CAE Inc (CAE) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the CAE first quarter conference call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Mr. Andrew Arnovitz. 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. 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 and uncertainties associated with our business in our first quarter fiscal 2014 MD&A and annual information form for the year ended March 31, 2013.

These documents have been filed through the Canadian Securities Commissions, and are available on our website at CAE.com and on SEDAR. They've also been filed with the US Securities and Exchange Commission under form 40-F, and are available on EDGAR. Forward-looking statements in this conference represent our expectations as of today, August 8, 2013, and accordingly are subject to change only after this date. 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 line 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 and challenges of the quarter, and then Stephane will provide a detailed look at our segmented results. I'll come back at the end of the call to talk about the way forward.

We maintained our market leadership this quarter, with a high number of full-flight simulator sales in civil, and more orders in military than we had at this point last year. In civil, we had disappointing margin performance this quarter, and while that clearly does not reflect the underlying strength of the business, we're off to a strong start to the year with 15 full-flight simulator sales booked in the quarter and another 8 announced today, bringing us to 23 sales for the year to date. In military, we sustained revenue and grew orders over last year, which demonstrates the resiliency of our business in the face of a challenging defense budget environment that is underscored by sequestration in the US. New core markets, we continue to perform well.

Looking specifically at civil, some of the lower margin performance in the quarter was attributable to factors outside our control, like softer market conditions in some regions, as well as increased competition. That being said, our performance shortfall largely resulted from temporary factors that we do control, and we have a very clear view of what they are and how to address them. The civil training business has a high degree of operating leverage, meaning that margins are sensitive to changes in volume and operating costs. The factors contributing to the combined 12.5% operating margin in the quarter, beyond market forces, include a slower than expected ramp-up of new simulators and training centers that we launched over the last 6 to 12 months.

We have, as well, a high number of simulators in our network that are being relocated. This entails both the cost incurred to move the simulators and the opportunity cost during the ramp-down and ramp-up of the simulators. We've recently had to increase the number of planned simulator moves in response to softer conditions this year in Europe and South America compared to last. Those markets are still attractive and growing in terms of air travel, but at a more modest pace, and as a result, we're somewhat ahead of the market in terms of capacity deployed. Not withstanding the issues affecting profitability in the quarter, we had a good performer order-wise, as I mentioned, in civil with CAD350 million in combined segment orders, or a backlog of CAD1.75 billion. In addition to this, we had CAD311 million of backlog related to our joint ventures.

Now turning to military, performance was largely as we expected at this point in the year. We continue to make progress to reduce our workforce in Europe, and we had a combined segment operating margin of 11.9%. We booked orders during the quarter in both established and emerging defense markets, including the sale of three full mission simulators for the Hawk M127 trainer for the Royal Australian Air Force, which we announced today, and an AW139 helicopter simulator for Coptersafety in Finland. Under US military sales programs, we were awarded a contract to expand the training facility for the Kuwait Air Force, and we received a contract for the KC-130R Hercules training services for the Japan Maritime self-defense force. Our first quarter military backlog was CAD1.96 billion, and in addition to this, we had CAD250 million of unfunded backlog, and another CAD126 million from our joint ventures. ¶ In new core markets, we maintained our positive momentum from last year. In CAE healthcare, we have been successfully leveraging CAE's global reached. We signed an agreement with a private hospital group in Brazil to establish a training center using our patient simulators and center management system. We also sold our center management systems to a public research university in the United States and a private hospital group in Turkey. In CAE mining, we sold our resource modeling and mine planning software to customers in Russia, India, and Mexico. A notable milestone during the quarter involved delivery to Fresnillo, the world's largest silver producer, of our first turnkey mining training solution. This is a unique offering because it is based on aviation standards and the way we trained pilots. The solution involves our CAE mining Terra simulators and e-learning courseware. With that, I'll now turn the call over to Stephane.

Thank you Marc, and good afternoon everyone. Consolidated revenue for the quarter was up 15% year-over-year at CAD530.4 million, and net income attributable to equity holders was CAD45.6 million, or CAD.18 per share. The quarter included a one-time tax benefit of CAD11 million and severance costs of CAD2.8 million after-tax, excluding which EPS would've been CAD.03 lower. Income taxes this quarter were CAD0.3 million, representing an effective tax rate of 1%, compared to 19% last year. The decrease in the effective tax rate from the first quarter last year was mainly due to a favorable decision by the Federal Court of Appeal of Canada rendered April 17 of this year, 2013, with respect of tax treatment of the depreciation and sale of previously used simulators in Canada. Also effecting the tax rate was the change in the of mixed income from various jurisdictions. Excluding the impact of this one-time tax benefit, our tax rate for the quarter would have been 25%.

