CAE Inc (CAE) 2008 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.

Good afternoon everyone. Thank you 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 day of this conference, including mergers, acquisitions, or other business combinations and divestitures.

You will find more information about the risks and uncertainties associated with our business in the MD&A section of our Annual Report, annual information reported for the year ended March 31st, 2007. These documents have been filed with the Canadian Securities Commission, and are available on our website and on SEDAR. They have also been filed with the U.S. Securities and Exchange Commission on Form 40S, and are available on EDGAR.

Forward-looking statements in this conference represent our expectations as of February 14th, 2008, and accordingly are subject to change after this date. We do not update or revise forward-looking information, if new information becomes available, unless legislation requires us to do so. You should not place undue reliance on forward-looking statements.

Robert E. Brown, CAE's President and Chief Executive Officer, and Alain Raquepas, our Chief Financial Officer, are participating in the call today. 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 potential 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 call over to Bob.

Thank you, Andrew and thank you everyone for joining us today. I will begin with some remarks about our third quarter performance. And then Alain will take you through our results more specifically. Following that, I will conclude with some comments about the way forward.

Our performance in the third quarter and year-to-date continues to show that we have successfully diversified our interest between civil and military markets, and among the various regions of the world. Training and services are becoming a larger portion of our business mix, which will provide more stable and predictable results.

Revenue in the third quarter increased 4% over last year to $345 million. Approximately 60% of our revenues are now being generated outside North America, and those originating in high growth areas like Asia, the Middle East, and South America, have grown by 25% over the same nine-month period last year. Net earnings in the third quarter increased 33% to reach $39.5 million. In the quarter, we received $567 million in new contracts. Nearly 60% of these orders are in our Military segments. At the end of the quarter, our backlog reached approximately $2.7 billion.

In Simulation Products/Civil, we announced orders for 11 full flight simulators during the quarter, with customers around the world, including Quantas, Etihad, Air Algerie, Continental Airlines and U.S. Airways. This brings the total number of simulator announcements to 31 for the year-to-date.

Training & Services/Civil won more than $104 million in new training contracts during the quarter, including a 10-year agreement with Air Asia, to fully manage the airline's pilot training. We also signed a 5-year contract with Dassault Falcon jet, which names CAE a preferred provider for maintenance training for Dassault employees. Similarly, we reached a 5-year deal with Hawker Pacific, to provide maintenance training to it's employees and customers within Southeast Asia. Maintenance technician training is less frequently talked about than pilot training, yet the stress on the global supply of qualified technicians is even more acute.

In the Combined Military segment, we secured $339 million worth of contracts, and as a result, our military backlog has increased by 14% from last quarter. During the quarter we signed $160 million in contracts with the Australian government, to provide MRH90 training systems and services to its forces. As well, Helicopter Training Media International, a company equally-owned by CAE and Thales, entered into a contract to supply the French Air Force with an NH90 full mission simulator.

To date, 14 nations have ordered the NH90, some of which may require their own dedicated training solutions, while others are likely to seek training services. Either way, we are well-positioned. The Royal Netherlands Air Force awarded us contracts for the C-130H and the KDC-10 full mission simulators, and a range of maintenance and support services, and we received a contract to provide the U.S. Air Force with C-130J pilot instruction and course ware.

With that, I will ask Alain to take you through our financial results.

Thank you Bob, and good afternoon everyone. In the third quarter, consolidated revenue was 345 million, up 4% from last year. Had the Canadian dollar remained level year-over-year, revenue would have increased by 10%. Net earnings were 39.5 million, or $0.16 per share, compared to 29.7 million, or $0.12 per share in the same quarter last year. Excluding non-recurring items, last year's net earnings were 32 million, or $0.13 per share.

In Simulation Products/Civil we recognized 12% more revenue this quarter compared to last year, because of higher order activity, which was somewhat offset by a stronger Canadian dollar. Our operating margin reached 24.3%, as a result of the mix of programs, higher volume, and a good cost performance.

