CAE Inc (CAE) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the CAE fourth 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 these forward-looking statements may differ materially from actual results or events. 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, CAE.com and on SEDAR. They've 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, May 19, 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 Chief Executive Officer, and Alain Raquepas, our Chief Financial Officer. During the first portion of the call, Marc and Alain will discuss our fourth quarter and full year performance, and Marc will conclude with comments about our outlook. We will then have a question and answer period for financial analysts and institutional investors. Followed by a session for members of the media. The second part of this afternoon's call will be a presentation on IFRS, to highlight some of the changes you should expect when we commence reporting under that standard in first quarter. The IFRS presentation will take place immediately following the first portion of the call, so we encourage those of you who wish to participate to stay on the line. We have prepared a brief PowerPoint deck to accompany our presentation on IFRS which can be downloaded from the investor section of our website at CAE.com/investors.

Let me now turn the call over to Marc.

Thank you, Andrew, and good afternoon to everyone joining us on the call. We had a good performance in the fourth quarter and the year as a whole. Revenue for the quarter was up 17%, at CAD464 million, and for the year it was up 7% to CAD1.6 billion. Net earnings were CAD50 million for the quarter and reached CAD170 million for the year. We also did well from an order intake standpoint, with CAD476 million booked in the quarter. And we ended the year with a record CAD3.4 billion backlog.

In our combined Civil segments, fourth quarter revenue increased 17% reaching CAD208 million. And was up 6% for the full year at CAD764 million. In Training and Services, we saw more recovery in commercial aviation training and some further improvements in business jet training, led mainly by the large cabin segment. We reached 74% utilization in the quarter and 70% for the year as a whole, compared to 64% for fiscal 2010. Our operating margin in Training and Services, excluding new core markets, was 19.2% for the year, and in products it was 11.1%. This gave us a combined Civil margin of 16.2%, in line with our outlook. We received CAD226 million in Civil orders during the quarter, for a book to sales multiple of 1.09 times. And for the year as a whole, we reached CAD916 million, and a book to sales multiple of 1.2 times. We booked 7 more full flight simulator sales in the quarter, nearly all from customers in the high growth emerging markets. This brought our total orders of full flight simulators for the year to 29. And also maintained our market share above 70%.

In Training and Services, we added CAD168 million to backlog in the quarter. Including a long-term agreement with Virgin America, involving a new training center in San Francisco. We also made solid progress with the CAE Global Academy, with new agreements to provide 150 pilots to some of our Asian and European customers. The CAE Global Academy, which we initiated only 5 years ago, is already the largest organization of its kind, supplying new commercial pilots to industry.

In Military, we had a big pick-up in the fourth quarter, with revenue increasing 18% to CAD256 million. As we pointed out in the past, our defense business is lumpy from one quarter to another, and performance is more representative on an annual basis. We realized the year was going to be back end loaded and that's exactly how it progressed. Annual revenue was up 7% at CAD865 million. And combined Military operating income was CAD148 million for the year with an operating margin at 17.1%. We received CAD250 million in Military orders during the quarter, for a book to sales multiple of 0.98 times. In products we booked a major upgrade order for a US Navy Seahawk helicopter trainer. Also from the US Navy, we won a US foreign military sales contract for a suite of P3C trainers for Taiwan.

We also continued to grow long-term Military service during the quarter, with simulator support contracts in Canada, the UK, and in Malaysia. In the United States, we won a contract with the Army to continue database development services. Market activity continues to be robust on long-legged platforms like the C130J with services contracts awarded to us by Lockheed Martin in support of the US Air Force, Italian Air Force, and UK Royal Air Force. For the year as a whole, we reached CAD939 million in Military orders, and a book to sales multiple of 1.09 times. And we ended up with a Military backlog of CAD2.15 billion.

Because of our success this year winning large recurring training revenue programs like the US Air Force KC135 air crew training systems contract, we started to report publicly our unfunded Military backlog which stood at CAD461 million at year end. Since the amount has become increasingly more significant, we felt it would be useful to provide this additional visibility to investors. The unfunded Military backlog is on top of the CAD2.15 billion we booked in our funded Military backlog.

In new core markets, we're pleased with our growth and the progress we made so far to establish CAE and its global brands in the healthcare and mining sectors. We're still in the investment phase of these startup businesses and we're laying the foundation for a much larger business in the years ahead. Through a combination of acquisitions and organic R&D projects, we're gaining subject matter expertise, expanding our portfolio of products and services and extending our market reach. In CAE Mining, we continued to grow our software sales in the quarter, with major mining companies in Latin America and in Mexico. During the quarter, we bought Century Systems, which complements our earlier data mine acquisition by expanding our portfolio in the mining industry. In CAE Healthcare, we launched our CAE Caesar trauma patient simulator which is a high fidelity simulator for training civil and military practitioners responsible for the care of trauma patients in the field. We've made good progress overall to establish the CAE brand in this new field. During the year, we sold more than 80 of our surgical simulators to healthcare institutions like the Mayo Clinic and the American College of Chest Physicians. And we had good success with our Viminex ultrasound simulators, with more than 50 sales to institutions like Harvard Medical, the Mayo Clinic, and several other notable universities and hospitals. Our entry into these new markets as the global leader in aviation training has come with high expectations of what CAE can bring to bear. And so far I believe we're doing a good job of building our credibility.

