CAE Inc (CAE) 2009 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the CAE first quarter conference call. Please be advised that this call is being recorded.

I will now turn the meeting over to Mr. Andrew Arnovitz. You may now proceed, Mr. Arnovitz.

Good afternoon, everyone, and thank you for joining us today. Before we begin, I need to read the following. Certain statements made during this conference 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 will find more detailed information about the risks and uncertainties associated with our business in the MD&A section of our Annual Report and annual information form for the year ended March 31, 2008. These documents have been filed with the Canadian Securities Commission and are available on our website and on SEDAR. They've also been filed with the U.S. Securities and Exchange Commission under Form 40-F and are available on EDGAR.

Forward-looking statements in this conference represent our expectations as of August 13, 2008 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 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 with investor questions, we will open the call to members of the media.

For your convenience, this 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 this afternoon. Since we already reviewed our first quarter results this morning at our annual general meeting, I will only briefly highlight our performance and I will take you through some financial areas of interest, and then I will conclude our presentation with some market observations and our outlook for the way forward.

We had a good performance overall this quarter with continued revenue and earnings growth in the combined Civil and Military segments of our business. Revenue was $392 million, up 9%, compared to last year and earnings from continuing operations were $47 million, up 21%. We took in $357 million in new orders and concluded the quarter with a $2.8 billion backlog which provides a solid base for the period ahead.

In Training and Services/Civil we signed $89 million in new training contracts and we expanded our global training network to an average of 114 RSEUs, up from 105 last year. Our first quarter is seasonally stronger for training and average annualized revenues per simulator reached $3.9 million which compares to $3.6 million last year.

On the business development front, we acquired Sabena Flight Academy to consolidate training capacity in Europe and to bolster our ability to address the global pilot shortage. In Simulation Products/Civil, we signed orders for 13 Full Flight Simulators during the quarter from customers around the world including airlines, training providers and OEMs. In the combined Military segments we won new contracts totaling $138 million.

The U.S. Navy ordered an additional MH-60R avionics maintenance trainer and we made important progress in the jet trainer market with the selection of CAE to provide two Hawk 128 full-mission simulators for the U.K. military. Also in the fast jet market we received an update contract for the Eurofighter training systems being used by several European nations.

On the Services side, we received a five-year contract extension to manage and support simulators for the Australian Air Force. Our positive momentum has continued since the end of the quarter. Last week we signed an agreement to acquired xwave’s Defence, Security and Aerospace unit which is an important step in our strategy to expand the range of defense products and services that we offer.

We also announced that Rotorsim, the consortium owned equally by CAE and AgustaWestland signed approximately $80 million in contracts with the Netherlands Ministry of Defense to provide comprehensive NH90 helicopter training systems and services. That contract is worth about $40 million to CAE.

And this morning, we announced an additional $106 million in military order contracts involving updates for the Eurofighter program, solutions for the U.S. Navy and Air Force, and services for the Canadian forces. With that, I will ask Alain to discuss our financial results.

Thank you, Bob, and good afternoon, everyone. Since we have already run through our financial results at the AGM this morning, I will briefly discuss our operating performance by segment and then focus my comments on two specific areas which we feel could benefit from more elaboration, capital expenditures and free cash flow. So in Training and Services/Civil revenue was up 16% over last year, $110 million. The increase came mainly from stronger demand and the addition of nine more RSEUs to our network.

Segment operating income of $20.7 million was up over last year but lower than last quarter mainly because of costs associated with the ramp-up of new asset and training programs. Also we recognized a gain of $500,000 last quarter for the sale of a used simulator. The segment operating margin was 18.8% this quarter compared to 22.8% last quarter and 20.7% last year.

In Simulation Products/Civil revenue increased 21% over last year to $137 million. This increase was the result of two main factors. First, we had the benefit of a higher number of simulator orders and, second, we recognized revenue on a number of simulators that were being manufactured and near completion for which sales were obtained during the quarter. Segment operating income increased 39% over last year to $27.4 million. The operating margin was 20.1% compared to 22.3% last quarter and 17.4% last year.