In terms of cash performance, we are pleased with the progress we've made to improve the way we manage our working capital. We had a CAD96.5 million improvement in free cash flow this quarter compared to the first quarter last year, which put us at nearly CAD11.5 million. Most of this improvement comes from low investment in non-cash working capital. Our free cash flow is generally higher in the second half of the fiscal year, and we expect that to be the case again this year. Capital expenditures totaled CAD29.9 million this quarter, including CAD22.7 million for growth and CAD7.2 million for maintenance. This is down 13% on the expenditure level in Q1 last year. Net debt was CAD897.8 million as of June 30, 2013 compared with CAD813.4 million as of March 31, 2013. This represents a net debt to total capital ratio of 42%, stable with last quarter.

Now looking at our segmented financial performance. In our combined civil segments, first quarter revenue increased 27% year-over-year, reaching CAD302 million. Notwithstanding this higher revenue, combined civil operating income was down 20% year-over-year, to CAD37.6 million or an operating margin of 12.5%. The utilization rate in our training centers was 69% for the quarter, up slightly from 66% last quarter, but down from 77% last year. The low utilization rate is primarily a reflection of the slower than planned execution and ramp-up of assets deployed over the last 6 to 12 months, combined with some comparably softer demand in Europe and South America. In our combined military segments, first quarter revenue was up 1% year-over-year at CAD198.8 million, and we generated an 11.9% operating margin. In new core markets, first quarter revenue was up 14% to CAD20.9 million, and operating income was CAD1.6 million.

Effective this quarter, we implemented a new IFRS 11 joint arrangements and the amended IAS 19 employee benefits. You'll note in our disclosure that we restated comparative figures for each quarter of the year ended March 31, 2013 to reflect the adoption of these accounting standards. We have prepared tables to summarize the impact of the changes in the accounting of our joint ventures, which can be found on the investor page of our website. With that, I will turn the call back over to Marc.

Thanks, Stephane. Notwithstanding the low margin performance in civil, which impacted the quarter overall, the longer term fundamentals of CAE's business remains strong, and we have a good handle on resolving our execution issues. In civil, full-flight simulator sales fiscal year to date, including today's announcement of another 8, gives us a strong start, and we now expect to reach 40 sales by March 31. Our previous high was 38, so this would be a new record for the Company. The market has been consolidating, and competition has become more determined, but I am pleased with our success to win business with our comprehensive solutions.

Our broad portfolio and unique approach has enabled us to maintain our leading share of the market. Price competition is a factor, but we are disciplined and deliberate in our pursuit of market opportunities. Our strategy involves being our customer's partner-of-choice, and we're most successful when competing on the basis of differentiation with our broad solutions offering, superior technology and reliable longer term service. At the same time, we continue to address our cost base so that we can offer our customers the best possible value, and continue to win our fair share.

In terms of getting civil unit margins back on track, the team in civil, led by its new group president, Nick Leontidis, is focused on the execution of its plan, and we fully expect the business unit's operating margin to reach high teens percentages in the second half of the fiscal year. CAE is in a coveted position in terms of its global reach and offering within a large and growing civil aviation market. The underlying strengths of our business remain intact, and our strategic priorities remain unchanged. In military, signing contracts remains our priority, and we have been active in all fronts to develop our pipeline. We currently have CAD2.3 billion in submitted proposals, and another CAD780 million in process. This, together with our CAD2 billion backlog and new orders like the ones we announced today, will enable our defense business to remain resilient.

Longer term, the fundamentals remain attractive for CAE, well-diversified business geographically, with a customer base of over 50 different national defense forces, and strategic positions on enduring aircraft platforms. During the Paris Air Show in June, we signed two strategically important memoranda of understanding with original equipment manufacturers. The first with Lockheed Martin, which named CAE the preferred provider of Canadian F35 training support systems integration, operations, and maintenance. This would give us a position in the latest fifth-generation of fast jet program, should Canada ultimately select the F35.

