CAE Inc (CAE) 2012 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the CAE first 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, Mr. Arnovitz, you may now proceed.

Good afternoon everyone and thank you for joining us today. Before we begin, I need to read the following statement. Certain statements made during this conference including but not limited to statements that are not historical facts, are forward-looking and are subject to important risks, uncertainties and assumptions. The results or events predicted in these forward-looking statements may differ materially from actual results or events. These statements do not reflect the potential impact of any 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 divestiture's. You will find more information about the risks and uncertainties associated with our business in the MD&A section of our annual report, an annual information form for the year ended March 31, 2011. These documents have been filed with the Canadian Securities Commissions, and are available on our website, at www.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, August 10, 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 Stephane Lefebvre, our Chief Financial Officer. After comments from Mark and Stephane, we'll take questions with financial analysts and institutional investors. Following the conclusion of that Q & A period, we will open the call to members of the media. I would ask that in the interest of fairness the participants please limit themselves to a single question. If you have additional questions, please feel free to reenter the queue or to contact us after the call. Let me now turn the call over to Marc.

Thank you, Andrew, and good afternoon to everyone joining us on the call. We've already presented a summary of our first-quarter results this morning at our annual, general meeting, but will do a recap for those of you who may not have been available to join in. Stephane will also provide a bit more detail about our results and I'll come back at the end to talk about the way forward. We had good performance in the quarter, led by civil, with an impressive 11 full flight simulator orders and a range of new training agreements. We saw increased demand for mature markets and we particularly benefited from the higher growth in emerging markets. We really hit our stride. The fact is, no other company in our business has the capabilities, credibility, and presence that we have across global markets.

We are well established in developed markets like North America and Europe, and we are the leader in China, India, Southeast Asia, Latin America, and the Middle East. The market is responding positively to the full portfolio of capabilities that we bring to bear, as demonstrated by our success at the recent Paris Air Show. Where we announced 3 pivotal joint ventures in commercial aviation. The first was with Malaysia's air Asia, to establish a center of excellence for commercial aviation training, for airlines in a rapidly growing asean region. This deal marks a major milestone for CAE, because it also means that one of the world's fastest growing airlines has chosen to CAE to undertake responsibility or training all of its pilots, maintenance engineers, flight attendants and ground crew. This is a great validation of our go-to-market solution strategy.

We announced a second JV with Interglobe, the parent company of Indigo Airlines, together we'll launch a new training center in Delhi next year. Which marks the fifth, CAE managed training center in India, and underscores our commitment to aviation safety in that country. Our third joint venture announcement was with Mitsui, to establish and operate a training center in Japan for the new Mitsubishi retail jet. This follows our agreement last year with Mitsubishi including a 10 year exclusive training provider program.

In business aviation, we saw continued strength in training demand for large cabin aircraft. Demand for midsize business aircraft also fared well during the quarter, while the smaller jet segment, especially for outer production aircraft, continued to lag the recovery. Given the high number of new aircraft for delivery overseas, we announced that we'll double to 8, the number of locations in our global network offering business aviation training. This expansion will include new centers in Asia, and South America. For Civil overall, we booked CAD230 million in new orders during the quarter, for a book to sales ratio of 1.09 times.

Turning now to defense. During the quarter, we continued to experience delays in procurement decisions in Europe. However, we received orders that we had been anticipating in the US, which were delayed due to the 2011 continuing resolution. The US and Europe represent the majority of the world's defense spending, so what happens in those markets obviously matters a lot. Like our Civil business, we have an established, global position in defense, which gives us access to markets such as Asia and the Middle East that are currently expanding. In fact, the emerging markets represented over a fifth of our military orders, which helped us make up some of the shortfall in the traditional markets. In our traditional, virtual air domain, we received a contract from the US Navy for 2 MH60R Seahawk helicopter trainer's. We also want to subcontract the design and manufacture trainers for the US Air Force under Boeing C-130 Hercules Avionics Modernization Program.

In fast jets, Boeing authorized CAE to provide 20 years of maintenance and support services to an international customer for the N346 Advanced Jet Fighter Trainer Simulators. Also overseas, we won an order for an AW39 helicopter full flight simulator to support Augusta Westlands customers in Asia. Beyond our success in our traditional air domain, I continue to be encouraged by our progress during the quarter to expand our core into the land domain where we won a contract for 5 Abrams tank maintenance trainers for the US Army. And in Canada, we team with force protection industries to compete the Canadian forces tactical armored patrol vehicle or TAP-v project. In unmanned aerial systems or UAS's, we have teamed with General Atomics to offer the Predator to meet Canada's intelligence surveillance and reconnaissance needs under the justice program. Total military orders in the quarter totaled CAD210 million, for a book to sales ratio of 1.02 times which adds to our solid backlog. Ratio for the last 12 months was .98 times.