The increase over last year is mainly from cost improvement while the decrease from last quarter mainly comes from differences in the program mix. Also, we are now working with an overall edge position on U.S. contracts in backlog that is close to par. Our ability to maintain the margin above 20% is testament to our sustained continuous improvement.

In Simulation Products/Military, revenue were 7% lower than last year at $88.4 million. The rate of our order booking has grown appreciably over the past two years and we are confident this will continue to translate into higher revenue growth. The decrease in the revenue this quarter is the result of a timing issue related to subcontractor milestones on certain helicopter programs. Segment operating number was $13.6 million and the operating margin was 15.4% compared to 12.9% last year.

In Training and Services/Military, revenue was up 3% over last year to $56.9 million. Segment operating income was up 50% from last year at $9.6 million. The operating margin was 16.9% compared to 11.6% last year. Result this quarter included the dividend from our MSH investment in the U.K.

Now a few words about capital expenditures which totaled $38.4 million for the quarter. This was comprised of $5.5 million for maintenance expenditures and $32.9 million for growth. The growth portion was mainly related to the expansion of our global civil training network. We are a fully integrated training solution provider and over the past four years we have substantially reduced our manufacturing cycle time.

We now have the advantage of being able to react more quickly to challenges and opportunities in the market and to adjust our rate of investment accordingly. We said last quarter that we expect capital expenditures this year to be similar to last year at about $190 million. The total range of investments that we could undertake would actually involve more capital, but we felt that maintaining last year pace would be more conservative. The majority of our growth CapEx is targeted for investment that will allow us to have civil training programs for aircraft models that we do not currently provide and that are supported by aircraft fleets already in service.

Some of our investment plans also relates to an expectation for market expansion and given our shorter lead times, we believe that we can afford to moderate further the pace of these expenditures this year while still staying committed to our growth objectives. We, therefore, have lower our total expected CapEx this year to around $170 million. Free cash flow this quarter was negative $42 million primarily because of investments in our working capital account for inventory and lower payables and accrued liability.

We normally anticipate a reversal in working capital at the start of CAE's fiscal year. Our first quarter is always impacted by cash payments for taxes, royalty and [worldwide] employee incentives that are accrued during the prior year. Similar to last year, we expect that a good portion of the working capital will come back over the balance of the year.

Net debt increased [$133 million] to reach $254 million as a result of our investment in working capital, our ongoing growth capital expenditures and our recent Sabena acquisition. Thank you for your attention, and I will now turn it back to you, Bob.

Thanks, Alain. The strategy we embarked on four years ago to diversify CAE geographically between civil and military markets and between products and services is intended to provide us with a level of stability and predictability. When all segments of the market are performing well at the same time, diversification seems less important.

Having taken lessons from the past, we made diversification a priority and remain disciplined in our execution. The strategic direction that we have chosen has effectively proceed CAE for conditions like the present when not all segments of the market and not all regions of the world are firing on all cylinders. No company is immune to economic and market fluctuations, but the majority of our revenue is now derived from military or recurring training revenue sources.

We are financially strong and operationally nimble, which means that we have the ability to seize opportunities when they arise and adjust quickly to changes. We are as usual cautiously optimistic about the future and remain confident in the execution of our long-term plans.

Our business should be regarded on the basis of long-term opportunities in addition to short-term factors. As most of you are aware, we are involved in both the civil aerospace and military business and it is important to recognize that the drivers for each are very different. In the civil market, high fuel prices and economic weakness are triggering a series of reactions among airlines and aircraft operators. Airline consolidations and rationalizations are starting to take shape in the U.S. and in parts of Europe.

A number of carriers have taken 10% to 15% of their fleet capacity offline, parking older and less fuel efficient models like the MD-80s, DC9s, and 737 Classics. The clear consensus is that it is better to ground old aircraft and take delivery of new ones. Aircraft financing for some carriers remains challenging as they redraft their business models. But eventually fleet replacements do represent a potential silver lining.