In Training & Services/Civil, our average annualized revenue per simulator in the quarter was 3.4 million, on a base of 109 revenue simulator equivalent units. Training demand continued to be strong in most of our training centers. Despite the strong Canadian dollar, revenue increased by 12% year-over-year, because of higher utilization, and the addition of 12 more RSEUs. Our operating margin for the quarter was 16.7%, which is a bit higher than last year, despite the drag caused by the launch of new training assets. We normally expect new training assets to take about 18 months to ramp up to their full expected contribution.

In our Combined Military segment, revenue for the quarter was 149 million, and operating margins reached 14.1%. Year-to-date, our Combined Military operating margin reached 13.5%. Our consolidated backlog increased from 2.5 billion to 2.7 billion, and our book to sales ratio reached 1.6 times sales for the quarter, and 1.2 times sales for the trailing 12-month period. As Bob mentioned, order activity was stronger this quarter in our Military segment.

Income taxes were 16.8 million, representing an effective tax rate of 30%, compared to 28% last year and 31% last quarter. The tax rate this quarter is slightly lower than last quarter, because of the mix of income originating from various jurisdictions.

Capital expenditure this quarter totaled 21.1 million, bringing the total to date to 141 million. Global market conditions remain supportive of our growth plan, and as a result, we expect to conclude the year with total CapEx of about 200 million. This is somewhat lower than our previous estimate, because we have realized some cost savings, and we have adjusted the mix of platform being deployed this year. We generated 61 million of net cash from Continuing Operations during the quarter, and we generated 46.2 million in free cash flow.

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

Thanks, Alain. I commented earlier that our performance reflects a healthy level of geographic diversification and balance between Civil and Military markets, and between products and services. We are continuing to focus on reducing costs, developing new products, and maintaining our strong financial position. Despite the current economic and financial market volatility, the fundamentals of the Aerospace and Defense sector remain strong.

On the Civil side, 2007 was another record year for aircraft orders, with Boeing and Airbus adding more than 2,800 planes, to an already lengthy backlog. As such, we have a good degree of visibility of potential future sales in that market through to the end of the decade. Demand for our commercial full flight simulators has been steady, and we now believe we can slightly exceed our previous full year estimate of 34 orders. The exact figure will ultimately depend on the timing of the number of contracts.

The U.S. and other developed markets historically represented the lion's share of aircraft demand. Today, emerging markets represent a significant source of demand. The growth in developing markets has guided CAE's aviation training strategy, our long-established and leading positions in China and South America, our recently launched training hub in Southeast Asia, and our rapidly developing training infrastructure in India, are all prime examples of CAE's global focus in commercial aviation training.

Our pilot provisioning initiative has rapidly become a vital part of the solution to the global pilot shortage. We already have the capacity to train annually approximately 1,000 pilots through the CAE Global Academy, and we expect to more than double this capacity over the next few years. We are effectively matching supply with the demand for new pilots from our airline customers. Last week we announced a formal agreement with the Indian government, to provide pilot training in two national flight academies, which is expected in time to bring to eight the number of flight schools in our Global Academy.

Business jet demand in 2007 reached unprecedented levels, notably in markets outside North America. With our extensive global reach, we are well-positioned in this segment. Our ongoing investments in Business Aviation will enable us to access previously unaddressable market share. The main driver for Business Aviation is demand from the existing base of aircraft worldwide. A backlog of more than 6,500 business aircraft orders should further expand global demand for training.

More than 40% of CAE's revenue comes from its Military segments. This has provided us with an important level of diversification, and has been a focused area for technology development. We had a number of impressive wins in the third quarter, which increased our Military book to sales ratio back to over 1 time. We continue to expect to conclude the fiscal year with a solid order book. Year-to-date, we have already taken in more orders than all of last year. The timing of military contract awards is always difficult to predict, but the level of activity remains strong.

