CAE Inc (CAE) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the CAE first quarter conference call. Please be advised this conference 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. Thanks 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. These 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 nonrecurring or other special items or events that are announced or completed after the date of this conference, including mergers, acquisitions, or other business combinations and divestitures. You'll 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, 2010. These documents have been filed with the Canadian Securities Commission and are available on our website and on SEDAR.

They have been also filed with the US Securities and Exchange Commission under form 40F and are available on Edgar. Forward-looking statements in this conference represent our expectations as of today, August 11, 2010 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. 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'll 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.

Hi, thank you, Andrew, and good afternoon, everyone joining us on the call. We presented our first quarter results this morning at our annual general meeting, so we'll provide a brief summary for the benefit of those who may not have been able to join us. After that, we'll be pleased to take your questions. We're in the early stages of a market recovery and positions in civil aerospace are clearly improving. I'm especially encouraged to see that in our first quarter, a positive momentum has already begun to translate into higher demand for civil training. The downturn we recently experienced and economic volatility that remains clearly makes forecasting markets more challenging, but at the same time, these conditions continue to prove the merits of our diversification strategy. We have shown our ability to adapt to be competitive and to generate good profits through some pretty tough conditions.

Our business depends more on sources of recurring revenue, like training and services, than it ever has before, and we've maintained a strong balance sheet, which gives us flexibility to pursue growth initiatives. Putting this all together, we're confident about CAE's future and we are very pleased early today to announce that effective September 30th, our quarterly dividend will increase from CAD0.03 to CAD0.04 per share. Now, looking at our performance in the first quarter, revenue was 4% lower than last year at CAD367 million. And net earnings, excluding last year's restructuring, were down 15% to CAD39 million or CAD0.15 a share. In the combined military segments, we had higher levels of training activity in the US and in Europe, but revenue decreased 2% to CAD182 million, mainly because of foreign currency translation and also because of the back ended profile of this year's production.

We also had a lower contribution in the quarter from some large programs that are in early development. Nonetheless, our combined military operating margin was 17.5% for the quarter. Performance in military is more representative over a 12-month period, since orders and production tend to be lumpy between quarters. Our order intake last year was much higher in the second half of the year and this will translate to higher revenue in the second half of this year. We had strong order activity in military at CAD276 million, for a book to sales ratio of 1.5 times. We received the CAD90 million maintenance trending contract from Lockheed Martin for Canada's C-130J Hercules aircraft. That particular contract's an important milestone for CAE because it's a major simulation-based training contract in an area that goes beyond air crew training.

As well, we were awarded a contract to perform a major upgrade on the Puma helicopter simulator that we operate for the United Kingdom Royal Air Force. This order showcases our ability to cover our defense customers' needs over an entire program lifecycle, with a total array of product and service solutions. In our combined civil segments, revenue was down 7% to CAD185 million, mainly because of the 19% decrease in simulation products revenue, which results from the after effects of the civil downturn. Although it will take a while to work through our backlog and for simulator margins to recover, the good news is that we believe the simulation products segment is bottoming. Also positive is the modest revenue growth we had in training and services, despite the much stronger Canadian dollar.

Simulator utilization was 69% during the quarter, which helped us generate an operating margin of 18.9% from training. Our simulation products segment margin reached 12.3%, but on a combined civil segment basis, we generated 16.5%. This is much better performance than CAE has had in the past market downturns and reflects the success of our efforts to control costs, diversify revenue sources, both geographically and through an expanded services offering. In terms of civil orders, we received training and services contract with a expected value of CAD82 million and another CAD69 million for simulation products including six full-flight simulators. In new core markets it's still early days, but we're making steady progress in CAE healthcare.

We received five contracts for our new CAE Owl Simulation Center Management System, which is a good example of a training technology and best practices that we leverage from aviation training into the healthcare arena. We also sold our first ultrasound simulator to the Beth Israel Deaconess Medical Center, a teaching hospital of Harvard Medical School. Simulation based medical imaging training is one of the key areas that we are pursuing and this solution is in support of the new handheld ultrasounds. Also significant is the accreditation from the American College of Chest Physicians we received for our e-learning ultrasound curriculum. In mining, we concluded our acquisition of Datamine to advance our entry to mine simulation. The integration of this Company with CAE is progressing well. With that, I'll now ask Alain to comment on specific financials.