We also signed a MOU with General Atomics to pursue international opportunities for CAE to offer its simulation and training systems for the Predator family of remotely-piloted vehicles. These aircraft systems are poised for long-term growth, and represent a strategically important segment for our defense business. We have a demonstrated capability in this space, and today's contract announcement for the US Air Force is further confirmation of our ability to win large competitive contracts of this nature in the world's largest defense market. The contract has an expected value of approximately CAD100 million to be generated over a five-year period, and it entrusts CAE to train the Air Force's total population of about 1500 pilots and sensor operators of the Predator and Reaper remotely-piloted vehicles. This involves CAE providing classroom, simulator, and live flying instruction at US Air Force bases in New Mexico, Nevada, California, and New York.

In new core markets, we expect to maintain our positive momentum with double-digit revenue growth, and expect to remain profitable. To conclude, I have complete confidence in the leadership team at CAE and our employees worldwide. In civil and for CAE overall, I expect that will see much better performance in the second half of the fiscal year. Thank you for attention, and we are now ready to take your questions.

Operator, we will now open the lines to members of the financial community. I would ask that people please limit themselves to a single-part question, and welcome you to reenter the queue should you have more questions after that. Operator, we will take questions from analysts and investors now.

Thank you.

(Operator Instructions)

Steve Arthur with RBC.

Great, thank you very much. Just wondering if you could elaborate just a little bit more on a couple points on the training and civil margins. In particular in your MD&A, you're talking about higher maintenance and repairs cost. Are those largely behind you now, would you say? And as well, on the moves of the simulators themselves, any sense of how many we are talking about there, and what the status is of those moves? Will they be largely wrapped up the end of the calendar or fiscal year, perhaps?

Let me take the first part of your question, Steve. The repair and maintenance costs in the first quarter were certainly higher than the run rate that we would have seen in last year and that we would see for the remainder of the year. It is -- it was in the quarter unusually high from our experience. But I guess you don't -- you need to react when some things breakdown. But we don't expect this run rate, the expense we had in the quarter to be the run rate for the rest of the year. So that is certainly additional cost that we have to absorb in the first quarter. As far as simulator moves, we finished last year, the end of fiscal '13, with seven sims being in transit and being moved. We have completed some of those in the first quarter.

Again, in reaction to some market softness in certain regions that we talked about, Europe, talked about South America, we also want to optimize our portfolio of assets. So we started some -- a number of sims being moved outside of certain regions, and being moved in places where the yield will be higher than where they were initially located. We are not through our overall deployment of asset and moving of assets. However, if I look at the going-forward for the rest of the fiscal year, we expect that by the second half of the year, there's a large number of those assets that will be -- we [RFD'd] in new regions, and will start generating some revenue and profit. That will alleviate the weaker margin that we had in the first quarter.

Okay, maybe just elaborate a little bit more on that question, Steve, as well in addition to what Stephane was saying. If you summarize, again, what Stephane was saying in answer to the question, we had about seven underway. We decided actually in the latter end of the quarter -- last quarter and this quarter to move more in reaction to this market softness, more than we anticipated. So you incur more costs for that, and more opportunity cost because if you lose the revenue. At the same time that we're doing that, we had centers that were ramping up, and they weren't ramping up at the speed that we needed them to. Some of it is our own doing, to be very honest with you.

Maybe when you do it, you do the amount of work that we're doing all once, some things fall, and inevitably that's what happened. But when you look forward, as we mentioned the outlook, we feel pretty good that we know what happened. A large part of the shortfall of the margin, as I mentioned -- I mean certainly competitive forces, certainly more than that -- the factors on the market itself in Europe and South America was a factor. But a large part of the shortfall was issues that we can control, and this is these moves of simulators, and if we are giving guidance on that -- or sorry, an outlook for Q3, Q4 that we will be back in the high teens as well. It is because we have a pretty good handle that our team in civil, led by Nick, first of all we understand the problem, and we have actions in place that will bear fruit in those periods.

This business, as mentioned, is very high leverage. Your costs are relegated to depreciation of the assets, leases on the building or the rental cost, maybe some people maintaining the sims after that. But you start throwing more revenue at them, and the leverage is pretty high. Some of the factors give us confidence that we will get back on track here.

That make sense. Just for context, in a typical year, over the last five years, how many sims would get moved around in your network, and is that total number a lot more than seven now, or is it just a couple extra?

We have a lot more now.

Okay.

I mean, it's a lot more in this period. Some of this is caused by the continuation of what we decided to do as part of the integration of Oxford and moving sims. Move more because of the market softness, opening up new training centers. There is a lot more magnitude, more disruption in our business than we have had on a run rate in the past few years.

Okay, thank you I will pass the line and re-queue.

Fadi Chamoun with BMO.