Now, looking at new core markets, in CAE mining we sold our geological modeling and mine planning systems to 18 new customers and in CAE healthcare, we sold more than 25 surgical and ultrasound simulators systems and modules to institutions like the Mayo Clinic and Massachusetts General. I continue to be encouraged by the progress we're making to ramp up in healthcare and mining. And, I'm particularly pleased with the credibility we've earned with customers. We are reaching important milestones that validate our go-to-market approach to market. And, give us additional confidence that new core markets will become a material and profitable part of CAE in the years ahead. ¶ With that, I will now ask Stephane to take you through the financials.

Thank you, Mark, and good afternoon everyone. In terms of our consolidated financial performance, revenue for the quarter was up 17% year-over-year at CAD427.9 million. At [Menicom] attributed to equal the [olders] of the company was up 16% at CAD43.1 million. Which generated CAD72 million of operating profit in the quarter for margin of 16.8%. Orders continue to be good during the quarter, with CAD450.9 million booked for a consolidated backlog of CAD3.5 billion. Bookings came in at 1.05 times revenue. We had negative pre-cash flow of CAD88.5 million in the quarter because of unfavorable movements in our non-cash working capital accounts and lower cash provided by operating activities compared to the recent fourth quarter.

We normally expect to see significant, negative changes in our non-cash working capital in the first quarter of the fiscal year. The change this quarter was mostly due to a decrease in accounts payable and accrued liabilities and an increase in [the net ]position of contracts in progress and accounts receivables. As in the past, we expect that a portion of this will reverse as the year progresses. Income taxes were CAD13.6 million for an effective tax rate of 24%. We had strong demand for our products and services in the emerging markets, and in those parts of the world, we benefited from lower, effective tax rates.

During the quarter, we generated a higher proportion of income from these jurisdictions than last year. Taking that into consideration, we now expect CAE's effective tax rate for the full year to be slightly lower than the 28% we previously indicated. While the lower tax rate resulting from doing more business in the emerging markets is definitely positive, from a macro standpoint, the growth in those markets has helped to strengthen the Canadian dollar. Hedging contracts give us some breathing room for a period of time, but prevailing rates eventually do catch up as we signed and hedge more contracts at current levels. Also, most of our current exposure is translation related and therefore is not hedged.

Although the Canadian dollar has retreated somewhat lately, the fact is that it still persists above parity with the US dollar. The impact of which can be expected to offset any benefit we might get from a lower tax rate this year. Capital expenditures totaled CAD30.5 million, including CAD9.6 million in support of our growth initiatives, and the balance for maintenance. We continue to expect total CapEx this year to be in the range of CAD160 million, as we keep pace with the goal of our customers and position for new opportunities.

Now, looking at our segmented financial performance. In our combined Civil segments, first quarter revenue increased 19% year-over-year, reaching CAD200.1 million -- sorry, CAD210.1 million. Our combined Civil operating income was up 24% to CAD45.2 million, which gave us in operating margin of 21.5%. IFRS has the most impact on the way our results are presented in Civil, and as a result, our combined Civil margin is about 200 basis points higher than it would have been under Canadian GAAP. In simulation product Civil, segment operating income remains stable compared to last year at CAD9.7 million, or 11.3% of revenue. While we had the benefit of increased volume, we're still working to lower margin back log. We did, however, see some improvement in project margins, but this was offset by a less favorable hedging rates.

In training and services Civil, we had more activity in Europe, the emerging markets and America's and we generated revenue in helicopter training for a CHC. We reached 75% utilization compared to 69% last year, an annualized revenue per simulator, was CAD3.6 million compared to CAD3.3 million. Our operating profit in training and services was up 32% to CAD35.5 million, for a margin of 28.6%. Despite the currency translation headwind, we had a sizable increase in profit this quarter from higher demand in a number of regions. We also realized approximately CAD6.8 million in gains on some simulators that we had previously built, and put into operation in our network ahead of agreeings to form certain joint ventures in the quarter.

In our combined military segments, first quarter revenue increased 14% year-over-year reaching CAD206.4 million. Our combined military operating income was down 6% to CAD29.4 million, which gave us an operating margin of 14.2%. In simulation products military, segment operating income increased 9% over last year, at CAD18.8 million, or 39 -- or 13.9% of revenue. This compares to 14.9% of revenue last year, and reflects a less favorable program mix. On a sequential basis, revenue and operating income were down CAD44 million and CAD50 million respectively. We had a particularly strong fourth quarter last year with programs in Australia and Europe having reached significant milestones for delivery, which made for a difficult comparable. We also had a higher level of activity on our big Canadian programs in the fourth quarter of last year. The lower volume this quarter also had a bearing on our operating margin as we had to absorb the similar level of R&D and SG&A expenses.

