CAE Inc (CAE) 2010 Q1 法說會逐字稿

Welcome to the CAE first 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.

Thank you. 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 and uncertainties and assumptions. The results or events predicted in these forward-looking statements may differ materially from actual results or events. These statements do not reflect the potential impact of any non-recurring or other special items or events that are announced or completed after the date of this conference, including mergers, acquisitions, or other business combinations and divestitures. You will find more 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 31, 2009. These documents have been filed with the Canadian Securities Commissions and are available on our website, CAE.com, and on SEDAR. They also have been filed with the US Securities and Exchange Commission under Form 40-F and are available on Edgar.

Forward-looking statements in this conference represent our expectations as of today, August 12, 2009, and accordingly are subject to change after this date. We do not update or otherwise revise forward-looking information, even if newer information becomes available unless legislation requires us do so. You should not place undue reliance on forward-looking statements.

On the call with me this afternoon are Robert E. Brown, CAE's President and Chief Executive Officer; Marc Parent, our Chief Operating Officer; Alain Raquepas, our Chief Financial Officer. After comments from Bob, Marc, and Alain, we will take questions from financial analysts and investors. Following that Q&A session, we will have a brief session for the media. For your convenience, this conference call as well as the presentation from this morning's annual general meeting 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 on the call. This morning we announced that Marc Parent will be succeeding me on October 1, 2009, as CAE's next President and CEO. Marc was appointed COO last November with responsibility for all four of CAE's business segments. Marc and I have a long history together in aerospace that predates the time I recruited him to lead the turnaround of operations at CAE and to restore profitability to our simulation products and civil segment. He has been an essential member of the leadership team, and his contributions have helped CAE to become the well-positioned, well-balanced, and financially secure company that it is today. The responsibility to lead the people at CAE, a global aerospace and defense leader, is a great privilege. I am very confident that under his leadership Marc and his team will continue to achieve new levels of success for all of CAE's stakeholders. I will be staying on at CAE in an advisory capacity until the end of the calendar year to facilitate the transition.

We discussed first quarter results in detail this morning as part of our AGM presentation, so we will be brief. I will begin with a few highlights from the quarter and Alain will comment on certain financial results and development. Marc will then provide you with a view on the way forward.

Overall, we had good results this quarter, especially given the challenging aerospace cycle. We generated revenue of C$383 million, which is within 2% of last year's results, and we had net earnings of C$27.2 million or C$46 million before the restructuring charge, which is also comparable to last year. We owe the resilience of our financial performance to diversification. Our combined military EBIT was sufficiently strong to offset the softness in our military segments, and we expect this to continue to help lessen the impact as we work our way through the bottom of the aerospace market.

In the combined military segment, we won new orders totaling C$194 million in the first quarter, including a C-130J. Hercules transport aircraft simulator for the US Air Force Special Operations and upgrades to Seahawk helicopter trainers for the US Navy. As well, we signed an agreement to perform major upgrades on a fleet of Chinook helicopter simulators used by the UK Royal Air Force.

In training and services civil, we took in orders with an expected value of C$59 million and we grew the average annualized number of RSCUs in our network to 130. Market pressure continued to be most pronounced in the United States and, to some extent, in Europe. Our geographic diversification in this segment is proving helpful as demand for training in Asia, South America, and Middle East have all held up relatively well.

Changes in market conditions are reflected quickly in this segment. Utilization was 66% in the first quarter compared to 67% last quarter and 79% last year. We have been and continue to reduce our cost to mitigate the impacts of lower levels of activity and increased pricing pressure. In simulation products civil, we signed six full flight simulator orders in the first quarter, including customers in Europe and the Middle East, and ian order for two simulators in support of Bombardier's C series program. Marc will update you on our outlook for the rest of the year. With that, I will ask Alain to comment on the quarter.

