CAE Inc (CAE) 2009 Q4 法說會逐字稿

Welcome to the CAE fourth 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 proceed, Mr. Arnovitz.

Thank you very much. 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'll find more information about the risks and uncertainties associated with our business in the MBNA section of our annual report and the annual information form for the year ended March 3 1, 2008. These documents have been filed with the Canadian securities commission and are available on our web site at CAE.com and on SEDAR. They've also been filed with the US Securities & Exchange Commission under the form 40F and are available on EDGAR. Forward looking statements in this conference represents our expectations as of May 14, 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, our Chief Operating Officer and Alain Raquepas, our Chief Financial Officer. After comments from Bob, Mark and Alain, we will take questions from financial analysts and institutional investors. We will have a second Q&A period for members of the media immediately following the investor session. For your convenience, this conference call will be archived on CAE's web site. 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 few comments about our performance last year and Alain will review our results in more detail. Mark will then walk us through the major elements of our reorganization plan and I will come back at the end of the call to conclude with some comments throughout the period ahead.

We delivered another year of strong performance in 2009 because we were well diversified and we maintained our strict financial discipline. Revenue grew 17% to $1.7 billion. And net earnings grew more than 30% to $200 million. CAE's backlog exceeded the $3 billion mark, which is a new record for the company. The downturn in aerospace is having an impact on virtually all companies in the sector and CAE's civil segments are not immune. The downturn, so far, has been mitigated by our geographic diversification, our civil backlog of orders from fiscal years 2008 and 2009 and the large portion of our business that is defense-related.

The positive outlook for our military business is supported by our record order intake. For the first time in CAE's history, military orders exceeded $1 billion. In the combined military segments, we won new orders totaling more than $544 million in the fourth quarter. Key contract awards during the year included the government of Canada's C-130J air crew training, a contract extension with the commonwealth of Australia for trading support services and a contract to develop Hawk 128, full mission simulators for the UK's MFTS program. In training and services civil, we signed agreements with an expected value of $464 million and we grew the annual average number of revenue simulator equivalent units in our network by nearly 10%. The impact on training demand from changes in the global install aircraft fleet, both positive and negative, are felt sooner in this segment. Overall, our annual utilization rate was lower at 73% compared with 81% last year.

Demand for training services in the US already reflects weaker conditions for aerospace. Europe is beginning to experience lower levels of activity while Asia, India, South America and the Middle East have all held up relatively well for training. Average annual revenue per simulator was $3.95 million in the fourth quarter and $3.9 million for the year as a whole. All told, we think this is pretty good performance in the face of a market downturn. In simulation product civil, we signed four orders in the fourth quarter and concluded the year, as we predicted, with a total of 44 orders. Marking discussions are still active with a number of potential customers but looking at the macro environment, we anticipate around 20 civil simulator sales for the current fiscal year.

Over the past 4.5 years, we have been in continuous pursuit of diversification, innovation and productivity improvements. We made good progress over the period and succeeded to overcome a number of major challenges. As part of his mandate, as Chief Operating Officer, Marc Parent has recently led a comprehensive review of the company to identify opportunities for synergies between our business units and within our global structure. He will elaborate on a series of organizational changes that are now being implemented to strengthen our competitive position by reducing costs and bringing CAE even closer to our customers.

The value of diversification is now most apparent. There's never been a better time for CAE's military business. But at the same time, we know that we must adapt to the weakened civil market. Concurrent with our initiative to drive synergies between our business units, we are taking actions required to size the company to the current and expected market conditions. With that, I will now ask Alain to discuss our financial results.

Thank you, Bob. And good afternoon, everyone. In training and services civil, fourth quarter revenue was up 16% over the same quarter last year to $121 million and was in line with the preceding third quarter. The pick-up we normally see in the fourth quarter, due to seasonality, was subdued by market pressures. For the year, revenue was up 21% to $461 million. On average, we grew the number of RSCUs in the network by 10 units for the year, to reach 118 and we've incorporated the results from our acquired companies. Segment [operating] income in the fourth quarter was $23.7 million, in line with Q4 last year and 10% higher than last quarter. For the year, segmental [operating] income increased 16% to $85 million. The segment [operating] margin was 19.5% in the fourth quarter and 18.5% for the year.