Thank you. Good afternoon.

Hello, Fadi.

Let's see. Along the same sort of line on the training side. There's some accounting changes, obviously. But it sounds like the organic growth -- other than the training civil, was actually negative, almost on the order of 5%, and I think it's the first time we see that in a number of years now. Is this a function of the simulator deployment that you're talking about? Is there a loss of share, because you talk also a lot about increased competition? So just to get your views on that.

Look, there is no doubt, Fadi, that we have some competitive pressures, but that's not the lion's share of it. A lot of it has to do, if you look at -- if you compare quarter -- I mean, year-over-year, quarter-over-quarter. Last year, we were really banging on all cylinders in pretty much all markets which qualified, for example, South America was on fire back then. I think we even use that expression, and that was reflected in the utilization we had last year. We had 77% last year to what we see now. You see, so there is definitely a factor that Europe is slower than it was. South America's slower than it was.

But having said that, those factors being what they are, the fact remains that we had about, if you take the number of sims that we are moving, and the ones -- and the sims that we have, the late starts or the delayed starts on some of the new centers that we're opened up in, mainly in Southeast Asia. We have up to 20 sims worth in some state of flux. So it's very hard to compare, and I don't think I would come up to the number that you came up 5%. I'm not sure I would have a number, to be honest with you. But I would say the largest part of the year-over-year, I think a lot of it has to do with the sims moving, centers being delayed, albeit with some effect of competition and market. There is no doubt.

Okay. As we go through the balance of the year, then, it sounds like you're saying with the second half of this year, you are expecting some pretty meaningful revenue ramp-up in order to, I guess, get you back to this high teen EBIT margin and to get some level of utilization on these assets that are being redeployed. How should we think about the revenue growth in the training service, basically, year-on-year? Is it -- does it get sort of gradually positive as the year -- do see it higher year-on-year by the end of this year?

Let me just say, we never really give outlook on revenue growth in civil. I don't think we have in the past, but I think your assumption is correct. That clearly, as I mentioned, because of the high operational levers of these sims. I mean at the moment, if you have sims that are out there that are being moved, we're paying the depreciation while they're moving, we are not getting a revenue. In a lot of cases we're still paying the rental on the building because it hasn't gotten there yet.

As soon as we start throwing more revenue as these sims become operational at their new location, and the new centers are operationalized, then you're going to see a disproportionate amount of that revenue delta drop to the bottom line because the costs are already there. That's really what we're talking about here. And why we feel confident is because we can't really control what is going to happen with the market or the airlines will do in South America and in Europe, albeit we know them pretty will. But we know what we can control and we know what sims we're moving. We know the focus of our team, and believe me, as I mentioned, we are disappointed with this quarter. We're not happy with these results. And you can rest assured, we have a full-court press to get these sims online earning revenue and the disruption slowed down to a dull roar.

Okay. Also along same line, I find a bit of disconnect, not sure why. But if we look at a higher level, the traffic growth that we are seeing in various market, including Europe, continues to be fairly strong, and obviously aircraft delivery rates are going up. So I am trying to bridge that between the gaps you're saying said softness in Europe and South America. What are we missing in that?

I think when I compare with last year when -- again, let's look at year-to-year comparisons, maybe quarter-to-quarter. Last year, I was just mentioning it. We had a very strong quarter in terms of utilization. The reason is, we were doing a lot of initials, both in South America and in Europe. When we do that, that is the difference between an initial course, which is a three-week course typically, to a recurrent training, which is a two-day course. Traffic is still good, and as I mentioned, those markets are still good in terms of traffic, but they're not as hot as they were, particularly in South America. So frankly, I think -- I'm not sure where the disconnect is.

I think it's still growing, but it's really, for us, the question is, the airlines that we're partnered with, if you think about it, LATAM in South America, which are going through an integration. TAM just announced, I think, that they're laying off pilots. We're exposed to them, clearly, in South America. If look in Europe, the airlines that are our partners, for example Iberia in Spain, Vueling. You look at Europe, but you've got to look at the airlines within Europe, and I think if you take it all in, what it results in less initials for us relative to what we had last year.

But in the end, I think you've got to look at this business, although we have this issue in this quarter, I think you've got to look at it over a longer term, because a longer term, this evens itself out. Because at some point, pilots have got to do initials, and then you go into the recurrence, and over a long enough time, I think the trend itself maintains.

Okay, that is helpful. Thanks.

Benoit Poirier with Desjardins Securities.

