CAE Inc (CAE) 2010 Q2 法說會逐字稿

Welcome to the CAE second 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 and good afternoon, everyone. I'd like to thank you all for joining us today.

Before we begin, I need to read the following. Certain statements made during this conference, including but not limited statements about 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-occurring or special items or events 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 MD&A section of our annual report and annual information form for the year ended March 31, 2009. These documents have been filed with the Canadian Securities Commission and are available on our website at CAE.com and as well on SEDAR. They have also been filed with the US Securities and Exchange Commission under Form 40F and are available on Edgar.

Forward-looking statements in this conference represent our expectation as of today, November 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 it to do so. You should not place undue reliance on forward-looking statements.

On the call with me this afternoon are Marc Parent, CAE's President and Chief Executive Officer; and Alain Raquepas, our Chief Financial Officer. After comments from Marc and Alain, we will take questions from financial analysts and institutional investors. Following the conclusion of that Q&A period, we will open the call to members of the media. For your convenience, this conference call will be archived on CAE's website. Let me now turn the call over to Marc.

Thank you, Andrew. Good afternoon to everyone joining us on the call. As CAE's new CEO, I've hit the ground running in a very challenging and exciting time and I very much appreciate the opportunity to discuss our second quarter results with you today. By now, you've seen our financials, so I will focus on some of the key highlights of the quarter and then I'll provide you with our outlook. After that, we'll welcome any questions or comments you might have.

Overall, we had a good performance in the second quarter, thanks to our strong military segment and because we moved quickly to adapt our civil business to current conditions. We generated CAD365 million of revenue on a consolidated basis and CAD62 million of operating income from a margin of 17%. We reduced non-cash working capital and generated CAD94 million of free cash flow, which gave us the ability to further strengthen our balance sheet. Net debt at the end of the quarter was down by CAD83 million to CAD258 million, and net debt-to-capital is now 27%, which includes our off balance sheet obligation.

We've been able to continue generating cash and profits even though we've had a substantial drop in our civil business. We're still on track to complete our restructuring by the end of the fiscal year. So far, we've made good progress in lowering our cost base and scaling our operations to fit the current and expected market conditions.

The value of CAE's diversification can't be overstated. We benefit from global reach in all of our business segments. In civil, our activities in the Middle East, Asia, and South America continued to help offset the declines in North America and Europe. The orders announced this week are concrete examples of our geographic reach. We're well balanced between sectors. Our two military segments accounted for 54% of revenue in the quarter and produced a combined operating margin of over 17%. In training and services civil, we booked orders with an expected value of CAD83 million. The average annualized numbers of RSEUs in our network was 128, which is 10 more than last year, but two less than we had in Q1. Since the start of the year, we removed and sold three older simulators from our network.

Utilization was about 60% in the second quarter compared to 66% last quarter and 71% last year. We're certainly not pleased with the low utilization, but this reflects the brunt of the storm that we're going through. We view the 6 percentage point drop from Q1 to Q2 to be largely the result of normal seasonality as pilots fly during the busy summer months rather than train as well as some additional market weakness. Last year's drop for the equivalent period was 8 percentage points, and the year before that, utilization dropped 5 points. We moved quickly to lower our fixed costs in this segment, which is the main reason why we've been able to perform even at these low levels. We finished the quarter with an operating margin of 15.5%.

In simulation products civil, we signed two full flight simulator orders in the second quarter with Kenya Airways and Korean Air. Clearly there are fewer opportunities this year compared to last year, despite aircraft delivery rates, which so far haven't changed much. Sales are taking longer to conclude, and because there are fewer of them, price competition is far more intense. On the positive side, as you saw earlier this week, we signed another two orders from Malaysia Airlines and Mount Cook Airlines of New Zealand, which brings our year-to-date total to 10 sales. We continue to target 20 sales for the year as a whole, and in the current environment, we think reaching that goal will be a success.

Revenue in simulation products civil was CAD64 million. The lower volume is largely explained by lower orders, the extended shutdown of three weeks that we implemented in July, and the furlough days that occurred during the quarter. We finished Q2 with a very strong operating margin of 19.4%, which doesn't yet fully reflect the extent of the downturn conditions and pricing pressure that we see. Also during the quarter, we benefited from favorable currency hedges on contracts. Hedging has given us some time to adjust, but a certain point the prevailing exchange rates catch up. We've been cutting costs to mitigate as much possible the Canadian dollar pressure, but inevitably some will remain.