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

Thank you, Marc, and good afternoon, everyone. Revenue for the quarter was CAD464 million, and CAD1.63 billion for the year. Net earnings were CAD49.7 million for the quarter and CAD169.8 million for the year. We generated CAD70.4 million of EBIT in the quarter, for a margin of 15.2%. For the year, EBIT was CAD259 million, or 15.9% of revenue. The strong Canadian dollar was a big challenge over the year. The effect of inflating the results of our foreign subsidiaries into Canadian dollars resulted in a decrease in annual revenue of CAD81 million and a decrease in net earnings of CAD12 million year-over-year. For the quarter, the translation impact was CAD11 million on revenue, and CAD1 million on net earnings. Net cash in the fourth quarter provided by continuing operating activities was CAD191 million. And free cash flow was CAD161 million. For the year, net cash from operations was CAD247 million, and the free cash flow was at CAD147 million. As anticipated, we had a reversal in non-cash working capital toward the end of the fiscal year.

During the year, we continued to make good use of our factoring program in collaboration with the VC in Ottawa. And extending it to contracting programs. Total investment in non-cash working capital for the year was about CAD37 million.

Income taxes this quarter were CAD12.9 million, representing an effective tax rate of 21%. The low rate resulted from 2 special items. First, we booked tax assets on losses in the UK. And second, we recognized lower future tax rate on future tax liabilities. Excluding those elements, income taxes would have been CAD17.5 million this quarter, or 28%. For the year, again, excluding these variable elements, the rate was 28%. As the US market recovery continues, we expect to generate more income in the higher tax rate jurisdiction and so we expect our effective tax rate to also trend higher.

Capital expenditures were CAD115 million during the year with CAD77 million for growth and CAD38 million for maintenance. As the Civil aviation market continues to recover and expand, we will invest more to keep pace with the growth of our customers. In fiscal 2012, we expect total CapEx to be about CAD160 million, depending on the actual pace of our long-term growth investments this fiscal year. In terms of capital structure, right after the end of the quarter we amended our CAD450 million US revolving credit facility to include more favorable terms for CAE, including an extension of the maturity date by 2 years to 2015. Finally, we have provided detail in the MD&A of the more notable expected impacts on our financial position that will arise from IFRS adoption. We will be laying out the these changes in our presentation immediately following this portion of the call.

And on that, Marc?

Thanks, Alain. I'll first make some comments about our long-term view for CAE in Military, Civil and new core markets. And then I'll relate how current market conditions factor into our outlook for the year ahead.

The use of simulation for training is the norm in the civil aviation industry. By contrast, training isn't regulated in defense. And a significant amount of training is still done live. We see this as an important upside opportunity for CAE over the long term. We're continuing to see evidence of a shift away from live training in real aircraft to simulators. And at roughly one-tenth the cost, and equally or more effective than live training, we view CAE's offerings as a part of the solution to the challenges facing defense forces. Our industry offers governments a way to maintain and improve mission readiness at a better value, which is a key factor underlying our long-term optimism.

Also contributing to our positive outlook is the progress that we've been making to grow our long-term recurring services business to provide us with greater earnings visibility. As well, we've been making progress with our strategy to broaden our reach into core defense market adjacencies like land and professional services. We already generate revenue in these domains, and our most recent acquisition of technology assisted learning helps us to broaden our land-based offering and grow our market share. We lead the market in the virtual air domain, but have only really begun to develop our position in the other domains in recent years. And so we see head room for CAE to grow in defense overall.

Cuts to defense spending in the US and Europe are continuing to occur. But so far, they had haven't had a big impact on our business or outlook. CAE is well-positioned on highly relevant platforms including helicopters, transport aircraft, tankers and jet trainers. We have an important footprint in the biggest defense markets, the United States and Europe. And we also have a well-established presence in other key global markets that are growing and where we are addressing new opportunities.

CAE has been a global company since inception and today we serve more than 50 national defense forces. Significantly, more than 50% of our employees are located outside of Canada. And we have several key centers of operation in strategic defense markets around the globe. We understand the challenge that global business represents. And the diversity of our wins this year is a testament to our well-developed global presence.

In terms of the year ahead, with our solid Military backlog in place, and our pipeline of opportunities, we continue to expect solid growth and profitability from our combined Military segments. Predicting the timing of Military orders is never easy, especially in recent months in the US market, but our outlook is positive given our current read of the market.

Now, turning to the Civil side of the business, in commercial aviation the fundamentals remain positive, with higher passenger demand and airline capacity in the first quarter of calendar 2011. In the emerging markets, growth rates have been running much higher than the global average. And we're particularly well-positioned to address the increasing demand for training solutions in those areas. In business aviation, the international market continues to be robust, with more than 50% of all aircraft orders and deliveries slated for markets outside of the US, mostly in Asia, the Middle East and Russia. Globally, there continues to be a steady demand for large cabin business jets, and to a lesser extent, the mid-sized jets which are recovering more slowly. The small business jet segment still has a while to go in terms of recovery. Much depends on global GDP and corporate profit growth, which are the key drivers in business aviation.

On balance, we expect the market trends we're seeing to continue to translate into demand for services in our global network of business jet training centers. Just this week, we announced that the European Business Aviation Show, EBAS, that we'll be doubling our global footprint in business aviation from 4 to 8 locations. This will bring training even closer to our customers in the emerging markets. Also investing for the future are the business aircraft OEMs, which have recently made multi-billion dollar investments to new aircraft programs. These actions support our view that business jet travel is poised for growth over the long term.