Thank you, Bob, and good afternoon everyone. I would like to comment on some of the financial results and developments for the quarter. We have adopted a change in accounting for (inaudible) book section 3064, which deal with goodwill and intangibles. Effective April 1, we began to fully expend our preoperating costs as they are incurred instead of capitalizing them. You will have noticed that we've restated prior periods information to reflect the adoption of this new accounting standard.

We entered private placement for about C$130 million with an average of 8.5 years and a blended fixed rate of interest of 7.15%. We repaid a $60 million note, which came due in June with part of the proceeds. The notes were placed with two of our original noteholders, which is a vote of confidence in CAE. As well, the rate we figured on these instruments reflects the stability and the credibility of the company. We believe this transaction sets a good precedent for our upcoming discussion with our bankers regarding the renewal of our revolving credit facilities, which come due next July.

Also, on the financing front, we established after the quarter a vehicle with Solidarity Fund QSL and Societe generale de financement du Quebec to help facilitate the sale of simulation products. We do not expect this financing option to become de rigueur, but we do expect it to assist those customers who require additional funds on top of what they can access from the Export Development Corporation, EDC. Ultimately this is another one of CAE's competitive advantages and we think this helps to derisk our full flight simulator sales forecast.

During the quarter, working capital increased, which is usual for the start of the year. Our military business is growing and thus requires more working capital while orders in simulation products civil slowed, which has a negative impact on the cash installment we received. That said, we expect some reversal in the overall trend in working capital as the year progresses. Finally, capital expenditures were C$32 million during the quarter, mainly in support of our prior commitment. The lower level reflects more moderate growth capital expenditures and lower maintenance expenditure because we did not buy back any leases this quarter. We still expect total CapEx this year to be around C$150 million, of which nearly one-third is related to our military business.

Thanks for your attention. I will now turn the call over to you, Marc.

Thanks, Alain, and thank you, Bob, for your encouragement. It's indeed an honor for me and a privilege to have been appointed to succeed Bob Brown as President and CEO and to lead the great team we have at CAE. We are in a position of strength today, in no small part because of Bob's clarity of vision and his ability to empower people. A major part of the vision we share, making certain that the company is equipped to manage market uncertainty. We are making our way through a difficult period in the aerospace sector no doubt, and our diversification and healthy financial position are helping bolster our performance and to ensure that we have the flexibility to benefit when the markets recover.

Last quarter, we announced our restructuring plans and the need to size CAE to current and expected market conditions. As well, we identified opportunities to adjust our global organization to achieve both cost and revenue synergies. The initiative is well underway. We are already operating under our renewed structure. We recorded C$27.2 million in restructuring costs this quarter and we expect the amount to total approximately C$32 million as we conclude our activities over the course of the year. The cost reduction and ongoing savings that we expect to realize this year should offset our total restructuring costs.

In the first quarter, we combined the sales and support organizations, a further restructuring of our two civil segments, to give us the ability to provide customers with a unique and seamless portfolio of products and services. This approach is especially timely as we can offer customers the flexibility they need to manage current conditions. We believe this will give us a greater competitive advantage when the market resumes growth. The latest commercial passenger and cargo traffic data show some improvement. Consensus is that air traffic may be bottoming out, albeit at a much lower level.

In business aviation, inventories of used aircraft is slightly [lower], which is positive, but conditions in this segment continue to be difficult. We share the opinion that sustained improvements in corporate profitability are necessary to drive a meaningful recovery in this market.

In training and services civil, we've cut costs globally to help mitigate the market decline. Conditions for training are weakest in the US and Europe and better in the rest of world. In this regard, CAE is unique in that we have the broadest global reach of any of our trained competitors. Our global diversification is working to partially dampen the effects of the downturn in the legacy markets. We should, however, recognize that the downturn is on a global scale and no market segment is completely immune.

In simulation products civil, the level of marketing activity is reasonably good, but it's taking longer to get deals done. That said, we continue to expect 20 full flight simulators order this year based on our forecast for new aircraft deliveries. We remarked last quarter that we believe we can achieve an average EBIT margin percentage this year in the mid-teens for our combined civil segments. We are monitoring market conditions and the factors like utilization and pricing very closely, and based on the visibility of the rest of the year that we have, we continue to believe this is the correct estimate.

