CAE Inc (CAE) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the CAE third-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.

Good afternoon, everyone, and thank you for joining us today.

Before we begin, I need to read the following. Certain statements made during this conference, including but not limited to, statements that are not historical facts, are forward-looking and are subject to important risks, uncertainties and assumptions. The results or events predicted in the 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 annual information forms for the year ended March 31, 2010. These documents have been filed with the Canadian Securities Commission and are available on our website, www.CAE.com, and on www.SEDAR.com. They have also been filed with the US Securities & Exchange Commission under Form 40-F and are available on EDGAR. Forward-looking statements in this conference represent our expectations as of today, February 9, 2011, 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 the Chief Executive Officer; and Alain Raquepas, our Chief Financial Officer. We changed, slightly, the format of this afternoon's call. First, we'll hear comments from Marc regarding the quarter and our outlook, and then we'll hear additional comments about our financial performance from Alain. Marc will then provide a wrap-up of the formal portion of the call. Afterwards, we'll 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 call will be archived on CAE's website.

Let me now turn the call over to Marc.

Thank you, Andrew, and good afternoon to everyone joining us on the call.

We continued to execute well in the third quarter, with revenue up 7% over last year at $411 million, and net earnings of $41 million or $0.16 per share. In our combined Civil segments, revenue increased 9% over last year, reaching $191 million. The strength of the commercial aviation recovery was evident in our Training and Services segment, which saw a double-digit increase in the quarter, and higher utilization of 71%. Our operating margin in Training and Services, excluding new core markets, was 17.7%, and in Civil Products, it was 11%, for a combined Civil margin of 15.2%.

We also had a strong quarter in terms of order intake, with $311 million in combined Civil orders, including $223 million for Training and Services, which involved a range of new and renewed long-term training agreements with airlines in the emerging markets. For example, we strengthened our position in South America with new long-term training agreements with TAM Airlines and LAN Airlines. Total Civil orders in the quarter represented a book-to-sales ratio of 1.63 times, which gives us more visibility into the growth of these segments.

Also during the quarter, we made additional progress with our helicopter training initiative, with the announcement that we have agreed to acquire CHC Helicopter's flight training operations. With this agreement, we also became CHC's long-term partner, and trained its more than 2,000 helicopter pilots and maintenance engineers. The dynamics of this market are similar to fixed-wing, in terms of the desire for greater safety and efficiency, which is something simulation-based training solutions can help to achieve. The high number of forecasted helicopter deliveries, and expected new pilot demand in the years ahead, will also serve as a positive driver. Unlike fixed-wing aviation, however, the helicopter sector is largely unregulated. It will take some time for the market to develop, but we're encouraged about the long-term potential in this segment.

In Civil Products, we announced another eight full-flight simulator sales, involving customers in the Middle East, China and Australia. We've announced 22 sales so far this year, more than 60% of which have been for customers in the emerging markets, and we continue to expect unit sales in the mid-20s by March 31st. Signs for commercial aviation continue to be positive, with emerging markets still leading the recovery, which plays to CAE's well-established global footprint. Passenger traffic, airline capacity, and load factors are all trending positively, and together with OEM production rate increases, this bodes well for future demand for our products and services.

In business aviation, we're encouraged by the modestly-high levels of aircraft utilization, and the lower portion of used aircraft available for sale. Take off and landing cycles are up 13% year-to-date, but this is still 19% off the 2007 peak, so there's still considerable ground to make up. Continued corporate profit growth will be key to reviving and sustaining the Business Jet segment recovery, and we're in good position, both in North America and globally, to meet the renewed demand for training.

Revenue for our combined Military segments increased 6% over last year to $221 million. Simulation Products revenue rose 9% at $154 million, while revenue remained stable in Training and Services at $67 million. Combined Military operating income was $39 million, and the operating margin was 17.6%. We booked $204 million in orders in Military, including a range of aircraft platforms strategic to CAE.

We won a contract to provide the US Navy with two MH-60R Seahawk flight trainers, and an option for two more. Together with the MH-60S, we will have designed and built a total of 15 simulators for the Navy in a program with good future prospects for CAE. We received an order from Lockheed Martin for a suite of C130J Hercules training devices, as part of our long-term preferred-supplier agreement with the OEM. We also won a contract from Boeing to supply two trainers for the Aermacchi M-346 jet trainer for an international customer. These contracts demonstrate CAE's important position on key platforms, and the kinds of relationships we have with major OEMs to enable our mutual program success.

