CAE Inc (CAE) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen. 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. Before we begin, I need to read the following. Certain statements made during this conference including but not limited to statements that are not historical facts are forward-looking and are subject to important risks uncertainties and assumptions. The results or events predicted in these Forward-looking statements may differ materially from actual results or events. These statements do not reflect the potential impact of any 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 will find more information about the risks uncertainties associated with our business in the MD&A section of our annual report and annual information form for the year ended March 31, 2011.

These documents have been filed with this Canadian Securities Commission and are available on our website at cae.com and on SEDAR at sedar.com. They've also been filed with the US Securities and Exchange Commission under Form 4-F and are available on EDGAR at sec.gov. Forward-looking statements in this conference represent our expectations as of today, May 23, 2012, 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 Marc and Stephane, we will take questions from financial analysts and institutional investors. Following the conclusions of that Q&A period, we will open up the call to members of the media.

Let me now turn the call over to Marc.

Thank you, Andrew and good afternoon to everyone joining us on the call. I'll first discuss some highlights for the quarter and full year. And then Stephane will provide a bit more detail about our results. I'll come back at the end to talk about our view of the way forward. I'm pleased with our performance in the fourth quarter and full year. On a consolidated basis, we delivered double-digit revenue and earnings growth for the year with solid margins combined with a strong order intake. Our backlog reached a record CAD3.7 billion, and we generated CAD174 million of free cash flow.

In Civil, we benefited from our strong market position and healthy demand in all regions. Total Civil revenue increased 9% for the quarter and 16% for the year, and operating margins exceeded 20% in both periods. We maintained our market leadership with seven additional orders for full flight simulators to reach a total of 37 sales during the year. In Civil Training and Services, new agreements signed during the quarter are expected to generate CAD214 million in future revenue. These include a long-term recurring training services deal with Vueling Airlines, the anchor customer for our new center in Barcelona, Spain. We also signed contracts with AirAsia and Vietnam Airlines to train new pilot cadets through our Ab-Initio Flight School programs. Another measure of our success in the civil market is the CAD1.1 billion in new orders booked for the year, a new record for CAE, giving us a book to sales ratio of 1.29 times. For the quarter, we recorded CAD284 million in orders for a ratio of 1.32 times.

Turning to our defense business, the fourth quarter was much stronger as we had anticipated. And we achieved 4% revenue growth for both the year and the quarter, while maintaining 15% plus operating margins. In the US, we booked orders during the fourth quarter for five C-130 Hercules aircraft simulators and a UH-72A Lakota helicopter training device for the US Army. We received contracts to upgrade the US Air Force KC-135 tanker aircraft simulators, and we won a contract from the US Army involving upgrades for the High Mobility Artillery Rocket System Maintenance Training System. In emerging markets, we booked an order for tank simulators in Asia, and we formed a venture with the government of Brunei to develop the CAE Brunei Multi-Purpose Training Centre. Within that venture, CAE was awarded CAD170 million in initial contracts for long-term training services on helicopters and fixed wing aircraft. This is a good example of government outsourcing of high end professional services and the tendency towards increased use of modeling and simulation for training and analysis.

While the year was challenging for our defense business in terms of predicting the timing of orders, we were successful with a solid CAD960 million in new orders for a book to sales ratio of 1.07 times. This includes a record level of US defense contracts and a strong increase in activity in emerging markets. For the quarter, we recorded CAD420 million in orders, for a ratio of 1.57 times. At the end of the year, our total backlog for the Military segment stood at CAD2.19 billion. In our new core markets, we continued to make good progress aligning our resources and structure for future growth including the integration of acquisitions. Revenue was CAD24 million for the quarter, and CAD83 million for the year, which is more than double last year.

CAE Mining sold software solutions to Vale and Goldcorp during the quarter, and received a contract to provide a workforce development strategy to the University of Saskatchewan. During the year, we broadened our footprint with new offices in Australia and Western Canada, and completed the development of a mining simulator called CAE Terra, which leverages high fidelity aircraft simulation standards and is intended for training operators of large haul trucks and electric shovels. CAE Healthcare significantly expanded its market reach through the acquisition of Medical Education Technologies, gaining a direct sales force in the US, close customer relationships, innovating marketing initiatives, and a worldwide distributor network. During the year, we sold a range of simulator products and center management systems to customers located in the US, Europe, South America, the Middle East, and Australia.