In simulation product civil, revenue was $107 million in the fourth quarter, stable with last year. For the year, revenue increased 10% to $478 million. Segment [operating] income in the fourth quarter decreased 22% from last year to $18.5 million. In simulation product military, revenue was $144 million in the fourth quarter, 41% higher than last year. For the year, revenue was up 26% to $484 million. We had higher activity on a number of helicopter and transport aircraft programs and we've benefited from the lower Canadian dollar. Segment [operating] income was up 85% to $27 million in the quarter and up 70% or $88 million for the year. The margin for the fourth quarter was 18.7% and for the year, was 18.1%.

In training and services military, revenue in the quarter was 23% higher than last year at $67 million. For the year, revenue reached $141 million, up 8%. Segment [operating] Income for the quarter was up 20% to $9.1 million and up 23% for the year to $39 million. We had more activity in the professional services area and we began to deliver maintenance services under the US Army SC Core program. The combined annual operating margin for our two military segments reached 17.5% for the year.

Capital expenditures totaled $204 million last year. Slightly higher than our forecast because of foreign exchange and a lease buyback. $149 million was for the growth capital expenditures in support of our prior investment commitments and $55 million was related to maintenance. We expect total CapEx to be about $150 million in fiscal 2010. Income taxes in the fourth quarter were $22 million representing an effective tax rate of 30%. For the year, taxes were $83 million or 29%. We've benefited from a different mix of income in both periods. We expect the effective income tax rate for fiscal 2010 to be about 31%.

Free cash flow was $34 million in the fourth quarter and $106 million for the year. We had higher investments in non-cash working capital and we paid higher dividends compared to the year ago periods as a result of our change in dividend policy. Finally, net debt increased $161 million this year to reach $185 million at March 31 to support our investment in working capital, our acquisition of (inaudible) flight academy and our growth capital expenditures. I will now turn the call over to you, Marc.

Thanks, Alain. These are pivotal times for CAE. We're faced with the challenge of managing our business through a downturn. At the same time, we have an opportunity to drive additional synergies between our business units to enhance our competitive advantage and strengthen the company for the future. We've double up the comprehensive plan to enhance our competitiveness in the global aerospace defense markets by improving the way we serve our customers and by doing things more efficiently. Within that plan, we've also had to address the changes that must be made now to scale down our business to manage the current expected market conditions.

Overall, our reorganization plan has been designed to achieve four basic goals. First, we wanted to distinguish CAE further from the competition by improving our go to market approach and our core civil and military markets. And providing our customers with a total solutions offering. We believe this will help unlock greater revenue opportunities with every customer interaction. Second, we want to maximize cost synergies between our four business units by employing a shared services model for engineering, manufacturing and support functions. Third, we aim to improve how we operate on a global basis by optimizing operations at the local, regional and global level with clearer profit and loss accountability. And lastly, we intend to ensure that we retain the financial and human resources that are necessary to develop new business areas. We'll continue to use a measured approach to lever CAE's core capabilities into industries like healthcare.

CAE offers the broadest array of products and service solutions of all of our competitors. We've consolidated the leadership of our two civil segments under Jeff Roberts and our two military segments under Mark (Inaudible). CAE has the capability to offer customized solutions to customers that combine both products and services. By adopting a solutions-oriented approach, with dedicated teams by region, we'll be providing solutions more effectively and we'll unify the (inaudible) of customer. Our customers will have the benefit of a seamless portfolio that will create greater value for them. It will be delivered in a stronger and more consistent way.

We felt it best to combine in one reorganization plan, all of the actions required to derive lasting cost savings and quality improvements with those that are needed to respond to the current market conditions. Our reorganization will be concentrated into two phases. The first of which is underway and the second which will be completed this fall. We're reducing our staff worldwide by approximately 700 people including 600 here in Montreal and 100 Internationally. For every direct labor position we're reducing, we are removing an equal proportion of indirect labor to contain our costs and remain competitive. Included in the layoffs are 70 management positions. These are extraordinary times for aerospace and we sincerely regret the hardship this will cause those affected by the layoffs. We're grateful to all CAE employees for their contribution. We're doing everything we can to maximize the number of jobs that we can maintain at CAE so that we can pursue our strategic initiatives.

