CAE Inc (CAE) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the CAE second quarter conference call. Please be advised that this call is being recorded.

I would now like to turn the conference over to Mr. Andrew Arnovitz, Vice President Investor Relations and Strategy. You maybe now proceed, Mr. Arnovitz.

Good afternoon, everyone. Thank you for joining us today.

Before we begin, I need to read the following. Certain statements made during this conference, including, but not limited to, statements that are not historical facts, are forward-looking and are subject to important risks, uncertainties and assumptions. The results or events predicted in these forward-looking statements may differ materially from actual results or events. These statements do not reflect the potential impact of any non-recurring or other special items or events that are announced or completed after the date of this conference, including mergers, acquisitions, or other business combinations and divestitures. You will find more information about the risks and uncertainties of our business in the MD&A section of our annual report and 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, cae.com and on SEDAR at sedar.com. They have also 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, November 10, 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 is 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 and A period, we will open the call to members of the media. For your convenience, this conference call will be archived on CAE's web site.

Let me now turn the call over to Marc.

Thank you, Andrew. Good afternoon, everyone, joining us in on the call. We had a good performance overall in the second quarter with revenue up 6% over last year at CAD387 million. And net earnings of CAD40 million or CAD0.16 per share which is in line with last year. In our combined civil segments, revenue increased 8% over last year reaching CAD181 million, despite the stronger Canadian dollar and a slight decrease in our product segment. In Training and Services, we had a 15% increase in revenue and a 67% utilization rate compared to 60% last year. On a sequential basis, utilization was up 2 percentage points-- Sorry 2 percentage points lower than Q1 but normally the second quarter is about 5 percentage points lower due to seasonality, so we see this as a sign of improvement.

Our operating margin in Training and Services was 16%. And in Civil Products it was 10.8%. For a combined Civil margin of 14.2%. Excluding our continuing investment in new core markets, the Training margin was 18.3%. The combined Civil margin was 15.6%. We received CAD229 million in combined Civil orders including CAD117 million for products which represents an improved book to sales ratio of 1.9 times for this segment. We made eight more full flight simulator sales during the quarter which included four orders from airline customers in Asia, two from customers in western markets and two for Airbus to build the world's first Airbus 350 simulators. The later contract adds to our list of recent wins with OEMs to develop first ever simulators for new aircraft types including the Bombardier C series and Learjet 85, the Mitsubishi regional jet and the ATR 600.

Revenue from our combined military segments increased 4% over last year to CAD206 million. Simulation products revenue remained stable at CAD137 million, which we anticipated given the back ended profile of this year's production caused by some recent large programs that only ramp up in the second half. In Training and Services, revenue was up 14% at CAD69 million. Largely because we had a higher level of maintenance and training services activity and higher professional services revenue. Combined military operating income was CAD36 million and the operating margin was 17.6%. We booked CAD209 million in orders in military including a contract from the US Air Force to upgrade two C5 Galaxy weapons systems trainers. We also won a contract to upgrade 12 CAE-built helicopter simulators for the German Army. And we received a contract to upgrade C-130J Hercules training devices used by the UK Royal Air Force. These contracts demonstrate the kinds of recurring aftermarket opportunities that originate from CAE's broad customers installed base.

Our book to sales ratio was just over 1.0 times for the quarter and 1.3 times for the last 12 months. In new core markets, although it's still early days, I'm encouraged by the progress we have made so far to build our capabilities and grow our core talent. We have concluded a number of sales this quarter in healthcare for our ultrasound and surgical simulation solutions involving strategic customers like the US military. We received further validation during the quarter with the selection of our ultrasound training curriculum by the American College of Chest Physicians. We also received good market validation in mining with the sale of our planning and optimization software solutions to major mining companies including BHP, Mitsubishi Alliance, Vale Ferrus and Anglo American.

With that I'll now ask Alain to comment on specific financials.