Stephane will now take you through some of the financials.

Thank you, Marc. Good afternoon, everyone. Consolidated revenue for the quarter was up 9% year-over-year at CAD506.7 million, and net income attribute able to equity holders was CAD53.2 million or CAD0.21 per share. Operating profit in the quarter was CAD88.7 million for a net operating margin of 17.5%. For the year, consolidated revenue was up 12% at CAD1.82 billion, and net income attributable to equity holders was CAD180.3 million or CAD0.70 per share. Operating profit in the year was CAD302.1 million for a net operating margin of 16.6%. We had good cash flow performance in the quarter with free cash flow of CAD106.7 million. This was mainly the result of favorable changes in our non-cash working capital accounts, as we usually expect in CAE's second half. For the year, we generated CAD173.7 million of free cash flow for a net income to cash conversion of 96%.

Net debt was CAD534.3 million as of March 31, 2012, compared with CAD593.9 million last quarter. The net debt reduction of CAD59.6 million was mainly due to increased cash before proceeds and repayments of long-term debt. Income taxes for the quarter were CAD18.4 million for an effective tax rate of 26%, which compares to 27% last year. The lower rate reflects a change in income mix from various jurisdictions. Capital expenditures were CAD44.4 million this quarter, including CAD36.1 million to support growth initiatives in the balance for maintenance. For the year, capital expenditures totaled CAD165.7 million, including CAD116.8 million for growth.

Now looking at our segmented financial performance. In our combined Civil segments, fourth quarter revenue increased 9% year-over-year, reaching CAD215.4 million. For the year, revenue grew by 16% to CAD840.9 million. Our combined Civil operating income for the quarter was up 28% to CAD44.3 million for an operating margin of 20.6%. For the year, operating income reached CAD173.8 million for a margin of 20.7%. Utilization in our training centers for the quarter increased to 75% from 73% last quarter and 74% in Q4 last year. The utilization for the year as a whole increased to 73% from 70% last year. Our trailing 12 month revenue per simulator increased to CAD3.57 million from CAD3.46 million last year.

In our combined Military segments, fourth quarter revenue was 4% higher year-over-year at CAD267.1 million, and also up 4% for the year at CAD897.3 million. We generated a 17.1% operating margin in the fourth quarter, and 15.8% for the year. In new core markets, fourth quarter revenue increased 118% year-over-year to CAD24.2 million. Operating loss was CAD1.2 million in the quarter. And for the year, revenue reached CAD83 million and operating loss was CAD13.8 million. This included the acquisition and integration costs associated with the METI acquisition in the second quarter.

With that, I will turn the call over to you Marc.

Thanks, Stephane. Fiscal 2012 was a good year for CAE with record performance in a number of areas. We made significant moves in all of our businesses to further strengthen their positioning and growth potential. Our strong cash flow, record backlog, and strong pipeline of opportunities gives us a solid start to the new fiscal year and continued confidence in the way forward. In civil aviation, the acquisition of Oxford Aviation Academy accelerates the progression of our long-term strategy. It strengthens CAE's leadership position in Civil, with the addition of two of the industry's foremost brands in Ab-Initio flight training and crew sourcing services. With this move, we have a broader footprint, increased capacity, and an even wider set of capabilities with which to differentiate CAE in the market. Civil aerospace market fundamentals are strong, and we believe we've increased our leverage to the civil cycle at an opportune time. With the projected doubling of the global aircraft fleet over the next 15 to 20 years and a record commercial OEM backlog of more than 9,500 aircraft, we feel very good about CAE's prospects for continued growth.

For the new fiscal year, which began in April, we're looking to capitalize on our broader trending footprint resulting from the initiatives completed or announced last year, while ramping up expected synergies from the integration of Oxford, a process that will take 12 to 15 months. Despite the economic difficulties in southern Europe and the high cost of jet fuel, we see continued strong demand for our Civil Training and Services as a result of a robust commercial market and the potential of a broader recovery in business aviation training. For our Civil business, we expect sustained growth with solid margins. In defense, the market continues to be challenging in terms of predicting the timing of orders, but we remain confident in CAE's outlook. Through our success last year, we've demonstrated the strength of CAE's position in terms of platform exposure, global footprint, and the fundamental value of our simulation-based solutions. In fact, CAE is among a select few defense companies that continue to show top line growth and good profitability last year. We're looking to sustain our momentum in the current fiscal year on the strength of a solid backlog, a large opportunity pipeline, and proactive measures to address new market realities.