We felt it was important to maintain our level of effort in support of new products and implement program commitments, as well as the expansion of our core and into new domains such as LAN, UASs, and professional services. In training and services military, segment operating income was down 24% compared to last year, at CAD10.6 million, which represents 14.9% of revenue. First quarter last year benefited from a favorable contract extension that saw our operating margin reach 21.1%. The operating margin this quarter is more in line on a sequential basis, and more typical of that segment's run rate.

In new core markets first quarter revenue increased 48% year-over-year, reaching CAD11.4 million, and our operating loss was CAD2.6 million as we continued to invest in creating a larger business for the future. As you will have seen, we now report a new core markets as a fifth business segment, the rationale behind this decision was to provide greater visibility into new core markets, and to enable investors to have a plain view of the Civil business without complications to get to the underlying performance.

Thank you for your attention, and back to you, Marc.

Thanks, Stephane. Our outlook for Civil is positive as we see higher demand for products and services as a result of the market up-cycle. And especially because of our unique position in the world's fastest growing regions. Commercial aircraft order backlogs have now reached a combined 8600 aircraft, which represents about 7 years of production. And Boeing Airbus have recently [singled] production rate increases to unprecedented levels. The agreements we announced with air Asia and Interglobe, the parent company of Indigo, are examples of CAE's ability to develop long-term, strategic partnerships with major airlines. These are in addition to over a dozen other partnerships, alliances and joint ventures that we've established with customers, which involves CAE undertaking responsibility for all or part of their training related operations.

We are monitoring economic indicators closely, and while predictions are more difficult to make, given the level of volatility, the secular, civil aerospace picture remains attractive. We believe it will continue to be driven by a combination of passenger growth, particularly in the emerging markets, and also by the re-fleeting opportunity in mature markets.

In business aviation, we've seen gradual improvement in demand for business aviation training. But, there's considerable upside remaining for a broader recovery which depends mainly on sustained corporate profitability. In civil helicopter aviation, we've seen a very positive market reaction to CAE's value proposition. In fact, we've been pleasantly surprised by the strong performance in helicopter training, in particular with support of the offshore helicopter operators.

As for the year ahead in Civil, we expect to see continued improvements in capacity utilization and revenue per simulator in our training centers. I would highlight however that we do experience seasonably lower demand for training in our second quarter, due to the busy summer travel period. As well, our product segment, is impacted by the regular summer shutdown at our major manufacturing facility in Montreal. In simulation products, we've had a very good start of the year so there's a good probability that we will sell a few more than the 30 full flight simulators this year. As well, we expect a product segments operating margin to gradually improve over the course of the year, as volume picks up and we get through more of the low-margin backlog.

In defense, we're confident in the quality of our backlog and we are in a good position having started the year with about 70% of our budget revenue already booked. And while that usually gives us a good base to forecast our performance, there is more uncertainty about the remaining portion we need to win, mainly in terms of timing. In recent months, we've seen defense procurements in the US and Europe either freeze up, scale down or generally take longer than we expected. This has been partially counterbalanced by the wins we've had in the rest of the world and by the resumption of procurement activity in the US, following the fiscal 2011 budget resolution. Of course, given the recent US government budget debate, the fiscal year 2012 defense budget appropriations process is less than certain.

Taking all the known puts and takes into account, we still expect to win our fair share of orders this year, and to grow revenue overall. Our operating margins slipped below 15% this quarter for the first time in a long while, and for the same reasons Stephane explained, we expect that level of performance to persist over the first half of the year. We got off to a softer start, but we expect margins to get back into the 15% range once volume picks up in the back half. Even in the best of times, the defense business is lumpy, and we can only really judge it on a 12 month basis.

Looking out longer term, the good news remains that there is an explicit desire by defense forces and governments to move more training hours from aircraft to simulators as a means of achieving recurring savings. And so far, we've witnessed some tangible evidence of a shift towards simulation, but not yet what I would call a wholesale change. In Germany and the UK for example, the cost efficiencies that increased simulation use can provide resonates well, but they are still trying to figure what their future fore structure should look like. So we're realizing that in practice the urgency of budget reductions in the immediate term has meant that the first priority for defense forces in these regions is finding areas to cut and then secondly, to look for ways to save, going forward.

So, then to summarize, in military, we expect lower growth this year than previously anticipated. But the overriding point is that we still have a strong defense business and we expect growth, despite a tough market. We've got a solid backlog, We are well diversified between traditional and emerging markets, and we're making good progress expanding our core and adjacency's like land.

Over the longer term, as force structures, budgets and training needs become better defined, we expect to see the benefits of an uptake in the use of simulation to reduce costs.

In Civil so far, we've experienced stronger than expected performance, owing mainly to the demand in emerging markets and the positive market reception to the full range of CAE's capabilities. We've demonstrated 3 new examples of key strategic relationships in the first quarter and will work to build on those successes with our other airline and OEM partners.