Helicopter training is an important civil market adjacency for CAE and we'll continue to build on our success in the period ahead. We've quickly become a leader in civil helicopter training, with solutions now being deployed in South America, under our joint venture with Lider, the largest helicopter operator in Brazil. And in India in partnership with the government. We most recently announced that in China we're deploying the first ever CAE 3000 series civil helicopter simulator for Asia. These moves build on our outsourcing deal we closed with CHC Helicopter this year, and will continue to position CAE in this growing area.

As for the year ahead in Civil, we expect to see continued improvements in capacity utilization and revenue per simulator in our training centers. And will continue to make targeted investments to keep pace with our customers and to broaden our market access. In simulation products, we're encouraged by the level of last year's orders and the activity levels that we're now seeing. At this point, we expect about the same number of simulator sales for fiscal 2012. In terms of operating margin for the combined Civil segments, we expect to see continued gradual recovery from the current mid-teens level. In new core markets, we intend to further establish CAE's position in healthcare and mining, with continued investments in R&D, and possibly more acquisitions to gain capabilities and distribution. We're confident that in time, our new core markets business will become as material to CAE as any one of our core business segments today. And while we're not able to say exactly when that will be, our initial success this past year reaffirms our belief that we're making the right investments in CAE's future.

To conclude, we recognize that uncertainty exists in terms of a variety of macroeconomic factors. However, we begin fiscal 2012 with a record order backlog, and a value proposition in both civil and defense markets that we believe will become even more compelling over the long term. Our customers have greater needs than ever for cost efficiency, and mission readiness, and we're well-positioned to meet them. Overall, we're pleased with the level of activity we're seeing and we're encouraged by our growth prospects in our end markets, given our solid foundation, our global position, and the range of initiatives that we have underway.

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

Operator, we would now be pleased to take questions from analysts and institutional investors. Before we do, let me first ask that in the interest of fairness you please limit yourself to a single one part question. If you have additional questions after that and time permits, feel free to re-enter the queue. As well, since we'll be having a separate presentation immediately following this session on IFRS, I would ask that you please hold any IFRS related questions for the conclusion of that presentation. Operator, we'll now take the questions.

(Operator Instructions). Cameron Doerksen with National Bank Financial.

Good afternoon. A question on the training business. You've obviously announced a number of new customer wins this week and also an expansion on the business training side. I was just wondering if you could maybe talk about how many new simulators you expect to add to the network this year? And also whether you think that you're starting to, or have won, market share in the business aviation training segment in particular?

In terms of simulators that we'll add this year, I think you could probably judge it. If you look at how much additional CapEx that we said we're going to be deploying this year, Cameron, I think that's a good proxy. You saw, as you just said, that EBAS, we announced we're going to be doubling our BAT locations from 4 to 8 now. That's going to take maybe a year or two for us to deploy. We still see good opportunities for us to add simulators. But I think you should look at the CapEx, give you a good idea. The second part of your question, sorry, Cameron?

Just on whether you think you're winning some market share in the business aviation training in particular?

Yes, okay. Thank you. I think that we're certainly holding our own in the developed markets, especially North America, with our main competitor. I think internationally, we're doing pretty well. That's really where I think, in my view, it's clear that we're the market leader in the international segment. And that's the focus we've had, in keeping with CAE's overall business. I think it's a smart competition there between us and the major competitors and that will continue.

Hamzah Mazari with Credit Suisse.

Good morning. This is Chris Parkins on behalf of Hamzah. I just had a couple quick questions. One of them was, can you just talk a little bit about how competitive pricing is on simulators right now and your bookings? And comment on that trend now relative to what's currently rolling through your P&L in the civil products business?

Yes, I think it's slightly better, is how I would characterize it. It's certainly not the Eldorado I would say. I think if you look at the margins expectations, I think you're seeing maybe a combination of a slightly increased pricing, better pricing environment. But I think more margin expansion will mainly, in my mind, come from the additional volume that will cycle through our plant over the next few quarters as a result of the higher orders we booked last year and the year ahead. I think that's where it's going to come from.

Perfect, thank you. And then, also, turning to your new core market initiatives, such as healthcare and mining, it appears that's a bit of a drag on your civil training business based on your current reporting setup. Could you comment on what margin profile those businesses currently look like, what you expect from them as you gain critical mass? And just comment on that relative to your current offering within civil training.

I think we put it in civil training, because we need a place to put it and we thought that was the most sensible place to put it. As you saw, we break it out so that there's no confusion as to what the margins are in the Civil business. And yet you get a good idea of what we're doing in the new core there. The first thing I would tell you is that we're not into running unprofitable businesses. So you can expect that. That's not going to continue forever, that's for darn sure. The phase we're in right now is we're investing. If you look at the simulators that we sell, whether the ultrasound, the ones that we have for surgery, the services we run in training centers for healthcare, those services, those products are profitable.

The issue is one of scale. We're just not yet selling enough to overcome the amount of SG&A and R&D that we're putting into it, but that to me is a temporary situation. How temporary is obviously the question and I'm not really giving much precision on that, because in some points we don't actually know how fast that will be in the market expansion. But if you look at the progress we've made this year from 2 last year to 38 this year, we have expectations that we'll be able to get some scale in this business and margins will turn more positive, which you would expect.

Ben Cherniavsky with Raymond James.

Good morning. Sorry, just hope this doesn't count as my question. Can you clarify what the CapEx was? You mentioned it, but just the number for this year, what you guided to?

Yes, for next year, Ben, we positioned it around CAD160 million with the caveat of depending on the opportunity that might develop over the year. But CAD160 million is probably a good number.

