CAE Inc (CAE) 2009 Q2 法說會逐字稿

Welcome to the CAE second quarter conference call. Please be advised this call is being recorded.

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

Thank you and good afternoon, everyone. Thanks for joining us this afternoon. 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 are advanced predicted in these statements may differ materially from actual results or events. These statements do not reflect the potential impact of any nonrecurring 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 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 31st, 2008.

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 US Securities and Exchange Commission, form 40-F, are available on EDGAR. Forward-looking statements in this conference represent our expectations as of November 18th, 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 to us do so. You should not place undue reliance on forward-looking statements.

Robert Brown, CAE's President and Chief Executive Officer, and Alain Raquepas, Chief Financial Officer are participating in the call today. Following the remarks, we will invite questions from financial analysts and institutional investors. 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 this afternoon. I will begin with some remarks about our second quarter and then Alain will take you through our results more specifically. Following that, I will conclude with some comments about the way forward.

We performed well in the second quarter and year to date overall. With continued revenue and earnings growth supported by positive free cash flow. Revenue in the second quarter grew 15% over last year to reach $407 million. 45% of this amount was generated from our military segments and 55% from our civil segments. Net earnings increased 25% to $49 million and our consolidated operating margin reached 18.6%. We took in $390 million in new orders and concluded the quarter with $2.7 billion of backlog.

In training and services civil we signed $79 million in new training contracts, and we continued to selectively expand our global training network to an average of 118 revenue simulator equivalent units. The second quarter is normally slower due to seasonality, and it was even more slow this quarter as a result of softer demand, specifically in North America. We made good operational progress despite the head winds with average annualized revenue per simulator increasing to $3.7 million from $3.4 million last year.

In simulation products civil, we signed orders for seven full flight simulators during the quarter from customers including [Etihat Airways], Southwest Airlines, [Cathay Pacific] and Lufthansa. Yesterday, we announced an additional five full flight simulator sales which brings our year to date orders announced to 23. At this point, we still expect 34 orders for the year.

In the combined military segments we won new orders totaling $227 million. We entered a contract to supply the US Navy with an MH-60R tactical operational flight trainer and we made more progress on the NH-90 program with the selection of our affiliate, [Rotor Sim] to provide training solutions to the Netherlands Ministry of Defense. As well we signed a 10-year deal to provide MRH-90 simulator maintenance and support services to the Australian Air Force. This morning I had the pleasure of announcing the appointment of [Marc Parent] as CAE's Executive Vice President and Chief operating Officer which takes effect immediately. Marc also becomes a member of CAE's Board of Directors. Marc's expanded mandate is intended to ensure the building of synergies between all four of CAE's civil and military business segments.

With that I will ask Alain to discuss our financial results.

Thank you, Bob, and good afternoon, everyone. In training and services civil, revenue was up 20% over last year to $108 million. We grew the number of RSEUs in the network by 12 units since last year, we have incorporated the results from acquired companies [Sabina Flight Academy and Flight Scape]. Segmental period income was $19.1 million which is 31% higher than last year and 8% lower than last quarter. The sequential difference is from seasonality.

The segment operating margin was 17.7% this quarter, compared to 16.2% last year. In simulation product civil, revenue was stable compared to last year at $114 million. Segmental period income decreased 11% from last year to $23.4 million because of a less beneficial currency hedge position this year compared to last year. This is an important point because the effect of the recent Canadian dollar drop did not benefit us on our product contracts that were hedged several months prior at the less beneficial rate. Another difference in the year-over-year comparison, is that we had higher utilization of funds from our government cost sharing program last year. Despite these differences, the operating margin stayed above 20%, 20.5% to be exact, which compares to 20.1% last quarter and 23.3% last year.

In simulation products military, revenue was 30% higher than last year at $126 million. We had higher activity on a number of recently awarded programs which accounts for the increased performance. Segment operating income was 61% higher than last year at $21.6 million, and the operating margin was 17.1% compared to 13.8% last year. Again, the increased performance in the quarter comes from higher volume.

