your first orders here in the very --for simulators in the VLJ category and the LJ category. What's your view of that and have you baked that into your thinking for simulator demand going forward?

You mean the building of the simulators or the actual training?

Both.

Yes. I think that we started to see some deliveries. I think that assessments started to proceeded from a certification point of view, the same with what we've seen from Eclipse. These simulators are going to have a lot lower value on them. I think we'll participate in some fashion there, but I don't think it will be significant for us. I think it's much more the joint venture we have, for instance, with Embraer where we're actually involved in the training and provisioning of the pilots for these aircraft, where there's going to be more of a benefit for us.

Great. Thanks, guys.

Thank you.

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

Hi, good afternoon. My question just on the military side, I guess specifically with the Canadian going ahead with buying a new aircraft and they just recently announced that their C-17s are going to be coming into the fleet. And I understand that Boeing is now parceling out some dollars to Canadian industry. Just wondering if you can maybe comment on whether you've started to have discussions with Boeing and what kind of contacts would you expect to win as a result of the offset programs?

Well, I think that what you've seen with the C-17s, I think it's four airplanes, it's about CAD1.2 billion and that's out of a total procurement plan that the federal government has of 15, CAD16 billion. So we're just at the first stages and we're dealing with the C-17, which is a pretty mature product. So I think it's going to be difficult for Canadian companies to have a lot of direct involvement in that. What I can say is that we're in discussions with Boeing and we expect to get some contracts from them over the next period of time. But the other thing that we're looking at, a couple of weeks ago the government issued to industry a letter of -- what's called a letter of interest. That's related to the training of pilots. And this is a normal process they have to see if there's a way that training could be handled in a way for the CH-47 and the C-130 in a way that could involve Canadian companies and Canadian companies that have leading positions in the training area.

And this is a very similar process that's been used on the broader procurements for the, I believe the 130, which the letter of interest leads to what they call the -- an SOIQ, which is a Solicitation of Offer of Interest and Qualification. And on the basis, that's a process that's playing itself out in the month of February. And we'll see where we go on that. Our interests here are to get specific work related to any offsets which might apply, but more strategically, we're looking for how we can improve our technological and market leadership position as it relates to the training of military personnel for aircraft. And so we're hopeful that we're going to be able to do something in that way.

Do you think there's a possibility that CAE would be running a simulator center for the Canadian military, and I guess for other foreign pilots similar to what you do in the U.K.? Is that something you think the Canadian government wants to do?

That relates more to -- there's two things they're doing in the U.K. There's one -- there's actually the training of the pilots, and then you know our Center at Benson, where we have the integrated center --

-- that's what I was referring to.

The second one. I don't know yet. I think we have to wait and see where things are going to go. I doubt if it will go as far as the U.K. has gone, but we're hopeful that something can develop here that will have broader applications to a number of platforms as opposed to a single platform.

Okay. Thanks very much.

You're welcome.

Thank you. The next question is from Nick Morton from RBC Capital Markets. Please go ahead.

Good afternoon. I wondered if you'd be good enough to talk about the competitive environments and what your competitors are doing and how you see the industry evolving?

Yes. Well, I think we're sitting in a -- you have to really look at each segment. If we started first, perhaps with the Simulation Products/Civil, here we have a good competitor, essentially [Talus] that we're going against and I think we've been doing very well in that particular area of the market. There continues to be some smaller players that are trying to get into the market space and we're working hard as it relates to technology, our product offering, our product support, and cost to make sure that we can compete in all of the segments of the marketplace. So I think everything is evolving in a way that you would expect it to in a growing market.

If I look at the civil training business, I think we're just coming out of our restructuring and the redeployments we've done, the strong position that we have outside of North America in particular is going to serve us well. Again, here, we have very good competitors, FSI, and for instance LTN, and the airlines and on the commercial side, commercial side as well. But here again, I think that we're holding our own. It's a growing market in both the commercial and the business aircraft side and I think everybody is operating rationally here. I think pricing is stable, it's good. I think we're okay in this particular segment.

If you look at the military side of the business, I'll just make a general comment here. We're very broadly diversified in a whole series of markets where we have installations in Europe, in Germany, in the U.K., in Australia, in Tampa in United States and of course here in Canada. So I think we're winning again our fair share of contracts and the technology that we have developed is very clearly in demand and through our Project Phoenix, we're making sure that we keep our leadership program -- the one thing that sets us apart from everyone, I think, is that we have a very clear suite of products and services. We can offer everything from A to Z that is very, very helpful in terms of us being able to tailor solutions to people that are trying to work out solutions in different areas of the market.