Also during the quarter, we announced that CAE USA was awarded prime contractor status on a major air crew training assistance contract, to provide KC-135 training for the US Air Force. This ten-year $250 million award represents an important milestone for CAE on two fronts. It marks the first time CAE will prime a major air crew training systems contract in the US, which broadens our position in the US defense market generally, and it positions us well to address the growing demand by defense forces globally to outsource training and maintenance services to private industry. Our strategy involves increasing the portion of CAE's revenue that comes from recurring sources, and this contract contributes nicely to that objective.

Our military book-to-sales ratio was 0.92 times for the quarter and 1.35 times for the last twelve months. US government budget approval delays are causing some of the programs we've already been selected on to move right, so some of the revenue we thought we'd get in the second half of this fiscal year will now likely be realized next year. Having said this, we should close out the year with high single-digit percentage revenue growth and continued good margins since we're still expecting a much stronger fourth quarter. Of course, the foreign exchange headwind hasn't helped, and forecasting has become a bit more challenging, but our fundamental view of the market remains unchanged, and our position within it remains strong. Based on what we have in backlog, and what we're projecting to win near-term, we still expect double-digit percentage growth in fiscal 2012. A lot has to do with the timing of the budget resolution, and we should be in a better position to refine our outlook by the time we report our year-end results.

In new core markets, we're pleased with our progress to establish a presence in the healthcare and mining sectors. Year-to-date, we've generated $27 million of revenue from selling products and services which are profitable at the gross margin level. It's still early days, and we're still investing for a larger business in the years ahead. Sales volume is not yet at a level where we can cover our SG&A and R&D expenses, so we saw a $1.3 million drag on Civil Training and Services income in the quarter. That's the business segment where we currently report these initiatives.

In terms of business development, we made additional progress in our CAE Mining business with the acquisition on January 1 of Century Systems Technologies, which complements our offering. And in CAE Healthcare, we sold more of our imaging solutions, as well as our surgical simulators, to customers around the world. Following the end of the quarter, we launched our CAE Caesar trauma patient simulator. This is a high-fidelity patient simulator for training civil and military practitioners, who are responsible for the care of trauma patients in the field.

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

Thank you, Marc, and good afternoon, everyone.

Revenue was $411 million in the quarter, compared to $383 million last year. Net earnings were $41 million, compared to $38 million last year, which included an after-tax restructuring charge of $2.6 million. We generated $65 million of EBIT for a margin of 15.8%.

The strong Canadian Dollar continued to be a challenge in the quarter. For the first nine months of fiscal 2011, the effect of translating the results of our foreign subsidiaries into Canadian dollars, resulted in a decrease in revenue of $70 million, and a decrease in net earnings of $10 million year-over-year. On an FX-neutral basis, the year-to-date revenue for our combined Civil segment would have been up about 9%, and our combined Military segment would have been up about 10%. Cash from continuing operating activities in the quarter was $56 million and free cash flow was $5 million. Non-cash working capital increased by $23.8 million in the quarter.

Our cash position has been affected by a number of factors, which required more investment in our non-cash working capital accounts. For most is the high number of contracts that we have won that are based on new developmental aircraft program for the Civil and the Military markets. In Civil, we are under contract to develop simulators for new aircraft types, including the Airbus 350, the Boeing 787, the Boeing 747-100, the C Series, the MRJ, and the AVR 600.

On the Military side, we are developing solutions for new aircraft programs like the Boeing PA, the Aermacchi M-346, the Airbus 400M, and the Canadian Maritime Helicopter Project. The overriding positive is that we have been entrusted by the aircraft manufacturer, and our costs emerged to develop a simulator for this broad range of new aircraft. CAE has an excellent longstanding reputation for developing simulators for new aircraft types, which is more demanding and complex than simulating something that already flies. Consequently, these programs require more up-front investment on CAE's part in order to, first, be in a position to pursue these growth platforms, and second, to be able to meet and maintain program schedules essential to the delivery with our OEM partner. So far this year, we have invested $136 million in non-cash working capital.

The growth of our Military business, and the nature of our program mix account for 70% of that amount, and the lower volume in our Civil Simulation Product segment explain the remainder. One-third of the cash invested in Military went to carry additional accounts receivable. Another third went to support contracts in progress, or WIP, on projects such as the PA, the MH-60, and the Airbus A330 Multi-Role Tanker Transport. The remaining third arises from lower deposits on contracts.