The outlook for our combined military segments is clearly positive. We achieved strong performance in the first quarter, and on a combined basis we've been outperforming our previous estimates of 10% revenue growth and 15% EBIT margin. We now believe that our annual revenue growth could be somewhat higher than our previous estimates. We are optimistic about military and we expect another good year of orders. Just this week, Canadian government announced it's concluded the contract for the purchase of CH-47 Chinook helicopters. As you may recall, a CAE led team is the sole qualifier for the training services related to this program and we are hopeful to conclude an agreement later this year.

Although we benefit from the larger programs such as this one, our business doesn't rely heavily on them. Our diversification strategy has favored smaller program sizes to lower exposure to any single contract. Excluding the multiyear Canadian C-130J contract that we won last year, the average of our top 25 contracts was approximately C$16 million. Demands for simulation based training solutions remained strong as militaries globally are intent on finding alternatives to live training to reduce costs, relieve bottlenecks, and enhance their mission rehearsal capabilities. We anticipate that the demands for modeling and simulation based solutions will outpace the rate of defense spending growth for the foreseeable future.

CAE's real forte involves aircraft types that are considered the workhorses of the current defense environment --helicopters, transports, tankers, and lead in jet trainers. As with our civil business, we are well diversified geographically, with key centers of operation in seven countries. Also, we are prominently placed on what we feel are the right aircraft platforms that are either new like the [NH-70] helicopter or that have long expected lives ahead of them like the C-130J transport aircraft.

Overall, our first quarter results were strong. In looking ahead, when we take into account market developments since last quarter and the actions we've taken, our outlook for the year is largely unchanged. We normally expect variances in our performance from quarter to quarter as a result of seasonality, particularly in training service civil. Accordingly, the second quarter is normally weakest as flight crews are busy flying passengers around rather than going through training centers. As well, we shut down our main manufacturing operations every July, which directly impacts the progress we make on programs during the quarter. These variances will be even more pronounced in this coming second quarter as our cost reduction initiatives include an extended shutdown of three weeks rather than two, and we also had two furlough days in the quarter. This means that our second quarter will be somewhat softer than usual. Nonetheless, as I mentioned, our outlook for the year remains intact. We should be able to make up some of the softness in Q2 with the ramp up of our cost savings initiatives over the second half of the year and with the continued strong execution from our military segment.

To conclude, the aerospace market is at historical lows. But the fundamentals of CAE's business remain strong. We've got a solid balance sheet. We are generating good cash flow. We are well diversified between markets, products, services and geographies, and we have a highly capable management team and employee team to help CAE weather the storm.

On a final note, Bob and I will be transitioning over the next six weeks. On behalf of the entire team at CAE, I'd like to extend our gratitude for his leadership and the invaluable legacy he leaves behind. Over the past year, I've had an opportunity to meet with a number of investors and financial analysts, and as we make this transition I hope to meet with many of you in the weeks and months ahead. Thank you for your attention. We are now ready to take your questions. Andrew?

Operator, we are now pleased to take questions from analysts and investors. And 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 feel free to reenter the queue as time permits. Operator, please go ahead.

(Operator Instructions).

The first question is from Ben Cherniavsky from Raymond James. Please go ahead. Hi, guys, he struggled with my name there. First of all, Bob and Marc congratulations to each of you for your -- obviously, Marc you're well deserved in getting this promotion and, Bob, you've done a phenomenal job here looking back at the last five years. I remember the old CAE and this is a big change, so congratulations on achieving those goals.

Thank you.

Thank you.

I do have a question, though. I'm wondering if you have any comments about or could shed any light on where you may be exposed if at all to some of the programs that are getting targeted in the US defense budgets as potentially redundant or at risk of cutback.

Go ahead, Marc.