In training and services military, revenue was up 7% over last year to $58.4 million. Segment operating income was up 44% from last year at $11.4 million. The operating margin was 19.5% compared to 14.5% last year. Capital expenditure were $50.6 million in the quarter. This was comprised of $8 million for maintenance expenditures and $43 million for growth. The growth portion was mainly related to the expansion of our global civil training network to address additional market share.

Free cash flow this quarter was $43 million up $85 million from last quarter. Net cash from continuing operations increased by $88 million due in large part to a lower investment in noncash working capital. As we said last quarter, we continued to expect a portion of the investment in noncash working capital that we made at the start of the year to reverse over the balance of the year. Finally, net debt was stable at $257 million.

Thanks for your attention. Back to you, Bob.

Thanks, Alain. The uncertainty of the financial markets in recent months has made forecasting in the civil aerospace market more difficult. Conditions that were originally considered by economists to indicate the likelihood of a contained US economic slowdown now appear global reaching.

We could not have predicted the magnitude of the global financial crisis witnessed over the past few months, nor the reverberations that have already been felt in many sectors of the economy. We do not take this situation lightly. But we feel that on balance we have reason to maintain a degree of cautious optimism. We have lived through difficult times, and it is a strategic imperative for CAE to always be prepared for the unexpected.

In the past four years, CAE has had to react quickly in the face of a number of major challenges, including the impact of a surging Canadian dollar, aircraft program delays, and the sudden durth of business of US legacy carriers which were once CAE's biggest customers. As a company we have shown our capability and willingness to adapt to whatever the market has presented us and to take the decisive actions that have enabled to us achieve high levels of growth despite the head winds. The period ahead will be more challenging, but we are confident that we will again be able to make the most of the situation.

We have talked a lot over the past few years about our strategic priorities, and I would like to remind you of some of them because they are particularly relevant today. We have a long history in commercial aerospace and defense, and we realize that in this business things do not always proceed as expected. We determined a number of years ago that for CAE to be durable and flexible we had to become financially strong and disciplined. A few months ago our capital structure was regarded as one of many CAE strengths. In today's climate we believe it is a major advantage. We have the flexibility to seize opportunities arising from current conditions and at the same time we can continue to uphold our priority for conservative capital structure.

The recent commercial market data shows a decrease in global demand for air travel. This is not surprising given the news flow this fall in the midst of the financial market meltdown. Despite the relief from cheaper fuel, current economic conditions may lead some airlines to reduce capacity further. Much speculation exists about what this means for OEM aircraft backlogs, which stand at more than 8,000 aircraft for Boeing and Airbus combined.

We know that the availability of financing is the single most critical factor. Both of these OEMs recently announced that they will make some financing available to facilitate aircraft purchases. But it will first take a general recovery in the credit markets to solve the larger problem. Customer demand may still support a good proportion of new aircraft deliveries, but unless airlines are able to obtain financing it will be difficult for them to access the supply of new aircraft. Some OEMs of smaller business and commercial aircraft types have already announced that they intend to curb production. But whether this will become a more widespread response across the OEMs is unclear.

As a result of these dynamics we do not know how much of the current aircraft backlog is at risk of delay or cancellation. What we do know is that the commercial and business aircraft backlogs are exceptionally large by any historical measure, and that the OEMs have acted conservatively by not taking production levels up the way they have in previous up cycles.

What does this mean for CAE and the way forward? We have been executing a strategy since the last market down cycle to increase the proportion of our business that is generated from the existing globally installed base of aircraft as opposed to business that comes from the delivery of new aircraft alone. Our civil training business is back stopped by the recurrent training that active flight crews are required to undergo on a regular basis by the aviation authorities.

As I mentioned earlier, the training business is certainly not immune to the current market conditions, but it is relatively more stable and is only partially dependent on new aircraft deliveries to drive revenue. The rate of pilot attrition is likely to moderate in the short term, but only to a point. Notwithstanding the market volatility, the pilot population, particularly in the mature markets of North America and Europe is not getting any younger and will reach retirement in increasing numbers. Pilot shortages resulting from retirements and the long-term growth trend in air travel continue to support our business model. We see opportunities as well for continued growth for CAE in this segment.