As I mentioned earlier, we signed our second significant contract related to the NH90 helicopter, to provide comprehensive training, systems and services to the Commonwealth of Australia's planned fleet of 46 MRH90 helicopters. This follows the German NH90 program, in which CAE plays a major role. The NH90 helicopter program is the largest ever launched in Europe, with firm orders now reaching 507 units, for 19 armed forces of 14 nations. U.S. Military spending in 2008 will be an estimated 9% higher than 2007. And the U.S. is still expected to represent about half of the world's defense market.

Given the global conflicts, the U.S. Military is continually looking for ways to address its high operational demands, as well as personnel readiness. Simulation is seen increasingly as a solution to these challenges, and we are working with All branches of the U.S. forces, to help identify solutions.

We were pleased to see the Government of Canada sign a contract with Lockheed Martin last month for the purchase of 17 C-130J Hercules aircraft. As we announced last quarter, the CAE-led and Canadian team is the sole qualifier to bid for the C-130J and the CH-47 air crew training capability. We anticipate the Government will issue a Request For Proposal for such training to CAE some time during the first half of 2008.

To sum up, we had another quarter of good performance. Worldwide demand for air travel continues to be supportive of our globally focused initiatives, and we will continue to prudently and decisively make investments to grow our market presence, and support our global customer base over the long haul. We are well-diversified with increasingly more predictable earnings. Our financial position is solid, and we believe we have the right people to act on the opportunities ahead.

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

Thank you. We will now take questions from the telephone line. (OPERATOR INSTRUCTIONS) There will be a brief pause while participants register for questions. We thank you for your questions.

Before we open the lines I would like to ask that in the interest of fairness, that investors limit themselves to a single one-part question, and then please do re-enter the queue if you have follow-up questions.

Thank you. The first question is from Claude Proulx from BMO Capital Markets. Please go ahead.

Thank you. Good afternoon. First question is just your margin in Civil products. You indicated after Q2 that 23% or so was not sustainable. One quarter obviously is not a trend, but now you have a second quarter with the margins even better. Any comment on the sustainability of these margins?

A lot of this depends, Claude, on the mix of the programs that you have. We still tend to be prudent in this area and we would stay with the same comments that we had last time, and I think these results have been done in spite of what has happened, in terms of exchange, but exchange plays a factor in this business as well. So I would tend to stay closer to the 20% figure.

And the fact that you have been ramping up production in order, among other things, to expand your training network. I mean, is that also a big part of that improvement, or it is not material?

There are a whole series of things that contribute to it. Obviously, volume has an impact, in terms of overhead absorption and things of that kind. It obviously has an impact, in terms of being able to procure on larger volumes in terms of what we purchase.

And you can build in some series of products in terms of as opposed to building them one at a time. So I think there are a whole series of things here that contribute. But there is not any single one that really is overriding.

Okay. Thank you.

You are welcome.

Thank you. Your next question is from Ben Cherniavsky from Raymond James. Please go ahead.

Hi, guys. My question is just around the pricing environment for the simulators. I know in the past I think you talked about a fairly benign pricing environment. Has that changed at all? Have you managed to at least get recovery from the increase in the Canadian dollar into your pricing, or what generally is happening on that front?

I think Ben we would basically stay with the same situation we have had before, basically we don't, pricing has not been improving. We have some new products going in, like the 5000s that are helping us out. We will start to see them going into the marketplace. But I think, we are on the continuous journey of innovation, and continually cutting costs and finding ways to do things more efficiently. We are trying to control the things we can control, and pricing is really not moving very much.

But is that to say, are you saying that in the context of the last four or five years, like since the markets started to recover, I mean, are you now talking about recognizing simulator sales at 40% less than you did a few years ago, when the dollar was much lower?

I would say that since we started this, our restructuring, basically the prices have gone lower, as opposed to going higher.

So there has been a dramatic drop in prices then, when you combine the pricing pressure and the currency?

I wouldn't necessarily describe it as dramatic.

The currency swing has been dramatic.

Yes. There has been quite a drop in the prices, I think you could characterize it that way and we have had to adjust, in terms of our cost base, and there is the pricing but most of the stuff is priced in U.S. dollars.

That is my point. So I mean, is the pricing pressure, the revenue pressure on you per simulator been roughly been equivalent to the pressure on the Canadian dollar?