In new, core markets, our progress to date and the opportunities we see ahead of us put us on track to create a material and profitable new business for CAE. While there is certainly no shortage of macro economic uncertainty, we have a strong, financial position and we have a track record of being able to change -- to adapt to changing market conditions and opportunities. CAE's future is bright and we expect to achieve solid growth overall in the period ahead. ¶ Thank you for your attention, we are now ready to take your questions. Andrew?

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

Thank you, Sir. (Operator Instructions). Cameron Doerksen from National Bank Financial.

Good afternoon. A question on the military business. Stephane you mentioned specifically Europe as an area, at least in the last quarter, that there were some delays and some uncertainty. Are there any specific programs you are bidding on that you can point to that have been delayed? And, just thinking about the broader military business, is there anything in your existing military business that you perceive as specifically at risk of budget reductions either in Europe or in the US?

Maybe I will start with the letter question first. You know I made the comment about the strong backlog, we feel it is a very healthy backlog because to answer your specific question, we don't see anything in there that's at risk of cancellation. And, when we look at the -- obviously there's a lot of hints out there of what may be cut, and if you look at the programs that we are on, programs like the C-130, like the Seahawk, Chinook, programs like that, we feel very strongly that they're looking pretty good in the budget environment that we are living in. So, I'm not worried about -- although you can never say never, I'm not worried -- we haven't had any cancellations and the integrity of our backlog to us looks very good.

In Germany and the UK, I think what we have seen recently is basically they have just -- it's nothing specific that would point to, is they have just basically frozen up in terms of decision making on procurements until they decide how many Tornado airplanes they're going to have, how many troops they're going to have. That's really what's occupying their minds. And over the next few months, as those decisions come to a fruition, then they go back and seem to figure okay well what does that mean for training assets and to the point that we make and that resonates very well is, well how can simulation -- an increased use of simulation be used to further help you in reducing costs?

Okay, that's good. And just 1 other quick 1, I don't know if you mentioned but the utilization rate in the simulator network in the quarter?

Yes, I think it was 75%, right? We had 75% of the network in fiscal 2011, first quarter versus like 69% last year, same time.

Great. Thanks very much.

You're welcome.

David Newman with Cormark securities.

Good afternoon, gentlemen. Just on the Civil Products side - the pricing environment that you're seeing right now. Obviously demand is picking up -- you had the 11 sims that you sold in the quarter and I think you took a production rate increase in Q4. So with that all kind of baked in, where do you think the margins could eventually migrate to?

Well I'm not ready to give margins individually in the product segment. If you look at the last few quarters, I'd really -- giving that outlook towards combined Civil margins, when we get back at the peak. What I would tell you is that we have seen some better pricing out there. I think I would still characterize it the same way as I did last time, certainly not the [Eldorado]. I still think that the margin increase in our business will largely come from the volume that's associated with those new orders.

And Marc, was Q1 at the stepped up production rate level?

When you say stepped up production rate, what do you mean?

Do you not increase your line rates in Q4?

Line rates? No, no I think we're -- I'm not sure what you were alluding to there to be honest.

The number of sims that you would actually deliver this year versus last year, I guess?

Yes, we did, I think what we said is we've delivered 4 in the quarter, in Q1.

Okay.

So, I think compares to 5 last year. I think what you will see is, as we go through quarter by quarter, you'll see the volume pick up and as we said, I think Stephane mentioned it as I did, that I think we pretty much -- are pretty confident that the low point has been hit in terms of Civil Products and are moving into a higher territory.

Okay, and just a quick one on the Military side. The 15% margin you are alluding to is that from what you see in the backlog in the 70% of revenues that you have booked and it is just the matter of timing on that backlog as, I guess, executed on?

It really is. When we look at what's in our backlog, and what we are executing as well as the orders that we won recently, the project margins that we're running the business at is very similar. It hasn't changed anything appreciably. So, really, we started the year with about 70% of our backlog -- of our revenue already in backlog so what we are really -- the impact we are really seeing and the uncertainty around the globe is around the timing to your question. And, I've run out of being able to -- thoughts to be able to predict when some of these things will happen. We feel good about winning the orders because in a lot of cases we are sole source on the programs. We've been selected so you would think we'd feel pretty good about it, but the thing is, I can't whether there will be another continuous resolution as an example. So, that's our uncertainty there. And the timing is what is affecting us.

So just to reiterate then, so the actual margin that you're forecasting is based on what you have today?

Yes, well you have to make -- I mean, if I look into for example into short term in to what you saw this year, this quarter, and what's going to move into second quarter, is that we're operating at less revenue, if you like, driven by the backlog in the orders that we won -- the order delays that we've had. But we are operating on a same cost base in terms of SG&A and R&D. Moving into the third and fourth quarter, what I see is, the backlog that's migrating from the programs we've won in the latter half of the last financial year, and the latter end of this quarter, plus a few orders and being quite conservative about the orders that we will win. So the largely is the part of the backlog and some orders that we have to win.