The (inaudible) airline industry must continue to adapt to new realities. Most of today's established carriers are working from leaner cost structures than they would have had at the start of the decade. Unfortunately, the precipitous rise in fuel prices has more than eclipsed their productivity gains. We do not wish to create expectation of major outsourcing by airlines, but we are engaged in more discussions with customers about how CAE can help them to improve their operating efficiency.

There may be some additional opportunities to replicate what we have done with a few of the world's leading airlines already. The U.S. and Western Europe are more acutely affected by fuel prices and economic malaise than the rest of the world. The recent Farnborough Airshow was dominated by orders for aircraft placed by Middle Eastern carriers. [Ejihat], one of our customers in the region ordered more than 200 aircraft alone.

Demand from China, Southeast Asia and India is moderating from its intense rate, but should still far outpace the mature markets. We believe the OEM aircraft order backlogs will experience some shuffling of delivery slots, but that ultimately the delivery of aircraft will continue at a good pace for a while to come. As a result, demand should continue to be supported for our suite of simulation products.

We said last quarter that we expect to sell 34 full-flight simulators this year and that we would update this figure as the year progresses. We continue to feel comfortable with that outlook. Business aviation is highly related to corporate profits. Used aircraft inventories have increased and the time used aircraft spent on the market is taking longer.

Lower turnover of existing aircraft means that initial training transactions will depend more on the new aircraft being delivered most of which are from markets outside of North America. Our training business is mainly dependent on the recurrent training requirements to support the existing installed base of aircraft. OEM business aircraft backlogs are at record levels as well which underlines the long-term growth opportunities in this segment.

Having a geographically diversified footprint in both the commercial and business segments ultimately helps to stabilize our performance. High fuel prices, tight credit markets and economic malaise are factors we consider carefully, but we believe the fundamental long-term trend continues to support growth in air travel globally. We will selectively make investments to secure market share within certain established markets and to expand our position in new markets.

In Military, we are on pace for another year of solid order bookings. We have good momentum in our niche market and we remain confident about our expected higher top line growth and higher margins. We are truly global entity in the defense market with a major presence in the U.S., the U.K., Australia, Germany, Canada and India.

Simulation-based training has not penetrated the military market like in the civil aerospace and therefore many opportunities exist for defense forces globally to offload training from real aircraft and other vehicles to simulators. The tempo of current conflicts around the world is putting high operational demands on weapon systems. Defense forces are exhausting aircraft faster than expected leading them to question how they can extend the life of their platforms. The response has been simulation-based training and updates and upgrades to existing platforms. All of this creates opportunities for CAE's Military business.

The U.S. Air Force spent $6 billion on fuel in 2007. Given that the average price of jet fuel has roughly doubled year-over-year, the urgency to lower operational costs has only increased. In recent months, the procurement authorities in the U.S. have become more vocal about their desire to increase the use of simulation for training, in particular for platform such as transports, tankers and maritime patrol aircraft.

Additional trends in military that play well to CAE's strengths are the outsourcing of maintenance and support services to help maintain concurrency between training systems and the updates made to aircraft. As well, we see increasing use of modeling and simulation in a number of areas in defense programs that go beyond traditional training applications. CAE's professional services group, complemented by our recent acquisition of Xwave's Defense, Security and Aerospace unit is in a good position to further our entry into these domains.

In summary, market conditions across the segments we serve are best described as a mix of pluses and minuses. Balance and diversification in our business is more relevant than ever. We believe that our strategic direction continues to be the right way forward. We will continue to invest prudently and selectively while maintaining our strong financial foundation.

Thank you for your attention. We are now ready to take questions.

Thank you. Mr. Arnovitz?

Operator, we will now take questions from analysts and institutional investors. Before we open the lines, let me first ask in the interest of fairness that you please limit yourself to a single one-part question. If you have additional questions and time permits, please feel free to re-enter the queue.

Thank you. We will now take questions from the telephone lines. (OPERATOR INSTRUCTIONS) There will be a brief pause while participants register for questions. We thank you for your patience. The first question is from Cameron Doerksen from Versant Partners. Please go ahead.