Thank you, Marc. Good afternoon, everyone. Revenue was CAD387 million in the second quarter compared to CAD365 million last year. Net earnings were CAD40 million compared to CAD39 million last year which included an after tax restructuring charge of CAD1 million. We generated CAD62 million of EBIT for a margin of 16%. The Canadian dollar was considerably stronger this quarter compared to last year. The effect of translating the results of our foreign subsidiaries into Canadian dollars resulted in a decrease in this quarter's revenue of CAD19 million and a decrease in net earnings of CAD2 million year-over-year. About half of these amounts relate to the translation of our civil Training and Services results from the US, the Euro and the British pound.

Free cash flow was CAD46 million this quarter which is an improvement over last quarter because noncash working capital remains stable. We usually see higher investments in working capital in the first half, a trend which normally reverses in the later part of the fiscal year. Net debt was CAD279 million at September 30, down CAD18 million from last quarter. Our effective tax rate this quarter was 26% compared to 27% last year, which is explained by the lower portion of the revenue we generated in the US, our highest tax rate jurisdiction. If the civil training business recovers, the portion of our US revenue will be relatively higher. On a year to date basis, our effective tax rate was 28%, which is equal to last year. We expect the tax rate to revert back to normal levels, in the range of about 29%, 30%. Finally, capital expenditure were CAD32 million during the quarter with CAD22 million for growth and the balance for maintenance. We continue to expect total CapEx this year to be about CAD130 million.

Back to you, Marc.

Thanks, Alain. The fundamentals for the commercial aviation market are increasingly positive. Airlines have returned to profitability with IATA predicting CAD9 billion in profits for 2010 compared to a prediction of only CAD2.5 billion dollars earlier this year. Passenger and fright traffic are at higher levels than prior to the recession and airlines have begun to increase capacity to contend with this higher demand. Leading the way are the high growth regions of China, Southeast Asia, Latin America and the Middle East where we are especially well positioned with our global network and established presence. North America and Europe were hardest hit in the downturn but have also started to show some improvement. We indicated in the past that when the airline market began to recover, we would expect to see this first in our civil training business. This is now becoming reality with improved market fundamentals translating into higher utilization of our commercial simulators and higher sales of full flight simulators. In the period ahead, we expect to see this positive momentum in our business continue as the airline industry makes further progress towards recovery.

The recovery in business aviation has so far been typical of previous market cycles where demand for business jet travel is preceded by rising corporate profits. On a rolling 12-month basis, aircraft utilization is up 10% in September which is encouraging but in absolute terms, utilization is still off about 20% from the previous peak. Recovering business aviation is taking longer than commercial with the bright spot so far involving training for the large cabin aircraft segment and the overseas markets which have been leading the modest recovery. Simulation products civil typically lags the aerospace market cycle and this time is no exception. We are continuing to work our way through a backlog that has been affected by lower volumes and pricing. The good news is that market activity is stronger with 16 full flight simulator sales announced year to date. Five of these orders involve new aircraft programs which have deliveries farther out than typical simulator orders. Although these will not contribute much to earnings in the short run, they are key strategic wins that position us well for the future.

Overall we are more confident in our civil market outlook and so we have increased the numbers of orders we expect to win this year to the mid-20s. Pricing remains stable and we believe it will take some time still for product margins to really improve. Competition is intense. We plan to maintain our leadership position through product innovation and our unique ability to bundle solutions by drawing upon the widest products and services offerings in the industry. Towards the latter end of the fiscal year and beyond, as the civil aviation market continues its descent, we expect our combined civil segment margin to gradually improve from the current mid teens level.

In defense, we continue to add to our backlog in support of our 10% to 12% revenue growth target and 15% plus EBIT margins. Last week we announced orders valued at more than CAD85 million including a simulation and visualization solutions contract for the Turkish Air Force. As well, we were awarded a contract to provide more training services to the US Navy and US Air Force. And we received an order to provide airborne tactical mission training solutions in the UK.

We never take success for granted, especially in an environment where a number of governments have begun to implement measures to reduce defense spending. The publication last month of the UK strategic defense and security review outlined a range of saving measures meant to reduce that nation's defense bill by 8%. From our perspective, the report reaffirmed the relevance of the major platforms we are currently involved with in the UK like the PUMA and Chinook helicopters. No doubt the market has become more challenging for the defense industry as a whole and we will continue to monitor budgetary actions closely as they evolve. We believe, however, that CAE remains well positioned because we offer a solution to achieving force readiness at a lower cost and therefore we expect to see the benefits of an increased adoption of simulation based training over the long term.

