CAE Inc (CAE) 2009 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and 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, 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 impacts 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 divestures. You will find more detailed information about the risks and uncertainties associated with our business in the MBNA 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 Commissions and are available on our website and on SEDAR. They have also been filed with the US Securities and Exchange Commission under form 40-F and are available on EDGAR.

Forward-looking statements on this conference represent our expectations as of February 11, 2009 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.

With me today are Robert E. Brown, CAE's President and Chief Executive Officer; Marc Parent, or Chief Operating Officer; and Alain Raquepas, our Chief Financial Officer.

After comments from Bob and Alain, we will take questions from financial analysts and institutional investors. Once that session is complete, we'll take questions from the media.

For your convenience, this conference call will be archived on CAE's website at www.cae.com. 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 a discussion of our third quarter performance and then conclude with some comments about the environment that we expect to face in the period ahead. Alain will then take you through our results in more detail and then Mark, Alain and I will take your questions.

Our performance in the third quarter and year to date, reflect the resilience of our diversified business model. Our combined military segments continue to deliver on expectations for increased growth and profitability and our civil training and services segment produced positive results, notwithstanding the deterioration that has occurred in certain markets.

In simulation product civil, we continued to execute our backlog and concluded the quarter with good results in light of the unfavorable currency hedge position that we are still making our way through. We have positioned CAE well over the past few years, which has enabled us to succeed in the face of a number of challenges, like the once soaring Canadian dollar.

It is no secret that the year ahead will present exceptional challenges for civil aviation, especially in the areas related to new aircraft deliveries and to a lesser extent, areas that depend on the install base. I will address this in my remarks at the end of the call.

Our success over the past few years has come largely from institutionalizing a culture of change and we will need to take actions to confront the current economic environment and to ensure that we are in a position to prosper when the civil aviation market eventually stabilizes. Revenue in the third quarter grew 23% from last year to CAN424.6 million. Net earnings increased 35% to CAN53.3 million and our consolidated operating margin was 18.5%.

We took in CAN455 million in new orders and concluded the quarter with a CAN2.9 billion backlog. In training and services civil, we signed agreements with an expected value of CAN139 million and we had an average of 118 revenue simulator equipment units in operation. We are feeling the effects of airline capacity reductions and decreased hours flown in business aviation. Training is integral to the operation of an aircraft and this segment of our business more rapidly feels the effects of changing market conditions and then that affected the installed base.

Overall, our utilization rate was lower at 75% compared to 81% for the same period last year. I have cautioned in the past that this is not an overly consistent metric to follow, but it does reflect the lower demand that we are experiencing. More acutely in the US and to a lesser extent in other regions.

We made good operational progress, despite these head winds. We continue to ramp up the utilization of our recently installed training assets, which has helped to support our overall performance. Average annualized revenue per simulator increased to CAN4.1 million from CAN3.4 million last year.

The foreign exchange rates, vis-a-vis the Canadian dollar, are currently on our side and helping to offset a portion of the market softness.

In simulation products civil, we signed orders for 11 full flight simulators during the quarter from customers including American Airlines, Continental Airlines, Air New Zealand, Saudi Arabian Airlines, Air China and the Hua Ou training center in Beijing. Year to date, we have announced 31 sales and we continue to expect a total of 34 by March 31.

In the combined military segments, we won new orders totaling CAN183.7 million. We signed a contract to supply the US Navy with an MH60-S tactical operational flight trainer and we won upgrade work for the German Army on a Euro Copter EC-135 simulator. As well, we received a contract option exercise related to the US Army SE Core program.

In training and services, we signed a contract for C1-30 simulator training and maintenance services for the US Air Force. Danish Merlin pilot training at our training center in the UK and simulator maintenance and support services for the German army and Air Force. With that, I will now ask Alain to discuss our financial results.

Thank you, Bob, and good afternoon, everyone. In training and services civil, revenue was up 30% over last year to CAN121 million. We grew the average number of RSCUs in the network by nine units and we incorporated the results from Sabena Flight Academy. Note that this acquisition is still being integrated and it caused some drag on the segment's operating margin in the quarter.

Segment operating income was CAN21.6 million, which is 39% higher than last year and 13% higher than last quarter. The segment operating margin was 17.9% this quarter compared to 16.7% last year.

