CAE Inc (CAE) 2013 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the CAE Third Quarter Conference Call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Mr. Andrew Arnovitz. Please proceed.

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. These statements do not reflect the potential impact of any nonrecurring or other special items or events that are announced or completed after the date of this conference, including mergers, acquisitions, or other business combinations and divestitures.

You'll find more information about the risks and uncertainties associated with our business in the MD&A Section of our annual report, and Annual Information 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 40F and are available on EDGAR. Forward-looking statements in this conference represent our expectations as of today, February 13, 2013, 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 conclusion of that Q&A period, we will open 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 go through some of the highlights of the quarter, and then Stephane will provide more details about our segmented results. I'll come back at the end to talk about our outlook.

Things went largely the way we expected this quarter, given the integration and restructuring efforts underway in both our civil and military markets. We continued to lead the market during the quarter, with six more simulator sales in the civil, which contributes to our year-to-date total of 30. In civil training, the integration of Oxford is progressing as planned. In military, our restructuring is underway in Europe, and our profitability has improved. The amount of orders we booked in the quarter still reflects the environment we're in. Where we've come to expect delays, but we had a good win rate on those contracts that were awarded.

Looking more specifically at civil, revenue for our combined civil segments was up 41% in the quarter to CAD287 million, and our operating margin was 16.4%. The integration of Oxford remains a priority, and has continued to occupy a large part of our civil organization over the last couple of quarters. Oxford represented over 3.5% dilution to our combined civil operating margin, which we expected, given the majority of synergies we target are still to come. Utilization normally picks up in our third quarter, and this time was no exception. Overall, the rate was 69%, up from 65% last quarter, which is a typical Q2 to Q3 increase, albeit a little lighter than normal.

That's understandable, however, since we've been ramping up four recently operationalized training centers, and we have four more underway. As well, we've continued to relocate a number of the Oxford simulators we recently acquired. It typically takes several months to a year for newly installed simulators to reach a desired level of utilization.

In military, combined segment revenue was down 7% year-over-year in the quarter to CAD206 million, and our operating margin was 13.1%. Profitability was a little better than we'd anticipated, partially helped by the restructuring underway, but mainly because of a better mix of programs compared to last quarter. We won our fair share of contracts on programs that moved forward to award, but order delays have been persistent.

We had another US foreign military sales order for MH-60 RS Seahawk simulators, this time for the Royal Australian Navy. We got product upgrade and long-term services contracts from the United Kingdom Ministry of Defense in relation to the Medium Support Aircrew Training Facility at a Royal Air Force Base in Benson. And we also saw a renewed commitment from customers involving simulation technology updates and aircrew training services contracts on enduring aircraft platforms like the C-130, C-5 and KC 135. These are tangible examples of customers upgrading and extending their training systems to be able to do more training using simulators.

In new core markets, revenue was up 6% in the quarter to CAD28.7 million, and operating income was CAD1.7 million. In CAE healthcare, we made good progress with international sales of our products to support new simulation centers in China, and we sold surgical simulators in Japan. In the US, we've continued to have good success with sales of our full suite of patient simulator products and sensor management systems to key customers. In CAE mining, we sold our resource modeling and mine planning software solutions to major mining customers in Africa, Brazil, Mexico, and Russia.

Stephane will now take you through the financials.

Thank you Marc. Good afternoon everyone. Consolidated revenue for the quarter was up 15% year-over-year at CAD522 million, and net income attributable to equity holders was CAD37.8 million or CAD0.15 per share. We had an CAD8.8 million after-tax impact from restructuring, integration, and acquisition costs this quarter. And excluding these costs, net income attributable to equity holders was CAD46.6 million or CAD0.18 per share.

During the quarter, we incurred expenses of CAD9.5 million related to the restructuring of our military operations, mainly in Europe. As we announced last quarter, the majority of our restructuring expenses are being incurred in the third and fourth quarters. Income taxes this quarter were CAD9.4 million, representing an effective tax rate of 20% compared to 25% last year. The tax rate was lower than usual this quarter, because of a change in mix of income from various jurisdictions, and the recognition of a tax assets generated from profits in one of our foreign operations.