In business aviation, the number of hours flown has decreased compared to last year, and there is a strong correlation with corporate profits. We are already experiencing the impact on our customers from volatile oil prices and weaker economic conditions. Used aircraft inventories have increased, and the time used aircraft spend on the market is longer. On the positive side, however, training demand for newer and larger business aircraft is holding up relatively well and our recently launched assets and facilities are ramping up. The mid to large cabin business jet segments tend to be less economically sensitive. And the vast majority of simulator assets that we have been adding to our network and that we plan to add to our network in the future, like the Falcon 7X and the Gulf Stream 450 are in this category of aircraft.

We said last quarter that we expected total CapEx this year to be around $170 million, and this is still a good estimate. We are in the process of developing a number of assets that need to be completed, and we are continuing to invest in certain new growth initiatives. But I would add much more selectively. Despite the market environment, we continue to see specific opportunities to enhance our competitive position within certain market segments that give us more exposure to the already in service base of aircraft. We are reviewing our growth options critically and on a case-by-case basis.

Our priority is to maintain a conservative financial position, especially in these uncertain times, but if there is a good long-term business case to be made to invest despite the market pressure, then we will use our flexibility to our advantage. Another essential part of our strategy is to maintain the balance position in military which already represents nearly half of our business. Given the growth in military orders over the past two years, and our outlook for future business, we expect this segment to grow in excess of 10% annually.

We achieved an EBIT margin of 17.9% this quarter, and we believe that we can sustain a margin in the 15% range for the foreseeable future. We are benefiting from the higher volume of military orders received over the past few years and improved program execution. As well our military contract mix includes a greater proportion of solutions that are more highly differentiated and more value-added.

We are a global entity in the defense industry with a major presence in key markets around the world. There is a growing tendency for defense forces to adopt more simulation based training particularly when budgets become stretched and we expect to continue to benefit from this trend. The high relative cost of training in live assets, the increased emphasis on mission rehearsal, and the emergence of risk reduction doctrines are all positive factors that support our expectations for continued growth.

The credit crisis, global economic malaise, and the recent decreases in air travel give us reason for additional caution, but we remain optimistic about our position. We are well balanced between civil and military markets, between products and services, and we are broadly diversified globally. We will continue to invest prudently and selectively as market conditions permit. We have flexibility to seize opportunities in the current environment and at the same time we can continue to maintain a conservative capital structure.

In summary, our outlook for defense, more specifically the modeling and simulation niche that we operate within, remains positive. Civil market conditions have become more challenging and they will likely get worse before they get better. We are in uncertain times but we will continue to adapt as necessary to the constantly changing conditions. This is the way that we have consistently been able to make the most of whatever opportunities the market has presented us within the past. We believe that we are well equipped to withstand the market turbulence and to continue to find ways to prosper.

Thank you for your attention. We're now ready for questions. Andrew.

Thank you, Bob. Operator, we'd be pleased now to take questions from analysts and institutional investors, and I would note that once we've completed the session with analysts and investors, we will open the lines to the media. Before we open the lines, let me first ask that in the interest of fairness that you please limit yourself to single one-part question. If you have additional questions and if time permits, you may reenter the queue.

Thank you. We will now take questions from the telephone lines. (OPERATOR INSTRUCTIONS) There will be a brief pause while participants register. Thank you for your patience. The first question is from Ben Cherniavsky Raymond James. Please go ahead.

Hi, guys.

Good afternoon.

In the past you guys have made the commitment to grow your installed base of simulators, I believe the number was about 10% a year. Are you still committed to that kind of growth rate through fiscal 2010 at this point? I mean what should we assume, or what are you assuming for your plans on an 18-month basis and on that particular part of your business?

Yes, you should continue with that assumption.

So that is not changed in spite of what's happened in the market? You guys are still confident that you can put that much more capacity into the system and get people to sign contracts and use your simulators and such?

Yes, and we're concentrating, as we've said in the past, primarily on business aircraft.

And with the order rate for business jets looking like it's peaked, that's still-- I mean, I guess I'm just trying to reconcile the caution you're I think rightfully expressing on the industry with your plans to expand your capacity on that particular part of your business.