For those remaining with CAE, the challenges are great. We will all share in the sacrifices required to manage through the period ahead. We're also implementing a number of temporary cost saving measures. Effective immediately, all management and most other employees globally will be subject to a salary freeze and will have five mandatory furlough days. We've also introduced new limits on overtime and we're offering early retirement incentives to qualifying employees. We believe that by taking these measures, we can pursue -- we can continue to pursue value from our strategy despite the current market turbulence.

In all, we estimate the reorganization will cost approximately $34 million for both phases which will be recorded largely in the current first quarter. We plan to prepare CAE for the future by dealing with this in three ways and we expect to substantially offset the reorganization cost this year through a combination of measures. First, a portion of the reorganization costs will be offset by reducing the scale of our civil segments to reflect the current market conditions. Second, part of the costs will be offset by savings this year from temporary measures like the salary freeze and furlough days. And third, we estimate the remainder of the reorganization costs will be offset by the ongoing savings we expect to realize from synergies. On an annualized basis, these ongoing savings should be approximately $15 million.

To conclude, we fully expect to manage the aerospace downturn successfully and we have the benefit of a secured and well-diversified base to work from. Our global reorganization should enable us to achieve a series of lasting benefits that enhance our competitive position. With that, I'll turn the call back over to Bob.

Thanks, Marc. Aerospace companies are working their way through some very difficult challenges. And CAE is no exception. Change is part of our culture. And we have had to adapt to dynamic market conditions for some time. We have the benefit of a well-diversified base and a sound financial structure and we have a plan to manage through the downturn and emerge rapidly when the market recovers. We also have the financial flexibility to remain committed to our long-term strategic priorities including maintaining our technological leadership. At the end of the quarter, we announce project Falcon, a 5 year investment plan for up to $714 million for research and development. This program will help considerably to maintain a number of high value jobs at CAE.

The outlook for our business is both positive and negative. And we expect some earnings impact on the civil side. Not all of which can be compensated for by the military side. With the organizational improvements Marc is leading, we expect to come back even stronger once the aerospace cycle stabilizes.

CAE's military business is coming into its own. We had felt it was important to develop this business to diversify CAE from its dependence on the civil aircraft delivery cycle. And now we're seeing the validation of this strategy. We're pleased to have broken through the $1 billion military order mark and we anticipate another good year for military orders in fiscal 2010. We expect to achieve 10% top line growth and 15% EBIT margins in our combined military segments in the current fiscal year. We expect approximately 10,000 new military aircraft to be deployed into the global defense fleets over the next five years. Which should generate demand for approximately 300 full flight simulators. We expect to serve a portion of this market, especially in programs involving transport and tanker aircraft, maritime patrol aircraft, jet trainers and helicopters. The use of simulation for training is continuing to gain momentum among defense forces worldwide. Earlier this month, Australia's Prime Minister released a white paper setting that nation's defense and security strategy for the next 20 years. It specifically called for a substantial boost to simulator training for defense and the use of simulation to relieve bottlenecks and training. They also stress the use of simulator training, permission rehearsal and intraoperability between allied forces. This is consistent with what other governments and defense forces around the world have been saying and implementing.

Turning now to civil, it is difficult to provide any precision in this area. However, based on our current view of the market, and the actions we are taking, we expect average annual margins in the mid teens for our civil segments. As I mentioned earlier, we expect about 20 full flight simulator orders this year which means lower production volume. As well, the timing or orders is a factor to consider in terms of how much revenue from these orders we're able to recognize during the year. Last fiscal year, we benefited from a high number of orders received in the first half of the year. In terms of pricing pressure, competition intensifies when there are few customer opportunities. Given the conditions we expect, margins will be lower but they will be helped by our improved cost base which will improve further with reorganization and the good level of production demand for military and internal products. In this light, we still think we can achieve decent performance considering the current context. We are also encouraged by the two full flight simulator orders we announced yesterday.

In training and services civil, we have already experienced the impacts of lower demand, mainly in north America, and to some extent, in Europe. Other regions have experienced various -- varying amounts of contraction in air travel but demand for training has held up reasonably well. We expect some additional impact on profitability as we go through the market trough. We have taken some steps to convert fixed costs to variable where possible and we will achieve more cost savings from our new regional structure. This segment responds quickly to changes in the underlying market. And so we expect it to be the first to recover when the market turns positive. There have been some early indications that the US region is starting to stabilize which is encouraging. But we will want to see more confirmation in the coming months before we are ready to call the market bottom.