Clearly what we've seen is that there have been defense cutbacks. We've been I would say largely unaffected. Certainly in the programs we have, we haven't seen cancellations. As we look at the outlook and the contracts that we would be positioned to expect to get, we feel good about it. We don't see a big exposure to that. I think on the other side, I would say that the need to cut budgets, not only in the United States but across the world as militaries have got their defense budgets stretched -- we see that as an opportunity because simulation based training saves money. If you look at closely what the Secretary of Defense has said in the United States and in other countries, they point to simulation based training as a means to save money. So it could be -- on balance, certainly we see it as a mild positive.

I know you just asked for one question, but can I steal a quick housekeeping item on the margins?

Sure.

You mentioned that there was a one time receipt of a contract amendment in the military training group. Was that material at all?

No, Ben, it was C$1.5 million impact to the bottom line.

Thanks a lot.

The only thing I would add here, Ben, is if you look back over the past five years, this has all become part of our business. It varies from year to year, but we always seem to have some things that are up and down. I think it's comparable with other years.

That's pretax, by the way.

Okay, but, no -- I recognize that there's lots of moving parts here, but just in terms of the impact on the margins going forward and such, they were a bit inflated in that group it sounds like from that item.

That helped a little bit.

Thanks a lot.

The next question is from Cameron Doerksen from Versant Partners.

Good afternoon. A question on the civil sim products segment, the margins particularly. You had a pretty significant drop year over year in revenue, yet the percentage margin stayed basically flat at a still pretty healthy 20%. I'm just wondering, was there anything special in the quarter? And if not, why would we expect the margins to drop to more than the mid-teens in this business -- just any color you can spin on that would be good?

I think here it's very much the business mix that's in there is one of the factors. Alain, do you want to comment as well?

Like you said, Bob, in the quarter the program that was in progress on which we took revenue were favored by the business, like you said, that was the most important point. And the benefit of the restructuring started to show, and also as you know the contracts inhouse were protected with hedge contracts that had favored obviously the top line, because the hedge rates were more favorable than where the FX is today. So this would be the two key elements to summarize.

Okay. And would the restructuring, would that be more, would we have the full impact of that in the second quarter?

I think you are likely to see the full impact coming in the third and fourth quarter as we talked a little bit before. Most of the actions have been taken. I think behalf of the expense has occurred, of the C$27 million. So you are going to see -- because we notified some people and we've done some things, you are going to see the furlough dates and some other things that are really going to come -- you will see the full impact of that as you get to, as the further expenses take place in the third quarter in particular.

Okay. Thanks very much.

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

Congratulations both Marc and Bob for the nice achievement and also the appointment. My question is related to diversification. You have been talking a lot about diversification last year and the recent quarter. Was just wondering -- what is your outlook in terms of -- let's say target in terms of percent of revenue three or five years ahead outside military and civil in terms of revenue?

I'm sorry, I didn't catch the last words you said.

Sorry, Marc, right now most of your revenues are derived from military and civil. I wonder what is the goal in terms of achieving revenues outside military and civil three or five years ahead?

Looking two or three years out is a long way in this business as you know. We try to achieve a balance in terms of our diversification. That was our goal. It's paying off now as you can see, because clearly the military is performing very well and we've been managing to mitigate a lot of the downturn in civil. We expect to continue to grow in the military. At some point civil will come back and we think we will be in a strong position there. I think the bottom line is we are going to try to be strong in all the segments that we operate. And we are going to be trying to -- that's what we are going to continue to try to achieve. I'm not sure that our goal is to be predominant in any one segment. I mean clearly we feel very good about the military continuing to be able to mitigate the downturn in civil for our next few periods.

Okay. Thank you.

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

Thank you. Good afternoon. First question, just want to explore the military margins a little bit further. Again, as you mentioned in your commentary they continue to run ahead of indications that you provided previously. Can you just provide a little more color on what's driving that, first of all? But also what to think in terms of going forward and how restrictions may be on the margins you're allowed to generate from military programs could impact those margins on a go forward basis?