Yes, I think, Ben these are Sims that we have already launched, and we feel comfortable what we're doing going into the market. As I said, it's primarily on business aircraft but I would say the other dimension is international, where we have an excellent footprint that gives us a -- gives us an advantage. And we -- I think we feel quite confident going forward with this.

But in your decision to do that are you assuming that overall demand for business jet training will go up? Are you assuming you will get more outsourcing, or that will you take share from someone else?

I think it's a combination of all of those that we have, but it's largely coming from the installed base, although there are some deliveries that are taking place over the next period of time as well. But I think we've been conservative in the approach that we've taken, limiting it to primarily what's already out there.

Okay, thanks very much.

You are welcome.

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

Good morning or afternoon. I guess the question I have was just on the -- again, on the training business, I guess more focusing on the airline customers. Can you talk a bit about geographically what demand for pilot training has looked like? Obviously there's capacity being reduced in the US but it's really a global phenomenon, and I'm just wondering if you are seeing any decrease in demand for pilot training in some of your international training centers?

I think, Cameron, the one probably the one we're seeing a little bit to the decrease is in Europe, because it sort of follows a little bit behind North America. But in the other areas, I think we're seeing a fairly steady demand. And you realize we're in start-up mode as it relates to what we're doing in India, so there's bound to be some buildup there. But as I said my remarks, this is an area where we've got to be careful and moderate the -- moderate the amount of business that we'll probably be able to do here.

The other thing I think I would remind you of is that we started out trying to take what I think is a realistic part of the market. We're not going for all of the market here, and so that is going to -- that helps us as well I think as people are perhaps scaling back a little bit in the short term.

Okay. If I could just squeeze one more in quickly, just the simulation -- or the training center utilization rate in the quarter?

Yes, we're at about 71% that would be, I think, overall year to date, something like that.

Okay. Thanks.

You are welcome.

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

Good afternoon. Thank you. Carrying on the training theme, gentleman I just want to better understand the potential down side in the business. Bob, could you share with us what you believe to be a split between perhaps training on new platforms -- aircraft platforms versus pilots that are required to maintain minimum training hours?

I think that going forward I don't have the exact number, but my general feeling is that it's going to be mostly on existing platforms. Certainly the increase in capacity that we're create willing be going mostly to the installed base, but there are some new airplanes coming on. As I mentioned before, like the 7X and the 450 as well.

Thank you very much.

You're welcome.

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

Thank you. Good afternoon. Question is, you talk about the flexibility that your good balance sheet gives you. I guess, we have to look at -- or you are looking at opportunities in civil training, I assume, a bit like Sabina, and I suppose you would be looking at small tuck-in acquisitions for your product businesses. Is that the way we should look at it?

Yes, I think -- even there I think will you find that we're careful in the next period of time. I think a lot of the gains that can come for us will be investments that we make in our own indigenous products. Populating our training centers, taking advantage of our global footprint. I think that probably will be the first priority that we have. And I would say that the other thing is the -- what we're -- what we can do in the area of the military.

We've made great strides in balancing the business, and creating a situation where we can have good margin with the mix of product and the way we've been executing. So there may be some things there as well. But we're going to be careful there as well, because we want to see what the orientation of various governments are going to be on military programs going forward. But I can tell you that the great positioning that we have on the platforms that we have and in summary, I guess, and the opportunities in the civil training business I think give us lots of runway in terms of what we can do going forward.

If I can squeeze just a quick housekeeping one, can you provide with us the deliveries for civil simulator for Q2 and also year to date?

Yes. I think that -- just let me see if I have got that. Q2 -- I think it's eight that we have a full flights. We have two for our network, and I think two military.

That's for Q2. And what about year to date?

Oh, boy, you got me. We'll have to -- we'll get that to you.

[Will ring you back on that] we'll get the data.

Okay. Thank you.

You are welcome.

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

Good day. I wondered if you could talk a little bit more about your balance sheet, what credit is available to you, and perhaps discuss a little bit more the working capital requirements?

Okay. I will give the general reply then let Alain talk. I think we have about $145 million in our -- of cash, and we've got lines of around $400 million that we have not used. But, Alain, why don't you?