Thank you, Marc, and good afternoon, everyone. Revenue was CAD367 million in the first quarter compared to CAD383 million last year and net earning were CAD39 million compared to CAD27 million last year, which included an after-tax restructuring charge of CAD19 million. Free cash flow was negative CAD65.4 million, primarily because of an increase in our accounts receivable and contract in progress, as well as a reduction in our payables and accrued liabilities. We normally expect increases in these working capital accounts at the start of every new fiscal year. This is because our first quarter cash flow is normally impacted by cash payments for taxes, royalties, and other expenses that are accrued during the prior year and paid in Q1. Similar to the last two years, we expect that a good portion of the non-cash working capital will come back over the balance of the year. Net debt was CAD297 million at June 30, 2010, up CAD117 million from last quarter. The majority of this is related to the increase in non-cash working capital.

We had a much stronger Canadian dollar this quarter compared to last year, which negatively impacted our results, because we account for our foreign operations in Canadian dollar. The effect of translating the results of our self sustaining subsidiaries into Canadian dollar resulted in a decrease in this quarter revenues of CAD34 million and a decrease in net earning of CAD6 million when compared to the first quarter of fiscal 2010. Revenue and earnings generated by our foreign subsidiaries is mostly self hedged, but create the translation exposure when we convert them to Canadian dollar for public reporting. Finally, capital expenditure were CAD22 million during the quarter, with CAD14 million for growth and the balance for maintenance. We continue to expect total CapEx this year to be about CAD130 million and for maintenance to account for about CAD50 million of that total. Back to you, Marc.

Thanks, Alain. The recent Farnborough Air Show and the improved market sentiment makes us believe that a civil aerospace recovery is under way, with more than 2.5 times the number of aircraft orders placed at this year's show compared to last year in Paris. In civil aviation, the emerging markets were less affected by the downturn and are now even stronger than before. We have been seeing improvement in the Americas and the Middle East remain solid. Europe is still struggling to regain its footing, but the situation there for the training segment is certainly more stable than it was just a year ago. Airlines by and large are getting stronger, having mended their balance sheets, and are now starting to generate decent cash flows. Passenger and cargo traffic is now at levels not seen since before the global recession began. While this has translated to higher load factors for the airlines, in some cases in the US well above 80%, they have continued to be disciplined about adding back capacity.

According to IATA, capacity in June increased by only 5.9%, while passenger traffic was up 11.9%. We're clearly encouraged by the rapid rebound in traffic and improved health of the airline industry, but we also realize it will take a while longer before this leads to increased capacity being flown, which is a key driver for our civil simulation products and training and services segments. In business aviation, aircraft utilization is gradually improving and inventories of used aircraft have further declined. Our view here is largely unchanged. We expect to see a gradual pickup commensurate with the pace of economic recovery and the strength of consumer confidence. We have recently expanded our relationships with business aircraft manufacturers and with the new training programs and simulators that we've deployed in recent quarters to our network, we feel very well positioned for recovery.

The average revenue generated per simulator in our network over the last 12 months was CAD3.3 million, which is about CAD500,000 less than the amount we generated at the peak of the last cycle. At that time, utilization rates reached about 80% and we had a mix of training which involved more initial type certifications than we had at the bottom of the cycle. Growth over the period ahead in training and service civil will come from a gradual recovery in revenue per simulator, commensurate with higher utilization and a better mix of training. We'll also continue to invest selectively, keep pace with the growth of our customers, and we'll expand our relationships with aircraft OEMs, like the recently announced ATR and Mitsubishi programs that we've been selected to support with global training solutions. In simulation products civil, we said last quarter that we expect to receive slightly more than 20 simulator orders this year and that remains our position.

We're encouraged to see Boeing and Airbus announce further increases to aircraft production rates and maintain their already impressive backlogs. These production changes will take a while to be implemented, but are a positive sign and will eventually lead to higher demand for training products and services. We are well positioned in the emerging regions and expect to maintain our market leadership overall. In defense, we're monitoring government spending closely, as nations make strides to do more with less. The positive is that CAE is part of the solution by lowering the cost of training and substantially at that. Simulation-based trainings are approximately one tenth the cost of live training and it's highly effective for improving mission readiness, which helps save lives. As well, CAE is mainly involved with the kinds of defense platforms that remain highly relevant to current defense requirements, like transport aircraft, helicopters, and tankers. The outlook for our military segments continues to be encouraging and based on our products backlog and what we see in the order pipeline, we remain confident in our 10% to 12% revenue growth estimate. Thank you for your attention and we are now ready to take your questions. Andrew?