Adding to this situation are the more recent delays in the US government budget approval, which is really more a matter of timing, but because we have not been able to invoice the customer, this also results in more cash being invested in work in progress. The cash invested in the Simulation Product Civil Segment is explained by lower accounts payable, and lower deposits on contract, resulting from the cycle contraction. As the cycle expands and volume increases, we should see these trends begin to reverse.

Finally, notwithstanding the extra investment we have had to make this year, we do expect a portion of the working capital to reverse toward the end of this fiscal year. Our effective tax rate was 28% this quarter and year-to-date, which compares to 29% for the first nine months of last year. The difference is explained by the lower portion of revenue that we generated in the US, our highest tax jurisdiction. As our US business recovers, the portion of our taxable income coming from the US will be relatively greater, pushing the average tax rate up.

Finally, capital expenditures were $24 million during the quarter with $15 million for growth and the balance for maintenance. We will provide an update on our CapEx plan for fiscal 2012 following the end of the current year.

On that, Marc, back to you.

Thanks, Alain.

The fundamentals for commercial aviation continue to be positive, and we expect this to drive improved performance in our Civil business, where we lead our markets and are well positioned in key growth regions. We anticipate that volume and revenue will continue a gradual recovery in Training and Services, and in Products, we're encouraged by the activity levels we're seeing. Business aviation normally takes longer to recover from a down cycle, and this time is no different. We're more optimistic, given the steady, albeit modest, progress this sector has made, and we're confident that it's only a matter of time before it fully recovers. Our view has been corroborated by the majority of business aircraft OEMs, which have announced new aircraft development programs, and committed billions of dollars of investments, which speaks to their confidence in the future.

In defense, we'll deliver good growth and margins this year, notwithstanding some program delays and the foreign exchange headwind. And we still see good growth of potential beyond. Here too, we're well positioned globally, and we look to build on successes like our recent KC-135 win to grow our sources of recurring revenue. Our domestic defense market has not historically been very large, and so CAE is, by its very definition, a global defense company. We have a well-established presence in key growth markets, where defense budgets have increased, and we're currently addressing new opportunities.

As for Europe and the United States, we've announced a number of important wins recently, and we're continuing to monitor the ongoing defense reviews as they develop. Thus far, we've seen that the kinds of defense platforms we're involved in; helicopters, transport aircraft, fuel tankers, and jet trainers, are all highly germane to current defense requirements. And longer-term, we remain confident simulation-based training will be an integral part of the solution to the challenges facing the defense establishment.

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

Operator, we'll now be pleased to take questions, first from analysts and institutional investors.

Thank you. (Operator Instructions). Our first question comes from the line of David Newman with Cormark Securities. Please go ahead.

Good morning, or I guess, good afternoon. Just a housekeeping issue to start off with. Your expectations on your guidance, is it excluding FX? So, what you expect is excluding the translation impact?

No. We don't -- we explained the effect of the FX. So, we can get good clarity on how we're executing, if you like, in the business, without considering FX. But when I talk about going forward, I take FX into account of probably at the spot rates we're at.

Very good. So, the actual organic growth could be higher than what you're guiding to?

If the FX starts to play against or continue to play against us in the future.

Right. Okay. Second of all, I know you had a tough comp on FX in the civil side but how do you anticipate you will burn through the, I guess, the lower price, lower margin backlog on the simulation side. And is pricing looking better Marc, at this juncture or how is that faring?

I don't see anything that changes the outlook I gave last time which was in products that, the kind of margins that we see today around the 11% there. I don't see a lot of movement up or down beyond that number for at least next two quarters, I would tell you. And a lot has to do with you look at how much product is going through the plant. It hasn't increased since last couple of quarters in terms of us exceeding the backlog. Volume would help, as we see, we're signing more orders. It will -- that will help. Some of those contracts, as explained in the past, a lot of them have to do with development programs or programs that don't deliver until not next year but sometimes the year after that. So, it won't probably contribute in the short-term, and with regards to pricing, there may be a slight better but nothing very significant, but it hasn't gone down.