As we -- as you've seen from our orders this year, our business is increasingly coming from high growth regions like Asia and the Middle East which are steadily modernizing their forces. At the same time, we're seeing lower activity in Europe where force reductions are continuing. We are taking measures to refocus our resources and capabilities in response to this change in the defense market. As a result, CAE's current workforce of 8,000 is being reduced by approximately 300 employees, most of whom have already been advised. We regret the hardship that this will cause to those affected, and we intend to do what we can to assist them. In relation to this activity, we estimate a total restructuring expense of approximately CAD25 million to be recorded mainly in the first half of fiscal year 2013.

Now turning to the new core markets, we're making excellent progress. We're well on our way to meeting our goal of having material business that leverages our core competencies outside our core. We're confident that we'll turn the corner to profitability this year. And I continue to expect new core markets to become as large in the years ahead as any one of our four other segments today.

To conclude, our business has performed well in the past year, and we're taking steps to get the most out of a strong civil aviation market and to ensure our continued success in defense. With the acquisition of Oxford, we've increased our leverage to a strong market at the right time. And in defense, we offer customers a unique value proposition. With the proactive measures we're taking, we can continue to grow and generate sector leading margins. Lastly, I'd like to recognize the contribution of CAE's employees, who are the very best professionals in our industry, and to thank them for their continued hard work and dedication. I'd also like to welcome the Oxford employees, who are great addition to our team.

And speaking of great people, before I take your questions I'd like to comment on the leadership succession in our Military business. We announced today that Martin Gagne is retiring from his position as Military Group President and staying on as a consultant in order to ensure a smooth transition and to continue to provide support on the number of strategic initiatives. On a personal note, since I took over the Military business in 2006, I've worked with Martin throughout that period since then and we're very sorry to see him go. Martin is a solid leader with a great track record of success, and I wish to thank him for his 16 years of devoted service to CAE and again, congratulate him for his many successes. At the same time, I'm very pleased to announce the appointment of Gene Colabatistto as our new Military Group President. He joins us from SAIC, and he brings more than 25 years experience in a number of leadership positions within the industry and the military. Prior to his corporate career, Gene served in the United States Marine Corps. I'm very confident that Gene brings his unique skill set to CAE that will help us to continue to grow our presence in our core military market as well as to develop our position in adjacent markets.

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

Operator, we'd now be pleased to take questions from analysts and institutional investors. But before we open the lines I'd first like to ask that in interest of fairness that you please limit yourselves to a single part -- single one part question. If you have additional questions after that, please feel free to reenter the queue. Operator, please go ahead with the question.

(Operator Instructions) David Newman, Cormark Securities.

Just on the margin guidance -- or the margin guidance maybe you can give us, on Military set-offs you had 300 cuts. My question is where are they coming from? Is it professional services, xwave, or some of those areas? And does it imply that the margin guidance should also see commensurate pick-up by about CAD25 million? Then any guidance overall you might have overall on the Military side? And then I'll switch over to the Civil side.

I think maybe if I go to the essence of your question, I think the cuts are -- I think there's a lot in Europe, as you would imagine, because of what we're doing here. But it's spread across the business. In Canada, we have some as well because obviously we have a lot of personnel here. There's about 90 here, mainly at headquarters in Montreal. And maybe just go to the essence of your question, I think what I would tell you is that we expect probably about CAD8 million of annualized savings that come out of that. And if you look at when we're doing this and there's going to be some disruption around it, so I think we'll get maybe three to four benefit this year out of that.

And any initial comments on margin profile that you might expect? Or is it just too much of a crystal ball at this point?

I think in terms of Military margins, I think we continue to expect a kind of outlook that we've seen between 15% and 16% overall from the Military business.

Okay. And then on the Civil side you did 37 sim sales this year -- great year. Any -- what's your expectation for next year, and what might that imply on the Civil side? Probably more manufacturing, but it looks like you're fairly consistent on the training side.