In simulation products civil, revenue was CAN119 million, up 15% from last year. Segment operating income decreased 10% from last year to CAN22.8 million because of the less favorable program mix and a less beneficial currency hedge position this year compared to last year.

We are still working through orders that were hedged when Canadian to US dollar exchange rate was closer to par. These impacts were somewhat offset by our receipt from a customer of CAN1.7 million that had been deemed uncollectible and written off several years ago. Assuming the Canadian dollar stays low, it will eventually help offset some of the weakness caused by softer demand.

In simulation product military, revenue was CAN126 million, 40% higher than last year. We had higher activity on a number of recently awarded programs and here again we benefited from the lower Canadian dollar. Segment operating income was CAN25.7 million and the margin was 20.5% compared to 12.8% last year. The increase comes from the combination of higher volume, favorable effects, and higher utilization of funds from our project Phoenix (R&D) cost sharing program.

In training and services military, revenue was equal to last year at CAN59 million. Segment operating income of CAN8.6 million was 9% lower than last year and the operating margin was 14.6% compared to 16.1% last year.

In the third quarter last year, we benefited from a revenue recovery related to our annual labor rate review with the Canadian government. This year, we had a mix of revenue increases and decreases in training and maintenance services and we've benefited from FX translation.

When evaluating trends in our combined military business, we encourage investors to consider period of 12 months or longer given the unevenness of performance from quarter to quarter. The combined operating margin for these two segments reached 18.6% this quarter. We expect the average margin will be around 15% for the foreseeable future.

Capital expenditures totaled CAN52 million this quarter comprised of CAN38 million in growth CapEx in support of our prior investment commitment. We have continued to expand selectively our training network to address additional market share and to respond to training demands in new markets. The balance is attributed to maintenance CapEx that were CAN14 million.

Income taxes this quarter were CAN19.8 million, representing an effective tax rate of 27%, which is lower than usual because of our settlement of tax audit and changes in the mix of income from various tax jurisdictions. We still expect the effective income tax rate for the year to be about 30%.

Free cash flow was CAN71.7 million in the quarter, up CAN21.9 million year-over-year. The increase was mainly due to a CAN52.7 million recovery in non-cash working capital offset by a decrease of CAN20 million in cash provided by continuing and an increase in maintenance CapEx of CAN7.5 million and a dividend increase of CAN4.9 million.

Finally, net debt increased CAN9.4 million from last quarter because of the lower Canadian dollar and against our (inaudible) debt. This was partially offset by a net increase in cash.

Thanks for your attention. I'm turning back the microphone to you, Bob.

Thanks, Alain. Last quarter we commented on the high level of market uncertainty and how this makes forecasting in the civil aerospace market difficult. We also expressed our belief that things would likely get worse for civil aviation before things got better. Things have gotten worse and the market in the period ahead will be very challenging.

(Inaudible) has predicted 3% lower commercial passenger traffic this year and several of the world's airlines have already taken steps or have announced plans to reduce capacity, particularly in North America. These measures, combined with the lower cost of fuel, should eventually help bolster airline performance.

As for new aircraft deliveries, so far, Boeing and Airbus have maintained their record backlog, which stand at 7 years of deliveries at current production rates. They have managed to offset aircraft deferrals with demands for new aircraft. Orders for new aircraft were lower in 2008, but still exceeded deliveries by a good margin.

Given the current climate, we expect aircraft orders to be substantially lower in 2009. What remains most unclear is the number of expected deliveries in the following few years, which may be impacted by deferrals and cancellations occurring this year. As well, it is unclear what the state of aircraft -- of the aircraft financing market will be as we go through the period ahead.

Export credit agencies in Europe have increased their commitment to help mitigate the apparent aircraft funding gap and so have the OEMs. We expect this situation will become clearer in the coming months and this will be an important driver for orders in our simulation products civil segment. We have already assumed that aircraft deliveries will be lower this year than last and this will impact full flight simulator orders.

During the last cycle downturn, CAE was battling the impact of a Canadian dollar that increased from the mid CAN0.60 level to about $0.80 US. CAE's much higher cost base back then made it virtually impossible to make money with lower volumes and a strong dollar. This time, we face the opposite situation with the dollar decreasing to around CAN0.80 from above par. Assuming the dollar remains around its current exchange level, this segment will be partially bolstered by the weaker dollar as our foreign currency hedges get closer to the prevailing exchange rates.