Okay. Obviously, as things tighten up here, and obviously, Civil is doing very, very well around the world. Commercial is obviously doing quite well, and Business Aviation picking up. Do you anticipate obviously the pricing going back to previous levels and certainly margins to previous levels, as well, especially as you get the volume throughput? Is there anything changed, I guess on a secular basis, in that front?

What I would tell you is we've changed. The market never stays stable, as you know. Competition comes and goes. There is a lot of competition in products. There was in the past as well. I really believe that, as we said before, we're really taking advantage of the full breadth of capabilities at CAE, both in Products and in Services, to be able to get solutions to customers that allow us to differentiate ourselves. So, how that really translates is -- really, I would encourage you to look at our combined Civil results. Because increasingly, that's what we're trying to do, is bundle our services.

Yes.

What that means is, it is along the lines that I said that I think a couple times before is, if you look at combined Civil margins, what we have been saying is that we should be moving over the next few quarters above the outlook I gave before. Which was combined Civil margins at 15 as the volumes picks up, particularly in training. And longer-term, when we're back at the peak I really don't see any reason, today, that anything has changed. That we could not generate the kind of returns, say 20% EBITs in our combined Civil business when we're back at the peak.

Very good. I guess last one for me. Utilization obviously at 71%, very encouraging, things are looking a lot better in that front. I mean, how do you think that will time out? It is kind of a similar question, but I think you previously sort of hit a high-water mark if I am not mistaken, sort of in the low 80s, which seems to be optimal level of utilization. How do you think that plays out? That will come before obviously near term, I think pilots obviously around the world have to get trained up.

Yes. I don't know if it happens that near term because what you're seeing today, of course, you have to look at the 71% as combined with what's happening both in the Civil -- and the Civil Commercial fleet and the business aircraft fleet, because we have both. What I tell you, the average is much more skewed. That 71% utilization is much more skewed to Commercial Aviation and our Business Aircraft centers that hasn't been much of a big pickup yet.

Right, makes sense.

And so, really, I think you get back to the peaks when both Business Aviation and Commercial Aviation are in lock step, which I think we're probably into 2012 before the business aircraft really comes in.

Calendar 2012?

Calendar 2012, yes, I think that's most people think that Business Aircraft really starts to recover and Business Jet OEMs start thinking about ramping up their production rate.

Perfect. Thanks, gentlemen.

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

Good afternoon.

Good afternoon.

I guess a question on the new core markets. You gave the year-to-date revenue and you also gave I guess the operating loss that was recorded in Q3. Do you have the revenue that was recorded in the third quarter?

Yes. If you give me two seconds, Cameron, I will give that to you. 2011? CAD11 million.

Sorry, what was that again?

CAD11 million.

CAD11 million. Okay. And I guess you sort of discussed it a little bit, but it seems, maybe I read this wrong, but seems like maybe the operating loss in the third quarter was maybe a little higher than what it was in previous quarters. I mean, at what point do you get a little bit concerned about the drag this is having on the margins in the Civil Training segment?

I think it's -- obviously, what we are aiming for is a profitable business, clearly. We're also aiming for a larger business than we have today. We certainly believe that we can get this, at some point that becomes material to CAE. That's our goal obviously, and we think that the markets will expand for us to be able to do that. What's happening today is that although the products that we're selling, whether they be surgical simulators, whether they be services, operating training centers, the products and services themselves are profitable. But what's happening is, because we're targeting a larger business, the amount of money we're putting in SG&A, sales and marketing, for example, and in R&D is, obviously, not being made up by the amount of revenue. So, it is a bit too early for me to say. I can tell you it is not years away, but it is a bit early for me to tell you when that breaks even or goes positive.

Fair enough. I guess just the second question, you talked a bit about the funding delays in the US military programs. Was there anything specific there that got delayed, or is it just sort of generally across the board with the US military programs?

Well, what's happening is, as you probably have seen it, is that the fiscal 2011 military -- well, actually the US Government budget hasn't been approved. So, there is still spending -- I guess the authorization is to spend the fiscal year 2010 levels. So, it is a variety of things. I will give you an example. We were selected for the MH 60-R helicopter programs. It is a four simulator program really, and the contract is for four. Now, because of funding, they have turned down two. We have been selected on the additional two but they don't have the funding to be able to operationalize those.