In conclusion, we have had good performance in fiscal 2009, especially in military. We expect the aerospace markets to be weaker in the current fiscal year but that we will be able to offset part of that with continuing strong military performance and the cost saving measures being undertaken. It is also our intention to carry on investing in R&D and to maintain our good financial position. We believe this approach will allow us to manage through the current period and continue to deliver shareholder value. Thank you for your attention. We're now ready to take questions.

Operator, we'd now be pleased to take questions from analysts and institutional investors first. And with the media after this session. Before we open the lines, let me first ask that in the interest of fairness, that everyone please limit themselves to a single one-part question and if you have additional questions and time permits, please feel free to re-enter the queue.

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

Good afternoon.

Good afternoon.

I guess my question is just on the civil sim product segment. The backlog dropped pretty significantly from Q3 to Q4. I'm wondering if you can just maybe talk -- you sort of touched on it a bit in your closing remarks, but can you maybe talk a bit about what the sort of level of simulator deliveries you're kind of expecting in the current fiscal year relative to last year? What sort of magnitude of the drop should we expected?

Yes, I think there's two ways, Cameron, to look at this. One, you know, as I mentioned, the level of activity's pretty good. It's taking a little longer to close the orders. And you know, we see some opportunities that are going to arrive, we think in the first and second quarter of the year. So, that's a -- I think a real priority for us. As we look at the actual number of simulator deliveries, I think Andrew, you're helping me here. The fourth quarter, we had a 15. You're going to see a -- probably a slight drop in that as it relates to the first quarter. So, that's basically -- as you would expect, with the order intake that we have anticipated.

Ok. Then just to clarify the total number of simulator deliveries in fiscal 2009, I'm wondering if you can maybe just break out that between internal and external builds.

We don't have it broken down like that right now but we'll get back to you with it this afternoon.

Perfect. Thanks very much.

You're welcome.

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

Good morning, thank you. Gentlemen, clearly with the strength in military carrying you through this year, could you share with us your assumption with regards to what your order mix should look like in 2010? Of that 20 full flight simulators that you provided between military and civil, please?

It is all civil.

What you told you was all civil. The numbers we gave you, the 20 is all civil, ok? But I think you're asking a question about the strength of the military market. I think what I would say to you there is with the order intake that we've had, about 75% of the revenue that we have for this year is already booked. Which, you know, I think is a very good year. And we expect as we've said next year, that for the current year, that we're going to have a very good performance on military orders with the visibility that we have into the contract we see coming forward during the next period. That's why, I think, that we feel quite strongly about the military part of the business.

And given the lag between orders and deliveries, Bob, do you have a view with regards to how the deliveries will ultimately shake out for this year and do you have a view to next year as well?

We really don't have a view to -- are you talking military or civil?

For both if you could share both. Or either one, whatever you're comfortable sharing that would be great.

Well, I think as it relates to the military, you know, as I mentioned, we got 75% of the revenue for this year. We also have I think quite -- a lot of that spills over into the following year which I think is positive. On the civil, you know, we have some visibility as it relates to this year. I think that we're around 50%, 55%, something like that. Which, you know, is a little lower than we've had in previous years against the targets that we have. So, you know, I think that we have a shot at meeting the targets that we've set out. Hello?

Thank you. The next question is from Benoit Poirier of Desjardins Bank, please go ahead.

Yes, thank you very much. My question relates to the military segment. I was wondering if you could comment about the training of (inaudible) in team Canada with respect to the CH-47. Is there any update and also if you could discuss the potential implication with respect to the 8400M (inaudible) down the road? Thanks.

Yes, I think theres -- okay, I'll try and go through each of your questions here. The CH47 is something the government has intended to move on. They've also been talking about a search and rescue platform. And with the program that we set up, you know, the OTSP that initially has the C-130J in it, these other programs would come along as they're approved. So, it is really a matter of determining when the government would make a decision to move on these contracts that are coming forward. It seems that the government is moving on the CH47 and I don't know, maybe in the second half of our fiscal year, something like that, there might be something coming. As it relates to the 8400M, we're not currently involved in that program. And I think any delays that occur there would probably strengthen our position on the Lockheed C-130J program.