The simulation product civil segment of our business is tied to aircraft deliveries and it is important to note that we have been deliberately diversifying CAE to become less dependent on the delivery cycle and to become more dependent on the already installed base of aircraft. Year-to-date, simulation products civil, accounted for 30% of CAE's revenue, which is substantially lower than in the past market cycle.

Our strategy has been to grow the other parts of our business at a faster pace.

In business aviation, the number of hours flown were down 19% in December and 12% for the year overall. For sale or used aircraft represented 17% of the installed base at year end and will for sometime compete with new aircraft orders.

The impact of the downturn on training demand is most acute on the small and medium size jets and especially on the older models. Recent announcements from the business jet manufacturers have confirmed large numbers of order deferrals and cancellations.

The OEMs have taken action to drop production capacity on a range of platforms. The larger business aircraft tend to be more resilient in the economic downturn and so far, production on the high end models appears to be stable.

Our training and services civil segment tends to be more related to the already installed base of aircraft, which means that it is inherently more stable than a business that relies exclusively on new aircraft deliveries. The number of hours flown globally has dropped significantly, less so internationally, and more so in North America. As we said earlier on the call, we are already experiencing the impacts of lower demand, especially for training on the older and smaller aircraft.

We have been getting some relief from FX as the dollar has fallen from last year's highs. As well, we have been advancing CAE's position in adjacent service areas, which helps to bolster our revenue per simulator. On balance, we expect the period ahead to be more challenging and we are already taking steps to lower our costs and scale our training operations around the world. The training network is well diversified and while we expect continued drag from the current conditions, we think we can demonstrate relative resilience with this segment's performance.

Now, turning to the military half of our business, we expect to continue to produce strong results in the period ahead, which would help to offset the impact of the civil aerospace downturn. We believe that we can sustain an average annual revenue growth rate of 10% and an EBIT margin of about 15% for the foreseeable future.

CAE plays an important role internationally serving the simulation-based training needs of more than 30 national defense forces. We are in a strong position on a number of aircraft platforms like the NH-90 helicopter and the C1-30-J transport aircraft that have extensive global reach and a high degree of relevance in today's defense environment.

Here in Canada, we are hopeful of concluding soon, a substantial agreement to provide an equipment and multi-year training services solution to the Canadian forces in support of its new air lift capacity.

US defense market is the largest by far and defense spending is expected to remain stable, at least through the 2010 budget year. The new administration has made it clear that defense and security will remain a top priority, as well as the preservation of jobs in the defense industry. The US secretary of defense has reiterated their focus on operational readiness and we believe that simulation-based training is integral to that view.

Our best intelligence and forecasting, however, indicates that there are several trends and factors lending support to our optimism in our military business. First, aircraft platforms such as helicopters and transports are the work horses for militaries worldwide and these platforms are where CAE has experience and capability.

Second, training and readiness remains a top priority and there is a continued growth in the use of simulation for more and more training requirements. Third, militaries globally outsource training support services through industry so that active duty personnel can focus on operational requirements and we see a number of opportunities over the next several years in this area.

Finally, there is a growing acceptance in the use of simulation beyond training for analysis and operations so we see growth prospects for our professional services business. The global war on terror is front and center for all governments and their security needs. With this reality, defense forces and other public security agencies must prepare and train for known and unknown threat. CAE's simulation-based solutions are central to achieving a higher level of readiness.

In conclusion, we are operating in a very challenging civil aerospace environment, but we designed CAE's strategy for this eventuality and our balanced portfolio is proving its strength. We will adapt as required to scale and position our business appropriately. In recent years, we have shown our ability to adapt to highly volatile markets. We will continue to take a sober approach and we are already taking steps to help ensure that we can make the most of the current conditions.

First, we are assessing our operations globally to reduce costs and right-size capacity. Second, we are identifying ways to create more variability in our overall cost structure. Third, our Chief Operating Officer, Marc Parent, is working to drive new synergies between our four business segments. Fourth, we are evaluating our R&D programs to ensure that we are running at a suitable pace.

Our strategic priority is to maintain our technological leadership and this needs to be balanced with constraints suggested by the current environment. And finally, we are working with financial entities to help customers in gaining access to financing in this highly irregular credit market.