We had good free cash flow performance this quarter at positive CAD90.7 million. Compared to last year, we had favorable changes in non-cash working capital and lower maintenance expenditures. Total capital expenditures this quarter were CAD32.9 million, including CAD24 million in support of growth, and CAD8.9 million for maintenance. Our net debt position also improved moving down to CAD965 million at December 31st, compared with CAD995 million at the end of the prior quarter. As a result, our net debt to total capitalization has moved from 49% to 47%.

At the end of December, we issued CAD349 million in debt by way of a private placement to refinance our existing debt. The fixed portion of this financing totals nearly CAD300 million, and is in trenches of 7 to 15 years, bearing interest rates ranging from 3.6% to 4.2%. The refinancing enhances our capital structure by giving us a mix of currencies, terms, and interest rates that fit our strategy and give us some flexibility to further strengthen our balance sheet in the future.

Now looking at our segmented financial performance. In our combined civil segments, third quarter revenue increased 41% year-over-year reaching CAD287 million. Combined civil operating income was up 12% to CAD47 million for an operating margin of 16.4%. This compares to a reported 16% in the second quarter, but recall this included a one-time foreign exchange gain. So on a comparable basis, the margin this quarter is actually 2.3 percentage points higher.

In our combined military segments, third quarter revenue was 7% lower year-over-year at CAD206 million, and we generated a 13.1% operating margin. The margin last quarter was 10.4% before the benefit of nonrecurring gains. So here again, we've seen sequential improvement in profitability.

In new core markets, the third quarter results put us well on track to deliver what we said we would do for the full year. We expected to generate at least CAD100 million in revenue, and to be profitable for the year as a whole. Year-to-date, we generated CAD83.1 million of revenue, and CAD4.6 million of operating income.

With that, I'll turn the call back to you Marc.

Thanks Stephane. Looking ahead, we're continuing to see the same sort of themes in relation to our market drivers as we saw last quarter. In civil, we continued to see solid fundamentals with industry forecasts for long-term annual passenger growth continuing to be around 5%. Growth in regions like the emerging markets is still significantly outpacing developed markets, and CAE is well-positioned in both.

Record aircraft backlogs are translating into record aircraft deliveries, with Airbus and Boeing projecting more than 1,200 deliveries this year. This bodes especially well for our simulation products business, and supports our expectation that we'll finish this fiscal year with mid-CAD30 million full flight simulator sales. As we get into fiscal 2014, we'll be in a position to provide you with our outlook for the year ahead.

In business aviation, the utilization of aircraft remained stable in 2012, and the percentage of used aircraft for sale decreased, which is a positive sign for the market overall. This is an attractive area for CAE, and we'll continue to invest in business aviation to keep pace with the market, especially internationally. Oxford has been and continues to be a top priority for our organization in terms of the integration and deriving the significant cost and revenue synergies we've targeted. Overall, we continue to expect combined civil segment margins to improve as we move beyond the current fiscal year and into next as synergies with Oxford are realized and utilization improves.

In military, the issues related to government budgeting and persistent contracting delays remain essentially the same. And because of delayed order intake, we still expect to finish the fiscal year with lower revenue than last year. The long-term fundamentals for CAE in the defense market remain attractive, and we expect to grow the business over the long-term. We have a military backlog of over CAD2.1 billion. And in terms of future opportunities, we currently have over CAD2.7 billion of military bids and proposals cemented and pending. As governments eventually make bid decisions, we expect that we'll continue to win our fair share.

Finally, in new core markets, we're doing more to expand our reach outside of traditional markets and into emerging economies like China. We're tracking above our target of CAD100 million of revenue for the year, and we'll continue to invest to grow the business and expect to remain profitable.

To conclude, our priorities are clear. And we have a sharp executional focus. We're working diligently to integrate Oxford, and derive significant synergies. We're in the process of restructuring our European military operations, and this will progress well into the next fiscal year. And we'll continue to lead in our markets by offering the best products and services to our customers.

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

Operator, we'd now be pleased to take questions from analysts and institutional investors. I would ask that analysts and investors please limit themselves to a single part question so that everybody has a turn. As time permits, please feel free to reenter the queue.

Thank you.

(Operator Instructions)

Hamzah Mazari of Credit Suisse.