Those are the examples you see. I don't have any concerns that the programs go away, i.e., with the site down, the military needs those programs. But what you see is that because of this lack of budget approval, things -- for what I have seen so far, it is like they're all the revenue kinds moves to the right. And almost by an incremental revenue moves by about a quarter to the right. Everything moves that way. That's what we're seeing right now. The next opportunity I think is March 7th for a vote on this subject, and so, we're cautiously, I guess, waiting for what happens on that date.

Got it. All right. That's all I had. Thanks very much.

Thank you.

Our next question comes from the line of Ben Cherniavsky with Raymond James. Please go ahead.

Hi, guys.

Hi.

It is usually my last name that they slaughter. I had a question, just lifting quotes from your press release, where you say based on our backlog and the programs we project winning near-term. Can you elaborate on some of the programs that you are bidding on and what you expect to win? And whether or not these are of the size that we have seen recently or there any big programs out there that could come your way?

I wouldn't like to comment too much on specifics because of, obviously, competitive reasons. I don't think you will see much change in the type. We're not banking on, if you like, big contracts to make or break our year. I think the kind of programs that we won recently are probably the same thing you would expect going forward. Same types of platforms, same -- as I think has been our strategy for quite a few years, quite happy when we get a CAD250 million contract. But we're not banking on it to make our year.

No. But are there any CAD250 million contracts you're bidding on at present?

Well, I think that if you look at some of the air crew train service contracts out in the US, you saw the win that we had on the KC-135, so there is a number of programs still up for bid. I think the C17 has been decided, that we'll see about that one. But there is other programs coming up. For example, the C5. So, those are the programs we would go after, but they're part of what I would consider. The way we manage things, like you would expect, is we have say an A list of programs we go after. We don't win them, we have a B and C list which we go after as well, with various degrees of probability, and that's what really makes the outlook that I give to you.

Okay. And just a second question to follow up on all of the discussion about the impact of the program delays. Would that have, had they not been delayed, had you seen that business coming your way, would it have come in the form in backlog or revenue? I am just trying to understand your book-to-bill ratio being less than one. If these program delays had translated into revenue immediately, as opposed to backlog for the future business, then that ratio would have been even lower. And so, what was the nature of the kind of business that's been deferred?

It would have been both, by the way. It would have been extra order intake and extra revenue.

Would the ratio have been higher than one, then, net-net?

I didn't actually calculate it, to be honest. I think we tend to -- I mean, we tend to look at it not on a quarterly basis because this business is so variable, you get one big contract that kind of skews things. And I think if you look back three quarters or the full year, you see we're at 1.35 book-to-bill. Even if you take into account that maybe lowers a little bit down, you're still have a good backlog brewing there. And also, if you think about programs like KC-135 even though we won that program and it is a CAD250 million program. We have only included CAD20 million of that program which represents this year's funding in the backlog. Even though the likelihood of that not going forward at the full value is very remote, but we maintain things that way.

So, nothing really to read into on the book-to-bill you're still confident that the growth outlook is as you say plus 10% or so?

No. I don't read much into it. Like I said, I really believe that our fundamental story hasn't changed. What I see is that, I see things move to the right. The incremental revenue we're expected by about a quarter. So, having said that, I expected a stronger third quarter and a strong finish in the fourth, which was my previous outlook. And visibility is pretty good because of where we are in the year, considering what date it is. We're pretty confident that we will see a strong finish in the fourth quarter, both on the revenue and bottom line, which gives me good visibility that in my growth year-over-year and in the kind of high teens.

Where the third quarter was light, then you would -- [multiple speakers]. I am sorry?

I am sorry, I said high teens. I have been slapped across the head. High single digits. Sorry.

Just final clarification and I will let it go, but then where the third quarter was a little lighter than you initially expected, now. You would see the fourth quarter being better than you initially expected. Net-net for the year it is a wash, but the fourth quarter gets lumpy on the upside.

It is really moving to the -- it is really everything moving to the right is what I am saying.

But are things in the fourth quarter now moving into the first of next year, I am trying to get an appreciation for the timing. Is everything moved to the right?

I think everything is moving to the right. A lot will depend on when -- the magnitude of everything will likely, really depend on when they turn on this budget for fiscal 2011. So, that's why I say that we'll be a lot smarter about this by the time we talk to you again at the end of the fourth quarter.

Understand. Okay, thanks a lot.

Our next question comes from the line of Benoit Poirier with Desjardins Securities. Please go ahead.