We believe we have a realistic view of the highly volatile situation we face and we will respond in a way that takes all aspects of our business into consideration, including the positive prospects of our defense business, our new growth initiatives, and the relative durability of our service business.

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

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

Thank you, Mr. Arnovitz. (Operator Instructions) The first question is from Cameron Doerksen from Versant Partners. Please go ahead.

Yes, good afternoon.

Good afternoon.

I guess a question on the training network. You spoke a bit about right sizing all aspects of that business. I'm wondering if you could maybe just talk about what opportunities there might be to perhaps retire some of the older simulators.

And I guess also, where are you on what has been sort of firmly committed as far as the growth in the simulator network? I guess I'm trying to get a handle on where you expect the revenue simulator equivalents to be as we look ahead sort of 12 months.

Okay. I think Cameron, I'll start probably at the end. We still are going with the -- you know increasing by about 10%. We've got a very selective basis in the way that we're investing. We're looking at assets that we can put in place that we feel quite confident can operate in the environment that we're in right now. So, I think you could say that's where we'll be.

As you look at the training network, we have made adjustments in the United States as it relates, you know, to the number of instructors we have in making that more variable and we've done the same thing as well in Europe where we had to take action as well.

And, you know, we've also had a number of new assets that we've put into place. You see the current level of assets that we have at around, I think it's 118. And the ones that we've been putting out into the marketplace have been filling up very nicely, even in the current environment we're in.

And as well, the ones that we've gotten from Sabena that we've taken over are operating well. We've mentioned that they were a little bit of a drag because they are not -- they don't have the margin that our current business or our initial business had. But we think that we can make improvements of that over the next year. So, you know, I think that we're seeing a number of things that are going well.

If you look at a couple of assets that, you know, we've put in, I'll use one example. You know, we're up and running now in Bangalore. And the A-320 that we've got there is jam-packed and we just started that in the fall. It's full. We have a Global Express as well that we've been putting out in Europe and it's very full.

So, you know, I would say by and large that, you know, we feel that we're still going to be growing with the assets that we can put in and we have very good visibility on the product areas where we think we can increase our, and keep up with the penetration that we need in that segment of the business.

Thank you.

You're welcome.

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

Good morning, thank you. Gentlemen, wondering if I can delve into the whole forecast for EBIT margins of 15%. Is this something you're seeing today in what you've booked into your backlog? Do you (inaudible) this to accrue beginning in Q4? If you can just provide how that's going to play out, that would be helpful. Thank you.

Sorry, Daniel, you're talking about the 15% in defense?

Right.

Yes, we've been going, as you can imagine right now, doing budgets for the new year coming. We've been re-evaluating our strategic plan. We've been looking at the order income and the nature of the orders that we've got coming. You know we've seen more of a switch now to military products as opposed to military services.

So we know the bids that we have out there. We know the contracts that we've won. And, you know, we've seen, I think in the last couple of quarters, we've actually outperformed the 15%. But we think it's wise to go with 15% in terms of what we have.

And as we look at our loading over the next few years, we feel quite confident that we can deliver that 15%. And a lot of the work as well has an engineering content to it and R&D and solutions-oriented, where you can tend to have the higher margins. So, I think we're feeling quite good about that.

Could you just comment at all, Bob, on where you see -- if we might be seeing margin pressure in any other areas of your business as well, given what's going on in the environment?

Well, you know, I think the area that you're going to see -- the civil area clearly is something to where it's going to relate to the orders and the volume that you get. And our real challenge is to keep operating the way that we've been operating during the entire restructuring period that we started four years ago, that we -- where we've been continually and continually trying to establish a culture where we have to adapt.

And so, I would say those are the two most challenging areas in the civil area. And, I think that will always be there. But you know we've got some things going for us here that we didn't have before. One is foreign exchange that, you know, it currently is in our favor. And I would say that the other thing is critical mass.

If you look at where we were in previous cycles, the business is very, very different. We're generating a lot of cash inside of our training business. We have a global footprint that we did not have before. We've got a financial system that you're seeing in the disclosure we have in the segments that we're using in the business to manage it to be able to react very quickly to situations. We have a much stronger balance sheet than we had before. I mentioned I think exchange rate and where it is.

We have a defense business as well that is generating cash that we didn't have in previous cycles. So, it's very, very different than what we had before. But, I think you have to look at this very, very clearly and the two segments that are going to be the most challenging are the ones in the civil area.