Excellent. Thank you very much.

Ben Cherniavsky, Raymond James.

Good morning, guys. I'm wondering how the impact of IFRS changes the way you look at your full utilization rate margins and you've talked in the past about getting back to where you were and I realize there is more margin leverage on the product side, which is less affected by IFRS, but, a big change in the margin -- in how the margins look on training. And, if we look back to the previous peak under GAAP accounting, you had margins I believe around 19% or so, which went down in the recession. And, as we sort of model a more full recovery, what is that? Do you have any idea under IFRS accounting what those numbers kind of look like?

Yes, and if you look at the comparing what -- the results that we had under Canadian GAAP last year, with the restated results that were showing in our MD&A for the same quarters, you see that they -- that the implementation of IFRS did increase the margin in the Training and Services / Civil segment. The biggest impact really was the recapitalization of our sale and leaseback of our operating leases on our balance sheet under IFRS, which were previously operating leases under Canadian GAAP. So, what you basically do is you replace the rental expenses with a repayment of capital and interest. So, the interest is below the segment operating income line. But, it tends to increase the margin in the Training Services / Civil alone.

There is some impact in all of the segments, if you do that comparison. But I think overall, in the Civil business as a whole, we're looking at -- and it will very from quarter to quarter obviously. But you're looking at around a 200 basis point increase on the margin for the Civil business as a whole as I said, under IFRS compared to where we were under Canadian GAAP.

And that would be the same magnitude looking backwards? I guess, Marc, correct me if I'm wrong, but I think you said previously that you sort of target a 20% margin, and that was under GAAP accounting. So do we just assume that your new target would be 22%?

Yes, I think that's correct.

Okay, thanks. And, 1 follow-up if I may. Just, I notice through the discussion of the MD&A, a few mentions of the declining revenue from CAE Academy. Is there something going on there? Or how material is that and maybe can you just speak to a little bit what that initiative has been doing?

I can't -- it must not be to material because I'm not-- you want to comment Stephane?

I guess, none of us know, too -- I know it's recalling the MD&A, but there's nothing really that I would be worried about there in terms of the operation of the business. I think there is a case that -- depending on sometimes things like weather, the way the book our revenue in that business, is airplanes have to fly and sometimes weather affects us, seasonality. But there's nothing in there that worries me in terms of the business itself.

Okay, thanks. Just thought I'd check. Thank you very much.

Yes, I mean overall the way that we look at that -- we continue to be encouraged by that business, just by the fact is -- particularly in the emerging markets of the world. The infrastructure, the trained pilots are not there and there is, for sure, going to be an increased demand to the level of 23,000 new pilots a year to be trained. And we are starting to see that. So, we are gearing ourselves up to be able to answer that demand.

Hamzah Mazari from Credit Suisse.

Good afternoon, thank you. Just a question on your civil training business. Seems like you've signed a number of contracts there. Could you comment on maybe what you are seeing in terms of share gain in that business? Relative to just underlying cycles coming back or market growth rate if you will? Thanks.

Share gain, you're talking [amsa] against the competitors? Or, is that what you meant?

Yes, yes, yes.

Well, I think in products, we are over 70%, pretty much on par with what we've seen in the past. In the training business, we do very well in the emerging markets. I'm talking disproportionately well, and that's been our strategy to go out there and be able to set ourselves up as a -- gain the first mover advantage. So I think we have pretty strong market share, if you'd look at South America, at Asia, and China, India. You saw I think with the 2 JVs that we've announced with -- the 1 in IndiGo, InterGlobe who is the parent company of IndiGo, I mean that will be the fifth training center that we've -- we are going to be putting together in India. So, I think we are doing well there.

Okay, great. Thank you very much.

You're welcome.

Benoit Poirer with Desjardins Securities.

Yes, good afternoon. My question is more on the Military side. I understand that timing is more difficult these days, but could you maybe provide some color about the pressure you receive right now from clients on actual contracts that you deliver? Just trying to understand if the client is trying to put pressure on the current rates? Thank you.

I don't see that, Benoit. Once a contract is signed, we typically don't see that. Of course, there's huge -- in all of the areas of defense there's a huge oversight in terms of how you execute the contracts. You have auditors, we have auditors present at our facilities in Tampa for example, government auditors. But, there's nothing there that results in us having different margin as we execute the project coming from customers. Stephane do you want to add anything?

What I saw, Benoit, is nothing in the very recent past. As a matter of fact, if you go back -- and as you know I've been working for that business for quite a while, there certainly has been at that change probably I'd say 5 or 6 years ago and there was more involvement from the US government, for instance, in auditing processes -- auditing of our rights and so on. But no specific unusual pressure from our customers in the recent past.