Thank you very much. So, my first question is on the defense side. When we look at the defense costs, I understand that there is a delay right now. But I am wondering if you see any positive impact on the simulation? And if your investment fees about the simulation, the savings is still valid?

Yes, I think, our investments fees remains the same with regards to that. The question is how much time. What's the timing on that, I mean some programs get cut. We haven't seen much effect on our business yet of that, and then we see governments asking us for solutions to reduce costs using modeling and simulation. So, if we do get -- if we do see cuts, does that get offset?

My basically thesis is yes, based on everything that I see. What we have seen that is for sure is that activity levels in our military training centers have increased. So, there is definite increase in the use of simulation-based training rather than live aircraft. That is definite.

When we look at the overall military bookings, still pretty solid, the year-to-date compared to the revenues. How confident are you about the double-digit revenue growth next year? And with respect to the bookings, are you confident to maintain a book-to-bill above one on the military for next year?

Book-to-bill for next year is a bit early for me to say, right now. I am much more confident with regards to the double-digit growth next year revenue. Because as you can expect, where we stand, right now, at this state with the revenue that we have won. We have probably have anywhere, approximately 60% of next year's revenue already in backlog. So, we have got to win 40%. Some of it has to happen in this fourth quarter. You've seen -- and that's why I say some of this is affected by this continuous budget resolution. But the business hasn't changed. As I look at the programs that we count on, to be able to win, to be able to get next year's revenue. We have pretty good visibility on our win probability on those programs. And whether those programs will be affected by any cuts, which we don't believe will be the case. If I look at all of that, plus of course I don't factor to win 100%. I always factor things in, that's where I come from that I still am confident about the 10% to 12% next year, even when I look at the exchange rates where they are today.

Okay. And maybe one last question, if I may. Obviously, the Civil market environment is improving. But when you're discussing with the airlines, are they cautious going forward, given the traffic recovery and also the fuel improving? Do you feel that they are looking to defer spending eventually?

I don't see that yet. It is not to say it won't happen. Our activity levels in simulator sales, you have seen the pickup in terms of our wins. Activity levels are good, and the profitability of the airlines is increased. And that's always a good sign. And so, no negative on the horizon so far, I would tell you.

Okay. Thanks for the time.

You're welcome.

(Operator Instructions) Our next question is from the line of David Tyerman with Canaccord Genuity. Please go ahead.

Good afternoon. First question, Marc, you commented that you expect the combined Civil margins to be moving up from the mid-teens level in the next several quarters. I am wondering what you see that will be driving that?

A few things. Business aircraft starting to come back. We haven't -- if you look at the utilization of our business aircraft centers, we haven't seen much of a pickup, nothing material. When it starts to pick up, business aircraft tends to have more revenue, and DOI per simulator. So, that has a pretty strong effect. Also, the fact that we're still quite a bit not full in our commercial simulator centers. So, as they grow, obviously, a lot of it at some point becomes a fixed cost business. So, the more revenue put across it, the more it drops to the bottom line. So, I think that those are the two factors that will drive it. Business aircraft coming back and passenger or airline capacity driving increased usage in our commercial aircraft centers. Other factors --

All on the TSC side it sounds like, then?

Sorry. I was commenting more on TSE, obviously. We're winning more orders in products. So, that will drive an increase in absolute dollars. But to your point, I think for the next few quarters I am still not confident that we can really say much material movement around the 11% in products.

Okay.

The increase on the 15 that I see is more driven by Training and Service.

And just related to that, will the new core markets likely continue to be, I don't know, CAD1 million or CAD2 million drag a quarter type of thing?

I hope not. That's not what we want, but as I said before, it will be a question of how much revenue. Because as I was explaining, the profits, the programs that we sell, the products and services are profitable. So, it is a question of having enough of them to overcome the SG&A and investment that we're making in R&D. We're investing for the future. So, I can't tell you when, but what I am telling you is it is not going to be years before that turns profitable.

Okay. That's helpful. Just on the military, if the budget impasse in the US continues for a very long time, which is possible, it seems, would this put at risk your double-digit forecast? And do you have any idea what it would be?