Okay, let me take that one, Marc. I mean, one of the things you see is in terms of the margins, using your word, that we're allowed to make, if you were to look at a number of defense contractors in the United States, we are certainly, that comment would be germane. We compared ourselves in the past to Rockwell Collins, for example. You will see that some of the margins we make are not abnormal, particularly when you talk about products business. When you are talking about services business, it's different, when you are delivering a fee for service for example. But in terms of the products business, it's certainly not unusual. And what you've seen us do over the past couple of years is really keep our focus on keeping our costs down, particularly in our SG&A costs. You look at our SG&A costs and compare them, we are at a similar level that we were just a couple of year ago, although our top line has grown appreciably. We've been able to benefit from that on the product side.

Okay. Thank you. Just one quick housekeeping question if I could, just wondering in the sim products civil segment if the deliveries in revenue recognized was impacted by the deferral of any full flight simulator orders?

No.

Okay.

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

Good afternoon. My question is for Marc. Do you foresee any change in the company's strategy under your leadership?

Not at the moment. Certainly when I say the moment, I say as far as I can foresee right now. I believe the strategy we've been embarked on since I've been at CAE is one I share. I share the vision behind it, it's paid off, and I very much believe continuity is the order of the day right now.

On the balance sheet under Bob Brown, it's been a conservative policy. It looks like your level of debt is starting to rise and may continue for a while. I wondered if had you any comments on that.

Well, I think that I share, me and Bob both share the priority to maintain CAE's financial strength. If you look -- as we've grown our military business. Clearly if you were to look and Alain can talk about our inventory for example, you can see that as we execute -- we build our backlog here, as we execute the contract, inevitably that boosts our inventory. So that's some of what you see. But we are focused on making sure that in spite of this that we maintain the financial strength which has carried us well in the past few months.

Maybe I could add a few lines, Marc, here -- just on the net debt, the net debt increased by C$55 million this quarter. The debt itself increased a bit more because we split that note out there and we [raised] C$130 million and repaid C$60 million. So for sure the total debt increased, but the amount was sitting in cash. The net debt really increased only by C$55 million and it was really driven by the usual working capital investment we are having in Q1, and Marc explained why the working cap increased more specifically on the military side. The business is growing, therefore we are investing in working capital on this side of the house.

While I have you, Alain, on the working capital changes, progress payments or advances for your simulator are down as orders have dropped. How do you see that change in non-cash working capital evolving over the next couple of quarters?

What I mentioned in my remarks is we do see a portion of it reversing. Q1 from experience in the last few years has always showed a pattern of investment in working capital. And so the forecast we've done indicate to us that we will see a little bit of reversal on the working cap.

My last question is just on the flight training business. I noticed you sold a couple of simulators in the quarter. I wondered if perhaps you might rein in the growth there and reduce your CapEx, maybe not this year but next year?

What we've done on the CapEx side, we've mentioned that we foresee $C150 million total for the year. I'm seeing a bit of a change in the mix of the CapEx. Military is taking a bigger percentage of the total CapEx of the company, and there's no doubt that in the last two quarters, we've been analyzing the business cases to deploy simulators more carefully so we increased the hurdle rate. So really what is in the pipeline right now is what we started a few quarters ago to build this in to complete the network.

Well, thank you and thank you, Bob Brown for the great job you've done.

Thanks.

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

Following up on Nick's question a bit, there was a C$4 million gain I guess in the training and services civil area and you also talked about there was a gain in Q4. A couple questions, one, if we back out those gains in Q1, that gets us to a margin in the 14.5% range. If you could, can you quantify the Q4 number? And any thoughts on that margin, if you are expecting the volumes to start moving down, if that margin is going to be probably running a sub 15% level that you are looking at for the rest of the year.

This is Marc. As I pointed out in the remarks, we've looked at this situation including all the facts that you just talked about there. Based on what we see of the markets and the way we've adjusted the business, because a lot of the restructuring that we've made has been targeted towards our civil network to, for example, lower our minimum [OpEx] costs in that business. We still see that we should be able achieve mid-teens level profitability in the civil segment.