Thank you for your attention. We are now ready to take your questions. Andrew.

Operator, we will now open the lines to the institutional investors and analysts.

Thank you. Ladies and gentlemen, we will now proceed with the analyst portion of the question and answer session. (Operator Instructions) Our first question comes from the line of David Newman With Cormark Securities. Proceed with your question.

Good afternoon, gentlemen. Just on the Civil side, just trying to get more granularity on the simulation products and on the training side. How is the pricing environment, right now? Is it improving? Obviously, demand is picking up. Are you seeing the pricing improve, at all, in the competitive environment? And do you think this might be the low water mark, in terms of the manufacturer of Civil Sims?

I would characterize pricing as relatively stable. It depends, obviously, what platform you are selling, a narrow body, wide body. But on average, the data that I see tells me it's relatively stable. Clearly volume helps and the market has -- we are starting to see more sales there. So, that is encouraging. But if I look at margins in that sector, particularly Sim Products / Civil. I don't see a lot of variability around that number that we're seeing today in Sim Products / Civil, in terms of margin, up or down. Probably less down than up. Meaning that I probably see more opportunity for it to go up, over the next few quarters, than I see down, mainly because of volume. But the pricing at this point remains relatively stable.

There's nothing in the environment at all, Marc, would lead you to believe there's been no structural change in the end markets. In terms of the competitive landscape or anything of that nature?

Not really. We have a number of competitors, not more than we have seen in the previous few quarters. Typically, when you have-- we have been through a time of reduced orders. So, there is clearly the same amount of people going after the same thing - a reduced number of opportunities. So clearly, it's remains intense. We have been able to maintain our share of business.

We do, as I mentioned on the remarks, we focus on competing through bundling our products and services. Through product innovation and, of course, through our reputation of delivering to airlines.

Okay. On the same vein on the training side, your utilization looks like it's improving. Obviously, this is peak season in the summer. So, it bodes well. Your network seems to be relatively fixed now. What sort of torque do you think you might be able to see on the utilization side, as we progress into next year? Obviously, traffic levels are looking pretty good.

It's hard for me to pick what the utilization will be. We're talking about normalized for seasonality, I think we have seen that. We've seen a pick up and we have seen the top line in our Training and Services / Civil has increased by 15%. It's hard to judge how much it will be, but clearly, as we have said, we would certainly expect utilization to increase as airlines continue to add more capacity. I think the one thing I would tell you, maybe a bit of a -- I wouldn't call it dry, but a bit different story, is from [Bae's side], on business aircraft. Because we are still -- the recovery is on but as I mentioned we are still 20% down from previous peaks. So, we still have not seen the initial training sessions really pick up. So, activity is still relatively down, there. So, a bit of a plus and minus there.

Very good. Thanks, gentlemen.

Our next question comes from the line of David Tyerman with Canaccord Genuity. Please proceed with your question.

Just a question on the military outlook. Marc, you had some pretty good comment there, at least about the UK. I'm wondering with some of the other militaries what you are seeing there. We are definitely in an era of constrained government spending. And you are part of the solution, not part of the problem, in terms of costs. But often it seems that governments just reduce spending everywhere. Regardless, of what you do and what you are offering. So, I'm wondering. Are you seeing anything where you might be negatively impacted, even though you do offer cost savings?

I'm with you that we have to look at the environment that we are in. We are watching it very closely. That's why we are so in tune with what is happening in the UK there. Looking at it program by program, seeing if we're effective. Seeing if we think we'll be effective in the future. We take all of that, and we are present, we sell military around the world. Not the whole world is not reacting the same way. But what I would tell you is, I go based on what I have in my backlog. Which, when you look at it, it's probably close to two years long, in terms of my products backlog. If I look at that, I look at this year. I look what -- clearly most of what I have to win to get this year's growth; most of it is already won. Next year it's, clearly, not already all won but we have pretty good visibility of what is out there. So, as I look forward, I have pretty good visibility, say 18 months out. And that's what leads me to believe that we will be able to continue over that period of time, at least 10% to 12%, as we've said. Longer than that, it's pretty hard at this point. Who knows. That's why we are monitoring governments by governments, as they make announcements in that light.