Good afternoon. Question on the acquisition that you made last week, I was wondering if you can give us more detail on the rough size of what it means for revenues and what new capability does it bring to CAE that maybe you didn't have before?

I think, Cameron, if you look -- if you look at revenues generally on an annualized basis it would be $30 million to $35 million on an annualized basis, and we think that we can grow on that as we've looked at the plans going forward at a pretty good rate. I would say that you can see the way the deal has been structured that it was $15 million plus $11 million earnout.

The earnout is specifically related to wins on contracts, so if we get some wins in those contracts, it would be more than the number that I provided to you. The second thing is that this really improves our Canadian footprint. There's a number of jobs in Ottawa, in Nova Scotia, as well as in [Squimouth], British Columbia. So that helps us out very appreciably, and the other thing that you need to look at is this is very much will complement what we are already doing in our professional services business and allow us to be able to provide advice and get in on the front end of a number of procurements as they are being formed.

So I think it's a very, very good bolt-on acquisition that has been done at a good -- from a good point of view, from a financial point of view. The only thing I'd remind you is that we have announced the deal. It's not closed yet and you won't see any accretion on this probably until the start of next year.

Great. Thanks very much.

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

Good morning. My question is along the line of Cameron's and he asked about the Bell acquisition. What about the Sabena acquisition and I believe there was one other one recently announced. If you can just speak to the revenue implications and for that matter, what all of these acquisitions might mean individually for your margins. Are they higher margins, lower margin business than what you are currently operating in and help us get a better sense of the forecasting we should assume for all of these transactions?

Ben, if you look in our current quarter, I think there's about $2.5 million of revenue that is coming from Sabena, so there's not very much, but on annualized basis, again, it would be in the $35 million range, something of that nature, on an annualized basis. And it has two elements to it.

One is the simulators that we are operating in Brussels and the second one is the addition of the pilot training operation that they have in Arizona that I think they are currently training about 400 cadets, something like that. That gives us more critical mass to increase the size of our pilot training organization. So I would say in looking at this one, again, to be prudent, that it would be basically looking at the last quarter of this year, the start of next year that you would see some results. And the margins in this should be I think similar to the margins we already have in these businesses.

And the margins from the Bell acquisition?

The Bell acquisition is a little different. On that one let's wait and see -- let's wait and see if some of these contract wins related to the $11 million earnout that we got, I think we are going to have news on that probably in the back half of this fiscal year. I think I'd be in a better position to give you some guidance on that probably at the next call.

So at this point just assume the status quo?

Yes. I would assume the status quo in terms of anything that would be added on, and don't forget that one still has to close, and I think, Alain, what is the date we are looking for closing?

End of the year.

End of the calendar year.

That one will show up on your Military Products division?

No. Services.

Within the military?

Not on the training side?

That's correct.

Was there another acquisition in there, a smaller one?

We had a series of them before when we created our new business [Prosagis]. There have not been any other -- there is one other thing that perhaps you are seeing that relates to the Portugal, the school we had there where we had 56%, and we moved to 90%. At 56% it was not material, so it was never reported. Now that we moved to 90% we are reporting it, but it's again a school that we had in Portugal in collaboration with TAP, the local airline so we are now taking a larger part of that again to do a roll-up as part of our pilot training organization.

How many RSEUs does that add?

There are no simulators there. It's a few aircraft and the training of cadets.

I see. Thanks very much, guys, good quarter.

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

Good afternoon. I notice that your leverage is rising a little bit, not an alarming amount, but it is rising and you are continuing to acquire and have an aggressive CapEx program. I just wondered are you doing this without issuing equity or debt or doing something different?

I think even where we are now if you look at the leverage including our balance sheet -- what are we at?

31% versus 69%.

We are 31% versus 69%. So we have lots and lots of flexibility as it relates to our covenants. And we see the working capital correcting during the year. So we don't really see any requirement to go -- to go to the market, and we think we are going to continue generating cash. So we are going to continue being careful and we are going to work hard, as we did last year, to reverse the working capital, and I think Nick, that will happen. No intention to go for capital.