Okay, thanks. The question I wanted to ask was just with respect to the government funding. The Project Phoenix just ran out and you've got a couple other projects that I think you're getting support through. But what can we expect the net impact to be on the margins, if any, and where might it show up as Project Phoenix runs its course?

Want me to take this one, Marc?

I think I'd just preface it to say that when I talk about the margins in Civil there, obviously we take that into account. And when we talked about the overall margins moving gradually north of mid-teens where we're at. But maybe I'll just ask Alain to give more precision on government programs.

The first thing to know, we'll probably discuss this a bit further in the IFRS call, but under Falcon, you realize, or people realize the support from the government was unconditionally refundable, and it was, indeed, therefore, partially as a loan. So you have in note 22 of the financial statement, Ben, the detail of how much Falcon has contributed to the income statement this year. And it was around CAD25 million this year. So this is probably a good number. That program continues for the next 2, 3 years at least. It was a CAD250 million program.

Sorry, I'm confused. It's going to continue to contribute that amount? I thought it expired?

I'm talking about Falcon now. Phoenix is behind us.

Oh, Falcon now. Okay, that makes sense. Sorry about the confusion. Thanks very much.

David Newman with Cormark Securities.

Good afternoon. Just noticing on the Simulation Products/Civil that it was a little lighter in the quarter. Are you viewing this as somewhat of a reflection of the market? Is fuel having some impact on your customers, and of course turmoil in the Middle East? And you're guiding to 29 or thereabouts for next year. If they regain footing, would you think to step up your production once again?

In terms of production of full flight simulators for the civil market you mean?

Yes. You were a little softer. You're guiding flat year-over-year. What are your customers saying in terms of what they're feeling from the pressure of fuel and some of the conflicts in the Middle East? Obviously, it's causing them to be a little bit cautious.

Okay. I think if I look at orders for the year, the way I characterize it is we're going to update that number, as we usually do as the year progresses. Right now, by looking at the fact that if you look at the 29 we won last year, we did really well. And market activity, if anything, is as robust or better in terms of the amount of proposals we got going and are coming in. If you look at last year, there was a number of programs that we won which are for development programs like new aircraft. So, those typically, if you like, mess up the average, because they come few and far between. And they came in lumps last year, so those kind of prototype programs don't necessarily recur.

Having said that, as I mentioned, the market activity is, if anything, higher. And the other thing is-- well, as you saw, we had a few orders come in, in the last month, and those you can't really predict. Depending on which page you close a contract, they could have easily dropped into this year. To me, what I see, based on everything I see today, I'm pretty confident saying that we'll do as well as we did this year, and we'll update that number when we get in on the first quarter.

And are you fairly comfortable with your current production rate through the next fiscal year?

Production rate in terms of activity?

Yes, the actual civil sims that you're actually producing and pushing out the door, are you comfortable with that production rate going forward?

Yes, we can increase it. We react basically to the amount of sales that we have and we have ample capacity to bring it up. That's not really a concern to us.

Last one from me. The utilization on your training network, I don't know if I saw a number. I think last quarter it was around the low 70%s, if I'm not mistaken. Around 71%. What was it at in the quarter and what do you think it could go to next year?

If you look at Q4, we finished at 74%.

Okay, I like it. Good number.

And if you look at Q4 last year, it's good to be able to compare these year-over-year. It takes seasonality somewhat out of it. Last year we were at 65%. It's a good pick-up. And is there room to grow? Yes. We will grow utilization. But I think one metric to look at, as well, is probably more accurate, is revenue per RFCU. And I think that's probably a good proxy to look at. And if you look at that metric, we're still about CAD400,000 in terms of revenue per RFCU off the peak of the last cycle.

Right, right.

So I think if you look at the number of simulators we've got, who knows how long it will take. It's your guess really in terms of when the complete business aircraft comes back in addition to what we already see in the airline. But clearly, there's no reason we can't go back to those kind of numbers.

Right. Looking pretty good. Okay, very good. Thanks, gentlemen.

David Tyerman with Canaccord Genuity.

Good afternoon, gentlemen. Quick question on the defense side. You said it's going to grow. Can you provide any more specificity in what you see for the coming year?

I think the way that I'll characterize it is yes, I feel probably as good as I did when I started the year last year. We look at how much orders we've got in backlog that we've already won, that will be executing, contributing to revenue this year. About 70% of the revenue that I need to get this year is already there. It's already in my backlog, I've just got to execute it. I feel good about that. The rest I've got to win. And do we feel good about our win probabilities and the programs being out there? The answer is yes.

The only thing that is hard to predict, and as I said on the call, is if you look at what happened in the US environment, what we've seen is obviously the 6 months delay has to be caught up. So it's really maybe the pace at which they're able to be able to put those orders out. We're confident we're going to win them, we've already won them, but to put the contracts in place. So that's the only hesitation I have with providing a number. Of course, last year we had the big impact on FX. When I look at positive growth this year, I'm considering the effects I see today. So spot rate. And that's important because if you look at the growth rate we had last year in Military, we ended up with 7%. But that was 12%, if you were to consider it FX neutral. So, a bit early to be able to provide you a solid number. The only thing I'll tell you is I'm confident that we'll have solid growth, both in revenue and profitability.

Right. I understand you can't specifically answer it but if you got the other 30%, where would you end up? Would you end up 10% higher or --?

That's the number I gave you last year. And to me, I'm sticking to that, with the caveat that I mentioned to you. It's really going to be basing at the level of which these orders can be finalized in the US contracting process. But what I see today, I don't see any reason why we can't achieve that.