That's very helpful. On the Training and Services / Civil, the RSCU count has stabilized out. Are this any more spaces where you need to add? Should we expect some growth in RSCUs or are we going to stay somewhere in the low 130s area for a while, do you think?

I think you will see us grow. We are focused. The market is coming back, as I mentioned, in commercial aviation. To a certain extent it's coming back faster than, I think, most people would have anticipated. We certainly anticipate that will continue. It's being led by the emerging markets. We have a pretty good position in the emerging markets. We'll want to retain that. So, I would anticipate that, we would be adding simulators focused on emerging markets. Also, focused on our relationships with our customers. You know that we are partnered with customers in JVs, in China, Dubai, elsewhere. And, of course, with OEMs. We have a cooperation agreement with Airbus. The long and short answer, I think you will see us add simulators to the network. We will be retiring some, as well. We have a habit of doing that. But net, you will see RSCUs going up.

Okay. Great. Thank you very much.

Maybe, I'll just add a bit of color to the last question that you had there, on the military. The other thing I should say is, we continue to see the trend out there that, as you said in your question, towards the use of simulation. It might be longer term because, as you said, and I readily agree with that, when you cut you usually cut and then see how you can save after. But if you look at the recent orders that we have announced, the kind that I mentioned in the remarks. What you find is, we have a lot of opportunities that come out of the installed base, first of all. And we, also, do work that I would consider -- we call it adjacencies to training, to actually sell simulators in training. To give you an example of that, we have about 500 people in the Company that do professional services in the military. And that's a growth market at this moment. And that doesn't involve training. So, I take all of those factors, when I talk about the 10%, 12% growth.

Thank you.

Our next question comes from the line of Benoit Poirier with Desjardins Valeurs Mobilieres. Please proceed with your question.

Thank you very much. My question is related to your new core markets. When we look at your margin in that division, if you exclude those initiatives it would have been up to 18.3%. So, it seems that in terms of EBIT it's about CAD2.7 million or CAD0.01 a share. Could you maybe provide more color about the revenue contribution in the quarter and when would you expect a turnaround in the profitability. And also, the mix between mining and healthcare, right now? Thank you.

Well, thank you Benoit. The contribution to revenue is about CAD8 million total this quarter, in terms of combined in our new core markets. I would tell you, as well, if you look at the Training Services / Civil, that CAD8 million is added in that sector. But remember, we are affected by effects translation in that sector, from translating the revenue that comes from our foreign training centers. That is about a CAD9 million drag. The revenue pickup by the new core markets tends to be pretty much neutralized by the negative FX translation. We talk about the 15% growth, normalized, in Training Service / Civil; it's really there. Just adding a bit of color on that one.

Longer term, I remain with what I said before; that it's early days in new core markets. We're continuing to add to our capability both in healthcare and mining. Healthcare is more advanced. It's too early for me to be able to say which will be more material faster, whether it be mining or healthcare. But as I've said before. If we are in those markets, it's because we feel the markets are big enough, and for us to establish a leadership position, and it's to be material.

Okay. Thank you very much.

Our next question comes from the line of Hamzah Mazari with Credit Suisse.

Good afternoon, this is actually Chris Barkins on behalf of Hamzah. Just, given everything in Civil appears to continuously be improving. Can you give us an update on the current potential operating leverage inherent in your model? And what revenue, per simulator utilization, are currently down from the peak levels?

Do we have that number, Alain?

The difference in revenue per sim is about CAD550,000 to CAD600,000 at current level.

Okay. And just -- no, before that. Can you update us on the current operating leverage if Civil does, in fact, keep continuously improve?

Operating leverage. Alain, I leave that one for you.

More on the production side of the house, or on the net worth? Like Marc said earlier on, obviously, volume will create some operational leverage as we are going to build more units. It will impact the overhead rate and will eventually improve the market, but --

I would add, in Training and Services / Civil, Chris, it is a high-fixed cost business. So, as utilization continues to improve, any measure of that revenue for simulator comes back. It has a nice impact, because the incremental margin is that much higher than the average margin we are seeing.