Thank you very much. Just to come back on the civil side, you seem pretty confident the civil margins will be back in the high teens in the second half. Why are you so confident, or what are the actions that you are taking that makes you confident that margins will bounce back in the second half?

The first thing I would tell you is that we have a very team led by Nick Leontidis, who is very highly experienced leading this charge in this business, and I have a complete confidence in the whole team in civil to do this. We are very focused on fixing that problem. Specific issues that give me the confidence is that the training centers that we're ramping up in the, for example in Asia, we know what they are. They're discrete. We know we have plans, which of course we have to execute.

But that is within our control as to when they will open, when the customers will start training on them, and how much business we should expect from those customers. We also know the sims that are being moved, and when they will arrive at their destination, and when they will be ready for training, and when the actually the training revenue will ramp-up on those assets. Again, it's a highly [leveraged] business. When the revenue starts flowing over those costs, compared to what we have today, it is pretty clear where the revenue comes up. There's other factors as well.

You look in this quarter, as Stephane was pointing out, we had severance costs in the quarter that affected civil, because changes that we have made. We had maintenance costs going back to Steve Arthur's question at the outset, that's in the -- higher in the quarter in civil than we normally see. We had kind of a perfect storm of issues that happened that hit us in Q1. Some of this will linger in Q2, because we don't continue to move sims overnight.

Nevertheless, I would see a positive trend. But at the -- by the time we get to Q3, Q4 will materialize, and yes, I don't -- maybe to underline what we don't control. We don't control the market, we don't control the competitive pressures. But we take -- we have a pretty good idea of them, of course, because we're close enough to our customers and we're close to this market, because it is our business. We have taken those factors and our assumptions upon them to factor in the outlook that we have given.

Thanks for the time. That is my one, and I will get back in the queue.

Thank you.

Cameron Doerksen with National Bank Financial.

Yes, thanks. My question is just on the military. I guess this will somewhat depend on orders for the rest of year, but I'm just wondering if you can maybe give us your thoughts on whether you thinking we're going to see some revenue growth in the military segment this year? And what we should sort of expect for the margins to trend for the rest of the year?

I think I'll maintain my outlook. I think we'll be resilient, and I think I said before it would be similar to last year, and in that region, last year it was a decline. But I don't think we will be -- we should not be in that region. I think we will remain resilient, which means to be stable. But going back to what you said, I think you are absolutely right, it depends on orders. Because we have a very good backlog, but at the end of the day, we eat at it everyday, obviously. We need to continue to win product orders. I'm very happy that we have won more product orders in the quarter than we won last year, year-over-year, that is very positive.

I'm very happy with the amount of proposals that we out there, because that is our leading indicator. Orders, obviously, are a lagging indicator. By the time you get them, obviously it's done. What gives us confidence is as we look forward, we look at how many proposals we've out there -- we've got out there and that we're writing. It's as and it's as high as it has ever been, even though big contracts, like for example KC46, which we weren't selected, they are out of what we are bidding. You can see by it that there's are a lot of proposals in there.

The thing that really is exacerbating this, if you look at the US, sequestration is an issue. And it's really the time it takes for the government apparatus, the bureaucracy, to get and make decisions on appropriations. A lot of it has to do with layoffs of personnel, and the fact that there's four-day weeks being worked on at the Pentagon, and a lot of the contractors and military personnel are making these decisions. Now, having said that, we are not expecting the ramp-up orders being placed at the rate that they are normally at. We're assuming they'll would be slower. The question is, how much slower? I think we will have to watch this phase, but lots that I have said here is going to depend on orders, but I believe we will remain resilient.

Thank you.

David Newman with Cormark Securities.

Good afternoon gentlemen.

Good afternoon.

Just in terms of the civil side, once again, more on the manufacturing side. How many units did you produce in the quarter? And what I'm getting at is, what is the pricing pressure that you are seeing on the market? How aggressive has it been, and maybe just a bit color on L-3 Lockheed Martin, and now Rockwell Collins partnering with the Chinese. How -- that looks like it could be a longer term issue for you guys, just in terms of pricing overall, and have you factored that at all -- any pricing improvement into your margin improvements over the second half? A lot of questions all built into one.

Yes, a smart way of asking the question. Three questions in one. (Laughter) Let me think about what they were.

Units produced?

10. We produced 10 in the quarter.

Perfect, yes.

Delivered. I'm sorry, delivered 10 in the quarter. Thank you.

You are ramping to 40 this year, you think?

I don't know. We don't usually comment on that. I don't think so. We don't usually comment on how many.