In the combined military segments we won new orders totaling CAD178 million in the second quarter, including major upgrades for German CH53 helicopter simulators and a range of A330 multi-rolled tanker transport trainers for United Arab Emirate and the royal Saudi Air Force. Our military business continued to deliver results that support our long term positive outlook. I'll now ask Alain to add a few brief comments on our financials.

Thanks Marc, and good afternoon, everyone. In the first quarter, we saw an increase in non-cash working capital, which is usual for the start of the year. During the second quarter, we reversed CAD44 million of our investments in working capital accounts, and looking at the balance of the year, we believe some furthered improvement is possible. Capital expenditures totaled CAD26 million and were roughly split between maintenance and growth expenditures. We continue to expect total CapEx this year of CAD150 million, mainly in support of our prior commitments. About one-third of this amount is for military. We are currently involved in our yearly strategic review and we will provide our outlook for fiscal 2011 expenditure with our Q4 results. That said, by the end of this year, we will have substantially completed the buildup of our critical mass and business aviation training, so we expect to have additional flexibility to invest in other parts of our business.

During the quarter, we incurred a restructuring charge of CAD1.1 million, which is in addition to the CAD27.2 million we incurred in the first quarter. We maintain our estimate for total restructuring cost of about CAd32 million, the remainder to be incurred by year-end. Finally, the effective tax rate this quarter was 27% because the proportion of our income generated in high tax rate jurisdiction like the US reduced and the proportion of income generated in lower tax rate jurisdictions like the Middle East increased. Accordingly, we have lowered our expected tax rate for the year to 29%. Thank you. Back to you, Marc.

Thanks, Alain. In civil, we see some signs that the aviation sector is bottoming. Most airline statistics globally indicate that year-over-year traffic declines are easing. As well, the business jet market is starting to show some stability. Business jet utilization still much lower than last year's levels, but year-over-year comparisons have also been more favorable in the last several months. Corporate profits, however, are ultimately what drives the business jet market. It will take renewed growth in corporate revenue, not just from cost cutting, to jumpstart that market. In commercial aviation, we think recovery will be gradual over the next couple of years. It's still too early to give much precision on the pace of recovery, but we've aligned ourselves to benefit from it when it comes.

Anyone who's followed CAE for a long time will know that our simulation products civil segment is a late cycle business and its main driver is expected aircraft delivery. By contrast, our training business is an early stage business. Changes in airline capacity and business jet aircraft utilization are reflected very quickly in this segment. When the downturn began, our civil training segment was the first to be affected, and when recovery takes hold, it should be the first to climb out. The main driver for civil training is the utilization of the already installed aircraft fleet of commercial and business jet aircraft. New aircraft deliveries are a factor, but not the main driver for this segment.

Based on our backlog and our current read of the market, we expect our combined civil segments to generate an average annual operating margin in the midteens. We had a higher combined margin in the first half of the year, but in the coming quarters, we expect it to be lower in our civil products segment as pricing pressure and foreign exchange impacts cycle through our backlog. The margin in our civil training and services segment should help to offset some of this pressure as cost savings ramp up and the training segment gradually begins to pull out of the trough.

CAE is in a very different position than it was during the last aerospace market downturn. Back then, most of our business was tied to our most cyclical segment, which is sim products civil. Today this segment represents only about 20% of CAE's revenue, actually 18% this quarter. We owe our resilience in the face of this downturn to our diversification and growth in the defense market. The outlook for combined military segments is clearly positive. We achieved strong performance in the first half of the year and we continue to anticipate more than 10% combined revenue growth and 15% operating margins, and we expect new order activity this year to support our growth and profit outlook.

There are a number of trends that support our view that our military niche will continue to grow in the current environment. Historically, the adoption of simulation based training has been much lower in the military than in civil aviation, and we are increasingly intent on using simulation to reduce training costs and to provide better mission rehearsal capabilities. Governments are also continuing to move toward outsourcing services such as training and maintenance, and we have seen this materialize already in countries including Canada, the UK, Germany, and Australia. Another important factor that underlies our assumption for continued growth in defense is the kind of aircraft platforms that are most prevalent in CAE. Our bread and butter involves helicopters, transport aircraft, tanker aircraft, and maritime patrol aircraft. These aircraft types are integral to maintaining national security in today's environment of persistent low intensity warfare. There will be inevitably changes in government priorities, but by and large, we see good opportunities in them.