Okay. I wonder if I can cheat and ask some leasing market. Is leasing market reasonably healthy for you, for your simulators?

In what sense?

That you lease them. Can you get those deals arranged?

We have been getting our deals arranged, but generally they are straight out purchases that occur, it's not -- and the ones that we put into our own network, into joint ventures, they are financed. So it's not an issue. It's not been an issue for us. They are very sound assets with long life to them. It's not a problem.

Great. Thank you.

Thank you. The neck question is from Tim James from TD Newcrest. Please go ahead.

Thanks. Good afternoon. In regards to your training network, there is some commentary about costs associated with the implementation of the new full-flight simulators and the deployment in that network and that created some unusually high costs in the quarter.

Is there something that is occurring that is making the costs higher than the normal deployment of simulators for you, or is this an ongoing thing that we would expect given sort of the build out of the network going forward? I'm trying to understand if there's a different dynamic particular in this quarter relative to building out the network in other quarters?

There's not a lot that is unusual. There are -- we are putting more into the system now than we have in the past, so maybe that's partly contributing into it.

We are finding as well that the cost of instructors is a bit more, and the market environment that we are in, and we are putting some of these simulators now into locations like, for instance, India where it's going to take a bit more time to get the build out. Everything is positive. Everything will happen. I think it's just the sequence with which it will occur. Nothing more than that.

Okay. Thank you.

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

Good morning, Bob. I was wondering when we could see some impact from the decline in the Canadian dollar given the hedging that you have. How many quarters before that starts to help you out?

Okay. I think there's a number of elements to this. One, of course, is translation that is going to help from a total amount as it relates to particularly our business in the United States coming back into Canadian dollars.

The second thing is that we can now on contracts that we are bidding on, that we can, obviously, be more -- we can bid more cost effectively, and in all of our bids we've been building in a certain percentage to be careful to make sure that the change from the time we bid to the time of the contract award that we are protected, and so maybe there will be some gains in that. But those are things more for the future.

I think as it relates to -- we have hedged all of our contracts. We'll continue to do that. But I think if you look right now, if you look at where we were at the end of last year, I think and maybe I'll let you explain. It was around $800,000

If I might help you, Richard, on that. In Q1 last year if I'm looking at my average hedge rate, it was around 110 and if I'm looking at Q1, the quarter we just closed my average hedge rate was at 102. That gives you a flavor of how much we had to go over the year to deliver the results and you know where the Canadian dollar is today.

So I think that -- if the dollar stays where it is, we may start to see some things happening in the third and fourth quarter that will help us in our products business both Military and Civil.

Thank you very much.

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

Good afternoon. Just to clarify. The press release on the $106 million in contracts for the Military business, is that new contracts or some of those were included in Q2 -- Q1?

They are all new.

That is all new contracts. Okay. And then from that perspective normally we've seen a drop off, I guess, into Q2 and Q3 on a book-to-bill ratio, with the rate that you are booking, do you have an estimate of where your book-to-bill will be in your Military segment for the full year?

No. I think last year we did something like $673 million. And I think can't really predict where we are going. What I can tell you is that the rate of activity is very good, and we feel that we are going to have momentum. I don't want to create expectations that we are going to do a lot better than last year, but I feel pretty confident where we are at this particular point in time.

I think we are at about $260 million, something of that -- of that nature. So that's on the Military side. If you look at the Civil side, the summer time, our second quarter is always our weakest quarter particularly as it relates to training because that's when all the pilots are flying and they are not doing training.

So I think that is something to take into account, but again as we look at the Military, we look at the Training, we look at our Products business over the full year, we feel pretty good at the point that we are at right now, and as well the level of activity that we are getting in talking with our customers.

Thank you very much.

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

Yes, perhaps following up on that, the 34 simulators that you stated that you think you have a shot for this year and I guess you mentioned the last two quarters, what goes into that? Is that based on the discussions you are having with customers so you can actually identify that kind of number, or is it forecasted based on deliveries of airplanes? What goes into that?