Yes, we have a revolver facility, Nick, of $400 million US, and another one of 100 million euros, that is essential untapped and fully committed to us at the moment. So in these difficult times it's very good to have access to liquidity and committed funds from our banking consortium. So in terms of access of liquidity, this is not an issue. You've seen, Bob has mentioned the cash balances that we have already on the balance sheet, so very strong. That's why we're confident that if there's some good opportunity we have the ability to use the revolver appropriately.

Or if the situation deteriorates, we're also protect, so we're trying to look frat both sides.

Could you be forced to buy simulators in joint ventures which would require you to put up substantial cash?

Well, I think that right now what we do in our joint ventures is we -- the joint venture that's established purchases the simulator, and so -- and normally the joint venture has its own access to capital. So we have not had any experiences of that kind.

So your partner couldn't back out and force to you buy them out?

In the arrangements we have now, no.

Okay. And could you perhaps, Alain, talk briefly about your working capital? You said that you think it's going to reverse as you go through the year.

Yes, I mean we're forecasting a portion of what we have invested since the beginning of the year. You have seen in the financials that we've put $120 millionish in additional working capital since the beginning of the year. A portion of that will reverse.

Major UBS, or unbilled sales, has been accumulating on some of our military programs, and these customers are very solid customers. It's just a question of meeting the milestone billing and collecting. So we see that reducing between now and year end.

Great. Thank very much.

A portion of it, yes.

Thank you.

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

Thanks. Good afternoon. Can you talk a little bit about how you see adjusting the organization going forward if conditions do deteriorate more significantly than you kind of current foresee? You've identified that obviously there's some risks and the visibility is challenging at best. I'm just trying to get an understanding here of what initiatives you might take and if you feel there would be any required if conditions do get worse?

Yes, I think Tim here you have seen the appointment of Marc Parent today. And part of that move is to make sure we can realize synergies and continue with the -- between all of the four segments. And we have developed a real culture here now that allows us to adjust very quickly. So you've seen, for instance, when the dollar went as high as $1.10, from $0.80, we were able to deal with that and accommodate it and still produce good results.

We have all kinds of ideas inside of the organization in terms of how we can continue to reduce our costs. And given the shortened cycle time, it allows us as well to be able to react and deal with that. So I think we're -- you never know what's going to happen. And so the balance sheet obviously helps us to be able to adjust to it, but I think the mentality and the approach that we have got with people helps us a lot and I also don't believe that all of the segments would go negative at the same time. For instance, I think the backlog and the book to bill that we've got in military is going to be very good for us and may even get better.

And the training revenues, they may be affected to a certain extent, and obviously you take people out, if those market conditions are there, and we're keeping a very, very close eye on what's happening in the simulation products civil. So there's no easy answer. It's more a process and a -- the way that we're approaching the business that is allowing us to be able to adapt and produce the results that we've done in previous challenging periods.

Does the increased diversity in the organization in terms of the markets that you are in, does that help you or provide a benefit in that you can reallocate resources if you will, if one of those segments weakens?

Well, certainly between building the simulators in the military and the civil area, whether it's engineering, it's procurement, it's manufacturing, those resources now are basically allocated amongst the various areas. So that's already ongoing. And yes, there is some benefits there, and I think with the new organization structure we are going to be able to even take more advantage of that.

Okay, great. Just one quick housekeeping question. You mentioned continuing to expect 10% growth in the networks. Does that include the additions from the Sabina acquisition or would that be incremental to that 10%.

That was, I believe for last year, I think I was making the comment about next year that we would still expect to grow by 10% on the new base that we have.

Okay. Thank you.

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

Thank. Good afternoon. Bob, I didn't quite catch, what was the utilization number that you provided earlier?

It was 71%.

71% year to date? That's for the quarter.

for the quarter.

Okay. Because this is your seasonally weak one? Okay. Thank you.

My question, I just wanted to get a sense of what's happening with your customer base in two regards. First, on the civil side whether you've seen any deferrals or cancellations in either equipment or training? And secondly, if you could just talk about pricing in terms of trying capture new orders, new training contracts?

Yes. In terms of orders that we've taken, we have not seen any deferrals. We've had one -- we have one customer where we've been having a bit of a financing issue, but I think we have alternatives. And for getting around that problem, and/or reallocating the simulator.