Okay. Thanks.

The next question is from Marko Pencak from GMP Securities.

Bob, I guess you've add had enough of the pesky analysts, so congratulations on your accomplishments, and Marc, congratulations to you. I will never forget the phrase you coined, which is over the next period of time. Always kept us guessing. Anyways, congratulations to both of you.

I am going to miss you, Marko.

My question has to do with feedback you are getting from customers on the civil side. It is a two parter. First, I wonder if there's been any material change in the financing for civil equipment in terms of terms or participation along those lines. Secondly on the training side, last quarter there was some discussion with respect to airlines contemplating potentially -- the ones that have not yet, outsourcing some of the training. And you had expressed some reservations in the sense that you didn't want to get burdened with significant assets where the utilization on those assets may be declining, given the environment. I'm curious on that side whether there's been any change, given that the airlines seem to be seeking additional cost savings measures?

In terms of the first part of your question I think things -- where we've seen the most pressure is on pricing. Clearly with less volume out there, less orders to be had, less training to be delivered, there is definitely pressure there, and that's been the focus of our adjustment of our cost structure -- that and utilization in our centers. In terms of airlines themselves, we are engaged with a number of talks with airlines about ways we can help them. Not only on maybe as you're suggesting outsourcing training services. We have done that. We do that. Is there a large trend out there? Certainly there's momentum. I wouldn't say more than that at the moment.

But would that potentially, could we envision a scenario where you effectively take over the operation of one of the major carriers' training function?

I think we will deal with that when we come to it. You can see the partnership we have around the world. We've tended toward the model of partnering with the airline, that's what we do with Emirates, Air Canada, LAN Chile, Iberia -- that's the model that we looked at. I'm not sure we'd turn anything down, but as we said, we remain financially prudent with our balance sheet. So that is not our focus to take over anyone's balance sheet assets at the moment.

Okay. Thank you very much.

Thank you. The next question is from David Tyerman from Genuity Capital Markets.

Yes, good afternoon. One thing that struck me is deliveries on the commercial side for Boeing and Airbus have been very little changed through the cycle. And yet you're looking at quite a large decline on orders on the simulator side. I was wondering if you could give some thoughts on what is going on there on one versus the other?

Maybe I could try that. I mean, as I think you're surmising is -- our business on [temporary] civil is pretty highly correlated to deliveries of airplanes. Now if we look back at history, what tends to happen is when there is a downturn, the relationship starts to be under pressure during a few months after that. And the reason is airlines clearly are looking at how can we do with equipment they have got to save cash. CapEx is under pressure. So -- but there's no doubt that, as you said the deliveries are holding up and it's a regulated industry. Pilots have got to get trained. So what's happening now is it's taking longer to get deals done. There's still a clear deal of activity out there, but clearly at the airlines that need the equipment, ordering airplanes, is just taking longer to overcome the internal hurdles to be able to go out and secure the buy.

Okay. That's very helpful. I'll get back in queue. Thanks.

Thanks.

Thank you. The next question is from Scott Rattee from Blackmont Capital. Please go ahead.

Hi, good afternoon. I obviously want to offer some congratulations both to Marc and also to Robert. I have a question, I just wanted to circle back on the margins. You had mentioned I think on the last quarter that in addition to the reduction in headcount that you are also looking at a couple -- it seemed to be shorter term or possibly even temporary cost initiatives, salary freeze. I think it was overtime, limits on overtime and stuff like that. Are these still in place? Are these things still in place?

Yes, actually we had over time, we had a three-week shutdown -- which we actually mentioned that, a three weeks shutdown instead of two that I mentioned in my remarks. We had a salary freeze. We had additional furlough days which means essentially days without pay. So, yes, they are in place. And that's behind the comment that I made in the remarks which is a repeat from the last quarter, where we said that those, the savings that we'll get from the restructuring plus the additional measures we just talked about should pay for the cost of the restructuring in this year.