Okay, thanks for the time, I will get back in the queue.

Tim James with TD securities.

Thanks. Good Afternoon. Just wondering if you can talk about the impact on margins longer term as you look out over the next couple of years, if any, from generating an increasing amount of Training revenue from developing markets? I'm just wondering whether that's the dynamic in the margin that you can generate from those regions is weaker or stronger than your legacy business in Training?

No, I wouldn't characterize it that way. When we give, Tim, the combined margin error, which I said at the peak, I'm pretty confident we can achieve like the 20% kind of combined margins, more like 22% under IFRS, combined EBIT margins. That takes into account the kind of diversity we see in terms of profit we can make in various jurisdictions of the world. I mean, looking 2 years out it is kind of difficult, but having said that, I don't see any -- I can't see anything that would change that.

Okay, thank you. In the Training Services / Civil segment with utilization improving noticeably in Q1, versus last year, what influences cause the decline in margin percentage relative to last year? Of course of you exclude the gain the was reported, is that partly the integration of the CHC business or is there other influences there?

Okay, so you are backing out the AirAsia contract and you're looking at the underlying profitability?

I'm backing out the CAD6.8 million and then just comparing the training services civil margin versus last year. And, I believe it's down a little bit and despite the fact that utilization improved quite nicely in the quarter. I'm just curious as to what might have been causing that?

Yes, I think there's nothing specific. If you look at apples to apples, taking those JVs out, which I wouldn't do, but anyway if you look at the underlying performance, I think you go from about 24% to 23%. And you're right, I think that mix has a lot to do with it. I think business aviation would have a lot to do. Stephane doing anything on that 1?

No, I think you are absolutely -- the difference in margin was not that big -- 1%. And, as we go -- as we increase our volume in different parts of that business a large portion of that business is fixed costs, as you know, so I think you would expect some pickup in the future as volume keeps increasing.

I think the fact that you haven't seen this quarter, good question, but it doesn't overly worry me. There is a mix issue. There's an issue of business aviation, maybe some -- there's a question about and it is true, a little bit lower in Global Academy, which factors in. But, as Stephane says, as our training centers become more and more occupied, we will see the gearing associated -- levers associated with that.

Okay, thank you. My next question, just wondering what the CHC -- HFTO business, the revenue recognized from that, does it hit any region in particular for you? Or, is it pretty widespread? Just when I'm looking at your geographic breakdown, I'm just wondering if it had a bigger influence on any particular region?

I think we're looking around, don't know the specific answer, but the training centers are -- there is 1 in Norway, 1 in Vancouver, 1 in the UK.

Some locations in Australia.

So I think we have to get back to you, right now. So I can't really say right now off hand.

So they're not necessarily sort of equivalent amounts of revenue coming out of each but those are the regions that would be affected, I guess?

Yes, yes, I think the main bases are Stavanger and a location in the UK as well. Aberdeen.

Okay. And then just my last question. Revenue from China was up quite significantly year-over-year, I think in the range of CAD15 million, and just wondering if you know off hand what the key was to that growth or what drove that performance?

I haven't looked at it in detail but I'm sure it's simulators. I mean, 2 things are up. I think definitely activity in our Zhuhai joint venture training center is up, definitely, and we sold more simulators there in the past couple of years, so I haven't -- the numbers broken down, but I'm quite convinced that's the reason.

So it would be a combination of both training and actual equipment sales, would it?

Yes, that's -- because we don't sell military there.

Yes, okay. Thanks very much.

Thank you.

Ron Epstein with Bank of America Merrill Lynch.

Hi, good afternoon is Elizabeth in for Ron, today. Just a couple questions. First, you said the tax rate for the year was going to be lower than originally guided to. What rate should we be thinking of?

Well, as we said, it's difficult to pick up a precise number at this point in time. I know we've said that we would be around 28% in the past, I look at the results for the first quarter, we're down to 24%. It really depends on where in the next few quarters the revenue will be generated from. I think we are comfortable at this point in time to say that it will be lower than the 28% that we've said in the past. Where I would be cautious, though, is that's good news for us. The flip side of it is we're -- depending on where the growth comes from again we are going to be facing some headwinds from FX that may unfortunately offset the benefits that we get from a lower tax rate. Which is going back to your initial question -- it will be something lower than 28%, but I wouldn't risk a number at this point in time.

Okay. And then, could you please explain how if you have order delays that effects your margins because aren't you booking revenue associated with your current backlog? So, how do order delays impact margins in the defense unit?

Well, it's really just the project margins are similar but we have lower volume going through and we're maintaining the same SG&A and R&D costs. That's essentially the issue. And the order delays that we've had, just means that we have less revenue going through it at this moment in time and we have to maintain -- the first part of the programs are usually R&D intensive and they don't result in revenue. So, does that answer your question?