I don't know now. I mean, clearly if it doesn't get approval on March 7th and in the orders that we are selected on that we expect to be on contract, if that moves too far out -- we have some buffer, but if it moves too far out to into the first quarter. Clearly that starts affecting our ability to get double-digit next year. It is too early for me to say. We're kind of banking on this happening on March 7th, but having said that, we do have some buffer. We do have work around plans to generate revenue that is not germane necessarily to that budget resolution. So, it will depend on the timing. That's why I said that we really have to come back to you when we report in the fourth quarter because that's when we'll know the impact. We're not anticipating it. Because as you can well imagine, CAE is probably a very, very small player in terms of the impact of not approving the US budget.

Fair enough. That's helpful. Thank you.

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

Good afternoon. Thank you. On the Civil Training side, are you beginning to see any pickup in initial certification type work yet? Or are you not yet seeing a lot of pilot movement take place?

We are seeing it. We saw more last quarter, Hamzah. These things tend to work in cycles -- I mean, in seasonally. So, therefore, it is a bit lumpy. So, I wouldn't say it is we have seen a sea change yet, but there is more than they were. If we look at it last year, it was almost exclusively recurring training. Now we're starting to see some more initial. And it is fair to expect that we're going to have more going forward which is why -- basically saying that we should see the margins in training services start to trend upwards.

Okay. On the military side, if you can just comment on how the European business is doing relative to your other market. And you spoke of activity levels going up in your military centers, are you seeing increasing use of simulation-based training in the US? And is that beginning to catch up to Europe? Are you seeing early signs of that yet?

We've seen increased levels of training in the military training centers across the globe, MSH was our center in training the Royal Air Force. And England, has definitely seen a pickup. And some of the training we do in the US, we have seen training come up as well. In terms of catching up, I couldn't comment. I don't know.

Just the last clarification question. You spoke of later delivery dates for some of your simulators. Is it fair to say that, it is going to take more than 16 months for orders to cycle through backlog? Your average, I think is 14. So, I am just wondering how to think about those later delivery dates?

I don't think we have made a weighted average. I think we tend to -- can you comment on that, Andrew?

There is a number of them that are new aircraft programs and new aircraft development programs. Hamzah, could be anywhere ranging from 18 to 24 months. Whereas a the high volume still could be twelve months or less. So, it is really skewed at both ends.

We usually try by the way. If we announce a simulator for a prototype program, like the 747-8, for example. We'll usually -- that you can assume the longer delivery time, and if we deliver a simulator that is like a repeat for an aircraft that's already built, usually you will expect a shorter -- around that 14 month timeframe. Unless we specifically say in the press release, and we usually do, when it is going to be delivered. And then you can see, if we say it is going to be delivered in two years. Then it is because we know that the customer that's the timeframe, that's when we're going to deliver it.

Okay. Great. Very helpful. Thank you.

(Operator Instructions).Our next question is from Marco Pencak with GMP Securities. Please go ahead.

Thank you. Good afternoon. Alain, two questions for you. The first one is, you recorded -- or you undertook a sale and lease back transaction at your [Amridge] JV. Was there a gain on sale on those two sims and if so, how much?

It is only on the half of the value, on the portion we're not selling to ourselves. That's the way it works when we sell simulator to a JV in which we own 50%. The specific amount of profit, Marco, I do not have with me, but I can confirm to you that there is only half of the value that is going through the P&L when we're selling simulator to JV that we own at 50%.

Okay. If you could send that to me.

We'll do the follow-up for you.

Okay. Thank you. Secondly, next fiscal year, when you transition to IFR's accounting, will your -- will you be recording revenues on your Civil simulators on percentage of completion, or upon delivery?

Under the actual guidance, Marco, we're very confident that we're going to be able to continue to record revenue on the POC business. There is some concept there about customization, what they call also continuous transfer. So, every time I am building a simulator as you know, it is still specific. It is for a specific customer, and the customer is taking almost ownership as I am building it. So, under this guidance, and the new rule under IFRS, we're still confident that this will stay. Obviously, for the military sims, for the 7000 series, and almost all of what we do.

Okay. That's great. Thank you very much.

Operator, we'll need to now take some time for members of the media to have an opportunity to ask questions of management. So, we'll formally close the Investor portion of the call and then open the lines to members of the media.

Thank you very much. (Operator Instructions).

If there are no calls from members of the media, we can conclude the call.

Thank you very much, Mr. Arnovitz. We have no questions from the press and media. You may proceed with your closing remarks.

I would like to thank everyone for participating in this afternoon's call and remind you that a transcript of the call can be found on CAE's website at CAE.com.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.