We continue to make small investments in our new initiatives, particularly in healthcare. While these initiatives will not contribute positively to earnings in the short-term, we believe we can create long term value by leveraging our capabilities in these new areas.

In conclusion, I think CAE has got a great future. I've been with the company for almost five years, and I've had the chance to meet many of our customers and most of our employees around the world. It never ceases to impress me just how strong CAE's brand and reputation are. Our employees are proud of the quality of our products and services and are dedicated to offering the best to our customers. We're facing considerable challenges in our civil markets and we're tackling them head on. We've battened down the hatches by sizing our business and we'll continue to adjust to current and expected conditions. We reduced cost so we can navigate through a civil market downturn and still generate decent cash flow and profits overall.

The fundamentals of our business remain strong and we're in a healthy financial position with a solid balance sheet. We have the flexibility to make investments in areas vital to our future. Military is achieving superior performance and will invest to support our continued success in that area. We have an excellent position in civil with our unique solution based market approach. I'm confident that when the market recovers in civil, we'll benefit from an even stronger CAE.

Thank you for your attention and we're now ready to take your questions. Andrew?

Thank you, Marc. Operator, we would now be pleased to take questions from analysts and institutional investors. Before we open the lines, let me first ask in the interest of fairness that you please limit yourselves to a single one part question, and by all means if you have additional questions, please feel free to reenter the queue. Operator, we'll take the first question please.

Certainly. We will now take questions from the telephone lines, first from analysts. (Operator Instructions). The first question is from Cameron Doerksen from Versant Partners. Please go ahead.

Hi, good afternoon.

Hi.

I guess a question for you on acquisitions. You've been fairly active over the past number of years in making smaller acquisitions. I'm just wondering if you can maybe describe what the pipeline looks like for additional acquisitions, and would you consider maybe making some more significant to accelerate your entry into the new markets like healthcare?

I think as you said, we've continued to make what we term as bolt on acquisitions. And I think you'll continue to see that going forward on our part, including areas such as healthcare where what we would be looking to do there is to gather subject matter expertise, because we know we can leverage our core competencies in those areas in what we're world class at -- simulation based training, simulation based [courseware] and those kinds of things. But clearly as you've seen us do we partner with people that do bring that subject matter expertise.

In terms of bigger, I mean the current environment that we're in right now, we're taking a cautious approach. We got a good balance sheet. We like that. It's not to say we don't look. We're open, but I would say that going -- at least in the period that I can see, we're mainly looking at more bolt on, continuing the strategy we've been in.

Thank you. The next question is from Ron Epstein from Banc of America. Please go ahead.

Good afternoon, guys.

Good afternoon.

A competitive landscape question for you. Yesterday, Rockwell Collins announced their 737 full flight simulator achieved Level D certification. What does that mean, and does it change for you in the competitive landscape as Collins has become a more significant competitor in full flight simulation? I'm trying to understand what that all means.

Well, I think Rockwell Collins has made no secret over the past while that they want to be in the market. I think we don't take any competitors lightly and we wouldn't take Rockwell Collins lightly either. I don't think it changes anything in the simulation environment. They're active in the military. We see them there as well. So I don't think that changes anything. We've been in the business for a long time. We've created a very strong franchise with the airlines around the world, and we feel -- I think we would never be overconfident. And that's why I say we take everybody seriously. And it's a tough market out there. It's clearly a buyer's market in today with the airlines where they are, so I wish them well.

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

Good morning, guys. I'm wondering about the shutdowns on your -- you said there's an extended shutdown on the civil manufacturing side in the most recent quarter. I assume that's got to do with summer holidays, but then -- which were extended because of the slowdown? I'm just trying to get a sense of how to read the quarterly revenues in that segment on some kind of a going forward basis. Is there any adjustment for that seasonality?

I think I would tell you what the actual -- we're usually in Montreal, we close -- which is our main manufacturing facility -- we close typically two weeks in July. This week we closed three weeks and it involved more of a general shutdown than more people than usually. We also had furlough days in the quarter, two furlough days which again removed two effective days. So if you look at how many working days out of the quarter that takes out, it's quite a considerable point. So to make any adjustment, that's what you would do.