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

Good day. On your R&D expenditures, you commented in your release that project Phoenix helped out your margins in the third quarter. And then you went on in your commentary to suggest perhaps that R&D could be cut for a period. How will that affect your contributions from the governments?

I think the main point I was trying to make here, Nick, is that the expenditures were a little higher than some of the previous quarters. And the explanation for that is that we had a piece that -- where a claim came through that had been made a couple of quarters previously. And we just happened to get it in that quarter. And we wanted to signal that that was -- that was unusual for that period.

I think the other thing is that I didn't want to give the impression that we're cutting R&D. I think that, you know, what we're clearly doing is trying to find that we can match the R&D in a way that can immediately help us in terms of commercializing the work that we're doing and help us make the sales that we see are coming in the next period.

Is there any change to the project Phoenix contribution arrangement with the governments?

Nope, no change.

And so it stays at sort of the level it's been at in recent quarters?

Yes, yes, for the life of the program.

That's great. Well, thank you very much.

You're welcome.

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

Thank you. Good afternoon. Just wondering, Bob, if you could explore or provide some additional details on a couple of these initiatives that you mentioned. In particular, looking to increase the variable cost structure of the business or looking to capitalize on that. And secondly you commented about looking for additional synergies. Could you just provide a little more detail on what's behind both of those initiatives?

Yes, I'll ask Marc to talk about the synergies and some ideas that we've got there. On the variability, you know, it's very much seeing if we can adjust part of the business so that we have the base loading. I'll give you an example.

In the plant here, we've had great operation from our workers and the union and we have a number of people that are basically temporary employees. So, we're able to move the man loading up and down to a certain extent. In some other areas, using perhaps some retired people that we have as trainers so that we're able to, you know, again, have more variability relating on the load that we have without sacrificing the quality of the service and the product that we're doing.

So, those are just a couple of ideas. On the synergies front, Marc, do you want to maybe mention some of the things that you're looking at there.

Yes, sure. I think if you look at synergies. Well, first of all, I think I would look at both revenue and cost synergies. I think both are there to be had.

You know, since I'm looking at four segments as a whole and having a lot of experience in the past few years looking at the products business on the civil side, and understanding the dynamics there as well as supplying simulators for our training business. It's very clear that the customers, the airlines of the world, the OEMs, are the same.

So, there's clearly from a go-to-market strategy on the civil side, there's clearly some bundling opportunities that exist there that will be easier to get as we focus on them.

From the same standpoint, you know, you look at how we operate in regions. In this civil business now and also across civil and military, you can -- in geographical areas inevitably you will have some overlap and duplications in how we go to market and operate in the various geographies. So, as we look at that, we can clearly see opportunities there.

Other opportunities, for example, is from our infrastructure. You know, you could think about -- we are looking at seriously about putting military sims in commercial centers, as an example. If we look at our network of civil centers, we can look at how we optimize, how we spare, you know, from supporting our customers. For example, who may be in the same geographical vicinity. I mean those are some of the opportunities that we're looking at in the -- from a synergistic point of view.

Great. Thank you very much.

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

Yes, thank you very much. My question relates to the margin on the SPC. You reported 19.1, but if we removed the 1.7 million in fact, is the impact only on the cost side? Is it fair to assume that you would have reported 17.7 and I was also wondering about the -- if you could quantify the unfavorable hedge position. And also more details about the impact of a program mix. Thanks.

Okay. Yes, I think the way I would look at the margin, Benoit.You're absolutely right in the way that you do the calculation. It would have been lower. But you know, we've tended to have items and we've always pointed them out quarter-by-quarter. But, yes, that observation is correct. And I'll ask Alain to comment on the hedges.

Yes, on the hedges, Benoit. If I'm looking at the average edge rate for SPC in the quarter, we were around $1 US to CAN1.06. And last year for the same quarter, we were at CAN1.13. So, obviously last year was better. That's why we said this quarter, vis-a-vis last year, FX played against us because of these rates.

So, looking forward as we're getting out of these hedges contract that we took close to par, it will benefit -- if there's no more pressure on price on the business, FX should help us.

Okay, and with respect to the program mix, is it more related to the 5000 series, or do you see more pricing pressure right now?