Okay. That's very helpful. And then on the Civil side, for SBC I'm thinking, I'm wondering, has the competition stepped up now significantly? Medtonic seems to be maybe, they've been around a while now. And Rockwell Collins has a product that they went out and spent a whole bunch of money on. Presumably they want to actually win something with it. I'm just wondering, is the profitability of that business impaired by increased competition in your mind? Or has anything changed there?

I think it's pretty nominal. All the players that you talked about have been around for quite a few years and there's nobody really new, of any significance, certainly over the last couple of years. So I don't think anything's changed. There is a lot of competitors in this market. As you've seen, we continue to do well on market share. It's for sure in the last few years that profitability has suffered as a result of the competition. But in the end, when I talk to you about margins moving above the mid-teens in combined Civil, I'm taking that into account.

Okay. So, do you think that, just to try and put a number on it, for SBC, is 20% out of the question now for an EBITDA margin? Or is that still the type of thing you think you'll be able to do with volume obviously?

What I've said is, and I'm sticking to it, what I'm basically saying is look at the combined Civil numbers. That's what I've been saying for quite a few quarters now. And part of the reason for that is because one of the competitive differentiators that we have at CAE is solution selling. We sell simulators. We deliver training. We can manage training centers. We run the largest network of initial training centers, where we actually train people to become pilots. So, we can provide pilots to the airlines. What we use, we use all of these various arrows in our quiver to be able to offer combined solutions. So, in some case that may mean that I will have a lower profit in one area, rather than another and that varies. So, that's why I'd rather look at giving you some numbers on combined Civil margins, which is what I'm giving you.

Marko Pencak with GMP Securities.

Thank you. I'd like to get two numbers and then one qualitative question. The numbers are, can you tell me what your market share was in the fiscal year that ended in terms of how many Civil sims you won in the competed market?

76%.

Okay. Can you tell me how many simulators you physically delivered in the course of fiscal '11.

Yes, we delivered -- let me check -- 17 to the external market and internally we built 4, so a total of 21 went through our plant.

Great. And then my qualitative question is, with the military budget pressures, can you just describe how are your customers reacting to that? Are they just basically sitting back and waiting for the politicians and the budget process to roll forward to determine what gets approved? Or is there any actual changes that they're contemplating? And specifically what I'm trying to understand is, do you see any shift towards more training rather than asset acquisition, because it simply pushes out the actual total dollars spent in a given year? I'm just trying to understand what that dynamic is. Thanks.

I think maybe the short-term dynamic, which I've talked about when talking about this year, it's really a question of the contracts being able to be put in place. The customers in the US, the various branches of the US defense forces, can't move forward, clearly, until the contracting mechanism is finished. In a lot of cases, if you look at the amount of work that's got to be done, I would maybe summarize it as saying the US procurement agencies have got to do the work of 12 months into 6 months to get back on schedule for what they've lost. That's really what we're seeing as we look at this year.

Okay. I guess the budget pressures and the positions of governments all over the world, clearly this isn't a short-term fix in terms of their overall financial position. So, I just wonder longer term, do you think that more and more of your military business shifts to training simply because the governments can then effectively push out the total dollars that they're spending?

Too early to say. It varies, depending on which government you're looking at. The first thing I'd say is good news is that we haven't really seen any cuts yet that have really materially effected our -- certainly our backlog. I haven't seen anything that's cut our backlog. And nothing that's really affecting our pipeline in any significant way. Too early to say it's going to switch to more services or, as you say, to offset the capital acquisition costs. What we'll possibly see is more outsourcing, definitely that's been a trend that we've seen over the last few years. That may accelerate that. But as I said, there's definitely a trend towards more use of training, using simulation than live, just because it's cheaper and you can do more effective training.

Michael Willemse with CIBC.

Thank you. Just wondering if you can give us a sense of the size of your civil helicopter business, that would be both on the simulation side and the training side?

Well, I think in size, I don't have it in dollars. I don't know that we have. We haven't broken it down, so I don't think I would at the moment. I think I would tell you, maybe to give you some color on it, we've expanded from our footprint from about 4 locations to 8 that have helicopter simulators. We have a prime position in the oil and gas sector with the outsourcing that we've reached this year with Canadian Helicopter Corporation, because they're the largest offshore oil and gas helicopter fighter in the world. And we just expanded recently into China, into South America, with Lider, as I mentioned on the call. So the market's evolving. We're well positioned to cultivate it. I'm confident, with what we've done this year, we're in the number 1 position in terms of offering simulator based training for civil helicopters at the moment.

Would you say that the revenue per facility should be similar to the rest of your training business for RCU?

Yes, that's what I would expect, yes.

Operator, we'll take one more question from investors, so that we have some time for the media.

David Tyerman with Canaccord Genuity.

Just two quick things. On the tax rate, Alain, you said that's going higher. I'm wondering if you can give us some thought for this year and maybe where you ultimately see it going.

Yes. What we're seeing, for a fact, is the business in the US is picking up, like I said on the remark. And, David, this is by far the highest tax jurisdiction. Tax rate are north of 30%.

Right. 37%.

As we're seeing the recovery in the US market, obviously it will drive my tax rate up. This year we've done well, 28% in average for the year. And so it will be around that number, depending on the share we're getting in the US.

Okay. So not a huge increase it sounds like this year. Okay. And then the other question I had is, your Training and Services Military depreciation bumped up. It was over CAD5 million, and it's been running more like CAD3 million or CAD3 million-and-change. I'm not sure what was going on there. Is this a new run rate?

On the depreciation in TSM?

Yes.