Operator, we would now be pleased to take questions from analysts and institutional investors. Before you open the lines, let me first ask that in the interest of fairness, that people please limit themselves to a single one-part question. By all means, if there's more questions after that, please feel free to re-enter the queue.

(Operator Instructions) Our first question is from Cameron Doerksen from Versant Partners. Please go ahead.

Yes, good afternoon.

Good afternoon.

Question on the civil training business. It looks like the Datamine acquisition is 100% being recorded in that segment. If that is the case, I'm just wondering what kind of impacts that its inclusion would have had on the revenue and the margins.

Yes, okay. If you look at Datamine, you're right. That's where we're reporting it in. In fact, if you take that, that's about CAD7 million in revenue. Now, what you have to look at as well, Cameron, I think is that if you're to net out that plus the revenue impact year-over-year from negative foreign exchange translation, which itself is about CAD17 million by itself, you are really looking at a normalized training and services civil growth of approximately 10% year-over-year, which to me shows the underlying pickup in demand.

Okay, and I'll just squeeze one other related question in and it's really in the same segment that there was a gain on a sale. I'm just wondering what that impact was on the margin.

Alain, you want to do that?

Yes, it was close to CAD1 million, Cameron.

Okay.

You're referring to the gain in Germany on the small training operation.

Yes.

Yes.

One thing I might have mentioned as well, Cameron, is in regards to the contribution of the new core markets there, I talked about what it means in revenue and in terms of earnings it's a bit of a drag, slight drag.

Okay. Perfect. Thanks very much.

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

Hi, it's actually Elizabeth for Ron.

Hi, Elizabeth.

Hi. For the military segment, if the revenues were down 2% this quarter, what is it giving you some confidence that you can achieve the 10% to 12% growth for the year?

It's -- really what we're looking at is -- we look at this year in particular, we have -- you look at our products backlog and some products military, most of that backlog, if you look at what we're going to execute turning to revenue this year, most of it, 85%, 90% we've already won. So it's for us to execute. So that's pretty much in our control to a large extent. We still have to win some programs. So if I look at that and our capacity to execute and as well, what I see in the pipeline of orders that we feel that we are well positioned to win, that's what gives us the confidence of the 10% to 12%, but I really feel it will be back end loaded for some of the factors that we talked about when Alain spoke.

Okay, thank you.

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

Good afternoon. When we look at your margin, the training services military, it was up significantly year-over-year. Could you maybe quantify, Alain, what is the impact, I mean, from the higher dividend from the UK and also how sustainable is the extension of the maintenance contract?

Yes, Benoit, like you said, the margin in TSN were a bit higher than the average. I would say a couple of points higher than what we do deliver. This is related to a contract in Europe. So we got the extension of our maintenance contract and one of our facilities in Europe and a portion of these costs were already incurred, which explained a couple of additional point in the margin this quarter. So -- but overall in average we show -- we shall continue to shoot for the sort of average margin you've seen in the past in that segment.

Okay, thank you.

You're welcome.

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

Thank you. Looking at your training civil side of the business, your ab initio pilot capacity throughout the network, I believe, is CAD1800 annually. Where do you see that number growing, let's say, over the next two to three years? Are you fairly comfortable? I mean, is that the capacity that you would like to sustain here for a couple of years or do you see growing that further?

I think that we -- I think we said before and I think we are maintain it that we would be comfortable with a target of CAD2500 to CAD3000 and we don't have a time line. It will depend on the opportunities that we see there, but if you think about what we ascribe to, the pilot shortage number that Boeing Airbus included in their forecast of about 18,000 pilots short a year for the next 20 years, we feel that we'd like to get a part of that, but also we want to be able to differentiate ourselves with a quality solution. That's why we would be limiting ourselves to that. If you look at the recent contracts we did, like the joint venture that we've expanded with China Southern to do all of their, well, do their pilot training in Australia as part of that growth. And it's part of the solution sell, that with the rest of our training, training and products offering.

And just as part of that question, I'm just wondering if you can talk in round numbers what percentage of your training revenue today is from ab initio related training or that capacity of 1800 pilots a year versus type certification in other training.

We haven't really disclosed that. We don't break it out externally, to be honest. And I don't have the number offhand either, but I don't think we're going to break it out. But if you think about typically I think a number that would be public out there is reasonable to expect, it's probably $100,000 per student for a pilot course. Maybe that gives you some kind of ballpark.

Okay. That's great. Thank you.