I think it's program mix. I think clearly there is some pricing pressure in the market that we're in right now, so it's a mix of all of those things. But, you know, the mix can change the next quarter as well. And, you know, as we go forward, we still have a goal of trying to be at 20% as we've talked about in the past. But that's a little bit more challenging in the environment that we're in right now.

Okay, thanks.

You're welcome.

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

Good morning.

Good morning.

Just if we can cover some of the acquisitions. Just if you can give us an idea with Sabena. The actual impact it had on training services. That would be great.

And then it -- as well as if you can just update us on where you're at with X-Wave and where you think the impact will be for next year?

Okay. I think what you can assume on the acquisition of Sabena in about CAN10 million a quarter, something like that. And you can assume, I don't want to be too precise here, but let's say the margin is about half of what it should be, okay. So, if we can correct that, you're going to see some of that be corrected going forward.

As it relates to X-Wave, it's -- we're still trying to finalize that acquisition. You know, there's always elements in these things. It's complicated because it's a defense business and they do defense business in the United States. And it relates to ITARs and it's an area where we've got to get preapprovals from the government in terms of the way that we do it.

You know, we're hopeful that we're going to get this finalized in the first quarter of the New Year. But it's something we've got to be patient with. It has to be done the right way because we don't want it to affect in any way the -- I mean, we want to understand how it's going to affect the relationship that we have with the State department of the United States.

Okay, and then with X-Wave, if can you just give us an idea of where you think order of magnitude of revenues will be? Any impact it may have your backlog and where margins may end up?

It's about the same as what we had for -- it's about the same as what we had for the other acquisition I was talking about. It's about CAN10 million a quarter. And, you know, it should have margins that are similar to what we're doing in the military business.

Okay, thank you very much.

You're welcome.

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

Hello, guys. The military business in the quarter first of all, I didn't see any specific identification of the Bell Alliant acquisition contributing to the revenue growth there. I'm wondering if that was a factor? And then when you guys maintain your 10% military growth forecast, is that combined between your two military divisions and is that inclusive of a lower Canadian dollar?

That's the combined business spend. So, it's both of the businesses together. There is nothing in for Bell Alliant because we haven't finalized the transaction yet. So there's nothing that would be there. And you know as we're making the projection, we are making some assumptions on exchange, as you always have to do in terms of revenue. But you can be sure that as we have in the past, we are being conservative in terms of the way we do our calculations. It's not at the spot rate to date. We're trying to be conservative in the way we do it and that's why we think we can do the 10%.

So, but -- isn't -- wasn't Bell supposed to have been accretive by now? I thought that was supposed to start contributing.

Yes, we were hoping to have it done by now. But I think as I mentioned in the previous call, there's some things that we have to work -- or not previous call, but previous question. We have to work some things out that relate to ITARs with the State department as -- because of the contracts that X-Wave has in the United States. And we're taking the time to make sure that that's done carefully. But you're not seeing anything yet from X-Wave.

And so that is in your 10% assumption as well?

Yes, it would be included at some point, yes.

Okay, thanks a lot.

You're welcome.

Thank you. Following question is from Marko Pencak from JMP Securities. Please go ahead.

Thanks, good afternoon. Bob, I didn't catch whether you'd mentioned -- whether you've actually seen any cancellations or deferrals yet in your civil equipment backlog.

Yes, we're in the same position, Marko, as we were last time. We've had one customer where we've had some difficulties. And we were able to basically cover off that, the particular sim that we had in that case. That's the only one that we've had.

And as you look across the sort of the timeframe for when you're supposed to deliver the simulators that you currently have in backlog. And you think about the specific customers. Can you give us a sense of what percentage of that backlog you think might be at risk and, you know, as opposed to what you feel pretty comfortable on? I'm just trying to get a sense of, you know -- because you've obviously mentioned the challenging environment and the cautionary stance you guys are taking. I'm just trying to frame that a little better.

I think everything that we have in backlog, I would feel pretty comfortable about. You know, we get advance payments against the builds generally speaking that we make. We get advances when we sign the contracts. And you know, I don't really feel that there's a lot that is there.

What I see more is going forward, as I mentioned, the -- as it is with the financing of aircraft, there's going to be some requirement for financing. So we're going to have to work out some mechanisms to make sure with the export development corporation, the great cooperation that we've got there, all the things we've done in the past. So as it looks -- relates to the backlog, I don't see any real risk, Marko.