I don't know. I don't have an exact feeling for that. There is clearly pressure on both aspects.

Okay. Thanks very much.

You are welcome.

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

Just a question on the simulator network. I am just maybe wondering if you can update us on where you expect the revenue of simulator equivalence to end up at the end of this fiscal year, and any sort of early outlook for where you think you are going to be at the end of fiscal 2009?

I think we would stay with the same statement we made before, that we see ourselves adding approximately 10% a year. So we have told you where we are right now, which is probably not a bad figure for the end of the year, and then you will probably see additions around the 10% level that we talked about previously on a year-to-year basis.

Okay. Just one quick one. What was the simulator utilization rate for the network in Q3?

It was just over 80%, 83%.

Okay. Thank you.

You are welcome.

Thank you. The next question is from Tim James from TD Securities. Please go ahead.

Continuing on with the training services on the Civil side, can you talk about as you look forward and the amount of revenue that you can generate per RSEU, how much of any incremental value you generate there is due to sort of that 18-month period in getting revenue through new training facilities, or through new simulators, versus kind of simulators that have been in place for a number of years, and you think you can actually increase the utilization of those?

I think we said it takes 12 to 18 months to ramp up a simulator, once you get it in place. So obviously your revenue per simulator is going to be lower, but I think that you would find that probably have more business aircraft simulators than civil simulators that are going into the system, and obviously that is going to help you, in terms of the numbers that you have.

And as well, I would say, the other part of it is we doubled our [Muncie] facility, our U.K. facility. We have just started up our northeast facility, and we are doubling it as well and those, they will tend to have a bit of drag on you, as you are getting them up and getting them going.

So the balance of improvement in revenue per RSEU going forward is going to come from new simulators put in place, as opposed to ones that have been in place for years, and there is an opportunity there to increase the utilization of those?

Yes, I think that we are obviously doing everything we can to improve our costs on the ones that exist. So there will potentially be some small gains there. We are also trying to look at how we can get wetter on the commercial simulators, in the past it has been basically the business aircraft, but we are having some opportunities where we can do that in the commercial area as well.

Great. Thank you.

You are welcome.

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

Good afternoon. Wondered if you could talk, Bob, about what is happening in the industry, what your competitors are up to, what may have changed over the last little while, maybe the last year, just update us on how you stand against your competitors?

Well, I think for all of us in the business, we have had a very active market. You have to look at sort of I think the demand side first, which are basically the airlines, and the aircraft that they have been ordering. So Boeing and Airbus I think and certainly even Embraer and Bombardier are taking orders, and at a very good pace, and I think if you notice, they really have not taken up their production rates.

So that helps us a lot, and we predicted, I think we have been predicting that that is what would happen. So that gives us better visibility and it also gives us an opportunity to have a more stable run over a period of time. So I think everybody is seeing that.

If you then look on the business aircraft side, as we said before, unprecedented levels. I think the first year that 1,000 business aircraft have been delivered, and that will be surpassed again I think in this calendar year as well.

So if you look as well at, I think if you talk to Airbus and you talk to Boeing, you would find that the slots that are available for people to order airplanes, you are out to 2012, 2013, 2014 on some models, and surely that can be improved on I guess, if they were to increase production rates, but to increase those production rates will take a little while.

So that gives us more certainty I think in terms of the extension of the cycle. So then if you look at the various segments and our competition, first looking at business aircraft, essentially ourselves, and flight safety, I think that we have had a market that we have been sharing, and I think it has been going well for both parties. And it is basically the two of us that are there.

If you look at the commercial aircraft, it continues to be the same as it has in the past, basically ourselves competing against airlines, that have these third party capabilities. You have [Eltion] as players there, you have two new players, [like star], but nothing really very dramatic that has been changing there.

If you look at the Military market, I would say it is much more stable. We are seeing increases in the military budgets going forward. We are seeing that a lot of the equipment that is being used, particularly by the U.S. forces, is getting worn out. It is going to have to be renewed. I think that that is something that is going to have to occur in the next decade.