Good afternoon. My question is on the Oxford business. Could you maybe give some color as to whether the dilution from that is higher than expected? And how investors should think about the integration of the asset? You did give some color on it takes about a year for some of these newly installed simulators to get up to full utilization. Any color how folks should think about how that business will fully integrate and the benefits there?

I think, Hamzah, the dilution is pretty much what we expected. There's a lot of factors playing -- coming into play this quarter, which I mentioned some of them. The four training centers that are ramping up, and the four more that we have underway, the assets that we're moving. And overall, let's be honest, the whole -- there's destruction associated with this size of move of acquisition and integration into the organization. All of which affects the SOI. But overall, the dilution is pretty much what we expected. And so are the benefits.

And I'm quite pleased with the progress that we've made to not only identify, but secure the synergies. And we're still underway, but we definitely are on track to realize the full synergies that we expected from that business. And I think to me within the timeframe that we talked about, we had said that we would expect that it would take about 15 months approximately for the synergies to fully ramp up. And I think we're about nine months in, and I think that time scale is probably pretty much on track.

Okay. Great. Thank you.

Cameron Doerksen of National Bank Financial.

Yes, thanks. My question is just on the military segment, and I guess maybe some comments on the impact of the issues with the budget in the US and sequestration potential. Have you seen any delays, and particularly on the training part of the business in the US? Have you seen any sort of delays or reductions in training so far? And within the contracts that you have there in the US, if the sequestration does go through, and it has an impact on training, do you have any kind of minimum guarantees with any of your contracts in the U S?

Well, I think the short answer is I'm not aware of any reductions in training. I have seen some increases, though, over this past year. Specifically in the US, I haven't seen any drops. We don't, as far as I know, have any guarantees of training. I could be wrong there. But we may have to check, but I don't believe so. But we're days away from knowing what is happening for this whole sequestration issue, which of course is a huge momentous event. So we'll see what happens after that. If anything, I would expect something.

Going forward, it's almost like we kind of expect sequestration is almost baseline now. The question is, how will it be implemented? So it's really -- I don't think I've seen any disruptions so far. I would anticipate some. If it happens. But I think, Cameron, what I would really be looking at more is that not as much training being reduced, is the delays in, further delay in orders being placed because of the disruption in the military procurement agencies.

Okay. That's good. Thanks very much.

David Newman with Cormark Securities.

Good afternoon gentlemen. On the back of Hamzah's question on the movement of the sims that you've actually moved out of Europe and then you have another tranche of them to go. Just in general, how do the markets compare between the markets that you're taking them out of and the markets that you're putting them into overall in terms of RES, EU, or utilization or any of the metrics? How busy are they in the new markets, and how lagged are they in the legacy markets?

Well, there has been some change. The way I would characterize this, I think if I go back maybe a year, I think that I would have characterized, and I think I did at the time as saying the market was like white-hot. We had like similar centers and member operating at well over capacity. And we were having to add simulators just because we just couldn't meet the demand. It's less hot now, but I would still characterize it as hot. And it's normal that things move around. It always does, even quarter to quarter, because airlines aren't the same everywhere. And their dynamics are not the same.

But more specifically, lately what we've seen -- Europe is difficult. It's been difficult all year. But having said that, it's grown this year, it continues to grow although pretty modestly probably, around the 2% range. Asia has been very hot. You've seen the amount of simulators we've sold in China alone this year is pretty much of a proxy to what you would see or any kind of training increase we've seen over the market. South America has been slower. Still good, but slower.

So look, I think there's ebbs and flows. But I think overall, it's still growing quite a bit. And long-term, we're still looking at 5% overall passenger growth, which is a pretty good passenger growth. Of course, stronger in emerging markets.

Okay. Just a quick one if I can slide it in there, just the on the KC-46 program, where does that stand overall?

Well, I think that will depends, again, you're a couple days -- not a couple, but probably two weeks away from a decision on sequestration. So far, the KC-46 decision, they say that they would make a decision relatively shortly. And I think at this moment, I think I heard last night that they said that if sequestration happens that KC-46 decision could be protracted. So look, we'll see. I guess it will depend. So far, what we expect is the decision within the next couple -- I think it's two to six months is what I believe.

And you feel pretty confident, Marc?