And would the same be true on the training side? I mean aside from just -- I recognize there's capacity reductions. And so you may have customers who just scale down their requirements. But I'm more just curious about some of your commercial customers, whether you think there's risk that some of them may just cease all together?

Well, I think that here we've got a very good mix geographically; a good mix between business aircraft, civil aircraft. The pilots to maintain their certification or type certification have got to go in at least once a year, some airlines twice a year, to maintain their currency.

You're still going to see, you know, from a pilot training point of view, you're going to see people reaching 65 and having to no longer be pilots. So, you're going to see you know, maybe, I think there's about 7000 of those that coming on an annual basis in the next period of time.

You're going to see a broad mix of things. We're clearly seeing right now that it's more acute in the United States than anywhere else in the world. and it's clearly affecting the business aircraft segment of our business. But there, you know, we've just got to adjust our business to make sure that we can deal with those changes. And I think as I mentioned before, we're doing that. We've done it directly. We've already started doing it in a number of areas.

Okay, thank you.

You're welcome.

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

Yes, just on the Sabena, I just wanted -- I didn't catch the number. Did you give a number for the impact on EBIT in the quarter?

No, we didn't, but what I said is, you know, we're there were about 10,000 -- sorry, CAN10 million a quarter in terms of revenue. And said, you know, you can assume that it's about half of whatever is there.

I'm sure -- I don't understand the last part of the comment.

It's about half of what the -- it's about half of where it should be to be consistent with the returns we're getting in the rest of the business.

Okay, okay. That's helpful. And then just quickly, the growth rates that you gave for the military, the 10% per year and also on the TSC area, 10% growth on RCUs. How long are you thinking when you give those numbers?

Well, I think we said on the military for the foreseeable future. So that to me would be you know two or three years.

Okay.

And on the -- what we're adding into the system on the RSCUs, I think we have to be careful here. You know, we can see ourselves out to about 12 months. So we're getting pretty close to next year. We can see ourselves doing it, but I think that we should be prudent not to say that you know we're just going to keep doing this at a certain rate. We've got to evaluate that situation all of the time.

And, you know, we're watching our CapEx very, very closely to deal with it. And, we already have, even before all of this -- the recession and the credit crisis developed, we have a number of assets that were already in the system. So we have a pretty good idea of what's coming at least for the next year.

Okay, great. Thank you.

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

Yes, good afternoon, Bob. Question of clarification, where would you expect your average exchange rate to be in the next quarter vis-a-vis the US dollar, if you were at CAN1.06 in the quarter we just completed?

I think Alain can help us there. We probably can't be too precise, but we can maybe give you just a general idea.

Assuming the dollar stays where it is.

Yes.

If I'm looking, Richard, at my basket of hedges contract looking forward. I mean the rate would be at 114 as the basket stands right now.

Right, but that could change.

That could change because depending what the rates -- if the rates continue to stay where it is, it will improve a little bit. If the rate goes back, the hedges we're adding to the pool will [delete] that 114.

Thank you very much.

You're welcome.

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

In your [MD&A] you mentioned that you have CAN145 million of debt maturity in the next 12 months. I was just wondering how you intend to address that?

Yes, I mean the major component of this, Benoit, is there's $60 million USD coming due on the private placement this summer. We already have protected it at a very good rate last year like we've mentioned. We have credit revolver available to us for more than CAN500 million for the next three years. So to finance this repayment is not an issue and if you looked at the cash on the balance sheet, there's more than CAN170 million around the network. So, that's not an issue, the refinancing of the CAN100 million coming out.

Thanks.

Okay.

Operator, we want to be sure to have enough time to respond to media questions. So I think we'll conclude the investor portion of the call now and remind everyone that a transcript of today's remarks can be found on our website. And if you will please open the lines now to the members of the media.

Thank you. We'll now take questions from the media. (Operator Instructions) The first question is from (inaudible) from (inaudible). Please go ahead.

(Spoken in French)

(Spoken in French)

(Spoken in French) The next question is from (inaudible) from (inaudible). Please go ahead.

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(Spoken in French)

(Spoken in French) The next question is from (inaudible) from the Canadian Press. Please go ahead.

Yes, just to follow up on the employment situation. You were in a hiring freeze a couple months ago. Has that been ended?