Well, I think if you look at our products business, the market drivers for that is really in large part, the delivery of aircraft coming out of the OEMs. So they've increased their production rates and they continue to do that, but of course it's a slow ramp-up. So based on what I see, we're expecting again probably a high number, probably similar to what we guided for this year, about mid-30s, that would be my guess at this point early in the year.

Perfect. And then on margin side, did you see anything that would be plus or minus from what you did this year or going forward?

I think if you look at the margin for combined Civil business, I think what we said before is that at the peak of the cycle in the business and I talked before Oxford here, we were talking about at the top of the cycle we would expect to be able to make in the region about 22% EBIT combined business. You saw what we're delivering. We're doing close to 21%. So I think we're doing pretty well considering that business aircraft hasn't really ramped up fully. The small business jets and medium hasn't really recovered, so there's juice to be had from there. I think if you look at it post-Oxford, you really I think need to adjust for, as we discussed in our call last week, to if you take Oxford business, about half of that business comes from our pilot sourcing business, CAE Parc, and that's lower margins. I mean great business, but lower margins, not capital intensive. So I think if you look at it, although the transaction is very accretive to earnings. I think if you're -- obviously it will be dilutive to margins going forward because of the -- mainly because of the contribution of Parc and the fact that there's some synergies to be had to ramp up the performance of their training business to the same level of our which we're already started to do.

Cameron Doerksen, National Bank.

Just want to go back to the Military segment for a second. Specifically on the revenue, I appreciate that there's some difficulties in trying to predict the timing of certain contracts, but would it be your expectation that the Military -- combined Military revenue would grow this year, and if so, do you have any guidance you can provide on the magnitude of that growth?

I think -- I expect that based on what I see of the pipeline of opportunities on top of the backlog that we have, that we'll be able to continue growing this business. I keep to my expectation of modest growth this year.

Turan Quettawala, Scotiabank.

On the Military side as well, just as a follow-up to the last question, what percent of your revenue growth expectation mark is already won in terms of contracts for fiscal '13?

Let me just -- I'm not sure I understand the question. You cut out -- How much is in backlog? Is that what you meant?

Yes.

Okay, got it. I think at this moment we have approximately about 65% to 68% in that region in backlog. If I look at the US specifically, probably had approximately -- no, I think we'll keep it at about 65% to 68%. That's solid numbers. [That's backlog].

That's great. Thank you. And if I may, just one more. On the Military backlog again, if I look at the same product backlog on the Military side, that's down, but training services is up and that's been the case for the last couple of quarters here. Is that sort of an ongoing change in behavior, you think? Or is that just temporary?

I think we've talked about a while ago that we see the tendency for governments to outsource training and provide -- and that's good for us. There's good growth of recurring training services. So the growth of backlog and training is a good story for us. I think what I would say though is it's hard to look at it between quarters or even six months at a time because there's a lot of variability in terms of when we can book these. So I would expect that we're going to ramp -- be able to ramp back up some product orders to get back into the proper mix there.

Benoit Poirier, Desjardins Capital Markets.

This Etienne de Rocher on for Benoit. Just had a question on the competitive landscape. I was wondering, Marc, if you could provide your comments about the competitive landscape if you expect any changes now that L3 has acquired the civil business of Thales?

I think -- obviously if somebody, L3 has bought Thales, it's inevitable it's going to change because it's different owner. Having said that, what it means for us, we'll see. But clearly the one thing I would tell you is we never rest on our laurels. We were dealing with a formidable company upon it to start with. Thales is a great company and L3 is a great company, and I'm sure that they will want to do well in their business. I think that we are confident in our ability to continue to succeed in the market. That's all we do. We excel in what we do. We spend about 10% of our revenue every year to make sure that our products and services in this business are really top notch. We take very, very good care of our customers, both in the quality products, the services we provide, the customer support. If you look at the bandwidth of our capability, both from a product, services, pilot sourcing, Ab-Initio Flight School, and the geographical bandwidth that we have, I think we can certainly be the formidable opponent that we have been to anybody coming in, but we will be smart. But again, we're not into giving up our share of the market.

David Tyerman, Canaccord Genuity.