As confident as I am about considering that the US Congress will make a decision about sequestration. And obviously, that's about as far as I can be going. But if you're asking about how confident I am about the deal, is that what you're asking about?

Absolutely. Yes.

Well look, I think we have a very competitive bid. We have great past performance on the KC-135 aircrew trainings, because we are the aircrew training company for the US Air Force on the current tanker fleet, which will be replaced by the KC-46. So our chances are very good, but this will be very competitive. And every company will be in this. So, I think it will be shoot out for sure. Actually I think our chances are good.

Very good. Thank you.

Steve Arthur with RBC Capital Markets.

Great, thanks very much. You've addressed some of this, but I just wanted to clarify a couple points further on the Oxford business. Just is there any change to the level of -- now that you're further into it, any change to the level of synergies or midterm margins that you were looking at? I think you were discussing something like CAD22 million in cost synergies, so is that still the case? And any further color on revenue opportunities or synergies that are materializing?

No. I think the CAD22 million is intact, and I think revenue synergies -- again, a little too early to talk about material numbers right now. But what I see is good. As expected, the fact that we have, for example contracts, or have relationships with the majority of the airlines in the world, is good for example for our parts business, [where it provides pilots]. So the amount of leads that we're able to provide to our part business has improved dramatically. So we have to convert those into dollars, and we've started to. So I feel good about that. I feel good about the opportunities with OEMs as well for that same business. So look, I think early days, but I'm quite positive on what I see so far.

With parts specifically, are you thinking more revenue synergies or will margins move there materially as well would you think?

I think both. I think materially is a big word. I think but certainly we'd like to see that improve over the 2%, 3% business that we inherited. It is -- notwithstanding it is a no capital investment business, we'd still like to do better there. And then that's going to be our target.

Okay. Thanks very much.

Ben Cherniavsky of Raymond James.

Hello guys. Can you -- I guess the question I'll ask just as a housekeeping one, there were some gains on the full flight simulators. Can you quantify that?

Let's see, a couple of devices, Ben, that were sold off our training and services civil business. I think the profit that we recorded is CAD2.6 million on those transactions.

Okay.

I'm sorry. And it's part of our TS/C segment results. Unlike what we've done in the past when we had similar transactions, and I guess part of the process of looking at our overall portfolio of assets and managing them in the proper way, and then we make decisions on disposing of some once in a while. It's part of our business.

Okay. Fair enough. If I could squeeze in one other housekeeping one just on the restructuring costs. Do you have an estimate of what they'll be in the fourth quarter, and how much they might carry into the next fiscal year?

Yes. So far this year, we've incurred around CAD55 million overall across our different restructuring programs. The first one that we announced last Spring, the Oxford integration costs and the more recently the second Phase of the military restructuring in Germany, and across all three restructuring efforts will be within our guidance. As far as restructuring cost is concerned, we don't expect to -- we'll incur pretty much all of them in this side of -- in this fiscal year.

Okay. Thanks a lot.

Tim James with TD Securities.

Thank you. What growth rate do you plan for your overall RSEU base over the next two years approximately relative to the third quarter period end level of 186 units?

Early days to say that. It's customer driven. And I think we've said before, we're going to continue to invest. Obviously our first priority for our cash is to -- we have three priorities, but the first one is to invest in our business where we see growth opportunities that are going to give us a good return in relatively short term. So it's going to be customer driven. You've seen us do some this year, and we'll continue to do that. Yes but, early days to be able to tell you exactly how many RSEUs that would be, because it very much depends on the opportunities we'll see in front of us.

Okay. Thank you.

Turan Quettawala with Scotiabank.

Yes, good afternoon. I guess I just had a question on the military side as well. I appreciate this might be a little bit hard to answer, but just wondering if -- have you done any analysis in terms of looking at how much your footprint may need to shrink or maybe doesn't need to shrink based on some of the scenarios that might play out in the US, particularly with sequestration?

We have, but it depends on you pick the scenario, right? As you say, it's a difficult question. And the good thing is that overall in the US, we have an ability I think to adapt our workforce easier than we would anywhere else. And not to say that we think we have to at this moment. It will depend on how -- if and when and how they implement sequestration. When they put in sequestration, this was never supposed to happen. It's very punitive. It was designed that way. It would have an overall disaster effect to US GDP. I have trouble believing it will happen the way it's been planned.