Well, you know, I think our business has changed very much. We have -- you know, when we started our restructuring, we were down around 5,000 employees. We're now up to around 7,000 employees, so we've added a number of people into the business.

And we with some of the contracts we've won, especially with the expansions we have on the military side, the type of people that we need are different than some of the people we have in the organization. So, we still have some open positions we have to fill to be able to meet the requirements that we have.

But you did do a -- you had a hiring day where people came in.

Well, it wasn't really a hiring day it was a --

Open house.

It was an open house to identify potential candidates for these positions that I was talking about, and, you know, that's -- that's still valid for a limited number of jobs that we have where we have special -- special requirements.

So, how many people are you looking to add then?

I don't know if we're going to add them all or not. But there are about 100 positions that we're evaluating where we have special requirements.

Okay, and would the military -- adding military to civil production, I guess, would that be in Montreal, or where would that be located?

Yes, most of the engineering that we would have that would relate to this would likely be in the Montreal area.

Now, there's been a lot of layoffs Bombardier you elsewhere. Are there opportunities that you feel to get qualified people as a result of those changes?

I don't think access to qualified people is a real problem. We have a very good source of talent here in Montreal.

Okay, thank you.

Thank you. The next question is from [Francois Chaland] from the Montreal Gazette.

Yes, hello, thank you. I'm wondering what the impact of the slowdown in the business aircraft market is on CAE? How many Sims do you have in the business aircraft segment? And how much pilot training do you do in that segments? And will this affect the utilization rates that has gone already from I guess from 81% to 75%, if I understood correctly?

Yes, our rate has gone down to 70 -- in the 75% or 72% range. That's, that's not unusual. You know, we haven't been really running at the 80% level for quite a while. So, you know, I don't think that that is really a big concern.

If you look at the total number of simulators in the business aircraft area, we have about 40 of them. I would add a number of them in the United States in Dallas. But a number are around the world in different locations as well. And the loading very much depends on the type of the aircraft and how new or old the aircraft is.

So for instance, I think I mentioned we've got some Global Expresses out there that are jam packed. We've got a challenger 300 that's out there that's jam packed. Got some of the older models that we have down in our Dallas facility. There's -- it's more challenging.

But I think overall, Francoishere that people do have to remain their currency to be able to fly. So they've got to go in at least once a year to get that currency. And, it's not -- if they don't do that, they then have to be evaluated as to whether they have to take a more extensive program to maintain the currency going forward. So, you know, clearly we'll see some downturn, but it's not catastrophic.

The other thing I would say is we are not as reliable as others. We don't rely as much on what I will call initial training when an aircraft's sold. There's normally initial training that goes with the aircraft that many times is paid for or sponsored by the OEM. Our -- compared to our competitors, we have a lot more that's ongoing and recurring as opposed to this initial training. So, we think that might help us a little bit as well.

Okay, thanks. And to clear up, your 7000 employees, how many of them are there in Saint-Laurent and how many of them in Dallas or around the world?

We have about 3,500 here in Montreal. The rest are around the world.

And is your military operations, are they basically in Florida or are they spread around as well?

They are here. They are in Tampa. And we do have some activity that we do in Germany and a little bit that we do in Australia as well.

Thank you.

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

I guess, I've become a reporter, too.

Hey, David.

I just had a question on Project Phoenix.

Yes.

You said that it helped SPM and TSM in the quarter. I was wondering how much impact that had. What would be considered unusual?

Yes, the unusual part in SPM, David, was CAN2.7 million and on TSM, it was below the CAN1 million mark, but it's a smaller segment. So we had to disclose it.

Right.

But CAN2.7 million was incremental and that might not necessarily belong to this quarter. So, we've got confirmation that those expenses were eligible and we got the share (inaudible) of this quarter.

Okay, that's fine. And then, Bob, you mentioned something about doing more in adjacent areas in TFC. What does that mean?

Adjacent areas in what, sorry?

In TFC, you said that you're doing more focusing on adding things in adjacent areas or the business has moved into that. Are you talking about web training or is it something else?

Yes, we're talking mostly about web training.

Okay, thank you.

Thank you.

Okay, operator, if there are no more questions from media, I think we'll wrap up here.

Thank you. There are no more questions from the media.

Okay, thanks very much.

The conference call has now ended. Please disconnect your lines at this time. We thank you for your participation, and have a great day.