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

Good afternoon. Wondered if you could talk about the effectively the higher Canadian dollar in terms of what your hedge is today and how you're offsetting that through cost savings, especially since you've got pricing pressure at the same time?

I'll let Alain talk about the details of the amount and what the actual numbers or values of the hedges are. But what I would tell you in terms of cost cutting, I think what you've seen over the past several years, we've been adjusting our cost base all the time. We've seen a high Canadian dollar before, but we've been able to adapt and generate relatively good margins. But that was in an up market and we have to remember that. That's a critical consideration. We'll continue to adjust, as I said. We'll continue to be able to take some edge off that through cost cutting, and we hedge contracts when we get them. But maybe Alain, just provide a bit more clarity to the quarter itself?

Sure. So first of all in regard of the quarter, obviously you've seen in the margin of [SBC], that the edge program we put in place in the last few quarters has helped to sustain the margin. The bucket of edges that we were able to tap in the quarter was roughly at [115]. The spot as I'm speaking today is at [106 to 107], I haven't looked at the screen recently. But it's 7% to 8% apart from our protected edge rate. So in the future, obviously it will be a consideration that we're selling in USD in our same products civil unit, and we will continue to protect the margin as we win the order like it has been our policy. So when we will secure a stream of cash flowing with the selling commercial simulator, we'll buy a forward contract to protect the margin. But it brings us so far, and right now, the bucket of hedges we have is emptying.

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

Good afternoon, guys. Quick question on training and services civil. You took another writedown into your backlog, and that's the second writedown now, took one at Q4. Can you just explain what's going on there? Because when we talked about this at Q4, you felt reasonably comfortable in just listening to your commentary that you see things getting better. I'm trying to get it aligned if you would.

It's a process that we go through twice a year, so we do that every year. The backlog in that segment is looked at in quite a lot of detail, and this is the result of that. In terms of magnitude, it's 4% of the backlog, so it's not large. And really what it is and what's been taken out is really customers that either rationalized their fleets or we've seen business jet -- some business jet departments have just gone out of business, their companies decide not to use business jets anymore. So clearly where they had a contract with us, they would no longer have a contract. Others had just gone out of business. So that's really what we're talking about and that's really what this is.

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

Good afternoon. A question on the medical side. You mentioned that you're right now making small initiatives and you expect to be negative in the short-term, but could you maybe provide more details with respect to the impact on the bottom line? And longer term, could you share with us what you would like to achieve with medical in the next two or three years?

Okay, I think I've always said and I'll continue to say that it's early days in these segments and I wouldn't want to create any short-term expectations about adding to revenue and to earnings in a material way, and that's what I've said. We think the healthcare market itself, we've said this before, is growing over the next three to five years to be a CAD1.5 billion market. So if we're in this market, it's because long term we think this has the potential to be a segment of importance to CAE. So that's what's our goal. I'm not saying we'll do that in three to five years, but certainly we'll work to establish a position as quickly as we can. In terms of today, yes, we believe in it. so we're putting people on it. We have people on it and we're making R&D investments. I think if I look -- maybe Alain will talk -- I think year-to-date it's about maybe going forward -- how much do you see in Q3 and Q4?

Yes, as we speak the top line this year will be very small in medical because we're entering that business. But because of the investment and the people we hired inside this year, it will be more a drain on our P&L than a contribution, because we're investing. And we see in the next two quarters that it will, it could in fact take away CAD4 million of our bottom line investing in medical. And then you see the ramp up in the following year obviously.

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

Marc, in terms of the competitive landscape, every cycle one or two new players pops up and most of them disappear. Is the competitive landscape changing at all over what's been seen in prior cycles?

I haven't been around the previous cycles. Only been here five years. My employees and colleagues that have been in there, direct reports that have been there, tell me as you say that every time the market heats up and everybody sees the opportunity to train, you enter our part of the landscape. And I don't think this is any different. And as a result of it, when the market does come down and where we are, particularly where we are now in the cycle where we're feeling the brunt of it because you could see airlines are in cash reservation mode, which means that every CapEx exposure is extremely scrutinized -- everything goes right up to the CFO level, you get to the CEO level. So even though there maybe a training demand out there, airlines are doing everything they possibly can, so to either push that out -- and it's a regulated market, it has to come through at one time or another. We're trying to push it out as much as we can and make do with what they've got. So clearly it's less opportunities taking long to do. So clearly it's a tough market, particularly with the number of competitors that are in the market.