But there is nothing, basically, quantifiable?

I think the one thing that we have said in the past, is when the markets really come back to their peak levels, at the top of the cycle. We see no reason, when that happens, that we can't return in our combined Civil Segments to the kind of margins that we made at the previous peak. So, 20% range in terms of EBIT when you are at the top of the market.

Thank you. Just very quickly, just returning to your growth initiatives within mining and healthcare, how should we think about your spending there for the remainder of fiscal year 2011, going into 2012? Can you just elaborate a little bit more on the potential acquisitions going forward?

I think to start with the acquisitions forward. You have seen us do some, what are called small acquisitions. Where we sought to gain either distribution channels, or more expertise in specific sectors that we are looking at, whether healthcare or mining. So, expect us to keep doing that. I think, nothing that I would consider large is being considered, certainly in those sectors, in the new core at this time. In terms of revenue, we haven't really guided around that. I wouldn't be ready to talk about that right now.

Perfect. Thank you very much.

Our next question comes from the line of Marko Pencak with GMP Securities. Proceed with your question.

Thanks, a question on your new sector businesses. Can you comment on the order intake during the quarter? And is the nature of the orders that you receive large and chunky or small and continuous? I'm just trying to get a characterization.

We haven't really spelled out those numbers, Marko. But it tends to be, so far, that we are selling the simulators one by one. So, it's not big chunky orders, as you say. But you sell more of them than you would sell, for example, one full flight simulator. It's more of a -- I wouldn't call it retail but certainly less -- more onesy-twosy. In that sense, not 100 at a time. Typically we'll sell surgical simulator, maybe about CAD100,000 apiece. And an ultrasound simulator about CAD35,000, CAD40,000 apiece. Those are the levels we are talking about at this point.

Okay. For Alain. There are a few adjustments that you describe in the MD&A to your margins. I wonder if you could just give us some specificity on those? First, there was the gain on sale of five used flight training devices. How much income did that provide in the quarter?

The EBIT level, Marko, was south of CAD1 million.

There was also a price adjustment on military equipment contract. What was that? You mentioned it in your MD&A that there was a price adjustment on one of your contracts in your military equipment division.

You want to get a sense of the magnitude of the adjustment?

Yes please.

North of CAD1 million, Marko.

Just a big picture question on Civil equipment orders. You talked about some of the new aircraft programs, longer term. But in terms of, not the first timers, if you will, but recurring business. Can you give us a sense of, how much of those orders do you think are related to the upgrade in fleets to more fuel efficient versions of existing models, as separate and distinct from expanding fleets in emerging markets?

If you look at where the orders are coming from, probably gives you a good idea of the answer to that question. Although I haven't broken it that way myself. If you look at this quarter, four of our sales have come from Asia. It's a good bet that most of those aircraft are adding to capacity, because the markets are growing. Clearly, we have another two, that were the first A350 contracts. The two in the western markets, I don't remember offhand, to be honest, but my recollection is they are adding capacity.

As you look at the prospects that you have, in terms of upcoming orders over the next 12 to 18 months, would that also hold? Or are you seeing what I would call re-fleeting in the developed world? Or, is it still pretty much just emerging markets that are driving this?

There has been some re-fleeting, but not a ground swell. I think as we see, merger activity -- merger acquisition activity continue in Europe and North America, I would expect that. But the majority I think of the growth will continue to be emerging markets because that's where the airplanes have gone. If you look at the sales of the OEMs, that's where they are going. We are lock step with that.

Right. Okay. Thank you.

Marko, one other data point that I think is of interest. Alain mentioned the gain on the five SEDs in the quarter being just below CAD1 million. We had a similar sized gain in the second quarter last year, from the disposal of full flight simulators. That might be helpful in your year-over-year comparison.

Right. Thank you.

Our next question comes from the line of Michael Willemse with CIBC. Proceed with your question.

Great. Thank you. Good afternoon. First of all, just on the Civil Simulator market in general. When you look at the market evolving over the next few years, and you look at emerging market growth, and you think about simulator orders that you received in the last peak of the cycle in the high 30s. Do you think you can break through that in the next cycle? And how soon do you think we'd get there? Are we a couple of years away, or three or four years away?