But revenues were up, right?

Year-over-year. Right?

Right. Okay.

Maybe I'm not answering the question right, am I? I think the point is that as we started the year, 30% of our budgeted revenue depends on orders that we expect to win during the year. And, it's in that area where we've seen some delays. Some orders that have come in a bit later than expected and others that we are still waiting for that has led to already lower revenue volume than we anticipated in the first quarter.

Okay, okay. Thank you.

Thank you.

Michael Williams with CIBC.

Thank you, good afternoon. Just a follow up on the previous question. Did you say that basically about 30% of the revenue expected in the year is budgeted for, but not fully booked?

Actually, if you look you'd look for the full year, we typically begin the start of the year with 70% of the revenue for the year in our backlog. So, what it means is that we typically have -- we need to win 30% of the revenue for the year from the orders that need to be generated to come in.

Okay. So --.

That's the 30%.

So there's more hesitation by various governments -- US, Europe -- and could you see revenue come you know, decline year-over-year?

For the full year? For the full year you're saying?

Yes.

That would be an absolute worst case, which I don't predict. I think, as I said in my remarks, I expect that we are going to have -- I feel good that we are going to have growth overall in revenue this year, but I am just backing off of the actual number that I've given before. Because of the uncertainty around timing. Again, it's not my worry about not being able to win orders, because in a lot of cases, we are sole-source on them. And in a lot of cases we've already been told that we've been selected for those that are competitive. It's just the delays on putting together and the anticipation or the worry that there may be another continuous resolution in the United States. So it's really around the timing of those orders.

Okay. And then, just the question I had was just on the new core markets, you've been at CAD11 million in quarterly revenues the last 3 quarters. When should we think about the next leg up for that market? Because I know there's a lot of growth potential there, I'm just trying to think about how the trajectory looks?

Well, I think we haven't really commented on that and I think I wouldn't want to comment too much about it right now, I think, but what I have said is that we're on a trajectory in these businesses to be bigger than CAD11 million per quarter. I mean, we're satisfied that year-over-year, if you look, we almost had nothing a year ago and the last full year we had CAD38 million in new core markets. So, we feel good about that and we continue to believe that we will continue to grow at a pretty good rate. So but I would want to be specific as to when we will do that. But, we're certainly not talking years.

Okay, thank you.

Marko Pencak with GMP Securities.

Thank you, good afternoon. I'd like to get some further insight into generically the way that you structure your military contracts and I'd like to understand if there are differences between your equipment contracts and your training contracts. And, what I am trying to understand here, is to the extent that you do experience any scope revisions or deferrals in terms of an annual allotment, or an outright cancellation, what kind of penalty clauses have you built in to your contracts, if any?

Well, look at -- on the equipment side, very often the customer may have some right for terminating a contract for convenience, and if it is the case, then we -- the customer would pay all of our cost plus a margin. I don't recall, actually, that it has happened.

No, but that's what's in our contract.

But contractually this is the kind of protection that we have. On the service side, it really depends. We do have some long-term training services agreement where there is no direct way for, if you're a customer, to terminate the contract. In other -- in certain jurisdictions, I'll take the US as an example, the funding is approved on a yearly basis. So, our contract is, as good as 1 year once the funding gets approved. But again, typically, the case of the KC135 is a very good example. Once you're in, then the likelihood of the contract being terminated or canceled is very low. And, just closing off on the more technical point -- from an accounting standpoint we only recorded in our backlog the funded portion of those orders.

Right. Just a question, for example, if you have a multi-year training agreement and let's say, that it's been previously funded and then let's say for fiscal 2012, the customer comes back to you and says oh, by the way, my budget for this particular funding has dropped by 20% and therefore, I will need 20% less of your services. So, at that point in time, would you be making any kind of a revision to your backlog and would you be able to capture any -- give any financial benefit akin to what you described in products? Or, is it basically just a risk that you bear?

No. Well typically, I think it would be -- I'm thinking about a couple of those longer-term services contracts where it would be -- the customer doesn't contractually have that option to get out the contract so I guess we would need to sit down and see what it means for us, for the customer and eventually with some other partners; banks or subcontractors. If it were the case and we would agree on a termination or a reduction in scope, then we would adjust our backlog. Yes.

I think the -- what's noteworthy as well, Marko, is that the trend that we are seeing is actually going the other way. Because when you -- typically, the only time that you would either cancel programs like that is if they just retire or basically put down the whole fleet of aircraft. You could see some reduction in the number of aircraft, but more of what we see, particularly in the US, is that the customers that we have, without going into which 1, because they would not want to be quoted, but is -- the fact is they have to maintain readiness, i.e. fly the aircraft, the same number of aircraft that they have, and do that at a reduced cost. So that really -- the trend is towards more use of simulation and we are getting contracts to upgrade simulators that we have under those training contracts to increase the level of fidelity to allow them to use the simulators more to reduce the amount of real flying time. That's the trend we are seeing.