Just a follow-up question on the Military side. So it looks like your SPM backlog is the lowest it's been in, I think, three years. You've got pretty good TSM backlog, but that's very long dated and we also have problems in Europe and problems in the US. I guess I'm wondering what is the risk here that you, instead of getting actual modest growth, that you end up with modest declines? I'm thinking particularly on the equipment side because your backlog is down and perhaps contracting et cetera is delayed as usual it seems these days.

Well, I think what I would tell you, you saw the answer that I gave there, we have about 65%, 68% in backlog now for the year. Last year was approximately at the same time we probably had about 70% if I recall, a bit lower overall. But again, if I'm telling you I think that we'll get modest growth is because I have a pretty good visibility on the pipeline of opportunities that we're bidding near-term, longer-term, and making some allowance for what can be delayed. In the end, there's no doubt as is every year, we have to win orders to continue to progress. Do I think we will win them? Yes, I'm pretty confident that we will, and I feel strongly that we'll be able to continue to grow this year modestly.

Okay, that's helpful. Thank you.

Ron Epstein, Bank of America.

It's actually Elizabeth in for Ron. For the CAD25 million for the one-time expenses that are expected in the first half of the year, how should we think about how they'll be weighted across the first two quarters? Will it be more heavy in the first quarter?

Stephane, do you want to take that one?

Yes, I think it will be a case. It will span over, as Marc has mentioned I think in his remarks, a lot of the people are being advised today. So I expect that most of the CAD25 million would be incurred in the first quarter. There will be some more in the second quarter, but it will really be in the first half of the year, mainly in the first quarter. The vast majority of it will be in the first quarter.

Okay. And can I ask one more question on new core markets. How should we think about the margins progressing throughout the year? If it's profitable on the average for the year, but how should we think about it progressing through the quarters?

We haven't really provided and the outlook on that yet, Elizabeth. And the reason we don't, frankly, is because we are continuing to invest in this business because we don't want to stop at the level of revenue that we're going to target for this year in the CAD120 million range. My view is that we'll be profitable for sure, but we're going to continue to invest in R&D and SG&A to support the creation of a stronger business. So I'm not ready to be able to really provide very precise profitability quarter by quarter at this point.

Scott Rattee, Stonecap Securities.

I just wanted to check on the full flight simulator side. Could you give us how many deliveries you've had this year both internal and external? And then also maybe just some color on what sort of manufacturing capacity you do have available? Thanks.

We delivered 34 simulators this year, and 28 were external, 6 internal. And what I would tell you is we have lots of capacity. There's no -- I would tell you -- I've done a lot of operation in my life. We -- capacity is not an issue.

Okay, that's great. Thank you.

Anthony Scilipoti, Veritas Investment Research.

I'm just looking at the cash flow statement, and I wanted to understand one difference looking specifically on the investing side in the joint -- the line item marked joint ventures. And it's moved from a negative 1.9 to negative 287.6. And I know that reflects on note four, but maybe you could give us some color on what is happening in these investments and how we're to interpret them from the standpoint of the rest of your business?

Sure. Well, these are, as you know, we've created a number of joint ventures in this last fiscal year, more than the year before, and some are quite sizable in nature. So that represents our share of the equity investment in those joint ventures.

It could also be for the transfer of assets for flight simulators or --?

Well, we actually -- it's really our equity investment in these ventures. And we subscribe to some equity, our partner does as well. And this is the way we fund all of the investments that have to be done within the joint venture including purchasing some simulators from us obviously.

I see. Okay, that's good. Thanks.

David Newman, Cormark Securities.

Just a quick follow-up, guys. Just on your METI acquisition, I think one of the things you described in Florida was a move into the clinical setting, and then additionally, partnering with the OEMs on the ultrasound devices. Do you want to give us a little bit of color on how that's proceeding?

We don't have anything we can announce at this moment, but I think the penetration of our ultrasound devices is going very well. It's probably the highest growth sector at the moment, and we're very optimistic about possibly going forward. Yes, we are talking to OEMs. I'm optimistic that we'll be able to do something that will be announced in the future, nothing now. But I'm optimistic about certainly that prospect for sure, David.

And the clinical setting, any uptake there?

Well, I think as we said, the majority of our sales so far in the medical business is still really educational institutions because that's where the market is. Some very -- I think some movement in the clinical side, mainly on nursing I would tell you. That's a strong market, but the bulk of it, no, mainly because -- that's, I think, a longer-term process. And we're not counting on for the growth of business, but certainly when and if it happens, it will be quite a big opportunity for us.

Very good, thank you.

David Tyerman, Canaccord Genuity.

Quick question on Training and Services/Civil, that business used to be quite seasonal with high margins in Q1 and Q4 I guess revolving around the pilot cycle and airlines. It was actually down -- the margins were actually down in Q4 this year compared to the previous Q, not very much, but just a little. I was wondering, has the seasonality changed or was there something -- I think there was a mention of a hit on non-cash working capital from FX. Just wondering, is there a seasonality like there used to be or has this changed? And what happened in Q4 of fiscal '12?

No, there's no changes in the seasonality. I think you still see when pilots are flying a lot, they're not training a lot. So you see that seasonality. I think that maybe I think -- Stephane do want to comment on any specific items that might have occurred there? I'm not aware of it.

No, the seasonality hasn't changed. The only thing that I will mention that may explain the reduction in margin is during the fourth quarter, we've resized parts of our business, as well as we've had to incur a lot of costs during the due diligence of the Oxford Aviation acquisition.

Okay.

Okay?

Okay. Yes, that might explain it. So I guess I just need to watch. And just two quick things, for fiscal '13 any thoughts on tax rate and capital expenditures for the year?

I believe the tax rate, we finished the year -- the quarter was at 26%. There was nothing really very, very unusual with it, but it really depends on where the business is coming from as you know very well. I kind of took the fiscal year '12 and normalized for a few ups and downs in the quarter and in the year and I get to 27.5%, 28%. I said a few times, I use 28% for predicting fiscal '13.

Benoit Poirier, Desjardins Capital Markets.

Just if you could provide your CapEx guidance for fiscal '13? Also what amount -- how much of that will be related to the renewal of the fleet -- the simulator fleet at Oxford?

Well, we spent CAD165 million of CapEx in fiscal '12. As you know, we're really at this point in time going through the exercise of looking at each of the individual assets that we purchased through Oxford, and really we're looking at two things. Number one is what is the actual level of investment that may be required on certain assets in the portfolio. And number two, how can we use some of those assets, potentially redeploy them, and get some savings from what we initially anticipated? We haven't completed the exercise. I think we'll be in a better position to provide some more guidance at the end of the Q4 -- Q1 results. The only thing I would say though is obviously I would not expect the CapEx to be lower than the level that we spent in fiscal year '12. We may have to spend a little bit more on relative terms for the assets we purchased at Oxford. But I don't see a lots of additional -- the CapEx being lower than what we had this year.

Maybe to add just a little bit, so we'll update you at the last next call for sure when we've done the exercise that Stephane is talking about. The one thing I will precise is that the CapEx that we do put in, in our Civil business these days is very targeted towards individual opportunities that give us growth. We've been focusing a lot on emerging markets. So that will continue. As we see the opportunities either to establish a joint venture with an anchor partner, that's what we will do. Then, as Stephane said, we'll look at how could we optimize assets that we've acquired with Oxford. We had a very good view of what we need to do there from the due diligence exercise. But now we're refining and saying, okay, how do we mix and match to optimize the CapEx and the growth of the business? So, more on that next call.

Anthony Scilipoti, Veritas Investment Research.

Guys, just looking at note nine under other assets, I'm just noticing the balance for long-term receivables going up quite a bit. Maybe you could just give us some color on what that business relates to and what the collection terms are on that, what might be due, et cetera?

It's actually, Anthony, it's actually -- we purchased in Q4, the remaining shareholding that we didn't own before, in a financing vehicle that we put in place many years ago called Simcap. That business had some leasing arrangements in place, so that's what explains the increase in the long-term receivable. It's actually the financing for a couple of assets that we purchased through the rest of the shares that we bought from Simcap.

Simcap, that would have been financing for a customer to buy full flight simulators or --? I'm sorry if I don't recall exactly.

No, well it was -- in this case, there's two simulators that were actually financed through Simcap for one of our joint ventures.

This business, Anthony -- maybe, Stephane, you can provide more color, but we put together this vehicle at the time of the crisis in about (inaudible) -- and it was --. We put together at the time, if you recall of course there was concerns about liquidity at that time, financing of airlines. So we had put together working with some partners and Quebec government amongst others and with EDC. And finally, as it all played out we didn't have as much need to use that vehicle, so basically as Stephane says, we bought out remaining partners now.

And so it's owed to you basically? That's why it's on your balance sheet?

Right.

Operator, we'd like to have some time for members of the media. So I would thank institutional investors and analysts for their participation on the call. Operator, we'll now open the lines to members of the media.

(Operator Instructions) Ross Marowits, The Canadian press.

I'm wondering if you can provide a little bit more details about the job reductions. Where in Europe are they located?

Germany mainly.

Germany?

Mainly Germany.

Okay. And you said I think 90 in Canada, mostly in Montreal?

Correct, yes.

Is that all 90 in Montreal or were there other cities that would be affected?

No, it's Quebec, it's Montreal. I preface that, Ross, by -- in the past year, we've actually added about 250 employees in Quebec. And since 2005, we've raised the level of employment in Montreal by 27%, but just at this moment in time, we have to really realign our business in the defense in particular which caused some overhead reductions elsewhere. That's where the 90 are coming from.

And what type of jobs are these?

It's across the patch, really. Let me just get a bit more details here. It's general, administrative jobs, overhead jobs, support jobs, I think those kind of levels. Not much engineering, for example. In fact, I don't think there's any engineering.

And this would be the biggest cut that you've made since 2009?

That's affirmative, yes.

And lastly, you talk about that you're trying to refocus the business a bit, but you're cutting. So how are you refocusing? Is there growth somewhere else offsetting this?

Yes, if you look at Asia and the emerging markets, what you find is that first of all, we already saw that they're re-fleeting in the civil -- they're building up their aviation business because of people wanting to fly in those markets. On the military side, contrary to what we see in Europe for example, there's countries in Asia, India, the Middle East, that are increasing their defense budgets significantly. And that's -- there's where the opportunities are. If you look, we, CAE has been -- we've been successful at capitalizing on those. If you look at we signed CAD170 million contract in Brunei for example in the fourth quarter. We also signed a tank simulation center in Malaysia. So really, it's no different than the rest -- what we usually do. The business follows our customers. We have half of our employees today -- close to half of our employees that are outside of Canada. Montreal remains clearly the headquarters and the technological -- where we keep the main part of our technology and R&D, but inevitably, when we refocus the business, some jobs have to go to support customers locally.

But are you increasing employment in those areas in Asia to support Asian and Middle Eastern growth?

What I would tell you is maybe not in the immediate term, but yes, overall, what you'll find is I have no doubt that when we look at CAE next year, CAE will have more people and likely it will be more people over there rather than here. Having said that, we will continue to increase here because as I said, the growth -- the bigger we get, the more simulators we sell and more products we do, the more R&D you need to do, the more support you need about all the people at headquarters here in Montreal, so I would expect us to grow there. But at this point in time, we have to adapt.

Sorry, one other thing. Do you expect to have to make any other adjustments in workforce if the US for example were to cut its defense budget more?

Nobody knows the answer to that question. The US right now is going through their budget process. I think the spectras out there of this -- when they call budget sequestration if they can't reach an agreement, and nobody knows what the answer if that happens. Of course, I don't think it will happen, but that's just me saying that. I think what I would tell you is we adapt our business depending on how many orders we get and that's not going to change. Do I feel that we'll be able to -- that the US will go down and will affect us significantly? I would tell you the answer is I don't think so. We just had a record year in the difficult environment that we just went through and are still going through. It's pretty hard to pick when you'll get the orders, but we had a record order intake in the US this year thanks to great work by our US team. And I would expect that to continue in a difficult environment. Remember that what we do, simulation-based training is a help when you're trying to save money. So I think we -- although timing is always difficult to predict, we feel good about the business we're in.

Thank you.

Thank you. I'm showing that there are no further questions from the phone lines at this time.

Operator, we'd like to thank investors, analysts, and members of the media and the press for their time this afternoon for joining us on the call. I'd like to remind everyone that a transcript of the conference call can be found on CAE's website at CAE.com. Thank you very much and have a good afternoon.

Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation, and we ask that you please disconnect your lines. Thank you, everyone, and have a good day.