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

Gentlemen, thanks for sharing your near term view on the military market. But wondering if you can share any views you've been hearing in terms of what might be happening in 2010, specifically with the US military? Have you seen any indications of where the budget might be, how much it might be cut? And this morning there was an interesting article -- looks like we're seeing defense spending ramping up in the Middle East, wondering if you might benefit from that increase as well? Thank you.

Yeah, I think our assumptions with regards to the growth that we've talked about do take into account what we see as happening in the US defense budget and also the worldwide. If you look at where our revenues and defense -- I haven't looked at those lately so I don't have the latest latest facts, but about 40% of our revenue actually in the military comes from the US approximately. So we are well diversified in other, globally -- so opportunities in the Middle East, certainly we see as a positive for us, and probably if I look at what I see as an order potential out there, those are a part of it.

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

Hi, thank you very much. Continuing along on that military theme, in the press release you'd mentioned that some of the sort of margin pressure was coming in the turning services group, just related to a higher level of marketing activity. I was wondering -- can you maybe provide some color on is that as a result of just you're trying to capture more business? Or is it reflecting fact that there's an increased level of competition for the business that you're going after?

No, I think mainly in the military it's largely a result of -- we see a lot of business out there, so there's a lot of -- clearly you've got to spend the effort, the marketing effort to be able to secure the contract. And often in the military, the size of the contracts, the type of business it is results inherently in terms of more of a sales and marketing effort and it takes longer. And sometimes you work two to three years to get a contract, but the payback is usually sizable contracts and therefore they last for quite a lot of years. So that's what I would see there as a dynamic.

Thank you.

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

Yes, Marc, I was wondering if you could comment on the civil training outlook at this point? It sounds like you feel it's reached bottom. Are you seeing it at a stable pace now for a while or are there any signs of it actually starting to pick up?

Well, what I see is if you look at the stats of airline traffic, for the first time -- first of all, the year-over-year comparison in terms of traffic reductions have been steadily decreasing, meaning people are traveling more than they have been for the last few months. In fact, September is the first month that actually traffic year-over-year in September was positive. Now I would caveat that by saying September last year was the beginning of the downturn, so the comparison is maybe not very good. But where we would see like a 10% drop in traffic a few months ago, now we're down 2% to 3% and maybe on an average year basis about 5%. And on cargo, you see the same thing. You're seeing it was down hovering from December to April at about down 20% to 23% and now in terms of year-over-year traffic decline in cargo, now it's about 5%.

If I look at business aircraft, I was at NBAA, the show. It was very depressed, yes, in terms of attendance. But you could talk anecdotally to people, you see charter traffic starting to come back. I wouldn't characterize it as a sea change for sure. I definitely think it will take corporate profits in the US, particularly it will come back for that. But there is an increase in traffic. So to me, if anything I would see -- I guess what I'm hoping to basically hear is that what we've seen in this quarter at 60% is around the level that was a low point in the cycle, because it was a seasonal low month and you have a seasonal quarter and we bear the brunt. Now, it's very volatile out there, so we've taken a cautious approach. You saw we're able to make money at that level, and that's where we sized ourselves to assume.

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

A big picture question. If you look at the backlogs that Boeing and Airbus have today, and if you look at some of your historical airline customers that are in the backlog, and if we assume that the deferrals and cancellations have abated, and if we further assume that the typical timing difference between when they are to deliver or when they are to receive new aircraft deliveries and when they purchase simulators -- when would you expect to see a rebound in order intake? And I'm just more curious, not to hold you specifically accountable, but I'm just curious -- when you look at your highest prospect customers, where their deliveries are in Boeing and Airbus backlogs and when that could theoretically translate into orders for your simulators?

I think, well inherently there's a lot of sense in what you're asking. But what I would tell you is we're not assuming a quick recovery here. And as I said, we're expecting this -- and my assumption is GDPs start to recover next year, traffic, maybe there's a lag to it maybe 12 months. And then traffic starts to pick up in a more positive way year-over-year and airline profits are after that. They know a few months to a year after that for sure. So there is -- deliveries of aircraft are one thing and that's the main driver, is you're right. So we'll see what happens in that side in terms of delivery rates out of the OEMs.