Yes. I think right now we've announced 14. We did 13 in the quarter plus we had the other one that we've done since then.

We would then have a number of discussions that we know about where we are dealing with MOUs and things of that kind with customers for a certain number that would give us confidence that that's going to get us to a certain number. And then we have -- generally we have two or three lists, the A list, B list, C list, of people we know that require simulators because they've ordered aircraft and we know the ones that have traditionally done business with us and we know as well generally a win rate we can have and we'll discount that win rate. And based on all of that, everything is based on very specific opportunities.

There's nothing that is being done in terms from a general fashion. So when you approach it that way and we look at it, that's why we say that we still think that the 34 number is valid.

Great. Within that, how many of those would be internal? I think you have two so far, two now.

Yes. In terms of looking forward, it would be a low number, I think, because the only ones we count that are internal are the ones that go into JVs. So I don't know, but there may be one or two in that projection, something of that nature.

Great. Thank you.

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

Thank you. Good afternoon. I wanted to confirm a number and then ask a question. Did you provide a utilization rate for your -- for the simulators in your training centers? If so, can you provide that?

I'm not sure if we have, but it's around 80%.

Okay. And my second question just again on order intake and prospect, sort of a two parter, in the sense, have you yet seen any deferrals, pushouts, whatever you want to call them for orders in your backlog? And, secondly, can you just comment on more specifically financing issues that your customers may be facing with respect to order commitments?

We've seen no movement in terms of things being pushed out. From a financing point of view, we haven't had any problems on that. We don't really see that as an issue as it relates to us.

Okay. Thanks.

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

Good afternoon. My question is related to Military. Just wondering you reported 16.9 EBIT margin on Training/Military. I was wondering if you can quantify the impact of the dividend and also the annual labor rate adjustment, and related to the same question, could you comment about the ramp-up on the NH90 going forward and also if the Military margin, how sustainable at 15% overall it is going forward?

Okay. First on the margin, we've changed the mix an awful lot, and Military Products is helping us a lot, and we basically know what is in backlog. So we have to execute. And we feel that -- before we talked about 10%, 11%. We are very much above that right now. We are in the sort of the 14%, 15% range kind of thing that we think we can sustain for the rest of the -- for the rest of the year.

As you look at the labor contract, I think all of that has been built into our budget for the year and our strategic plan going forward, and we've done everything we said we would do with our unionized employees. That's working fine. But we are cutting costs overall in the business in a very good fashion. So what I would say is it's really not having an impact on us as it relates to our costs. Our costs, we continue to confront and very aggressively on that and we'll be able to continue to make gains there going forward.

The dividend and the increase in the dividend, that is basically cash that you are seeing, and we've said that we've made the move where we went to $0.03. We have no plans at this time to change it. When we did it, we thought it was the right thing to do for shareholders and also demonstrated the confidence that we have in being able to protect the Company, to continue to invest and also return some capital to the shareholders.

On the ramp-up of the NH90, you have seen some of the contract wins that we've had. We now with our partners have won every single contract. We don't see any reason why that should not continue. I think there's 13 -- 12, 13 customers that have ordered the helicopter, and I think we are -- only two or three have arranged their training systems. So there's lots more to come there.

That has been part of our strategy of getting involved at ground level with platforms that have long legs. And so I think you are going to see more of that over the next couple of years.

Okay. Thank you very much.

Thank you. (OPERATOR INSTRUCTIONS) The next question is from David Tyerman from Scotia Capital. Please go ahead.

Hi. Just to go back to Benoit's question, the dividend on TSM was what?

Oh, sorry. I missed your question, I apologize. Okay, Alain, go ahead.

It's around $1 million in the quarter.

$1 million?

Yes.

The other question I had was I noticed that you added eight FFSs to TFC but only four are RSEUs, is this just a timing issue or why the difference?

Strictly timing.

Okay. So we should see a ramp-up in the number of RSEUs in the next quarter or two to getting back to a more normal ratio?

I think so.

Don't forget the Sabena acquisition that we completed three weeks before quarter end, brought six simulators in the fleet but in terms of accretion it was only a few weeks in the quarter. So that's impact to our RSEUs obviously.