I will have to go back to you, David, to tell you exactly why there was a reduction in the quarter for that.

Okay. An increase. It went up. Yes, okay if you could let me know. I just want to know, should I be modeling that going forward or is it something unusual in the quarter and it's going to set back.

We'll get back to you with the reason and we'll be able to conclude if it's a good run rate.

Operator, we'll now open the line for members of the media.

(Operator Instructions). Marie Tyson with Le Press.

(Spoken in French).

(Spoken in French).

There appear to be no further questions registered at this time.

Operator, we'll now conclude the Q&A session for investors and the media. And we will now commence the second portion of our call with a presentation on IFRS. Joining the call on IFRS are, again, Alain Raquepas and we have Antoine Auclair with us, CAE's President and Corporate Controller. Alain and Antoine will go through our IFRS presentation deck which is again, it's downloadable from our website at CAE.com/investors. And following the formal portion of the presentation, we'll again open the lines for questions from financial analysts and institutional investors.

As you are aware, CAE will report its financial position under IFRS standards commencing with the first quarter of our fiscal year 2012 which is now underway. And we will issue those results on August 10, 2011. The year end MD&A issued this morning provides detail on the more material changes you should expect to impact our results. And the purpose of this additional presentation is to help to ensure that you're well-familiarized with these changes by the time we report those results in August.

Before we begin, I need to remind everyone that the information we will present here is provided solely for the purpose of allowing investors and others to obtain a better understanding of our IFRS changeover plan. And it's not a suitable source of information for those who are not familiar with the Company. The information may not be appropriate for any other use, and it's not in any way a substitute for reading the financial statements and the MD&A. The new accounting principles and impacts identified should not be considered complete or final. Final financial decisions on accounting policies are not required to be made until the preparation of the fiscal 2012 annual financial statements.

Nevertheless, the information being presented reflects our current assumptions, estimates and expectations, all of which are subject to change and are not fully audited. Considering the IFRS rules are not yet static, and subject to other accounting regulatory lobbies, among them the US Accounting Standards Board, other future changes to IFRS may also impact the information being presented here this afternoon.

So, with that, let me turn the call back over to Alain.

Thanks, Andrew, and thank you everyone for staying with us for this IFRS briefing. Our objective is to show you some of the bigger differences between IFRS and Canadian GAAP and how these will likely impact CAE's financial position at transition date. For illustrative purposes, we will also present how IFRS would have likely impacted the first 9 months of the fiscal year we just closed with the call today.

So, as a general comment, I would say that from a P&L standpoint, the net impact of IFRS reporting is not expected to be materially different from Canadian GAAP. That said, some of the changes we will highlight are significant from a balance sheet standpoint. But our expected cash flow remains the same and the change in accounting methodology does not affect the fundamentals of our business, which remain strong.

Turning to page 3 of the deck, that Andrew mentioned, that you could find on the IR site. So on page 3 of that presentation, we note that the total assets decreased from CAD2.622 billion to CAD2.591 billion. Excluding the noncontrolling interest, the total liabilities increased by CAD325 million, and shareholder equity decreased by CAD356 million. These changes on the consolidated IFRS balance sheet relate to leases, employee benefit or pension obligation, government assistance, property, plant and equipment including borrowing costs, deferred taxes, deferred tax assets and other minor items.

So, let's see what has changed. On slide 4, we note the impact on leases. We have 29 simulators, out of our global fleet of 156, that were financed as operating leases under Canadian GAAP. Under IFRS, 24 of them will be accounted for on the balance sheet as capital leases. This increases our asset base by CAD141 million, and adds corresponding debt on the balance sheet of CAD176 million. Equity decreases by CAD23 million to account for the difference between what the asset depreciation and the loan amortization would have been if these leases were originally treated as capital leases from the start. When we looked at our capital structure, we already include the present value of lease obligation. So from a practical standpoint this does not change much for us. The lease adjustments will have no impact on our key covenants and our ability to borrow.

On the management control standpoint, our off-balance sheet arrangement under Canadian GAAP are included in the way we calculate performance ratio like return on capital employed and other metrics such as RFCU. Going forward, from a P&L standpoint, we will have higher depreciation and interest costs on these leases and lower rental expenses. Total interest expense for the Company will go up, but the margin in our Training and Services Civil segment will benefit from lower rent. Taken together, we estimate there would have been a reduction in FY '11 Canadian GAAP earnings of CAD600,000 for the first 9 months. As we approach the midpoint of the lease terms, we should see a net P&L pick-up over the formal rental expense as the debt obligation from these leases wind down and the related interest expenses decreases. I expect the tipping point to occur about fiscal year '13.

I will draw your attention to slide 5 now on employee benefit and pension obligation. The IFRS impact comprises 3 elements, adding up to a net after-tax adjustment of CAD57 million against equity. First, we will recognize all cumulative actual yield losses of our defined benefit plan. We know that several other Canadian companies transitioning to IFRS have also elected to do so. This allows CAE to fully recognize the pension liability disclosed in our note 23 of our Canadian GAAP statement. The second impact relates to the valuation date. Under Canadian GAAP pension assets and obligations were valued as at each December 31, but IFRS requires these to be valued at March 31.

And finally, the third impact relates to past service costs. When a defined benefit plan is amended, an entity may agree to grant benefits in respect of past service. The accounting cost arising from a plan amendment in accordance with Canadian GAAP is different from IFRS. So, in addition to the opening balance sheet adjustment, the sum of these 3 elements to the P&L is expected to provide a pension expense saving of about CAD1 million annually in the following years. Any actuarial gain or losses after the conversion date will be accounted for directly on the balance sheet, without effecting P&L.