I don't think the ratios will change much because the ratio's really dependent on regulations of how many pilots you have per aircraft. How many flights per day. So I think, it's really going to be proportional to how many airplanes are delivered out of the OEM. That will dictate. The ratios are typically about -- for every 30 to 35 narrow body aircrafts, such as a Boeing 737 or an Airbus 320, necessitates the need for one simulator in the market. For a wide body aircraft, it's about every 15 to 20 airplanes requires another simulator in the market. We would certainly expect to defend our market share which is typically 70% range. So, that would tell you how many simulators I would expect in the market. So, I would certainly expect that we will get back into the 30s. It's hard for me to say exactly when that will occur. It will be dependent on when those airplanes are delivered. But I think you can look at the production rates of Boeing and Airbus because they are the large producers. And I think you can get a good read on that one.

Just one more follow-up question. If you look at the business jet market, it looks like, it's also, really moving to emerging markets. It also looks like the market's moving to the larger sized business jets and away from smaller jets just because of globalization. Do you think because of CAE's position, this is a good opportunity to take market share in the business jet training segment, because of your position?

I think, definitely, we are well positioned. If you look at our focus in adding business jet internationally, business jet simulators internationally, you think about the joint venture that we have with the Emirates, ECSB in Dubai. We have a number of business jet simulators there, and that's helped us a lot through this downturn. They tend to be the larger business jets. So, using just that example plus the simulators we've deployed in Europe. Certainly, I think we are well positioned to where the airplanes are going international.

Okay. Thank you.

Our next question comes from the line of Scott Rattee with Stonecap Securities. Proceed with your question.

Great, thank you very much. Just a question -- it sounded a little earlier, Marc. That when the question was put about adding more RSCUs into the network, that it sounded that you were committing to adding them on the commercial side. But I was curious, is there still some further growth in actually adding more business jets to the network? I know that has been the focus lately but is there still a larger opportunity there?

Yes, there is. If you look at just recently during the NBAA show. We announced that we added, that our joint venture training center with Emirates at Dubai, we added the Dassault Falcon 7X, Falcon 7X That is one example where -- we seek to have OEM agreements, partnerships with OEMs. That is a great way of growing. You saw recently, that we won on the Lear 85 with Bombardier, that is another example. I would certainly expect that we will add more business jets. Our focus is to be able to cover the majority of -- to have simulators available for the majority of business jets that come off the manufacturer's production line.

Okay. And to that extent, I was under the impression that a lot of the business jet training activity is somewhat more ad hoc. I guess -- I know that through this year, you have either renewed or announced a number of, sort of, training programs with operators. Can you discuss, give a little bit more color on how much further you think you can penetrate into that type market? And gaining those type of contracts?

When you say ad hoc, you mean more than what the regulations would dictate? Is that what you are driving at?

No, what I'm referring to is that, in some instances, for over a certain period of time, one year, two years, that you will be set in with a contract with a certain operator. But I was under the impression that was still more the exception than the rule, that a lot of the training is sort of done on an as needed basis and there is not as much up-front visibility into the revenues and stuff like that?

Okay. I see what you are saying. Typically, I think that it's more transactional, certainly. But having said that, if you look at, for example, again at NBAA. We announced the renewal of a five year exclusive training agreement with Flight Options, which is a big fractional ownership provider. So, it really, a lot of it depends. Typically, I think it's transactional because most fleets, most business aircrafts, if you like, flight, departments, don't have a lot of airplanes. So, it's the nature of the beast, to a certain extent. But you look at a Flight Options, it's basically an airline, the number of airplanes they've got. So, then they tend to be more deliberate. As exemplified by that contract, we've got a five year exclusive contract with them.

Along that, how much of the business is still on that transactional?

I don't know. We would have to get back to you, to be honest. I would think the majority but maybe we can get back to you, Andrew, with some details on that.

Sure.

That's great. Thank you very much. That's all my questions.

Our next question comes from the line of Cameron Doerksen with National Bank Financial. Please proceed with your question.