But the dynamic that we see at a time like this that we are in the market right now -- as I said, airlines are in cash crunch and they're pushing back as much as they possibly can. So we're not banking on a big increase. We're going to update that as we always do at the beginning of the year. Typically what we do, and to the root of your question, we're a few months out. We basically talk to all of our customers one by one where they are in the backlog, and we see and we form a good opinion about what they're going to be able to do. And that's the basis that we've gone in with the outlook that we've given for this year.

Thank you. (Operator Instructions). The next question is from Ben Cherniavsky from Raymond James. Please go ahead.

Just a follow-up question as I listen to all of the discussion about your outlook. Is it fair to say that your view of the market has tempered at all in the last three to six months on the commercial side? Have you become a little more cautious about margins and order activity on the commercial side at least?

I don't think so, Ben. I think -- to me, I maintain that -- I really believe that again, as I explained the two parts of our business -- and we're really learning by the way for the really first time, the impact of us being in training, whereas because it's early cycle business, when the pickup starts, we expect to see pretty quick. And the products business we know it's a late cycle business, and we're bearing the brunt of it now, and we will bear the brunt in the next few quarters. But by and large as I look at those two together with the assumption we make on the market, I still see out there that we should be able on an average annual basis to generate midteens profitability in that combined civil segment.

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

Yeah, thanks. I basically want to ask my previous question again, because you commented, Marc, your outlook for this year. I'm not at all -- that's not where my question was. What I'm trying to understand is in the context of the backlogs as they sit today and certainly recognizing that airlines have been pushing things to the right -- what I'm trying to understand is based on your most prospective customers, is the bulk of their deliveries, if you were to aggregate your prospects -- are they at 2011, 2012, 2013? Like I'm just trying to gauge where in a long term scheme of things your most prospective customers are.

And I guess secondly I'm curious by your comments being so focused on traditional growth metrics in terms of overall passenger, because a lot of the backlog has to do with replacing basically new aircraft for existing older aircraft and fleet size isn't really going to change. So even if the passenger metrics don't improve, there's still going to be some replacement, which given the change in aircraft type is going to stimulate demand for you guys. So I don't know if you're comfortable adding or expanding on your question, but I'm really just trying to understand bigger picture, longer term, where the bulk of your most prospective customers might be.

I'd really like to tell you that we have as good a crystal ball as that at the moment, but it's a very volatile environment out there. Some of the information you asked for, we have our customers with sensitive information. They know where they're at and discussions they maybe have with the OEMs are not [purveyed] to us for a lot of reasons. So I really believe we'll just have to wait to see what deliveries look like in the next couple of years to be able to really figure out what deliveries and orders of simulators are going to be. Meanwhile, we've aligned ourselves to deal with the market that we're in in terms of our cost structure. And going back to saying replacement is a factor but [passive] growth is an important factor as well. So I think you're going to have to be patient with us and live with unfortunately the visibility that we live with, and we're going to update this as we always do at the beginning of the year.

Thank you. The next question is from Ron Epstein from Banc of America.

Hi guys. Just a follow-up. You discussed the pricing pressure a little bit. I just want to better understand where the pricing pressure comes from on the commercial side. Is it because it's just more of a buyer's environment or can you just give us more color there?

Well, I think one of the factors is that the number of competitors for the level of opportunity is one. The level of potential orders out there to market is much reduced, the number of competitors hasn't. So obviously airlines are in a cash crunch. They aren't going to leave any dollars on the table, because they need every $0.01 from our customers and that's where this is all coming from.

Okay, good. Thank you.

Operator, we want to ensure we have enough time left in the call for members of the media. So I would call the investor portion closed and invite anyone who has any additional questions to contact a member of the team here. And so now we would like to open the call to members of the media.

Certainly. (Operator Instructions). The first question is from Ross Marowits from Canadian Press. Please go ahead.

Yes, I'm wondering if you've had any impact in this quarter or up until now from the Buy American Act and if so, what has been the impact and do you expect any going forward?

No, I think the answer would be no to that, certainly nothing that we're remotely aware of. We're very international company. I haven't seen any and I wouldn't expect it either.

Thank you. The next question is from (inaudible). Please go ahead.

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(spoken in French).

Thank you. (Operator Instructions).

Operator? If that's all the calls we have from the media, we'll conclude the conference call. I'd like to remind everyone that a transcript of today's call is available on our website at CAE.com as well as an audio replay, and thank everybody for their participation.

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