And investments that we have made in technology and the partnerships that we have established, and I think the leverage that we have been able to use through the Canadian purchase of aircraft to allow us through industrial benefits to be able to participate in some programs, have really positioned us in such a way, that we can be a very valuable partner to people, in terms of bidding around the world, and I think the base that we have around the world is very good for us.

So I would say that we probably improved our competitive position as it relates to the military area. Hope that gives you an--

That is a great answer. Thank you very much.

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

First I just want to get a data point, and then I do have a question. Can you tell me how many sims you actually delivered during the quarter, how many civil sims? While you are looking for that, question to you, Bob.

Talk about prospective mergers between the U.S. legacy carriers. I am curious to get your perspective. If we go on the assumption there is one, or perhaps two pairings, how do you see that affecting prospects for the company, both in the sort of call it 12 month timeframe, those mergers occur, and then more on a longer term timeframe?

I think the big thing here is it is not so much the mergers, it is the requirement for a number of the airlines to reequip. You have started to see some talk about the purchase of some 737s, A320s by American U.S., by the legacy carriers. And I think the real question here is, for me anyway, it is inevitable, as we have always said, they are going to have to order some airplanes.

Normally mergers, things of that kind, tend to slow down the acquisition of aircraft, and that is why we have been very, very diligent in expanding our business, not depending on the North American legacy carriers. We are very much on the expansion outside, and if it happens in North America, that was our base.

I think we are very well-positioned to participate. The mergers are much like what was happening with the Chapter 11. It creates a level of uncertainty of who is going to be with whom, and how would they integrate the fleets, and the result from that of what new aircraft would they want to acquire. We are very well-positioned to jump on that quickly, but I think we are going to just have to let that sort out for the next little while.

Would you anticipate that you would get any shorter term training requirements as they move through their pilot seniority ranks, and try to move to fleet types in the short term?

Maybe. The FAA changed the age limit from 60 to 65. It is going to be very interesting to see how many pilots decide to stick around, and what the demand for pilots is going to be. So I think that will be something that is going to have to play out in the next little while. But there could be some activity but I would say, in terms of our plans, it is not material.

Okay. Then did you get that count for me?

We will follow up, Marko.

Okay. Thank you.

Thank you. The next question is from Benoit Poirier from Desjardins. Please go ahead.

Good afternoon. With respect to training and services, military, you have benefited this quarter from a cost recovery. Just maybe if we could quantify the impact, and what would have been the margin, or the impact on the EPS?

Yes, you are referring to the adjustment in the labor?

Yes.

Yes. Okay. I think why don't you cover that, and I will make a general comment after.

Okay. Normally the way it works in military businesses, you have forward pricing at the beginning of the year. So the amount of work you are doing with the government is based on that forward pricing. And once a year you do your calculation with your actuals, and you get to the real actual rate that you can bill the government. It is an annual process.

That is what happened this quarter, and the adjustment was around 1.5 million in this segment. So if you remove the tax it will be a million to the earnings contribution. It is an annual type thing, so it is coming every year so it's part of our ongoing business. But you are getting it only once a year when the government comes and audits your rate, and gives you the benefit of your actual versus your forward pricing.

So definitely the 16.7% margin won't be sustainable in the next quarter? The 16.1.

I think the way you should look at it, again is look at both of the divisions, or both of the segments together, and you will see that we've been doing a little better than where we always were previously of very low double-digit margins. And I think we are probably going to be maybe not at the level that we are at, but we will be able to do better than, we are getting more confidence. We can do better in the military segments than we have in the past.

Perfect. Thank you very much.

Thank you. The next question is from [Steve Michio from Buyside Research]. Please go ahead.

Hey, guys. Great quarter. You mentioned maintenance training versus pilot training. Could you just talk a little bit about what, if any, are the margin differentials between those two businesses?

Well, I think we are really in the stages of what we are doing. We established a group that is concentrating on the maintenance and services, and this is an area where there is not a certification requirement by the FAA, or other authorities around the world.