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

Thanks. Marc, just want to ask about or some detail on your view on the turn in the cycle. You've pointed to a number of macro factors in the industry, but if we look more specifically at your results thus far, in your civil training business you back out your other sort of new initiatives of revenues and you look at your order intake, your book to bill is still fairly weak. And so I'm just trying to reconcile whether your comments about the turn of the cycle are more sort of macro or in your discussions with existing and perspective customers are you also finding that the pipeline of opportunities is getting bigger and you just haven't, for timing reasons or whatever, been able to convert them into orders in your form of backlog. Can you just give me some perspective on that.

Yes, yes, sure. I think we look at training, I think we've always said that what we would expect is to see the pickup in training first as airlines add back capacity. They haven't added at the same rate of passenger pick-up, but nevertheless, they started adding it and we're seeing it as it translates into our numbers. I do think, and maybe Alain can expand a little bit more, when we look at the book to bill in the training and services civil business by itself, it doesn't really tell the whole story. It's different than our three other segments, which in the products segments they are manufacturing-related backlog, you have a contract that's very, very clear and they are execute over a number of quarters. Our training and service civil is more typical of a retail business. You'll get an order and you'll execute it directly into the quarter. We get about, typically, about 70% of our customers that come to our training networks will renew, will come on. And I don't think that's fully respected. That's for us to sort out, but that's not fully reflected in how we look at book to bill in that segment. Do you want to expand on it, Alain?

Yes, sure, Marc. It's a good metric, the book to bill in TSC, but obviously much less relevant, Marko, than the book to bill in the manufacturing businesses. Like Marc said, very difficult to have in the book to bill the revenue that we're getting in the same quarter. So if someone shows up in the network and take CAD1000 of training, you don't get it in the revenue. You get it in the revenue, but you're not getting it in the book to bill. So the indicator for us that really we monitor is the utilization rate, which we're sharing with you on a quarterly basis, and also the revenue per simulator. You have the revenue simulator equivalent unit and you have the total revenue. When this is growing, coupled with the utilization rate, this is really the metric that tells you that the business is growing more than the book to bill, because it's a service unit. It's not a manufacturing unit.

And if you look -- so thank you for that detail. But if you look in terms of the prospects that you're seeing, are you finding that the level of inquiry from customers that might have more of what I would call a longer term or recurring business, so it's not sort of the walk-in for a couple of hours, but it's more substantial. How would you characterize where they are in terms of incremental contracts with you?

I think it's anecdotal at this point, but suffice to say, we are starting to see more interest coming back throughout the network. The emerging markets still remain strong. In initial [tread], yes, thank you, Alain. I think what is coming back, we're seeing more initial come back, initial training. During the downturn pilots were essentially frozen in their seats and that means essentially the lion's part of our business was recurring training, which is the shorter in duration. So now we're starting to see the recurring business come, the initial type certifications come back. Not in a huge way, but it's contributing more to our results.

Great. Thanks for that detail.

Thank you.

Thank you. Next question is from David Tyerman from Canaccord Genuity. Please go ahead.

Yes, good afternoon. On the military side, I was wondering if you could talk about what you're actually seeing right now. Are you seeing any impact from more constrained government budgets and so on in terms of either the numbers of things they are looking at doing or the pace that they are signing contracts?

Yes, I think the -- as we talked about, we're monitoring what's happening in the market. It's clear that in the US we saw announcements by Secretary Gates a couple days ago with (inaudible) sweeping changes that they are making, including drastic cuts, like closing joint forces command. The good news to all of that, we're not exposed to any of those that were related to that. And if I could take the US on a broad sweep, including taking the budget that was passed, all of the programs that have been cut we're not exposed to and those that we are, most of them, specifically helicopters, C-130J type aircraft, have seen production rate increases. So from that point of view, we haven't been affected. If I look at Europe, the UK, Germany, clearly there's going to have to be, and they are signaling strongly, that there will be defense cutbacks. On the other hand, we haven't seen any programs that were under contract being effected nor think that will be effected. There's a couple of opportunities that I've seen in the pipeline, at least one that I've seen in Germany, without saying which one it is, that's been effected, that the government's decided not to do that one. But if I look by and large and I net out the positives and negatives, we're exposed to the platforms that are closest to the needs of the defense customers around the world, helicopters, transport aircraft, tankers, jet trainers, those type of aircraft. And at the same time go back to the fact that simulation-based training is part of the solution. And we hear that. That's more than anecdotal. And really we really believe that ultimately this will trans -- for reasons of budget consciousness, it will force more use of simulation-based training. If you -- as we've said before, in the civil area, 100% of a pilot's training has to be done on a simulator. In the military, there is no such regulation and because of it, there's been a wide dispersion in the amount of training that is actually done by militaries around the world using simulators. Anecdotally, it's anywhere between 30% to 50%. That is the numbers I hear. But what I do hear a lot from our customers, whether it be the US Navy, whether it be the UK, is that more use of simulation-based training is in the cards. So that's why, if I look at our outlook I remain confident that we'll be able to continue the good order pickup that we've had, that leads to the revenue growth that we've talked about.