That's great. I appreciate it. Thanks, Marc.

Thank you. The next question is from Anthony Scilipoti from Veritas Corp.

Thanks. Bob, we've known each other for a long time and I want to offer you congratulations for a great career and thanks for all the positive changes at CAE, and I wish you the best on behalf of myself and partners at Veritas. Marc, best wishes to you. You have a good team to work with. Just a quick clarification, I may have written down wrong, but the capacity utilization, was that 66% in the quarter?

Yes.

Then 67% the previous quarter, and year over year was 79%, is that right?

Correct.

Okay. Good. When I look at the note for receivables the other balance has gone up pretty sharply from C$49 million to C$71 million or C$72 million almost. Can you just give me sort of maybe what happened in that balance?

What page are you on, please, Anthony?

Sure, it's under the note for receivables on page 10.

Alain is looking.

I'm looking at note 10.

Note 6, page 10.

Okay, so which one are you looking at?

Just looking at the other receivables.

I would like to go back -- give me a couple of minutes, I have the back up, I'll get back to you before the end of the call. Maybe it's related to the government receivable that we classified [seriously].

Let's verify that.

And the other quick thing is in the sim products civil segment, where you talk about the capital lease accounting which impacted the results for the quarter, is that a new thing now that things are are being sales type leases or is that -- ?

It's just that when we do that we cannot take POC, so it's really you take revenue almost based on delivery. So that's the only nuance we are making.

That's a deal we had some time ago.

Is it new or is that -- ?

That is --

No, I meant is it part of your business new or you've always done sales like that?

It's relatively new. We have one or two once in a while, but it's not.

We've always done it that way.

Sure, the accounting.

I know the accounting has not changed. And the impact on earnings or revenue would have been roughly, can you estimate?

C$0.01, so make it C$0.12 and a regular margin of around 20%, so that would be the impact.

C$0.01 to the net earnings?

No, no, because 20% of C$0.12, so it's a bit lower than that. C$2 million then you put the tax on it, so it would be C$0.005.

We are talking one quarter though.

Okay. Thank you, guys.

We'll phone you back on the other one.

Very good, Bob, all the best.

Thank you.

The next question is from Chris Murray from CIBC World Markets.

Thank you. This week the US Air Force put out an RFI for lead in jet trainers and I guess the thought will probably be the 346, the Hawk and probably the T-50 that will be the leading candidates. Any thoughts on, or can you give us an idea of any exposure that you may have on those platforms, as well with your knowledge of how the US Air Force has been doing training in the past, do you think this opens up any new opportunities similar to what you are seeing the Canadian military and UK militaries did?

Let me try to treat those separately. I mean, there's three main lead in jet trainers which you mentioned -- the hawk, the T-50 and the 346. We are well-positioned on both the 346 with Aermacchi and on the Hawk where we've done a number of Hawk simulators, and last year we announced the contract in the UK -- with the [MFDS] Consortium for the outsourcing contract in the UK. We are well-positioned on both those platforms, those two out of three, so that's not bad. In terms of the way that the US government does its training contracts, they have not adopted full outsourcing contracts or anything like that. They do air training service contracts that are recompeted every five years typically. It depends. There is a number of them coming up for recompete in the next two years. There's a number of them. I wouldn't expect them to change to go to an outsourcing model. But nevertheless, I mean, those contracts are important contracts because they are multiyear.

Do you think that, do you have any opportunity to get exposure to the T-50?

I wouldn't prejudge. One of our strategies is to try to establish relationships with OEMs on platforms that we think will have a good life. We don't have a relationship on the T-50 right now. It's not to say we won't try, but we don't have one right now.

Do you have any contracts right now with the US Air Force for training or is that something that you might be bidding on when they come up for renewal?

We will be bidding when they're renewed We sell to the US Air Force. We don't, I might have to get back to specifics, I'm not aware that we deliver air crew training to the US Air Force. We do to various branches of the C-130 for example, Air National Guard, I'm not sure the Air Force itself. We can get back to you with the specifics.