So what we are trying to do is look and see how we can establish a business here, and so far, we have come to the conclusion we can establish a business, and it's going to I think have some pretty good margins. But it's too early for us to, I really don't want to give any indication until I have a better idea of after we have gone through it, after we have had some time to go through it.

The other aspect you have to look at is it is very much a differentiator for us, in terms of we have tried to be the total training solutions provider, doing pilots, doing maintenance, wet training, dry training, you name it, and we can do it. So we have been approaching it from that point of view. We will have to wait a little bit before I can give you more precision on the margin.

One additional question related to that. Any idea in terms of market size for maintenance training, say versus pilot training, sort of a similar sized market or--?

It is probably, our initial estimates are that it probably could be around the same size.

Great. Okay. Thanks a lot, guys. Again, great quarter.

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

Yes, good afternoon, Bob. Just a clarification. The French NH90 contract, is that in your backlog as yet?

Yes.

Thank you.

You are welcome.

Thank you. The next question is from [Chris Murray] from CIBC World Markets. Please go ahead.

Good afternoon, guys. In terms of military sales, could you give us some additional color on if there are specific programs. You mentioned the NH90 and some of the Canadian government stuff. Are there other programs out there, that are either ramping up, or are going to become available to you, where you guys can focus in transports, or fast jets, or helicopters?

I would say the C-130, we have been the preferred world leader in that area. The CH-47, we have been very strong on that platform. All of the helicopters, basically.

Of course we have the NH90, and the Seahawk is another one that we have been good on, and more recently, the C-295 that comes out of CASA. So there is a whole, part of our strategy here is to make sure that we are installed in platforms that have long legs, long lives, and I think the NH90 was a very good addition to the already good, the good stable of platforms we are on.

Any thoughts on fast jets? It is not really one of the areas you guys spend a lot of time at, it appears.

There are no fast jets, but there are some of the training aircraft, like the hawk, for instance, and I think those are the main ones that we have been involved on. Fast jets is not a specialization that we have had.

Okay. Thanks.

Thank you. (OPERATOR INSTRUCTIONS) The next question is from Cameron Jeffreys from Credit Suisse. Please go ahead.

Thanks very much. Just a question on the military side. Are there any programs you have that you are involved in right now, or bids that you see on the horizon, that might be at risk or in jeopardy if there is a change in the White House south of the border in the November/December timeframe?

No.

Okay. Thanks.

Thank you. The next question is from Steve Michio from Buyside Research.

Hi. I guess just a general broad question here. I guess U.S. legacy carriers they haven't really started in earnest or at all, in purchasing new equipment for their fleets. Could you just give us a sense as to potentially what sort of impact that could have on demand for your simulators, and eventually your training facilities?

I missed the very first part of which?

U.S. legacy carriers really haven't been --

Okay. Sorry. Well, I think you have to again look at the type of aircraft and I mean, I think the main ones you have to look at are the MD-80s, DC-9s that are in the fleet, and there are quite large quantities, at American for instance, at Northwest, as well. We are probably talking there, 200, 300, 400 airplanes, I think something of that order of magnitude.

And we will have to see what happens on the 787. There has been some 787s that have gone in there as well. I think some people, the reason it is hard to predict is because I think some people are waiting to see if there is going to be a 737 or an A320 replacement aircraft that is going to come along.

And so this is what is very hard to predict as to which way people will go, whether they will take existing aircraft now, and try and trade them out later, or they are going to wait and try and get more, see if aircraft have more operational efficiency. But I think there is very clearly a very good potential going forward, but very hard to come up with a specific number for you. I can only give you some general color on that.

But in general, it looks like as it has been in past cycles, that if they do sort of start to I guess purchase some of your products and services, seems like it would be a pretty material positive impact on your business.

I would say it would clearly have a positive impact on our business, but it has been, how do we estimate whether it is going to occur. So we have not tried to speculate on when that will happen, because there are so many things that have been happening for a number of years in that market. That is why we really tried to make sure we diversified the business in such a way we can continue to grow, and if anything comes from the U.S. it will only help us.