So if you leave that aside for a second, if the services are allowed, which is what they're looking for, if they are allowed to basically achieve the result by cutting in the targeted way and achieve the same result, that will have a different impact to us. Because I think the kind of things we're involved are mission critical. So I think if you can make a scenario in there that we won't be affected at all, but I think probably that would be a rose-colored glasses one that you wouldn't be affected at all. But again, I really believe that this for us, doesn't really change the dynamic that we've been in over the really last year and half to two years. It really is a question for us of these persistent order delays.

And to the extent of how sequestration if it's done, how it's implemented, how does that affect the people that place orders, the procurement agencies? That's really what we're watching. And I think we're so close to this momentous event that I think we'll be in a lot better position to talk about that once this is over as we get onto the next call in the next quarter.

Okay. Great. And maybe if I can just ask, at the beginning of last year there was a bit of a bump in terms of revenues and order flow in Q4. Is there something like that, Marc, that maybe happens this year as well just based on some pent up spending or something?

Well I wouldn't comment on orders, because I know what we've bid, but then I know what I think will happen. But it's, again I don't control when they're actually going to make a decision. In terms of the revenue, look, I think that we've said that we'll be lower this year. Or lower 4% I think year to date. I think 7% on the quarter. I think we're going to be within those kind of ball parks for the year. I think that's what we anticipate.

That's great. Thank you very much.

Ron Epstein, Bank of America Merrill Lynch.

Hello, good afternoon guys. Maybe a quick one on the commercial side. With the slowdown in 787 deliveries, have you seen any airlines come back to you wanting to delay or slow down deliveries of flight simulators for 787?

No. I haven't seen anything at all on that front, Ron.

Okay. Okay. And then not to beat a dead horse but it's come up a couple times on the call. You probably know, I don't believe -- if sequestration actually does play out, it happens. So when you think about strategically running your Company and that side of your business, really, what do you do to face that? How do you think about -- what do you have to change to deal with that?

Well I'm a bit with you. I think sequestration, the way we're thinking, we've almost pretty much accepted as our baseline. The question that we also believe that certainly I always believe is that, and I hope I'm right, is that this will be done in a way that's the cuts will be selective and not across-the-board. If it's across-the-board, I think we have a scenario that in the end, we will be affected the same way as everybody else. We're halfway through the year, so flying hours will be cut. The US Air Force, US Navy has already come out with how much they would cut flying hours. It would be affected. But on the other side, they've also said that they would try to maintain readiness using flight simulators, so I think we'd be affected. The question is, how much would come back the other way? Either way, it's a pretty -- it's not a very big impact to us. Remember that 65% of the CAE's business is outside of the US, first of all. That's one thing.

But again, I think coming back to it, Ron, I really am more concerned if anything about sequestration about how that affects government decision-making with regards to placing contracts. So and for us how we would react, I think in the end, I think if our business and training goes down, we'd have to probably furlough, we'd want to keep our people. You'd see scenarios, we'd go to four day weeks, that kind of a thing in our training centers. And those are the kind of measures we would take. But look, to me, again as you know, we're about a few days away knowing which way this is going to go down, and then we'll be a lot smarter next quarter.

And then, maybe one more question maybe on the more constructive side, how would you expect it to play out that you get it back? The thesis that you'd see more training in an environment, simulator training in an environment where you're more cost conscious makes a lot of sense. So how do you think that would reverse? What would we have to see to really start to see that like -- I'm sorry I'm struggling for words, but what would we have to see to have that really gain traction?

Well I think we're already seeing it. And in my mind, this is such a big event that, I think and I was talking to our US ward and some -- we have pretty senior people that are very connected to the US military. And the dynamic there about how training is done. And it's clear that mindsets are changing. And if under the dramatic cuts that were being considered, things are going to continue more. And here's some of the things I would point to. If you look at the P-8, we are contracted to build the P-8 simulators for Boeing under their contract with the government. The numbers of simulators that we've been tasked to build for the P-8 is literally an order of magnitude more than the equivalent number that the US Navy would have had for the P-3.