Okay, perfect. Thank you.

You're welcome.

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

Thank you, good afternoon. Looking at the civil training business, for a moment, can you comment on the outlook in terms of the overall market dynamics and the competitive situation? I'm thinking about -- I believe there's been some rationalization and some small competitors having difficulties in this environment. Do you see an opportunity to pick up market share in part because of the weakness of the competitive environment at all?

I think that, you know, we've been moving very rapidly to adjust to market conditions. As we said, making more of our cost (inaudible) variable. And we've had very good success in doing that, not just in North America but in Europe and around the world as well. I think that we've been seeing some of the things on the rationalization that have been going on but where we think we have the competitive advantage is what's going on internationally. You know, in terms of the -- where our footprint, I think is quite good. And that's -- I think where we can pick up some advantage. And also, you know, we've been making some move, for instance, the move into the northeast and the United States, we're seeing -- you know, we're seeing some good, positive feedback there. And also what we've been doing in the UK with the expansion of the training center there. We've been seeing. So, I think we're going -- you'll find that we're going to focus more on to -- on the things that we can do and the portfolio products that we have, the additions that we're going to make. And you know, I think it's going to position us well for what we're doing right now but also for when -- as we said before, we think this is the part of the business that will come back quickly when the market comes back and we want to make sure we're well-positioned for that.

Thank you.

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

Good afternoon. I would like to ask you about your cash flow. Looking at page 8 of your financial statements, I see that cash from operations has been declining for the past three years. And I just wondered if you could discuss the changes in non-cash working capital last year.

I'll take this one yes? Hello, Nick. So, the -- effectively, the cash flow this year as you might have noticed, we've made investment in working capital. I mean more than $94 million went to working capital. Obviously with the growth of our military business, as you grow that business, the AR and the unbilled sales or the long-term inventory on the military side are going up. So, this explains a good portion of the investment we've made in the working cap.

Okay, so if (inaudible) unbilled sales were $215 million versus $139 million. What are those? What are unbilled sales?

Well, let me try to describe to you what unbilled sales are. As you know, we're using POC, percentage of completion, to recognize our revenue at CAE as well now. So, when we get the long-term contract in the military area, for instance, we book our revenue as we expand the cost. As we incur the costs. And depending on when we get the milestone or the payment on these long-term contracts, we might have a receivable in the book if we're entitled to build that military customer by contract. And if we're not yet at the milestone, we have what we call the unbilled sales on the balance sheet. So, it is really like a receivables from all of these military customers, all good credit that we will collect eventually. So, its not working (inaudible) on assets that we're doing without the contract to back it up.

Ok. That's good. Maybe while I've got you, could you comment on CapEx for this year?

For the year we're in?

Yes, for the year you're in.

Yes. The year we're in -- we're a bit like we've said in the comments, a bit higher than what we thought. And the key reason was the foreign exchange obviously on that and a buyback that we got in Q4.

But I think you were asking about this current fiscal --

Fiscal '10.

You are all (inaudible) in fiscal '10, alright. So, we think that we expect right now, $150 million of total CapEx. This includes our maintenance CapEx, a good portion of it goes to military. As close to $50 million going to military and the balance grow to complete the growth of our civil network for assets that are already in process here in the plant.

Great. Thank you very much.

You're welcome.

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

Good afternoon, Bob.

Good afternoon.

If I were to look at CAE and say that the revenue is going to be flatlined over the next ten years, what level of CapEx would be required to keep revenue where it is now?

Well, I think -- first of all, it's not going to be. But secondly, if you were, I think you know -- you'll have to look at what we're going to be doing in the military. It would be a piece of it. But the second thing, as you look at civil, you know, the new 5,000 is having a whole bunch of impacts. It's got a shorter cycle time. It has a lower cost. Its -- and now proven that it can be maintained at a significantly lower level than simulators that have been put out in the past. So, I think we're still going to be able to have the growth and do the things that we need to do because of the improvement in this cost base and the quality of the product that we have going out there. So, I don't know. If everything stayed the same where we are right now, we could probably stay around the $150 million mark that we've got right now.

For total CapEx.

Yes, for total Cap Ex, yes.

For total CapEx but what part of that would be -- could you get away with $54 million and maintain revenues where they are now?