Good afternoon. It seems as though, CAE has cornered the market on building the first sim for new aircraft platform, at least that's been the case lately. I'm just wondering if you can describe what the competitive advantages for CAE being the first to build an A350 Sim or some of these other new aircraft platforms? Is it historically been the case, that that has positioned you to win the majority of simulator orders for that aircraft type down the road?

Not necessarily. To go to the later part of your question, not necessarily, but it certainly gives you a leg up. Because you have, obviously, been involved with the manufacturer up-front, the OEM up-front. So, you have the first simulator in the market. You have exposure to the first customers and you have been able to absorb a lot of your nonrecurring, to produce the first simulators on that contract. So, it allows you to be more competitive in the open market for subsequent wins. I think, I would certainly not say that we've cornered the market. I think we have been very happy that the level of orders that we have received, which lately it's the majority.

I think the competitive advantage of that I would tell you is that, and having certified airplanes in the past, I can tell you that it's very uppermost in your mind when you do that. These days you need a simulator to be able to certify the aircraft. It's a requirement. So, at CAE we have done simulators for prototype or first off airplanes for over 40 different types. First 777, the first A380, and on and on, the first A350, now the C Series. And our reputation is, we have never missed. We have developed the expertise and the skills to achieve a schedule. And in environments, where changes happen. It's never a smooth process, when you are developing such a highly complex piece of machinery as an aircraft. Us, we roll with the punches and we deliver our simulators on time. So, that the manufacturer can certify the airplane on time. And the simulator is not a headache for them. That's part of the attraction, with everything else that goes along with CAE. But I think on prototype programs, the technology and the skills and the project management to be able to deliver on time are strong differentiators.

That's great. Second question, just very quickly, on the margins in the military segment. I'm just wondering how we should expect those to track over the second half of the year given that you have some new programs that are ramping up? Does that suggest that perhaps there's going to be a bit of a drag on the margins because early in programs the margins tend to be a little bit lower?

I wouldn't characterize it that way. I have been talking about 15% kind of margins, is the number to look at longer term. If you noticed in my comment, I added plus. People have reminded me I have been saying that for many quarters, and that we've actually been doing better than that. I don't see the environment changing. There is nothing structurally changed in the marketplace with regards to what we believe we can win contracts at. We have great people that are executing these programs, and they continuously impress me by being able to execute those contracts at better margin, than we sold them. I see no reason why that should change. I'm basically adding the plus to the 15%. So, I'm not expecting anything much different structurally there. Obviously, I'll always caveat to effects, but we hedge our contracts when we get them. So, we have a measure of protection there.

All right. Thanks very much.

Our next question comes from David Newman from Cormark Securities. Please proceed with your question.

Just a couple of loose ends, guys. Any sense on the impact of the copilots having to obtain their ATP license? I know it's been in effect now and the FAA has to make a rule up, on the back of the legislation. But have you done any assessment what the impact of that might be?

Yes, we have been looking at those rules very closely. And, in fact, because of our position as one of the, if not the, lead training provider, we are being consulted on this. We have personnel that will be participating or are participating on the FAA's -- what they call the rule making committees. So, we have a very good insight of what may happen. You know what they've talked about, they have talked about limitations on the hours of flight time, increasing the copilots, as you say, from 250 minimum hours to 1500. So, to me, it's early days. But what I see there, is that for the requirements of safety, people are looking at increasing these regulations or changing these regulations. That will be good for safety. And I think it will be positive for our business. It's early days to be able to say how that will translate. I think one could expect maybe that more of the training could be done using simulators, in order to be able to get the 1500 hours, for example. So, we will see. But I think net to me anything that requires more training and if you have longer -- less duty time, for example, that would require more pilots. So, I think that's a net positive, as well.

A couple year implementation, right Marc? I think it's a couple years, two years to implement the rule?

I think we are talking about, if I recall, that the effective date will be between August 2012 and August 2013.

Okay. And the second thing is, on your CA 3000, I see you placed your first one. What does the pipeline look like there? Is there any chance you could do things like, fleet training for offshore oil and gas in the UK, or anything of that nature?