Thanks, guys.

(Operator Instructions). The next question is from David Tyreman from Genuity Capital Markets.

Yes, on the profit improvement plan that you have, where exactly would you be on the C$50 million annualized profit improvements in the quarter? Did you have much of anything in there or basically where are you?

In Q1?

Yes.

Well, I think largely in Q1 we had mostly expense. I think we had a portion maybe a small portion of savings coming from we put the salary freeze in place, so there is an impact. It's not very big. I think you have to look at the full year where really you will see us as was talking about Q3 to Q4 you is where we see bulk of the savings come through, compensating for the rest of the year. Next year, the year after, we feel good about the C$50 million in recurring savings.

So really it doesn't hit until the second half, that makes sense. That's pretty fast to get anything in the first quarter. Okay. And, Marc, I think you said that, well, I know you said that the military margins are probably going to be higher than your previous guidance of around 15%. Can you give us any specific numbers or ballpark numbers?

I actually didn't say the margins. I expect the revenue -- we previously said 10% revenue growth, 15% EBIT. I think we'll stick with the 15% EBIT. As we look at things, we've been fortunate to be able to grow our backlog, and if we look at the visibility we have on contracts coming up for bid, we feel good about, we feel good that we will be able to do better than 10%. It would be hard for me to give you a number right now, but certainly you've seen what we've done in the past few quarters. So will we do as good as that, I don't know, but certainly 12% would be a minimum I would go for. 12% to 15% I mean the next couple of quarters next couple of quarters.

Next couple of quarters.

Over the rest of the year.

But from your comment then on the sales growth, though, are you talking about greater than 10% growth for more than just the next little while as in the next few quarters? Or are you talking about years of growth at that higher rate?

Well, here you are asking me to -- in terms of years, two, three years is pretty much as far as our visibility would be. So again I think that if you look at our backlog growth by itself and you think that military contract would tend to -- they tend to deliver over two or three years, the rate after that I think it would be fair to assume that higher revenue than 10% could be achieved over that period. But remember, it's -- even though we've grown, it is somewhat of a quarter to quarter lumpy business, so you are going to have to look at it 12 months to 12 months.

Right, that's fine. I understand that. So you are saying based on your backlog the next couple of years it sounds like. Then on the margins, you guys continually exceed that 15% by quite a large number. Why keep at that level? Is there something in the backlog that's going to take you down a lot?

No, we don't see it, I mean there is a mix, there is a mix of programs out there. Some programs are larger, different profitability than others, NH 90 for example with a different margin, lower margin because of the fact that where partnerships with the company is the sales contracts are structured that way, and as well we've been able to hold our SG&A quite low and grow our backlog. There's a finite limit that you can do that. As we expanded to other territories. But I feel certainly good about the 15% for sure.

Okay. And then final question, on training and services military, the contract amendment you gave us the number on, it sounds like there was also additional kind of unusual stuff. I know you get it from time to time, but it was unusual in the quarter on the annual rate adjustments. Maybe just totaling up, did that segment had very high margins in the quarter and it sounds like there was unusuals in there. Can you give us any sense of what the overall unusual would have been for the segment?

Maybe Alain can give it to you. It was high [net] for sure in the quarter. It will come back down to more normal levels where combined military -- maybe Alain?

We've mentioned the other amount prior on the call, but that was the two together were just north of C$3 million pretax.

C$3 million?

Just north of that.

Perfect, thank you, Alain. Thank you, goodbye.

Operator, we need to save some time for questions from the media, the three to five minutes that we have left here on the call. So we will thank investors for their participation and their questions and open the lines to the media.

(Operator Instructions). Thank you for your patience.

Operator, if there are no questions from the media, we will conclude today's conference call and thank all participants and remind everyone that a transcript of today's discussion can be found on CAE's website at CAE.com. Thank you.

Thank you. The conference has now ended. Please disconnect your line at this time and we thank you for your participation.