Great, thanks for that detail. Appreciate it.

Operator, we have only 5 minutes left in the time allotted, and we did want to open the lines, of course, to members of the media. I appreciate that there's probably more questions from investors and analysts that I would be happy to take off line, the conference call. And, I would ask that you please open the call and the lines over to members of the media.

Thank you. (Operator Instructions). This portion of the Q&A is reserved for the media.

We have no members from the media at this time, sir. Would you like to proceed back with analysts?

We have time for one more question.

David Tyerman from Canaccord Genuity.

Yes, good afternoon, gentlemen. I will try and keep it really quick. Just first on the CAD6.8 million Training and Services / Civil. I'm guessing that also ran through the sales line? Or did it not?

It did not. It's a product -- Sorry, was that the end of your question? Was that it?

That was the question. I have another question. But, --

I'm sorry I thought that we had cut you off, go ahead.

No.

I was just going to say but it's a very valid one It's product sales that have gone through our Civil segment because those simulators had been put in operation before being sold have not then been put in production -- we would have seen the same sales going through our product segment and then, yes, we would've recognized revenue and gain on it.

Okay, so sorry did the CAD6.8 million go through somewhere?

It did.

At some point?

It did. It went as additional margins on the Training and Services segment.

Right. So, was there never any sales recorded related to that sale?

The simulators were in our fixed assets.

Okay, got you.

So sales, they were accounted for as disposal of assets.

Okay. Understood. And then the other question I had was just on the non-cash working capital. It was a really large use of non-cash working capital, I'm not sure if it was the largest ever in Q1, but I look back a bunch on them and it was certainly very big. So, I'm wondering, why it was so large, and then would we see an usually large recovery in the remainder of the year? Just given the size of the draw in Q1?

It was a large utilization on non-cash working capital. I'm not sure if it was the largest ever, I don't know, but if you compare it to the first quarter of last year the investment in non-cash working cap this quarter was CAD160 million. And in the first quarter of last year, we had invested CAD115 million, basically CAD115 million, so there's kind of a CAD45 million more investment in this quarter compared to the same quarter of last year. And, this is a trend that we typically see every first quarter because of some specific payments that we have to do in the first quarter of our years. But, we definitely haven't seen that kind of magnitude in the first quarter of last year. The volume has gone up, so it certainly going to be a factor, but it really is mainly driven by the accounts that we faced in the first quarter so it's mainly, mainly driven by a drop in our accounts payable and accrued liability. As well as in our DOC -- our deposits on contracts.

So, would you expect a larger than normal normalization through the remainder of the year?

No, I think as I said, we definitely expect a portion of that to reverse by the end of the year.

Okay, that's great. Thank you.

Too early to say, David. I'd like to come back to your first question there because I think it's important that we clarify what we are doing there. I think we've been talking to analysts and investors for quite a while that -- in Civil and the Military business, we operate this business very much from a combined solution selling process and that really gives us an edge in the market. Because if you think about it, the Civil business, we're the only company that can offer products, services, training, provide pilots, operate your training center. So we use all of those weapons that are disposable in this kind of market. So, when you look at this I think it would make it akin to -- often what we'll do is we will have, in our products business, we'll have advanced built simulators. Meaning that we'll have simulators that are half built in our inventory that -- because we want to be able to seize the opportunity for a customer that needs a short delivery time.

So then, when you see that, and we've seen that in past quarters, not recently, but we've seen that product segment, that you get a quarter that you get a bump because you've had these advanced builds that suddenly -- they were half built so they could turn into revenue very quickly rather than, say, the 12 to 18 months that a traditional simulator takes. In the products, in the training sector, what you're seeing us increasingly doing -- and in this case we have 3 such joint ventures this quarter -- what you are seeing us doing is go after the customers and in some of these cases is to say putting assets into their training center. Sort of like advanced builds except for the training side, we've put in there in anticipation of being able to grow and create a joint venture around it. And when that happens, okay, we crystallize that by basically recognizing, if you like, the sales all at once, or the EBIT all at once. This is what happens, and that could happen in the future as well. And that's why we disclosed the number, but, I think you -- just in the same way that I talk about combined margins of the peak expected to be 22%, I would really basically advise you to look at this on a combined basis. It would have been the same as if we had done, in our minds, that if we had done an advanced bill in our product segment.

Thank you, operator, that really is all the time we have for the call this afternoon. Once again, I would invite anyone with remaining questions to contact me by phone or e-mail. And, I thank all participants for joining us and we would remind you that the transcript of the call will be available on CAE's website www.cae.com. Thank you.

Ladies and gentlemen that does conclude the conference call for today. We thank you all for your participation and kindly ask that you please disconnect your lines. Have a great day everyone.