One of those simulators is just going into service.

So one of them the FFS deployed is the end of quarter number and the RSEU is --

Yes. And we should still be able to go -- we talked about 10% growth in the past. We still stay with that number even with the lower CapEx that we have.

Would that include -- with the six from Sabena that would be a lot of your 10% for this year, or would the 10% be over and above the Sabena, or include the Sabena?

It's only for part of the year, the Sabena, so it won't be full, but we should still have the 10% on the original basis that we talked about.

Okay. Thank you.

Operator, we have time for questions from the media. I think we should turn the call over to them. I want to thank investors and analysts for joining us. I will now open the lines to media.

Thank you. (OPERATOR INSTRUCTIONS) The first question from the media is from Hugo Miller from Bloomberg News. Please go ahead.

Good afternoon. Mr. Brown, you said that the demand was slowing a little bit from China, India and Southeast Asia, but is still ahead of the mature markets. Would I be right to assume that the one exception to that slowing growth as you suggested and what you said about Farnborough is the Gulf states and is there going to be in any sense the Gulf sort of supplanting China or Southeast Asia as one of your number one markets?

I think it's already an excellent market for us on both the Military and the Civil side, so it's very good, and I didn't want to give the impression that there's not growth in China and India. I think that we just have to be careful with everything that is going on in the next period.

We still see more business there, but again it comes back to the diversification, the geographic and the product diversification that we have that we are able to move, essentially, unlike anyone else anywhere in the world and be able to supply the customer because of the roots that we have there and the relationships with the customers. So I think we are feeling good and we are feeling good about the Middle East as well.

Okay. Just to follow-up, you've cited, and I know some of the big civilian customers you have in the Gulf and India and Southeast Asia, but in terms of military customers outside of Europe and the U.S., who are we talking about, which are the biggest countries spending the most on military spending from the Gulf all the way across to East Asia?

The first one, Australia has had a very big defense budget and we've been very successful there. I think that in India, they've announced a $50 billion 10-year program for the re-equipping of their Armed Forces, and our acquisition of Macmet there in the Military segment that do simulation and modeling technologies has served us well.

We are also working, have an MOU with HAL, Hindustan Aeronautics Ltd., which is the largest defense supplier in India for the training of pilots on helicopters. So I think that we are well positioned there as well. And we should not as well -- in the United States, which is a traditional market, we believe because of the fact that their fleet is being worn out more quickly than anticipated because of all the conflicts they are involved in and any potential tightening of budgets that it really makes sense for them to do more training on simulators than in actual aircraft.

And, I think, the U.S. Air Force announced that it costs about one-tenth of the cost to train in the simulator than it does to use a real airplane, and never mind the logistics of trying to get a real airplane to train in. And, of course, in Canada there is some re-equipping going on and we've been identified to provide the training solution for the C130Js and as well for the C47s that are coming in. We received the RFP and we are on an exclusive basis now and we are going forward and finalizing the contracts. So there are lots of opportunities that are shaping up around the world.

Thank you.

Thank you. The next question is from [Casey Chee from Innovativ]. Please go ahead.

You mentioned about the call relations between crude oil prices and the use of simulators. How accurate is that interpretation that you mentioned?

The one I mentioned I think was -- it was a number given out by the U.S. Air Force with basically it costs one-tenth of the money to train in a simulator than it does to use an aircraft.

So can I infer that the higher the crude price the higher the probability of military or civilian companies using your products?

I think as a general statement, that's true. But you have to look at all of the operating costs that are in there. And I think I quoted a number. The cost of fuel for the Air Force went up in the United States by $6 billion in 2007. And these are their numbers not ours.

I see. Okay. Thank you very much.

Thank you. Mr. Arnovitz, there are no further questions registered at this time. I will turn the meeting back over to you.

Thank you, operator, and thank you to all our participants today. I would like to remind everyone that a transcript of today's conference can be found on CAE's website at www.cae.com. Thank you.

Thank you, Mr. Arnovitz. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.