Okay. And on the margin side, on both of the sides of the business, are you continuing with the guidance you had before, I think it was mid teens for civil and 15% for military, and would there be anything that would cause those to either be going up or down in the next few quarters that you can see coming down the pike?

No, we're not changing the, our outlook on that. We're maintaining that for the near future, until at least we disclose next time. I don't see any macro or effects that would change those any time in the, within this year for sure.

Okay. Thank you.

Thank you. Next question is from Michael Williemse from CIBC. Please go ahead.

Thank you. On the military programs that are ramping up second half of the year, are these projects with long lead times, are they going to go on for a few quarters or are they programs that might roll off after 12 months?

And you're -- I think that maybe I'll answer it and I'll ask Alain to get into more detail. Typically our backlog it Sim Products military is about two, three years long. So that might give you an idea. Is that enough or do you want Alain to expand?

We're referring, Michael, to the major program we won toward the end of last year. And obviously the build phase on these program is over 24, 30 months. So that's why we're saying we were in the early development stage of these programs, so you can assume that their first come to second half year and next year they are going to be there also.

And is most of the growth happening in the simulation side or the training side?

Right now, I mean, we're seeing the pickup in the second half more on the product side than the training side in military.

Okay, thank you.

You're welcome.

Thank you. Our next question is from [Gregory Jackson] from Raymond James. Please go ahead.

Good afternoon, guys.

Afternoon.

What is your -- what is the acquisition environment looking like out there for you guys?

I'm not sure that it's changed very much. We're -- in our outlook, what we said hasn't changed there. We're still in new core markets, still looking at some relatively smaller acquisitions to further our distribution channels and our expertise in the markets. And we'll continue that. In our core markets that's where we are more open to do larger acquisitions, certainly, than in a core. We're out there. We're monitoring valuations. I think valuations of the military still are challenging in some cases, notwithstanding what's going on in potential defense cuts. But, overall I don't think much has changed there.

Okay, thank you.

Thank you. Our next question is from Scott Rattee from Stonecap Securities. Please go ahead.

Hi, great. Thanks very much. Just a question, again, sort of circling back around to the civil training services. Normally when we sort of go into your second quarter, it's seasonally weaker than the first. I guess I'm wondering whether or not you expect to sort of see that sort of seasonality again this year or will the sort of the recovery that we're sort of experiencing, whether or not that will sort of mask the normal drop.

Seasonality is -- Sorry, Scott, it's Alain. Seasonality year-over-year is always there, but what we see (inaudible) our Q2 will probably be better than Q2 last year because we're seeing sign of improvement generally. Year-over-year should improve, but the seasonality will still be there. That's what I would say. What do you think, Marc.

Yes, I agree, plus and minus.

Okay, great. Thanks.

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

Hi, it's Elizabeth again. In your press release you indicated that you had received orders for six full-flight simulators and I was just wondering if this trend was continuing, because I think that would put you above the 22 that you're guiding for the year.

I think it's -- all it takes is one day and you gone from 5 to 6 and then we're down to 20. It depends. Typically, my experience run Sim products for a while at CAE, summer tends to be a bit slower. People are on vacation in parts of the world, so I think we remain with the order outlook that we've said. But I would tell you that there's more activity in there than we've seen, more bids. So I think if we need to update the guidance, we'll do it as we do every quarter.

Has the last month been consistent with that or -- ?

Yes, yes. I think since the last quarter, I think -- we talked about last time that we're seeing more activity out there and that trend is continuing.

Okay.

I don't expect, like, if you like the big pickup. I wouldn't expect it, because we've seen the order rate increases at Boeing Airbus, which is great. It's great. It's a very positive signal for the industry, but typically a rate increase like that will take about a year to year and a half for that to hit the street before more airplanes come out. And typically, there's a lag between the deliveries going up and us seeing the pickup in the sales of simulators. So I wouldn't expect a drastic change to what we've talked about any time soon, at least this year.

Okay, thank you.