And the real -- and when asked, it's very clear that the US Navy has said that they're going to be using the aircraft for the mission and not for training. They're going to use simulators for training, which of course is the way we do it in the civil business. We see that more and more. We've seen a lot of upgrades to programs this year, programs we have in place that people have been upgrading to simulators in order for them to be able to do more training using the sim. So to me this is something that's going to accelerate. How long it's going to take, I think we're cautious on that. But clearly to me, the trend is already in that direction.

Yes. Yes. Okay, great. Well thank you very much.

Thank you. And just one anecdote, I think it's public, the Air Force and the Navy have both said that they plan to increase use of simulation from 25% to 50%. And this is before I think the sequestration actually comes to play.

Okay, great. Thank you.

Steve Riccio with Buyside Research.

Yes, hello guys. A question on the new core markets. And I missed the first part of the call, so I apologize if you already went over this. It looks like you sold out your modeling and mine planning software.

We sold out? What do you mean?

That you sold -- did you sell that entire business or --

No. No. No. No.

Okay.

No, no. I was just saying that we sold more of our software planning solutions, no sorry. Hopefully I gave nobody else that impression. No, no. (multiple speakers) We are quite happy with our mining business.

All right. Question then, what do you anticipate once you sort of scale up both mining and healthcare? What type of EBIT margins can we expect in this area?

More. I don't want to be glib about it, but what we said for -- the short answer is what I guess would tell you is not dilutive to the rest of CAE. That's what we're targeting. Now, we're targeting a bigger business. I think what I've always said on this is we wouldn't be in this business, in either of these businesses, if we didn't think that new core markets could be at least CAD250 million within a reasonable timeframe. We've targeted to be CAD100 million this year, and we'll exceed that. We've targeted to be profitable this year, and we're doing that. We're going to continue that way.

So I think what you should expect is margins to continue to improve. But having said that, in order to be able to target the growth that we want to get, the actual revenue number we want to get, we're going to continue to invest in R&D and SG&A probably at a disproportionate level, which means you're not going to reach margins that are not dilutive to CAE probably into next year. But you will see better margins than you see now.

Got it. And the CAD250 million that's per business line? Like healthcare and mining, or is it combined?

Combined.

Combined. And that would be basically just through organic growth without any sort of supplemental bolt-on acquisitions?

Well, I wouldn't expect -- there are probably some acquisitions to gain some market access, some niche products like we did recently with acquiring Blue Phantom, but I would expect the bulk of it to be organic.

Beautiful. Okay. Thank you very much guys.

You're welcome. Operator, we have time for one more question from investors and analysts. And then we'll open the lines to members of the media.

Chris Bowes of Canaccord Genuity.

All right, thank you. Marc, you mentioned that profitability in military was a little bit better than anticipated, owing to mix. I'm hoping you can talk about what drove the positive mix, and maybe whether we can expect this contextually good profitability to persist?

Maybe I'll get started with [this spacing]. As usual, military is a bit lumpy, but maybe, and that's part of the answer. When you execute a program in one quarter that's operating at a higher profitability, if you reach a milestone then you tend to attract more profitability in that quarter than you would. So that's what we mean by mix of programs. But Stephane, maybe you have a better wholesome response.

Sure. And while just to maybe going with what Marc just said, taking you back to when we say it was better than what we had expected, when we look back at the second quarter of this year, really our margins in mil as we said was 10.4%. And quite frankly, by the time that we see the benefits of all the restructuring that we currently do, we could see the margins pretty much being steady at around 10%, 11%. So from that perspective, the profitability was better in Q2, Q3 than what we'd expected. Just on the mix of programs, and it's really been both in product and service.

And just as we have more effort on programs that are driving better margins, it tends to increase our profitability on the overall portfolio. So that's what happened in Q3. I think as we said before, what I think we could see is Q4 of this year likely to still be soft in terms of profit margin, and I can see that the benefits of the restructuring being done in Europe we'll see those benefits likely when the restructuring activities themselves are completed, which is likely to be the beginning of the second half of next year.

That's great. Thank you very much.

We'd like to thank members of the investment community for their attention and their questions. And operator, we'll now open the lines to members of the media.

(Operator Instructions)

Okay operator, it appears that are there are no questions?

There seems to be no questions at this time.

Okay. Then I will thank all participants again for participating, and remind you that the transcript of today's call can be found on CAE's website at CAE.com. Thank you.

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