As we look at pricing, would you expect right now that it's a very competitive market, we've been able to maintain a win rate of just under 70% so we're still winning at the same rate. I would say the market is competitive, but that's life, and we like competition, and we're adapting the organization to make sure that we can continue to provide the margins that we've been able to in the past.

And is there a particular parts of continues where the pricing is more intense than others?

I would say that on the -- probably on the civil simulation product, not in business aircraft, but --

Commercial?

Yes, commercial side. In North America, in the training business, we're seeing a bit of tightening up there as well. The military side, I think we're getting quite effective in the way we bid, and so we always have to be competitive. But you don't really -- at the end you have to put the price there to win, but what you control is your cost base, and you have to make sure that your cost base is continually aligned in a way that is going to produce margins and that you have got a base in the business and an overhead that as you get more incremental business, you are going to be able to make more money. And that's what we have been trying to do.

Alright, great. Thanks very much.

You are welcome.

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

Yes. Good afternoon. Like to ask about SBC and I think also TSC margins and foreign exchange. First, is your sensitivity that you showed in the fiscal 2008 report still broadly correct?

Yes, David. We've rerun the sensitivity, so you are probably referring to the one in the MD&A that we provide annually. So if you looked at the impact of $0.01 on the hedged business, it went down a little bit, so $500,000K is probably beater number, as I'm speaking to the $800,000 that we've given in MD&A. If you looked at that time business, if the would be unhedged, the $2.5 million on the net earnings percent appreciation of the Canadian dollar is still a good one.

Okay. And it looks to me like your backlog is about two to three quarters long. So given the huge decrease in the Canadian dollar, it sounds like you are going to have a pretty big tail wind two or three-quarters down the road. Does that make sense, or am I missing something?

I think the way to look at it is that we are prudent. We hedge contracts as they come along, and we also, we establish budgets in certain levels. As exchange changes and is favorable to us we will take bites of it. We're not going to gamble in things moving up and down, we lock in certainty.

So I think you are probably right that as we get into the new fiscal year, you will see that we will -- we probably will have some advantage that's going to come through to us on exchange as we're bidding on new contracts. And I think the backlog you were -- if you were talking about the backlog generally, I think it's longer than the period that you have outlined. If you are looking at the civil simulators, it probably is a touch longer than what you said.

I'm just looking. You've got around $343 million there, and you are producing at 100 some, so I thought, okay, two to three-quarters.

Close to one year.

So if I understand correctly then, you would -- the orders that say you just announced, you would have been hedging those presumably at the current exchange rate. I don't know if you change your bidding parameters in terms of target margins. But if you are, presumably when those come up, you are doing them at, say 123 Canadian to US dollar; 120 whatever the number is and the old contracts that were rolling off are probably at par or worse.

No. I wish that were the case, but again, we're very prudent, and it's normally based -- the exchange will be based and the way we bid at the time of the offer that we make. And we'll normally do it with a contingency for exchange that can go either way.

Okay.

And so it won't match what you are saying. It won't be as good as what you say because we prefer to have the certainty rather than the fluctuation from the time we bid to the time we win.

Right. How long would that typically be, Bob?

It really varies. Some con take six months, some can take a month, or weeks. It really varies, and we -- what we have been trying do is be able to deal with people that want things on a short-term basis, people that want to have the a negotiation over a longer period.

Other cases where we're the preferred supplier or recognized preferred supplier because of our quality of product, the quality of our product support. And so it's different with almost every client in terms of how we deal with it. There's no specific rule.

So it sounds like it would take a year, year and a half before the full effect of a big swing like what we've seen would flow into your statements?

Yes, I would say the second half of next year, something like that.

Okay. Great. Thank you. I'll get back in queue.

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

Thank you. Good afternoon.

Good afternoon.

I guess the first question I would like to talk a little bit about is military spending trends. With the change -- and if you could touch maybe a little bit on your expectations with the change in administration in the US? And if you could also talk a little bit about some European spending trends? I know France has increased their defense budget, and there's been some discussion with NATO countries about increasing their's. So if you can touch on any new opportunities you may be seeing and certain programs that you may have opportunities in?