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

Yes, thank you very much. Marc, when we look at the recent big announcement from the Canadian government, the Joint Strike Fighter, I understand, if I'm right, I don't think you have any exposure to that program, but what are the opportunities foresee down the road and what are your expectation or what would you like to see?

Well, I think you're right. We're not exposed, Benoit, right now to the F-35. We'll be working hard to demonstrate to Canadian government and Lockheed Martin the value that CAE can bring, which -- and clearly we have a lot of -- we have a wealth of experience providing training systems for front line combat aircraft like the F-35. We're part of the Euro fighter consortium that's currently active. We have 20 years experience on the CF-18. We currently have over 200 people working in Mirabel supporting the F-18 in Canada. So it really depend on what the Canadian military will want. They are negotiating now and they have announced that they are going to buy the aircraft, but the Canadian government hasn't really said what they are going to be doing in terms of the logistics for the aircraft, which include training. And really Lockheed Martin will have an offering for training for the F-35 probably in the United States, so it really will depend on what the Canadian government requirements will be with regard to training in Canada. And we'll be -- and [firmly] I believe there will be opportunities there, but we're talk about a ways out. I think before they get the contract on the F-35, it's probably a year and a half out. And prior to being training opportunities for that, I think we're probably talking another couple years after that. So I think we're talking about a few years out, b But I would think that our chances are good.

Okay, perfect. And maybe a second question, if I can. The US House and Senate leaders are working right now on an aviation safety bill. I understand it's hard to quantify. I don't know if you could provide more color right now.

Yes, I think you're talking about the one that we've sean, that they are increasing, they're talking about increasing the number of minimum flight hours to 1500 hours.

Exactly.

As you say, it is still in the early stages and really too soon to say what it means for the training industry. But you got to believe that increased training is a positive for the industry and for safety in general. And I think that really what we are trying to do here is provide better training, not just more training, so to me more immersive training, the kind of training that we do, you think will bring a benefits, particularly as skies become crowded and the pilots get younger because of the pilot shortage. So, we'll work with those regulatory authorities to help define a best practices and ensure safety. But I think it will be a net positive, but it's too early to say what actually it means.

Okay, thank you.

Thank you. Our next question's from Tim James from TD Newcrest. Please go ahead.

Thank you. You were commenting earlier about expecting the revenue per simulator in the network to grow going forward. I'm just wondering if you can provide any commentary on how much of that is higher utilization and if any of that expectation includes pricing improvements in the training business. I don't know if there is some ability to push on higher costs or, sorry, push higher pricing through as utilization increases or is it entirely just dependent on greater utilization?

I think utilization's a big factor. If you look at last peak, we reached a 80% utilization, so I think that there's an upside there. Clearly, pricing, I think pricing has improved modestly and it really depends on where you're talking about. Europe is still pretty crowded in terms of competitive environment. And so we'll wait and see on that one.

Thank you.

Thank you. The next question's from David Tyerman from Canaccord Genuity. Please go ahead.

Yes, just on the new businesses, you mentioned that Datamine was CAD7 million incremental in the quarter. What is the total for everything incremental?

No, it's the total of the new core market contributor, David.

Okay.

And both are recorded against TSC or in TSC.

Okay. So the total for everything is CAD7 million and it sounds like the total margin impact was that --

It's a negative.

Was a bit negative?

Yes, was a drag in the second quarter.

So it's the total?

Yes.

And the other question I had was on the dividend. Just wondering if you can give us any thoughts on what is driving your dividend thought process. Do you have a target payout range that you're trying to achieve, either as a percentage of the fair price or percentage of probably, more likely, of net income?

Yes, we clearly look at where we are in terms of those metrics, but that's not what drove us there. And we don't have an underlying policy at this point anyway. It's really a reflection of the confidence of our business. And the different business model that we have, which is more -- half of our revenues now are coming from recurring sources of revenue, like services, and we see we've just been through arguably the worst downturn in the history of civil aviation and we've been able to generate pretty relatively good cash flows and good profits. So it's all testimony to that, that we've seem confident enough and the board of directors have see confident enough to increase the dividend and I think that still leaves us plenty of room within our balance sheet to execute the kind of growth opportunities that we see out there.

Okay. Thank you.

Operator, we'll need to end the session for investors and financial analysts here. And I thank all for their participation. We'll reserve the last few minutes for members of the media who wish to answer -- to ask questions.

(Operator Instructions)

Operator, if there are no questions, we'll conclude the call. I wish to thank everybody, again, for joining us and remind you that a transcript of today's conference can be found at our website at CAE.com. Thank you.

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