So you don't see any upstart in your business disturbing things?

I don't see, Nick, you can ever say never or whatever, but I feel quite good about the positioning that we have in the market and the way that we're positioned to be able to confront any challenges that we might have in our space.

Can you add just a little bit more on the training facility in India? I think you talked about in your press release about a partner, perhaps and how that -- the capital cost and how that might work out?

Yes. What we've done in India is we've tried very -- there's a lot of uncertainties in India. A lot of airplanes going in there, we know there's a shortage of pilots, we know there's infrastructure that has to be built, we know that there's a lot of young airlines that have started up. With our partner, Airbus here in the training side, we have established a basis for going in there in what I think is a very good starting position, a first mover position as we did in China before, relatively low capital costs, a lease facility, we have great flexibility to adapt to any changing circumstances that will be there, and we're poised to pounce on this market going forward and we're setting a solid foundation as it relates to being able to again provide the full suite of services and in terms of providing pilots at the same time as training pilots, and we have lots of people that want to be partners with us in this area of the world. It's partly to share capital cost risk, but most of it is to increase our reach for customers, potential customers, and for people to help us that may perhaps know the region better than us and can complement the capabilities we have.

Great. Well, thanks very much.

You're welcome.

Thank you. The next question is from Marko Pencak from GMP Securities.

Thanks, good afternoon. I have a couple of questions relating to your Civil training business. The first one is, you were talking about relocating a total of 28 simulators. Where are you in that process now?

We've relocated 26.

So two to go?

Two to go. They should be done by the end of this quarter. So we should start seeing the -- we're finding that it takes a bit of time to get these ones done. So the ramping up, you're probably not going to see much of that until second, third quarters of next year as we get everything stabilized, Marko.

Okay. Of the restructuring charge that you took, how much of that would be related to this, to if you could allocate it to other divisions?

You mean of the total charge that we had?

In the quarter, yes.

Oh, in the quarter.

Almost all of it.

Almost entirely.

Almost all of it? Okay. Just while we're on training here. Is the formalization with the Emirates into a joint venture company, does that have any meaningful impact on your financials?

I think the only impact it has is we now -- before it was a revenue-sharing agreement, and now it's a full joint venture, so there's P&L and a balance sheet and management of costs, which is something that both the parties really wanted to have so we can run this much more -- in a much more normal business-like fashion. And there's some incremental affect over time with regard to some benefits that will flow from the structure that we have set up. But we haven't taken them once we're doing it over time.

But would that mean, for example, the margin that you record from the business change -- I mean, you might be reporting it differently from a technical accounting perspective, but in terms of the actual P&L impact, would there be any material change?

Not that much, Marko, until some of the potential cost synergy and operational benefit that Bob just talked about will crystallize.

I just wanted to make sure there wasn't some kind of a mismatch between the costs and revenues that you're getting from that today, but it sounds like that that's going to be about the same?

About the same.

Okay. The last question I had was the -- you mentioned in your Civil equipment side the sale of a capital lease type sales.

Yes.

And you mentioned how it boosted revenue in the quarter because of the revenue recognition. Would it have had any impact on your margin? Or would that still be flowing through at a normal margin?

Normal margin.

Okay, great. Thanks very much.

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

Thank you. Bob, one question. With regard to the training and Civil margins, as we go forward into decade and the expansion consolidation construction gets behind you or becomes a smaller percentage of your total operations, what kind of sustainable margin are you looking at for that business?

I think this is a business because of seasonality. You've really got to look at that over a four-quarter annualized basis and we're trying to get to the around or just below the 20% level.

On a sustainable annual basis?

Yes, I think so.

Okay. You were at 22% in the first quarter. I realize it's seasonal and though it wasn't under your stewardship, but when Derek first expanded into pilot training, the goal was more of a flight safety type of margins, which were say in the high 20s, low 30%. Are you lowballing at 20%? Are you being conservative?

No, we are not at all. What you've got to look at is with the sale and leaseback, you have to add maybe 4 or 5 points. So if you compare that margin, adding the sale and leaseback, because the sale and leaseback occurs below the line, not above the line, you'll find the margins are about the same as flight safety. So I think that this is a competitive margin. It's a place I think where we should try and get to. And the other thing I would add is we're doing this at very different exchange rates than existed at the time.

Okay. Thank you very much.

You're welcome.