Now, moving to slide 6. I will discuss the third major impacts to IFRS balance sheet which relates to government assistance. Under IFRS, government assistance that is conditionally repayable through royalty should be accounted for partially as a liability and no longer entirely as a grant, as it was the case under Canadian GAAP. The liability booked is equal to the discounted value of all expected future royalty payments arising from the conditional government assistance. Specifically, this means we will recognize a liability of CAD157 million representing the expected discounted value of the future royalty to be paid by CAE over the next 15 to 20 years. Programs detailed in our MD&A such as Phoenix and the one with [Davis] (inaudible) Quebec for a new core market, fit this category.

In regard to the more recent Project Falcon, since their repayments are unconditional, the liability treatment was already applicable. Each year as CAE approaches the royalty repayment period on these programs, an interest expense is recorded to increase the discounted liability, so that it is ultimately equivalent to the actual royalty to be disbursed. Under Canadian GAAP, the repayment of government royalty was accounted for on the P&L as a royalty expense, only when the conditions triggering the repayment of the assistance were met.

From a P&L standpoint, we estimate that IFRS would have reduced our FY '11 Canadian GAAP earnings by CAD4.4 million for the first 9 months. This is explained by the annual interest expenses accrued under CAD157 million government liability, which is higher than our actual royalty expenses recorded under Canadian GAAP. As we progress in these risk-sharing programs, we expect the IFRS treatment to actually provide a net P&L benefit as the interest expenses under IFRS will likely become lower than the royalty expenses we would have otherwise incurred under Canadian GAAP.

So turning now to slide 7. Let's talk about property, plant and equipment. The main adjustments under IFRS, which impact the measurement of property, plant and equipment, including borrowing costs as at April 1, 2010, reduced property, plant and equipment by CAD110 million before tax benefit. One of the adjustments relates to a reduction of capitalized interest cost included in some of our assets prior to April 1, 2010. Specifically, unamortized capitalized interest prior to April 2010 will be eliminated with a corresponding adjustment to equity, resulting in a reduction of property, plant and equipment of CAD25 million before tax. The net annual savings from this adjustment under IFRS will be around CAD1 million of additional EBIT, primarily in our Training and Services Civil segment.

Another adjustment relates to asset measurement under IFRS. We used the discounted future cash flow method to determine the deemed cost for some of our simulators on the opening balance sheet. Discounted cash flow must be used after the conversion date to test whether a long-lived asset continues to be worth what they are measured at on the balance sheet. This is a major change in methodology from Canadian GAAP, which required that only the undiscounted cash flow be used to test whether book value is valid. Accordingly, 26 of our 156 simulators were effected by this change, resulting in a reduction of CAD76 million to property, plant and equipment.

From a P&L standpoint, this will result in a net benefit of about CAD5 million in additional EBIT in our Training and Services Civil segment. Please note, this is only a non-cash benefit and our expectations for EBITDA and cash flow next year have not changed as a result of this methodology change. Two other less material adjustments relating to componentization and derecognition, reduce property, plant and equipment by an additional CAD9 million.

So, on slide 8, the last major item that I would like to comment on with respect to IFRS is the income tax accounting under related adjustment I have just described. All of these accounting entries and adjustments triggered significant one-time retroactive adjustments that are recorded as a reduction of retained earnings. As we analyze where these accounting adjustments could eventually result in tax savings or tax deduction and whether we should recognize a tax asset for accounting purposes. To determine the value of the benefits, we considered the country in which the accounting expenses were recorded, the historical taxable profit of our subsidiary, and also the period for which management had a reasonable assurance that the benefit could materialize. As a result, total net tax asset recorded under IFRS is adding up to CAD12 million.

Before I wrap up, and summarize all of these IFRS differences on CAE's equity and on CAE's net earnings, I will now ask Antoine to share with you some additional consideration.

Thanks, Alain. I would like to start with the accounting changes impacting CAE in a less material way.

Please turn to slide number 9. First, with respect to business acquisitions, all acquisition related costs previously included as part of the purchase price under Canadian GAAP must be expensed in the period in which the costs are incurred. This accounting treatment is also aligned with US GAAP. Also, we had reset the cumulative translation adjustment or CTA account to zero. This resulted in a reduction of retained earnings and in an increase in our other comprehensive income in the amount of CAD226 million. But, does not have an impact on overall equity.

Now, in terms of other issues that are still developing under IFRS, I would like to point out two items of interest to CAE. Please turn to slide number 10. As you know, we used the percentage of completion method to account for the sales of our Civil and Military simulators. We expect this method to continue to be appropriate, based on current IFRS. However, as part of the international Accounting Standards Board work plan, an exposure draft has been published proposing a single model for all types of revenue. This model would be based on transfer of control, and the notion of risk and rewards would be an indicator of control. Accordingly, we remain confident that POC will still be applicable to our business.

As a final note, the IASD issued last week a new standard for joint arrangements which eliminates the choice of proportionate consolidation and makes equity accounting mandatory for participants in joint ventures. The new standard will be applicable for our fiscal 2014 but early adoption will be permitted. This will have no impact on net earnings and EPS as the earnings from JVs will still be part of our results. The difference is that we will no longer recognize our share of revenues and expenses from JVs, and net earnings will be recorded below the segment's EBIT line. For example, if done today, our annual revenues would be CAD90 million lower, but there would be no impact on our net earnings. This also means that we will have adjustments for all assets, liabilities and other balance sheet items previously proportionately consolidated from our JVs. All of these items will be presented as one line on the balance sheet.