Yes, so if I might help here, Bob. Yes, the maintenance CapEx, yes, probably its south of 50, like we've experienced this year. But to keep steady state to maintain the fleet out there, the update, fix the roof in Montreal and all of these maintenance CapEx expense, probably south of 50 would be a good number.

And if you wanted 10% growth, what would that cost you, Marc? Or sorry, Alain.

Well, pick a number. I mean, the network at the $8 million simulator, seven depending on the asset. 10 if its a more sophisticated asset. And multiply it by the number of units. So, probably $100 million, you'll have at least 12 assets per year. On that front.

And just a clarification on an earlier question that was asked. Last year, you delivered 29 simulators and you had 37 orders. What was the number in fiscal '09?

Do you have that Andrew?

Fiscal '08 --

Let us come back to you, Rich. We don't have our hands directly on that we'd have no trouble giving it to you. We'll just have to search for it and come back.

Thank you.

It should be in the MDNA.

I'm sure it is in the MDNA, Richard, but I do not recall exactly the number.

Appreciate it.

Ok.

Thank you. The next question is from Scott [Rattray] from Black Mountain Capital, please go ahead.

Hello, thank you. Robert, with regard to the layoffs, I get the impression that the majority of the layoffs are in the civil segment but you've got significant growth that you've posted in the military group. Will there actually be sort of hiring within that group during this coming year?

No. What we're doing, we have a very flexible organization. We're shifting people in the engineering organization primarily over into that area and with the contracts that we've signed, you know, in the military and the R&D program that we have underway, that allows us to, you know, deal with -- I think we've -- a very substantial number of people.

Ok. So, the layoffs are sort of net of those sort of internal movements that you've got, is it?

Yes, that's correct.

Okay, great. Second question is just, you'd mentioned that there was preliminary softness in the civil training services group in Europe. Could you provide a little bit of color maybe on why this region may differ from this sort of acute downturn that we've seen in the US so far?

Well, I think that the way that the airlines operate there, the regulatory environments that they're in, is very different. And as a consequence, you see some airlines that are very strong, you know, in comparison to North America. You'll look at ones like Lufthansa, you look at Liberia, you look at some of the things that [Ryan] Air are doing, So, you're not seeing a lot of the same impacts that you would see in North America.

Ok. That's great. I appreciate it. Thank you.

You're welcome.

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

Good afternoon.

Hello.

I was wondering if you could give us some more color on the civil backlogs, particularly in simulation products, the mix between some of the 5,000 and the 7,000 and if you can just discuss if you're having issues with any of the customers and then if you can on the training side, there was a bit of a downward revision of about $78 million. Could you give us a little bit more color on exactly what that related to?

Okay, do you know what he's talking about on the $78 million?

Yes.

Why don't you do that one first?

Okay, so in training and services civil, as you know the backlog or the order is an estimation on the value of contract we're getting. So, at the end of every fiscal year, we revisit our estimate on the value that we can pull out of these contracts. And considering the actual state of the affair, we've made that adjustment of $78 million to the backlog.

And I think, as it relates to -- in the sim products civil, the backlog, we're seeing a good mix, an increasing number of the 5,000 that are coming forward and I can tell you that the number that we have out in the field now, we're getting a very good feel for how these sims are operating and what the cost of maintenance is, the level of reliability. And the feedback has been excellent.

Ok. Any particular customers that you're concerned with at this particular point?

No. Well, you saw last year, we had one customer where we had to do a fill-in but any of the customers that we have, no, I see no issues.

Thank you.

Thank you. The next question is from Marco [Pensach] from GMP Securities. Please go ahead.

Thank you, good afternoon. I want to get to one number from you and then sort of a more substantive question. The first one is can you tell me what was the size of the externally competed civil simulator market in fiscal market in '09? How many units?

We had 71% market share.

We had 34 and we calculated 71% so, I guess we'll confirm the math to you but that's basically it, Marco.

Okay, and then my question to you, I guess, Bob, is if we just base this simplistically on the change in the number of civil sim orders that you expect. So, you're down, you know, just over 40% year-over-year, and if I just simplify to say that your employee base is roughly half and half civil and military and please correct me if I'm wrong. I'm just wondering whether between the number of layoffs and some of the internal engineering staffing is going to be shifting, you know, whether that's sufficient and sort of why you pick that level and not more. Like I'm just trying to frame why you guys sort of decided that number as opposed to some other number and how that may relate to sort of your ongoing capability to support your customers and business.