Beautiful. Great, guys. Thanks.

Thank you. The next question is, yes?

Go ahead.

The next question is Ihor Danyliuk from Merrill Lynch.

Hi, Bob. With regards to the full-fledged simulator Civil that you are targeting, what is your target for the fiscal year '09?

We are going to do that probably in the first quarter next year, Ihor, so I can't really give you a number. The only thing I can tell you is that activity levels are quite good.

Okay. Thank you.

Thank you.

Operator, if there are no more questions from investors and analysts, we will open the line to the media.

Perfect. There is one more question from the analysts, it is from Benoit Poirier, Desjardins.

With respect to your strong Civil equipment margins, could you maybe provide more details about the cost reduction initiatives you implemented, and also what needs to be done going forward?

I think I can't really be specific there Benoit, other than to say we have a very clear approach, and a culture of continually decreasing our costs, and as I said before, that relates to procurement. It relates to the way the product is designed.

And as well, the work practices that we have, and I think that we still see that there are opportunities for us to be able to attack all of that in a way that we can have, we can continue to have savings going forward, and we do have the advantage that we are providing some product as well for our own network. And that helps us a lot in terms of what we are going to be able to do now, and what we are going to be able to do going forward. Particularly as it relates to the strength of the business aircraft segment.

Okay. Perfect. Thanks.

Thank you. We are now opening the question period for the media. (OPERATOR INSTRUCTIONS) The next question is from [Mehi Stone from Latay] Please go ahead. [Speaking in French]

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[Speaking in French] Bonjour.

Merci.

Thank you. The next question is from [Ross Marowitz from the Canadian Press]. Please go ahead.

Yes, hi. I am wondering if you could elaborate a little bit more on your comments regarding the U.S. military usage of their aircraft, and how that could help you going forward?

Yes, I think that what we are seeing, I mean there are a couple of aspects that have to be looked at when the military are evaluating doing training in simulators, or doing it live. And the first thing that I think you have to look at is safety, and being able to do the mission, and bring people back safely.

And clearly the amount of training you can do, significantly improves the prospects for people that are going out on missions. They are also using the equipment in simulators not just for training, but because of our capability to download satellite information, basically mission rehearsal is possible on very up-to-date information, when they are going to into various areas of conflict. So I would say that safety is one of the things, and making sure that people have the best chance possible to carry out their mission in a safe fashion.

The second would relate to cost. And training live in an aircraft takes, especially if you are for instance practicing refueling a large, say a 130 aircraft using helicopters, getting together the aircraft with the helicopter, getting the right zone, getting the people all together, takes a lot of time, and it takes a lot of money. You can do that very, very quickly, and for instance in those simulators that we are making right now. And clearly the equipment that is being used, I think they are finding, when they are looking at what's happening in Iraq, Afghanistan, that the equipment is wearing out at a lot faster rate.

You know, multiples of a time faster than had been anticipated. So anything they can do to train in a synthetic environment, as opposed to training with live equipment will help them overall. So in summary, it is really the two things. The most important one is the safety of the people, and the second one is the cost savings that can occur, and the ease at which you can schedule people to go into the simulators.

As they wear out the aircraft, I guess from usage, there are other opportunities for replacements, is that as well?

Absolutely, yes.

Is there any quantification on that, or how do you see that happening?

All we know is, there are numbers that vary between that the equipment is wearing out 3 to 5 times faster than it has in the past, because of all of the use that it is getting. It is hard to come up with any specific numbers, because each product is different, is used differently in each theatre of war.

We would have to wait and see how all of this comes out. But we are at unprecedented levels of spending, particularly in the U.S. right now, even on an inflation adjusted basis. I would think the spending now is even greater than it was at the time of World War II.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Mr. Arnovitz, there are no further questions registered at this time. I would now like to turn the meeting back over to you.

Thank you. I would like to thank all participants for joining us this afternoon on CAE's third quarter conference call, and I would remind you that an archive of the conference can be found on our website, www.CAE.com. Thank you.

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