Certainly. I think that is one area, offshore oil exploration. They have the operators that do that. That is an area that we certainly look at, because although helicopter training is not regulated, ie, they don't have to do training in simulators. In the offshore exploration market, typically I think it's everybody, the oil companies and other operators, insist that if their personnel are going to be flying out to oil rigs on those helicopters, the crews have to be trained using simulators. So certainly, that is market that we look at. We certainly see growth there the next five years, definitely. I've looked at it recently.

The pipeline in general, does it look pretty good at this juncture or is it still too early in the process?

I think the pipeline is good just because of the growth, notwithstanding what happened in the Gulf. There is still a very strong growth in offshore oil operations and that dictates the need for more helicopters. If you look at the companies that operate in that space, you consider a Briscoe helicopter, you consider a CHC. They are all doing pretty well. As they add more helicopters to be able to meet that growth, I think because they have to train in simulators, that creates opportunities for us. It'll be a market like business aircrafts, it's a similar dynamic.

Last one for me, I promise. On the F35, any sense of how that is going? Do you think they will outsource some of the training to you guys or what is that looking like, at least for Canada? I think it's early days. They have to sign the contract. That will take some time. Then the Defense Department has to decide how they want to train, where they will want to train. So, we are talking a few years out now. Certainly I would expect, on the assumption that the training and recurrent training would be done in Canada, that we would have a good position there. But no guarantees there. Excellent. Thanks, Marc, I appreciate it.

Operator, we do require some time for questions from members of the media. So, I would ask that we please close the Q&A session with investors and institutional analysts and I would be happy to take any follow on calls personally. Could you please open the lines to members of the media?

Certainly. We will now proceed with the media portion of the question-and-answer session. (Operator Instructions) Our first media question comes from the line of Ross Marowits from Canadian Press. Please proceed with your question.

First, I'm wondering, in terms of layoffs, what is the number of people you have on layoff and how do you expect that to change given the market recovery?

We don't have anybody -- when you say have on layoff, we are not laying off people now. Actually, we are hiring people

No, but you had people that were on layoff, weren't they?

Yes but I think the mix has changed, Ross. When we first announced the layoffs, we were about 7,500 people in the Company. We are back to actually -- we are back to that number, Company wide. Now, it's not necessarily the same people. For example, here in Montreal, the manufacturing side we've had to do layoffs. What I'm happy is that we were able to do less than we initially anticipated. But having said that, we haven't recovered yet the level of manufacturing activity to be able to bring, certainly, all of the people back that we laid off in manufacturing. But that has been counter balanced by other sectors, including some acquisitions that we made.

Do you foresee when you will be able to bring those manufacturing people back?

It all depends on sales. We have to sell. It's always the same case. It'll depend on how many sales we can make.

The other thing is, in terms of defense, you talked about Britain, but what are your expectations from the US and Canada as to budget cuts? And whether that will affect you?

I tend to look at it, when they come out. We have a pretty good visibility of what the US is going to do based on the budget that they announced not that long ago. If you looked at where the cuts were coming from, they weren't on platforms where CAE is exposed. Most, in fact, the contrary. Most of the platforms that we are strong on, for example C-130J aircraft, transport aircraft, we have a very good position as the exclusive provider to Lockheed. We've done very well on that. They've added more helicopter squadrons. So, that has been good, as well. In Canada, we have done well with Canada First Defense Strategy, with having gotten the training on the CH47 Chinook helicopters and the C-130J aircraft. So, it depends. We look at it when they announce it, but as I said before, if I look, say, 18 months out, I'm pretty confident that we can continue to grow based on the visibility that I have on the backlog, on the sales that we expect to make. And also ,other adjacencies that we are in, such as professional services which continues to grow.

Do you expect any difference in policy as a result of a change in congress?

We will see. It's too early for me to say. We will have to wait and see what they come out with.

Okay. Thanks.

(Operator Instructions)

Operator, if there are no other questions from members of the media, I would take this opportunity to thank all the participants for joining us on the call. And to remind you that a transcript of today's discussion can be found on our web site at www.CAE.com. Thank you.

Ladies and gentlemen, that concludes the conference call for today. Thank you for your participation. Please disconnect your lines. Have a great rest of the day.