Thank you. The next question is from Brian Morrison from T.D. Newcrest. Please go ahead.

Yes, good morning, Bob. With respect to the global training Academy, back on CAE, you did mention your initial concern with this platform was signing up airlines and not cadets, but the opposite had in fact occurred. Just wondering if you could give us an update on how airline demand has progressed, how has the pursual of cadets improved, and how quickly can you get up to 2,000 pilots and has this number moved up or moved forward?

I think we pretty well stay with what we said before. We're still looking at a couple thousand cadets that we can, do, and with the cadets we've got signed up right now, I think we've talked about 600, something like that in the existing schools that we have. We basically have a match as it relates to the demand side. So I'm feeling pretty good that as we go forward and we add on schools that we're going to have a -- we're going to be able to match the demand with the people that we're going to produce. I'm feeling quite good about all of it.

As your peak number of 2000, has that changed at all with the heightened demand?

I don't think that's necessarily a peak. I think that, again, we're taking a measured approach here, a conservative approach to make sure that we can go into this area and execute from a timing point of view and from a quality point of view. And I think that's the best way to approach it. If there is some upside, it will come, but I think the 2000 number we have is pretty solid.

And what year do you think you could get there, ballpark?

I think that's going to take a couple of years.

Thank you very much.

Okay.

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

Just a couple questions. First of all, on your civil sim business that you're selling, what are you seeing, other third party providers, on the training side. Are you seeing any demand from them other than flight simulation company?

Third party, that would be people like, say, Pan Am or others like that.

That's correct.

We don't see much from them.

So you're not seeing much growth in them, maybe other than maybe Alteon?

Yes, Alteon, that would be the only one.

One other question. How is CAE positioning themselves with the multi-crew licensing coming? We're hearing some comments from one of your competitors, at least, that level B simulators are starting to become more usage if that starts to take hold?

I think that we listen to the customer. If that's what the customer wants, that's what they'll get. We think we're very well positioned to meet the, any situation that may arrive there coming forward in the next period of time. I think our record and our relationships with the customers are very, very good. The feedback we're getting from them is very good. We, quite frankly, don't see a huge demand in this area. But it's clearly an area we'll need to address and I think we'll be able to do it.

But you don't see multicrew licensing being a big part of the market, or --

Well, I think there'll be something there, but I don't see a lot, no.

Okay. Thank you.

Thank you. The next question is from Horst Hueniken with Westwind Partners.

Thank you. In your Simulation Products/Civil segment, in the notes, it's disclosed that you've started recording, at least a portion of your sales, using sale-type capital lease transactions, which helps explain the revenue growth in the latest quarter. I'm just trying to determine how much of that revenue growth was due to this accounting change?

Yes In fact, it's not necessarily an accounting change. We do not intend to use that method to recognize revenue. We were forced to do it on two simulators sold to one of our key strategic partners and that sales contract included some special feature that brought us into lease accounting. So that's why we were unable to recognize the transaction as we do normally with the percentage of completion method. It's exceptional and it happened in the quarter.

So you're inferring that it won't happen or at least not materially so in future quarters, but I'm still trying to determine how much it did distort this particular quarter.

You would normalize it, because we would have had a portion of the PUC if we had PUC'ed it. I guess $15 million on the top line is probably the number to use.

All right. Thank you very much. That's all for me.

You're welcome.

Operator, I think that's all the time we have for questions from investors. We need to save some time for media. I think we'll switch and open the line to media now.

Thank you. We'll now take questions from the media. [OPERATOR INSTRUCTIONS] Your first question is from Robert Gibbens from the Montreal Gazette. Please go ahead.

Could you just clarify the NH90 situation, because the deliveries have been delayed quite a long time. That was a very important contract at the time you announced it. Could you clarify, please?

Yes. I think the NH90 is proceeding. There are a number of conversations or discussions that are underway and I think that we're going to see at the start of our new fiscal year during next year you're going to see some -- the letting of some contracts and I think that we're well-positioned to win our fair share.

Okay, thanks.

You're welcome.

Thank you. [OPERATOR INSTRUCTIONS]

Operator --

Yes?

Go ahead.

Well, we don't have any more questions from the media.

I want to thank all participants for joining us this afternoon and remind you that the transcript for today's presentation can be found on our Web site www.CAE.com as well as a replay. Thank you very much.

Thank you, Mr. Arnovitz. The conference has now ended. Please disconnect your line at this time. We thank you for your participation and have a great day.