As you can appreciate, IFRS is still evolving. And with the joint projects with the US Accounting Standards Board underway, we should expect some further development in the period ahead. With that, I'll turn the call back to Alain.

Thanks, Antoine. So to wrap up, I will now summarize the equity and the net earning impact that all of these IFRS adjustments will have on CAE as we transition from Canadian GAAP.

On slide 11, we summarize the expected equity impact. The Canadian GAAP equity value of CAD1.156 billion will become CAD800 million under IFRS, excluding noncontrolling interest adjustment.

Slide 12 summarizes the expected impact of what IFRS would have done to CAE's net earnings for the first 9 months of fiscal '11, for which profit would have been lower by CAD5.2 million. We believe the IFRS adjustment for leases and government assistance will eventually have a positive impact. As a final comment, based on our best estimate, and what we know at this point, we expect the projected earnings of the Company under IFRS will be only slightly negative to neutral over the next couple of years and should improve thereafter.

So with that, we would be pleased, Andrew, Antoine and I, to take your questions.

Operator, if we could reopen the lines to members of the investment community and financial analysts.

(Operator Instructions). David Tyerman with Canaccord Genuity.

Yes. Thank you for the presentation. And my question is related to the segmented impact. From the comments that you made, Alain, it sounds like the TSC category is going to be positively benefited quite a bit by this. And it seems that there would be some offset somewhere, like the government royalty programs roll through somewhere, I would think. So I'm just wondering, could you run through the segments and the rough impacts that you see based on the first 9 months?

Yes. If we start with TSC, you're absolutely, right, David. In terms of EBIT it seems, if there's such a thing, that they're the winner of a bad transition. Because of the leases. Like I said, right now it's slightly negative but eventually obviously they'll benefit from that because the interest will be below the line. And obviously, the other one that will impact them is what we've done on property, plant and equipment to fair value, a small portion of the fleet, which will reduce eventually the depreciation, and therefore, give them a benefit on the EBIT line.

In regard of the other adjustment, governmental royalties, obviously were benefiting more the manufacturing segment. SBN and SBC are the beneficiary of the governmental assistance. So, you can extrapolate that this will be in the future impacting them. And the other one are small items. The taxes is not allocated and the borrowing cost is rolled into property, plant and equipment, and it was all under-- for building and simulator. Therefore, again, TSC is a beneficiary of that eventually.

Michael Willemse with CIBC.

Just in your summary slide here, slide 12, it's indicated that income taxes and other would negatively impact the first 3 quarters last year. Could you just review how that's being negatively impacted by IFRS? CAD3.2 million?

Yes, you would like to get a bit more color on what composed the amount, I guess, Michael?

Yes.

Because it's a mix of income tax and a bunch of other items described in the MD&A, so let me try to figure out.

So that's just a mix of --?

It's not only income taxes. If you go through the MD&A disclosure, there's a list of other items that might have impacted. The more important one, like Antoine has mentioned, is the acquisition cost. So, when we're going to do an acquisition, we've done few this year, as you remember, there was three acquisitions in our FY '11. The acquisition cost to close these transaction under Canadian GAAP are capitalized and amortized thereafter. Under IFRS they're expensed. So, obviously a good portion of that CAD3.2 million relates to that.

Okay. And then just one follow-up question. There is a comment, I think it was when you were talking about property, plant and equipment, and the beneficial impact from EBIT once they're converted from leases to capital assets. Did you say an improvement in EBIT of about CAD5 million a year? Is that the comment?

It was not in regard of leases. Leases, what we said is this year was slightly negative. The improvement on the EBIT was more in regard of the adjustment for fair valuing some of the assets. So, your CAD5 million that you're relating to is more related to the fair value than to the lease.

And that change would positively impact EBIT by CAD5 million?

Yes, sure, that's one of the positive items described in slide 12. In fact, we're showing CAD4 million and slide 12 for that adjustment.

Dave Taylor with GMP Securities.

Hi. Thank you. You answered a question earlier on your taxes. What effective tax rate under IFRS should we model for fiscal '12?

No change, Dave. I'm not too sure if I should say prior guidance, but I do not see a lot of natural changes in the tax rate at this stage. It might be a bit more volatile. There might be a bit more variability in the provision. But overall, in average, it should end at the same place.

(Operator Instructions). David Tyerman.

Yes, just a follow-up on the leases. So, the net effect in the first 9 months of last fiscal year was a reduction in income of CAD600,000. What would the split have been between the rent that's no longer there and the interest that is there now, because that's going to effect TSC, EBIT?

Let me see if we can get this more detail from my colleagues, David. Obviously the CAD600,000 was the net of the two. And the important thing is as we move out on these leases, like I've indicated, around fiscal year '13, instead of being a slight negative it will become a slight positive. But the breakdown, maybe we can get back to you, David, with the detail. I don't have it handy with me, as I'm speaking to you.

Okay. That would be helpful. Is it large, Alain, do you think? I'm just thinking when I'm modeling TSC, this is going to effect that.

We'll get back, but the net was CAD600,000, but you never know, it might be a big positive. So we'll get back.

Yes, that's what I'm driving at. Thank you.

There appear to be no further questions registered at this time.

Okay. Operator, thanks very much and thank you to everyone for your patience this afternoon on this extended conference call. The team and I are, of course, available to answer any additional questions on the quarter, the year and IFRS. And I would remind everyone that a transcript of today's call can also be found on our website, CAE.com. Thanks very much.

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