Yes, if I deal with military spending trends, our assumption is that basically they're going to be flat. There may be some marginal increases but I don't think they will be able to adjust too much in the short to medium term, and that's addressed, I guess specifically to the US. But all countries right now are under pressure for spending that they are having to have to support their financial systems. And so I think that we should be prudent here in terms of what we expect to come.

We are seeing in some areas that there are increases. Yes, France is one, and I would say generally Europe probably is quite good. But it relates more to the platforms, I think, than to the specific countries. For instance, the NH-90, I think there's 13 countries that have ordered the machine so far, and I think only two countries have signed up for training. And finalized their deals. So there's a number of more to come there.

We're seeing the C-130s as well. We're well established on platforms. There's things that are coming forward there. We see the Canadian government we believe will follow through on the announcement where we are the sole supplier for the Hercules and the CH-47 helicopter coming forward. So, I think it's mixed.

The other thing I think that we're going to see is that if military budgets do tighten up, a lot of it may relate to what are called supplementals, especially in the United States where supplementals are essential used to fund the war in Iraq and the effort in Afghanistan. It doesn't deal with the sort of -- the base of the -- of military activity. So, we see there as well that the requirements for training, in fact, could increase because as we've said before it's a lot cheaper.

I think the US Air Force says it's one-tenth the cost to train on a simulator than to fly a live aircraft. So, I think it will be a mix. But so far, the activity level has been very good. And the other thing I would remind you of is the contracts that we're bidding on are quite a bit below the radar of the very, very big large political contracts that tend to involve the political activity. So I think we'll be okay here over the next few years.

Okay, thank you. I will get back in queue.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS)

Operator, if there are no more immediate questions from investors at this time, because we are getting close to 1:00, I would like to open the call to the media.

There is one more question from --.

Great. Let's address that please.

Benoit Poirier from Desjardins Securities, please go ahead.

Yes, good afternoon. My question is more related to simulation products military. Your revenues were up 43% sequentially from $88 to $126 million. I understand you have new contracts with NH-90 and also the C-130, but I was wondering if you could maybe quantify a little bit and also I'm wondering if it's kind of sustainable level at this time?

Yes, I think while the general question here, Benoit, would be we do think the level of revenues are sustainable, and as I mentioned, we think that we can have a 10% annual increase going forward here. As we look at the mix of contracts, I think that it's basically the ones that you have mentioned where we have been seeing more activity, and we had some contracts as well that have come in from Australia, that have positioned us well.

We have a great recurring business that we have in Germany. And things that I see coming forward I think that we're going to be well positioned to do some things in India as well with the base -- the foot hold that we've established in that market with the investments that we have made. So it's no one single thing. I think it's just an accumulation of all of these things with some of the large efforts that are coming forward as well on the NH-90 type product.

Okay. And for the NH-90, only two countries chose their training. What are your expectations for the next year?

I may have made a mistake there. It may be three. It's either two or three. But I think there's a chance there will be another couple countries that will be signing in the next year. So they tend to be very sizable contracts that also involve a service component to it. And the fact that we're teamed here with Tallus, we have a pretty good view on the market, and I think very, very good positioning.

Okay, thanks.

Okay, I want to thank investors for their questions. We'll now open the line to the media, please.

Thank you. The first question is from [LeeAnne Tagmier] from Aviation Week. Please go ahead.

Good afternoon. You mentioned pilot training and attrition. What about on the maintenance side, and how will new technologies and new aircraft such as maintaining aircraft with laptops affect CAE's training?

Yes. Well, we see -- the maintenance training we think is as large an issue as the pilot training. And I think it will basically -- this is a growth market area where we're just getting started, and so I think that we can continue to have growth in this area. And as you mentioned, the new technologies that are being brought to bear are related to integrated computer technology that allows you to forecast problems that you are going to have or be able to actually recognize and fix problems when in flight. I think are things that are going to become more developed over time.

Thank you.

You are welcome.

Thank you. (OPERATOR INSTRUCTIONS)

Okay. If there are no other questions from media, I would like to thank everyone for joining us this afternoon on CAE's conference call and remind you that a transcript of the call can be found on our website at www.cae.com. Thank you very much.

Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation.