CAE Inc (CAE) 2013 Q2 法說會逐字稿

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

I would now like to turn the 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. The statements do not reflect the potential impact of any non-recurring or other special items or events that are announced or completed after the date of this conference including mergers, acquisitions, or other business combinations and divestitures.

To find more information about the risks and uncertainties associated with our business in the MD&A section of our annual report and annual information form for the year-ended March 31, 2012. These documents have been filed with the Canadian Securities Commissions and are available on our website at CAE.com and on SEDAR. They have also been filed with the US Securities and Exchange Commission under Form 40-F and are available on EDGAR.

Forward-looking statements in this conference represent our expectations as of today, November 8, 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 Lefabvre, our Chief Financial Officer. After comments from Marc and Stephane, we will take questions from financial analysts and institutional investors. Following the conclusion of that Q&A period, we will open the call for members of the media.

Let me now turn the call over to Marc.

Thank you Andrew. Good afternoon to everyone joining us on the call. I will first go through some of the highlights of the quarter and then Stephane will provide more details about our segmented results. I will come back at the end to talk about our outlook.

During the quarter, we had good order intake for the Company as a whole, with book to sales of 1.15 times on CAD590 million of new business and total backlog of CAD3.9 billion. In Civil, we made good progress integrating Oxford and we had a strong demand for simulators with 12 more orders in the quarter, for a total of 19 announced so far this year. In Military, we signed more long-term recurring training services contracts and in New Core Markets, we had good growth and better margins.

Looking more specifically at Civil, revenue for our combined Civil segments increased 36% in the second quarter to CAD288 million and our operating margin was 16%. This includes a full quarter of Oxford which, at this stage of the integration process, represents about 3 percentage points to 4 percentage points of dilution on a combined Civil margin. The integration is a top priority and is well on track but it required a fair bit of our operational focus during the quarter. Civil training saw a slower than usual summer and our results were further impacted by some disruption from our ongoing integration of Oxford.

However, we made appropriate use of the summer period when airlines were busy flying and not training to make the changes necessary to get us to the CAD22 million of cost synergies that we expect to realize by the time our integration work is done. We've been making significant adjustments to the combined workforce and we have taken some of our simulators off-line to relocate them within our global network to better match supply with demand.

Turning to our Defense business, revenue for our combined Military Segments decreased 2% year-over-year in the second quarter to CAD198 million and our operating margin was 14.3%. The margin was helped by other gains, about which Stephane will elaborate.

Order activity was good in the quarter with a high proportion of multi-year services contracts materializing from our pipeline. We like these types of contracts because they increase the predictability of our Military business but they translate to revenue over a longer period of time than products. In addition to the effect of our order mix between products and services, our growth and profitability in Military was further impacted by the ongoing weakness in Europe, specifically Germany.

We announced last May the restructuring of our military operations primarily in Europe to adapt to lower demand. Since then, market conditions in Germany have further deteriorated, leading to new orders dropping off faster than we expected and it's taking longer to reduce the cost of our operations because of local labor laws. The result is lower revenue and profit in Germany during the quarter which negated otherwise good performance in the rest of our Military business.

In our New Core Markets, we generated CAD28 million of revenue for the quarter and we became more profitable with a segment operating profit of CAD2.2 million. We had continued success with positive market reception to new products we've just launched and we had some good sales of existing product lines.

In Mining, we announced the strategic partnership with Devex, which is a technology company involved with mining operations management. This gives us more solutions to extend beyond mine planning and we have secured exclusive distribution rights for Devex technologies in a number of key markets. We continue to do well, offering our existing software solutions also, with sales during the quarter to major mining customers in South America, South Africa and Australia.

In Healthcare, we launched our new Caesar trauma patient simulator and we prelaunched our new VIMEDIX Women's Health Ultrasound simulator, both of which are exciting new additions to our portfolio. We also had a number of strategically important deals during the quarter with the sale of our center management system to the US Veterans Health Administration for use in 159 of its centers throughout the US and to the US Air Force and 25 medical simulation centers around the world.

Stephane will now take you through the financials.

Thank you, Marc and good afternoon everyone. Consolidated revenue for the quarter was up 19% year-over-year at CAD514 million and net income attributable to equity holders was CAD36.5 million, or CAD0.14 per share. We had CAD9.8 million pre-tax impact from restructuring, integration and acquisition costs this quarter and excluding these costs net income attributable to equity holders was CAD43.5 million, or CAD0.17 per share. More than offsetting these costs, however, were other pre-tax gains including a CAD8.3 million in foreign exchange gains and a CAD5 million gain on a contractual expiration and reversal of contingent liability related to a prior acquisition in Military.

Income taxes this quarter were CAD12.5 million, representing an effective tax rate of 25% compared to 21% last year. The tax rate was lower in the second quarter last year due to the recognition of certain tax assets.

Free cash flow was positive CAD17.7 million this quarter, which is up from last quarter because of lower investment in non-cash working capital and more cash from operating activities. Free cash flow was lower, however, than the second quarter last year because of a higher investment in non-cash working capital which was only partially offset by more cash from operating activities. That said, we still expect a partial reversal of our working capital investment toward the end of the fiscal year.

Capital expenditures totaled CAD44 million this quarter including CAD33 million in support of growth and CAD11 million for maintenance. We still expect total CapEx for the year to remain within our CAD150 million estimate.

Net debt at CAD995 million was stable compared to last quarter and 49% net debt to total capital. It remains our intent to decrease this ratio over time to around 40%.

The integration of Oxford is going as planned and we still expect to be within our CAD20 million cost estimate and we're on track to deliver CAD22 million of annual cost synergies by the time the initiative is complete in the coming fiscal year. As we announced this morning, we are implementing additional restructuring in Europe with an estimated cost of CAD15 million and the related charges will be incurred in the second half of the current fiscal year.

Now looking at our segmented financial performance. In our combined Civil segments, second-quarter revenue increased 36% year-over-year, reaching CAD288 million. Combined Civil operating income was up 9% to CAD46 million for an operating margin of 16%. Utilization for the quarter was 65%, down from 77% last quarter. Excluding Oxford from our results, utilization was 69%.

As Marc said, our second quarter was seasonally slower than usual and this, combined with some disruption from the integration of Oxford, added pressure on the margins. For a same-store comparison, if we exclude the results of Oxford this quarter, the combined Civil margin of 19.4%.

In our combined Military segments, first quarter revenue was 2% lower year-over-year at CAD198 million and we generated a 14.3% operating margin. If we remove the benefit of non-recurring gains in the quarter, the margin would have been 10.4%. The lower results this quarter are mainly due to our German operations, before which the Military would have shown modest growth and profitability more in line with our expectations.

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

Thanks, Stephane. With more than half of fiscal year 2013 now behind us, we've got a better sense of how we expect the year to shape up as a whole.

In Civil, we are highly leveraged to a growth market with excellent long-term fundamentals. We are seeing a positive response from customers to our recent addition of Oxford and the expanded range of capabilities it gives us. We are still very much in the midst of a strong commercial aviation cycle and we have already seen utilization in our training centers return to normal levels in October. We are expecting higher demand in the second half and increased margins as we continue to ramp up synergies with Oxford.

In Business Aviation, we are bolstering our position in the large aircraft segment which continues to outperform the small and mid-sized markets. Our recent agreements with Bombardier naming CAE as authorized training provider for all Bombardier business jets models in Europe and naming us its worldwide authorized training provider for the Global Express series business jets, are a testament to CAE's strong market position.

In Products, we are continuing to see good momentum for simulator sales and with 19 already announced, our mid-30s target is well within reach.

In Defense, the challenges presented by government budget processes are well known and while this has caused some uncertainty about the timing of orders, we do know the market for CAE's solutions remains large. We have good reason to be confident in the long-term growth and profitability of CAE's Military business.

There are three factors that distinguish our Defense business from the sector at large. First, we have a solid position in terms of platform exposure. Second, we have a diversified global footprint. And finally, the fundamental value of our simulation-based solutions is even more compelling in an environment where defense forces are given the challenge to do more with less.

Let me first talk about platforms. We have an excellent position on aircraft that remain highly relevant in the current context. We have grown our portfolio solutions for long-legged platforms like the C-130 and MH-60 helicopter, which have an ever-increasing installed base not only in the US but around the world.

Next, in terms of global reach, we are continuing to make excellent progress developing new markets with over one-third of our orders year-to-date coming from the emerging markets. Our defense customers in Asia and the Middle East are increasing investments in defense to modernize their forces and we expect these markets to continue to present significant opportunities for CAE. Just in the last three years, we've seen our military orders from emerging markets more than triple.

The third factor that defines CAE's Military business and the most fundamental is the very nature of what we do. Simulation-based modeling and training is an important answer to the question about how defense forces can maintain mission readiness at a lower cost. The argument for increased use of simulation is strong and we see buy-in from heads of government and defense forces. In the US, the world's largest market by far, the Government Accountability Office has clearly acknowledged the need for the US Military to make more use of virtual training.

Both the US Air Force and the US Navy have recently reiterated their explicit intent to increase the use of simulation for maintaining mission readiness. The US Military currently uses simulation for training about 35% of the time and industry estimates it will increase to a targeted 50% over the next decade. Given the size of the US installed base, this movement alone represents a very material opportunity for our industry and for our Company.

In Europe, the landscape is changing. Future opportunities are now expected to involve more training services integration than traditional products. This bodes well for the CAE's expertise but we need to align our capabilities in the region to this new reality.

In light of the clarity, we now have about the magnitude of the expected restructuring of the German Armed Forces and the state of European business originating from our German operations, we are undertaking additional restructuring. In doing so, we believe we will have accounted for the full brunt of current and potential defense cuts in the region. Once the restructuring is complete, we will be able to more profitably deliver existing defense programs in the region and be in a better position to meet the future needs of the broader European market.

The long-term fundamentals of CAE's market position in defense remain attractive but we have also reason to be confident in the near term. We currently have over CAD2.7 billion of defense bids and proposals currently submitted, which is as large as our pipeline has ever been. That being said, we have a high proportion of long-term services contracts booked so far this year and they convert to revenue more slowly than products. This factor, combined with lower revenue in Germany, leads us to expect Military revenue to decline slightly this year.

We expect Military margins to remain stable next quarter and begin recovering towards the latter part of the year as we continue to restructure our operations. This view is based on work we already have in backlog and plan to execute, orders recently won and are currently negotiating with customers, and orders we believe we have a high probability of winning before the end of the year.

Finally in New Core Markets, I continue to be pleased with the progress our teams in Healthcare and Mining are making to develop our offering and penetrate the market. We have recently signed significant contracts with some of the most sought-after government and industry customers, which is a testament to our innovative technology and the CAE brand. Just this week, we announced the bolt-on acquisition in Healthcare that is immediately accretive and gives us additional capability in products in the rapidly growing ultrasound simulation market. Even without this acquisition, we are well on our way to generating CAD100 million of revenue this year and I am encouraged by our increased profitability.

To conclude, there is no doubt that this was a challenging quarter, but we know where the challenges exist and we are addressing them. We've already begun to implement additional measures that we believe reflect a conservative outlook for defense in Europe and also position us better to meet the changing needs of what remains a large and attractive market overall. We are a leader in our niche in the US defense market and we continue to see large opportunities to support the expanded use of simulations.

Adding to our long-term confidence in CAE, we are highly leveraged to a robust civil aviation cycle and we have a strong position in the more rapidly growing emerging markets. Our integration of Oxford is strengthening our position even more and we expect our business to continue outpacing the global growth rate in air travel overall. Lastly, in New Core Markets, we are succeeding to foster additional long-term growth drivers for the Company that leverage our unique capabilities.

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

Operator, we'd now be pleased to take questions from analysts and institutional investors. Before we do open the lines, let me first ask with in the interest of fairness that you please limit yourselves to a single, one-part question. If you have additional questions after that and time permits, please feel free to re-enter the queue.

(Operator Instructions)

One moment please for the first question. David Newman with Cormark.

Just on the Military side, obviously, I think you've got the European situation beginning to sort out, but the US, we have got the elections behind us. You have the automatic spending cuts coming ahead, I think on January 3. There seems to be a political will to derail this and perhaps unfreeze the spending. So my question is, does this have an impact? Do you think it will be derailed? Would it have an impact if the automatic spending cuts go in? How does the US Military play out here?

Well, a lot of questions and a lot of uncertainty among which you say for anyone in defense industry. But I mean, at the end of the day, I think that, where we are today, procurement is still going to go on. They have -- they are operating under a continual resolution. Platforms that we are good at are being funded in any budget scenario that you see. We've talked about platforms like the C-130, the MH-60. I looked at, again, I talked about this CAD2.7 billion of bids and proposals we have got out there. But over CAD1 billion of those are in the US alone, and they're based by the fact that they are active bids and proposals, it means that they are programs of record. They're not speculative at all. So, the fact that they are able to continue to procure, and that they have, there is a very real requirement for those products and services that we're bidding.

I mean, clearly, we will have to see. If the fiscal cliff materializes, I don't think anybody really can really make a prediction of what would actually happen in the short term. I personally don't think anything will happen in the short term, to be very frank with you. I think that this will be pushed -- we will operate under continuous resolution and like everybody, you hope that, now that the election is over, the cooler heads will prevail and a compromise will be made in the interest not only of the defense industry, but from the economy in general. So I don't think, in summary, this changes our prospects much. It's a one way or another for our Business.

Okay. One last one, just as a realignment of some of your training in Europe to emerging markets and elsewhere, do you think this is the leading edge of a shift, or is this just tweaking? In other words, do you think we're going to see more of this in the future where you're going to realign your business towards the emerging markets and shift more of the Sims out of that market as it stabilizes, as even maybe the growth prospects aren't there? And you'll just shift more down into some of the emerging areas?

Are you talking specifically in civil or --?

Yes, civil training, and it seems like you're moving some Sims out of there into Europe -- sorry, into Asia and elsewhere?

Okay, yes. No, well, I mean, obviously you go where the market is. If you look at the past few years, the lion's share of the market for new airplanes has gone to emerging markets, Asia-Pacific, China and really, where there are airplanes, as you know, it is a regulated business. Every 30 narrow-body airplanes that gets delivered to an airline, they have to -- they need -- it necessitates the need for simulators work for capacity in the market. If you have wide bodies, it's about double that, meaning that you need a simulator for about every 15 aircraft. In fact, what you see in Asia-Pacific, there is a disproportionate number of wide-body aircraft.

So I think that is where you're seeing the fastest growth but having said that, the legacy markets, or the way we call them, the North America and Europes, are still very large and there is a lot of replacement opportunities as people upgrade their fleets to more fuel-efficient airplanes.

So I think what you see us doing specifically, in the case of recently, is us taking simulators that were in Oxford, for example, where they were unutilized because of, I mean, when we bought Oxford, they had a limited scope for being able to move simulators within the network. They didn't have a global network, barring one center in Hong Kong. But we have a global network where we can move simulators around cost-effectively, so that is really what you have been seeing us doing. We will continue to do that til we have completed our integration of Oxford, and we will continue to react to the market in placing simulators where the airplanes go.

So it sounds like it's just one-time and one-timer, a couple of quarters' worth and then once you have realigned, you're good to go.

I don't, I think that if you're poking at the impact that the integration has had, I think it is safe to say that we have had a disproportionate effect on disruption to our operation. I think the large part is behind us. We will still have some simulators that we're going to move around. I think we've talked about it when we had the initial calls about the acquisition of Oxford that we were going to move about 12 assets. We're clearly not going to move them all at the same time. We took advantage of the fact that during summer, airlines aren't flying much. If ou try to move, if you try to do-- shutting down, moving simulators in that period, we still, we have moved 12, clearly. But there is more to be done but that will be done over a period of time.

So I think the lion's share of disruption, coming back to it, was associated this quarter to moving simulators to the fact that we have affected literally one-third of the work force within the combined workforce of Oxford plus CAE here, that people are worried about losing their jobs and that has a bearing on the efficiency that we are able to run our operation. At the same time, when number one buys number three, that attracts attention. We had an investigation by the Office of Fair Trade in the UK which delayed us, but I'm happy to say that is free and clear. We had a free and clear ruling from them, but all of these factors is really what's hit us here, and I certainly don't expect that to recur, nowhere near to that level.

Benoit Poirier with Desjardins Capital Markets.

My question is related more about the SPC. Could you maybe provide more color on the -- what impact the summer season, and what was the utilization rate in the quarter? When you say it's back on track, where are you so far in the quarter? Thanks.

Okay, Benoit, I think you probably mean TSC, right?

Yes, yes. Sorry. Okay, sure.

Okay, then just coming back to seeing -- what we are back to more normal, what we consider normal, in line utilization for this period. I mean, we have October that we are looking at. We are back in the numbers that we usually see in this period of time, which is a big difference compared to where in the couple of months there during the summer.

Okay. What was the number in the summer, Marc?

Well, we were 69%, let me just look at the numbers here. Am I looking at the right number? I'm looking -- I will give you two numbers, one with and without Oxford here for comparison. Just getting out the numbers for myself. We had 65% utilization in the quarter. If you were to normalize that, you had to compare to, say last year, for example, because Oxford gives you a dilution. It would have been 69%, so the absolute value was 65%.

Hamzah Mazari with Credit Suisse.

It's actually Andrew here. Just wanted to know given the strong performance of the New Core Markets, even though it is off a smaller base. Do you plan on spending more capital growing that business given that defense is a bit slower right now?

No, well, I don't think that it will attract any kind of capital that would really affect our numbers in any immaterial way. We're going to continue to invest in those businesses, in G&A, in R&D. We might do -- I don't have any imminent. I would tell you but we might do some more bolt-on acquisition if we see that kind of technology and that we are looking at, but I think we're going to spend in proportion to the size of that business.

Okay, and I guess just more a broad question, if you could just talk to us about the impact of four more years with the Obama administration, if it has any impact at all on your business?

Well, look I think that when I was looking at statistics today of what the two presidential candidates, what their platforms were, I mean an immediate thing I know that if you look at some analysis I have seen, that's how you -- Credit Suisse report that it just recently, you see under President Obama, it is good for helicopters, good for CAE. That is one example. But so, look, we had four years of that administration. I think we're going to have four years -- I think that in large part, I think I don't see much change one way or another. What I would say that the day that the US Defense budget -- the day that CAE's revenue is a proxy for the size of the US Defense budget, then I will worry about that issue, but we are not there yet. I think there's still lots of opportunity for us to grow within the largest defense market in the world.

Steve Arthur with RBC Capital Markets.

Just shifting gears a little bit, if we look at CapEx expectations of around 150 for the year, that's implying something lower for the second half, so if we look at that, without getting any specific numbers, is it fair to say that CapEx might be trending lower over the coming years, that it's still expansion but less aggressively in favor of cash flow? Is that the right way to think about it?

Well, I think you've got to go back to the outlook that we gave in the last call which haven't changed. We haven't changed much in our -- I think that what you are seeing is pretty much what we've indicated, and our priorities for cash remain that we're going to invest our CapEx, we're going to continue to grow our Business and that's our first priority. We're going to invest our CapEx where we see specific opportunities for that to grow. They are going to be a lot less speculative than it has been in the past.

Target, for example, specific joint ventures where we are growing with our customers. For example, we did joint ventures last year with fast-growing carriers like CEBU Pacific, like IndiGo through Integral, their parent, like Air Asia. So as they add airplanes, we will be adding simulators and therefore, CapEx to those joint ventures. But there is an anchor customer, there's a guaranteed return. So, those are the things we're looking at.

The second priority is to deleverage, and we're not uncomfortable with it, and Stephane can talk more about, but if you ask him, but we're not uncomfortable where we are. But having said that, after the acquisition of Oxford, we are more leveraged than we were. Certainly not unreasonable levels but we think somewhere between where we were before the acquisition and where we are today is somewhere we would like to trend.

Finally, you saw us do a dividend increase in the first quarter and the third priority is to share with shareholders, either by dividends or through looking at, although we haven't done any, looking at potential share buybacks. But again, we haven't done any so we're not indicating anything here except that it is a priority we will look at.

Cameron Doerksen with National Bank Financial.

I just want to go back to the Civil Training segment and you talked a bit about the fairly weak, or unusually weak summer. I was just wondering if you could talk about why you think there was an unusually weak summer period, and if that was a CAE-specific issue, or was that really an industry issue? Secondarily to that, in what regions did you see that weakness in and are you seeing any pockets of weakness still in various geographies?

What we saw and to put it in context there, it's best to look at it apples-to-apples because the dilution of Oxford tends to skew things. But really what you saw is, if it's compared normally, what you see in summer period is about a 5% drop in utilization. What we saw apples-to-apples this year is about 8% so you're about 3% worse and that's what affected us in [a bait] plus as I said, all the other disruptions that we've talked with you, the integration of Oxford. But really, I mean certainly, there's not a -- we don't see an industry issue here.

The issue we specifically had was what, actually, just a couple of airlines located in India, Asia and Europe. And they're -- frankly, they are all airline-specific issues and I call them issues, they're just, their pattern of initials versus recurring training changed during that period. In one specific case, in India, you had Kingfisher Airlines. I use their name just because they went out of business and we were training them. So, that affected us specifically there. But now those pilots that were working at Kingfisher redeployed to other regions, to airlines in the region, so we will see a pick-up. But those are issues that affected us. And like I said, we go -- when we look underlying that, we don't see an industry issue here, it's that we are back to more normal levels as early as October.

Okay. Are you seeing any changes from in this quarter versus previous quarters on the business aircraft side? Is it still the same trends, soft on the mid- and light size, that they're still pretty strong on the large side?

Yes, that is what we see. I think we're actually starting to see maybe a little bit of further weakness on the light side but the large cabin is still very strong. The seasonal disruption, specifically in business aircraft, was pretty much in line with what it usually is. So, I don't see any big changes so far, nothing terribly good, nothing terribly bad.

Thank you. Fadi Chaumoun with BMO Capital Markets.

A question on the Military. I hear you, in terms of your comments about the outlook and you sound fairly comfortable, and confident, but we are still coming off here two rounds of restructuring back-to-back in Europe. How comfortable are you that this is not likely to get worse or occur in some other regions in terms of your Military business?

Well, I think I'd start with what happened in Germany specifically. What we had in Germany is, we had an operation there which is the only operation outside of the mothership, let's say, in Montreal and Tampa where we had actually had a quite sizable engineering operations program management, full operation. And that is a legacy way of doing business that we are not in in other regions now. And we've kept it because we, because there's orders in the European region and in Germany, specifically, that underpin that. But the market has changed quite dramatically.

The restructuring of the German Armed Forces, specifically, is the most pronounced, now that it's coming to light, is the most pronounced since the end of the Second World War. So, unfortunately, when we did our first restructuring, we were taking the view that we were going to be able to continue to win orders and there were programs out there that we could see, and that would sustain our operations. Although we would be at a lower level, we would still be able to sustain that operation. The reality is, the depth of the cuts, it means the orders just aren't there. Certainly not on products and to sustain the level of activity.

So what we have taken the view is that we are sizing that operation now to a conservative view of what that market will be, and we are consolidating now the operations in Germany to be in line with, let's say, for example, what we do in other countries like the United Kingdom. We will have still -- we are certainly not abandoning that market. It is a strong market, we will do services, we will have personnel to be able to do, support the customer, customer service running a few platforms that we have over there like the Tornados, as an example.

So, and it coming off the second part of your question there, I think Germany and Europe as a whole, I think we've sized ourself, what I hope to be pretty conservatively. You can never be totally sure but I feel pretty good that we have taken an aggressive view here from a conservative standpoint. Now when you look at the rest of the world, I take your point and look, we're never -- at the end of the day, we've got to win orders but that's no different than we ever have been. We have been operating in the last couple of years in this environment where delays in procurement have been the order of the day.

But where I take the strength, Fadi, and where I take my confidence is I -- again, I'm looking at this backlog of business of 2-- sorry, not backlog but my bids. We have -- I'm looking at and believe me, we look at this in a very detailed manner, CAD2.7 billion of bids written and proposals written against real customer requirements. Now there's always -- so if those come to fruition, I have absolutely no problem about growing and growing strongly.

Now do I expect that to happen the way it will? No. I fully expect that things will continue to get delayed and that those CAD2.7 billion will be stretched over a longer period that we currently anticipate. So, I'm taking the view that we're going to be, we have to get through this period of uncertainty but I feel confident that with the backlog of proposals we have out there, the pipeline is strong and that we will be able to continue to be successful. In terms of if it doesn't, I think when you look at what we had to do in Germany, it is quite costly to reduce your operations in the European context.

It takes a lot of time to be able to unfortunately, to be able to lower your workforce. It takes a lot of time to negotiate with worker councils, for example, and take the time and that there's a process. There's laws to be done and it's very costly. I don't see that same [main] -- if we have it, heaven forbid, to reduce more in the rest of our operations, I'm not -- first of all, I don't anticipate that, but if, should it happen, I'm not seeing, I'm not anticipating that level of cost. So, look, a long-winded answer but look, it comes back, we have to win orders. I'm looking at this pipeline, I believe we are going to win orders. I can't just predict -- I'm not the one writing, as I've always said, I don't predict when the government procurement will actually press the button and give the order. I don't think anybody can.

Okay. That's helpful. Stephane, maybe quick question. Do you expect to be working capital neutral this year?

Well, it's definitely, I am expecting some reversal of non-cash working capital. What we have seen this quarter, I think last quarter, last year at the same quarter, we started reversing some non-cash working cap earlier in the year. This time around, I can see the reversal starting in the third quarter as opposed to the second quarter. So there -- I'll see a portion maybe, not all of it, Fadi, in the remainder of the year. I don't think we will be non-cash working cap neutral by the end of the year, but you will see a portion of that reversing.

I am quite pleased with certain areas of our non-cash working cap that we have managed, especially in, looking at our receivables. The aging is better than it was a year ago. Even the DSOs are better than last quarter. But we, going through this quarter, we had to -- Q2, we had to pay some payables that were, that we inherited from the acquisition of Oxford. The other drag to the non-cash working capital was the delay in some military procurement that reduced the deposit on contract that we typically have. But just going back to my initial answer, I don't see it all reversing towards the end of the year, but a portion of it will reverse in the second half of the year.

Okay. Related to the restructuring in Military, if I take out the gains this quarter, your margins were in the low 10%, around I guess between 11% and 10%. How should we think about the progression back to the mid-teens in the next few quarters?

Fadi, I think you need two things to go back to where we were before. Marc just talked about the impact of the restructuring in Germany will have. The issue we have is you know what you have to do, but it takes time before the costs are actually out of the plan. So, you end up with a much lower volume of business and allocation where you still have to absorb your fixed overhead. So, the first thing that will need to happen is, well actually cutting costs and having those costs -- of our manufacturing plant in Germany. The second thing is volume. In the past year, you're looking at the 15% costs that we've guided last -- that we have been guiding for quite awhile. We had a second half of the year in our Military business where the volume would increase by quite a bit. So, once you get both, you get back to the 15% types of margin that we've guided.

Next question --

Yes, operator, sorry. We will have time I think for one more question from investors so that we have some time for members of the media.

Thank you. Chris Bowes with Canaccord Genuity.

I just have a housekeeping question. I'm wondering if you can help me with how those unusual gains run through the segments?

Sure, I can. Well, the biggest -- there are two main ones. One of them is specific to Military and it is a CAD5 million reversal of a provision that we booked on an acquisition that dates back to 2009 for, call it, an earn-out provision that we reversed as the contractual deadline came up for us to make that payment in the quarter. So we didn't have to make the payment, we reversed the provision. The other item is some FX gains. I'll -- there's a CAD8.3 million of FX gains in the quarter. I'll split that in two parts. The first part is specific to Oxford.

And when we acquired the business, we looked at the basket of currencies that the company Oxford had and the exposure on different currencies, more specifically, in relation with some lease obligations. We've applied our imaging program to those obligations and those leases are now hedged and along the way, we crystallized some FX gains.

The other part is not in relation with Oxford but in relation with our internal loan financing structure that we have in place. Like many companies, we're double dip structured, and we restructured some companies during the second quarter. The company that we bought, Oxford, also had a similar vehicle, so while in preparation for merging the two vehicles, we reorganized some companies and some gains were crystallized along the way.

Fair enough. So the CAD5 million, fair enough to assume that it's, it went through SP/M and the FX is all training, civil --?

So the CAD5 million went to SP/M and the FX, the first part that I talked about for Oxford leases went to TSC. That is a CAD2 million FX gain. The rest was not specific to a segment, so it spread across all four segments.

Operator, we'll now want to open the lines to members of the media.

Thank you. So for the members of the media.

(Operator Instructions) Ross Marowitz with The Canadian Press.

I'm wondering if you could first -- the restructuring in Germany, is there any impact on Canada?

If there's -- not immediately. If there is some, we don't anticipate now. We don't know, but I can't categorically rule it out. But don't anticipate some right now.

So there, you don't anticipate job losses as a result in Canada?

No. Not, don't anticipate some right now.

Is there a number as to how many job losses will be in Germany?

Yes, we -- well, I mean it's in the neighborhood -- I'm just hesitating here because what we've totaled our own population here. But I think it's, I totaled up job losses not only in Germany, we're sizing it approximately 100.

100, okay. You talked about in terms of US election that there isn't much difference with the result. But if the Republican, if Romney had won, where might you have seen potential for increases?

It's hard for me to get into that level of detail because there is so much what if there. For us, what I look at is no matter what administration was coming in, the kind of platforms that are important to us, helicopters and transport aircraft, are being funded. But as a broader answer to your question is, I mean a question like you have has obviously a very big impact if you are a major defense contractor in the United States, a company, I don't know, like Lockheed Martin, like Northrop Grumman, like Boeing.

I mean obviously, those kind of questions are very material because, depending on their view of their major platforms, would it be a Joint Strike Fighter, Nuclear Submarine, whatever it matters. But us, we have a strong Military business, but let's be honest, we operate at the margin of defense spending in the US, which is actually good in the sense that it is a great, big market for us and so we can get more. I think what the effect for us, and it really doesn't matter which administration it is, is that there's delays that are being caused because of difficulty in reaching decisions.

Perversely, the fact that we have the same administration means that you don't have a big disruption time, one that's caused -- when a new administration comes in, as you can well imagine, all the personnel change, all the people in the White House change, the people supporting him change, and that whole administration, by the time it changes, that in itself causes anything over a six- to nine-month lag in some decisions being made. So clearly, we're not having a change in administration, so on that basis alone, that will be a positive.

(Operator Instructions) One moment please.

There are no further questions from the press at this time.

Operator, thank you very much for handling the call. I would like to thank members of the investment community and the media for joining us for the second quarter conference call and remind you that a transcript of the call can be found on our website at CAE.com. Thank you.

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