Yes, I think that we've had a very thorough exercise here. And you know, we really looked hard at the adjustments we had to make for volume. And we know the ones we have now and then we anticipated if you go to a lower order intake, that the other adjustments will have to come in September. So, we wanted to deal with that once so that we could come up with an organizational structure that's going to be a lot more efficient, can be better organized going forward on a continuing basis. Then the other thing we looked at is how can we structure the business to make sure that we can be more competitive going forward and adapt to the circumstances that we're in. And that has an impact not just on the civil side. It also has an impact on the military side. So, I think -- are we saying this is the last time that we'll have to do it? We hope so, we believe that we've tried to anticipate the market situation. But you know, sometimes life and the market unfolds in a way that you can't predict. But, we've made the best call we have -- we can right now, to make sure that we have the business sized to make sure that we can continue to have a solid performance in the period we're in right now. And that we're going to be -- that we can continue our growth in some of the areas related to our innovation ideas. We can expand the military business and that, you know, as the civil area comes out of its slump, that as we've said before, that we're going to be poised to really capitalize on it.

Just to follow up on your comment about expand the military business. I mean, I know you have the commonality in Montreal between civil and military, but when we look at the phenomenal order in (inaudible) military that you've had, if you assume that the duration of -- or the delivery profile of the backlog has the same duration as it has historically, in other words, you know you delivered over the next year and a half or whatever the math suggests. I mean, could it be that your 15% -- or pardon me, your 10% revenue growth expectation for military is conservative and you're essentially providing yourself some capability internally to do better than that?

I think I'd say that, you know, we stick with the estimates that we've got right now. If we can do better, that will be great. But we expect another solid year from military in terms of order intake and you know, we have visibility that goes out to basically two to three years and we also have very good visibility around the world right now of contracts where, you know, we have a good chance to win them. So, I think that -- I think that this is a business that we've spent a long time developing and maturing and understanding. And its going to perform very well over the next two or three years.

Ok. Thank you.

Operator, we have time for just one more question because we do have a series of members of the media to respond to. Just to clarify, the question on the deliveries, we deliver 38 simulators to external customers this year. Versus 29 last year. So, operator, we'll take one more question, please.

Thank you, sir. The last question is from David Tyreman from Genuity Capital. Please go ahead.

Yes, good afternoon. I just wanted to revisit the military emergence. Bob, I think your guidance was 15% for fiscal 2010. Did you 17.5% in fiscal 2009. Is there something about the mix of the business in '10 that takes you down or is this conservatism or is there some other explanation?

Nothing is different. We're using 15.

Okay, so conservatism. And just one last question, inventories were pretty high, Alain I think, provided some explanation, is the expectation that the inventories will come back to more historic levels at some point or is this just really the nature of the military business?

Yes, we're -- you know we're doing everything we can to collect the receivable and keep the UBS (inaudible) at the proper level on the military side. Like I said, the important thing, they're all governmental customer and very solid credit and that business is growing. So, we do our best to keep it low. But you know, let's see the next couple of quarters how it goes.

Yes, I think it -- the way I do it, David, its going to be a bit cyclical quarter-to-quarter. You know you're -- there's -- we -- this is an area where you can't really -- you don't have as much influence on the customer in terms of the way we pay you. You can go and collect. You have milestones that are contractual in terms of what you have to do. But -- so you have to look at it over a longer period. I think as the business gets bigger, you're probably going to find that some of the inventories are going to go up a little bit. It will depend on the program. But, you know, there's nothing that's really out of line here in terms of the way we're managing it. I think it's being managed very well.

Ok, so 100 days -- 90 to 100 days is closer to normal than 70 or so in the past it sounds like?

Yes. But, you know, our goal is to get it down still to the 60, 70 days if we can. A lot of this is just determined up-front in the way that you negotiate the contracts and so its not just a matter of just collecting from the customer. And so we're reviewing the way the contracts are structured to see if -- if there's a way that we can get closer to the cash more quickly and I think you know that our compensation plan from an EBA point of view is very much driven by cash. So, you can be sure that this is a priority inside the company.

Ok, great. Thank you.

Your welcome.

Operator, we'll now take calls from members of the media.