David, we delivered 39 last fiscal year if we count both the ones that we sold to airlines and the ones that built for our own network. Implicitly with higher order volume, you can expect that it will be higher.

Good. Okay, now just on the pricing, Marc, maybe.

Going back to maybe the latter end of your question, to answer what you've said. When we talk about the high teens in the civil market in the second half, implicit in that outlook is our assumptions on pricing. There's no doubt, so we are taking into account. You ask about the competitors, L-3 Lockheed, there is no doubt that they are being aggressive out there. Competition is certainly a factor, it is pretty --predetermined, to use the word I gave there. I think that we're going to be disciplined, and we are being disciplined and deliberate. We are going to protect our market share, and we have been in this market for a long time.

We have been a leader in this market for a long time, and I think that affords us some level of closeness with our customers that helps when they go buy simulators. And so I believe this is not going to be, in the end, a price shootout down to the last cent everywhere, and that's not the kind of game we play. We play game of differentiation based on our total solutions. Yes, they are aggressive. You would expect them to be aggressive. I will point out, we have been facing -- this is not the first time we faced competition. We have faced competition from large and small players for years, and we have managed to continue to be able to win profitably in this segment. I mean, it's our business. We sell simulators, we deliver training. We've got to be good at it, and that's the game we play. I believe we will be -- continue to be successful at doing that. Notwithstanding there is pricing pressures, as I mentioned. It is affecting, if you look closely at our margin, part of it is competitive pressure that is affecting those margins.

And China there, I'm not overly concerned about that, to be honest. Collin's a smart company, and I trust that they know what they're doing. But in the end of the day, if you look at our performance in China, we are selected on the C19 aircraft for the full-flight simulator, we're selected on the ARJ21. Before that, we were selected on AVIC for the transport aircraft. We have sold very high market share in China last year, and we are -- got a very good solid JV with China Southern, the largest airline in China.

I think one thing I would qualify about China, which is I think germane to our business, is as they go about growing their aviation infrastructure, they are extremely focused on the highest levels of safety, and adopting the global standards in terms of safety. That's part of the reason, it is like CAE, is because we have been and continue to be the gold standard in terms of safety in aviation training, and I expect we will be able to continue to be successful in that market.

Just if I could squeeze one more in. Is there anything at all at CAE, or in terms of the Quebec government or Canada, et cetera that would be considered sensitive? In other words, could one of these guys who are obviously under pressure on the military side, take a look at CAE -- is there anything precluding an offer coming on, or them looking at you as a potential takeover candidate?

Look, I don't know, to be honest, I don't think so. I mean, that would be a question for the Canadian government, to be honest. Our game is, and my game is to grow this business with the plan that we put in front of our Board. And that's the game we play. I certainly couldn't comment on anyone's willingness to acquire CAE. I mean, we're a widely held Company. There's no majority shareholders, so people can do what they want. But our game is not that. We've got a good growth plan, and we're out to execute it.

Excellent. Thanks, Marc. Appreciate it.

Ben Cherniavsky with Raymond James.

Good morning. I guess most of my questions have actually been asked. I'll maybe just beat the dead horse a little further, though, on the margins. Talked a lot about the margin pressure in civil training. I was a bit surprised to see the products, the margin pressure there as well. And you talked about not competing on price and selling the whole package, and I understand your strategy clearly. But I'm just trying to reconcile that with the actual numbers. I mean, have always understood this business to have a lot of operating leverage to it as well. I'm talking about the manufacturing simulators.

You've got a relatively small volume of units sold every year, and when you -- when that number's going up, your allocation of fixed cost per unit has quite a bit of leverage to it, at least it has in the past. Help me explain -- help explain how your revenue and your deliveries can be going up, your manufacturing level's up, and your margin's down, without competing on price?

If I said that we are not competing on price, than I misspoke. What I would have said, and I think I said but it doesn't really matter, I will repeat it, it is not only about price. We're compete on the solution selling. Which is leveraging everything that we can, and that includes training, the simulator itself, it includes updates, long-term service contracts, pilots, pilot leasing. So that is part of our solution selling, which we are uniquely and exclusively in a position to be able lever. As well as other factors, like the technology [fatigue] and offer -- and the long-term service support.

All of this gives us an opportunity to differentiate beyond pricing. There's no doubt that than that pricing is being -- is a factor, competition is a factor. It is showing up in our results. What I would tell you as well, though, is if you look at things quarter-to-quarter, there is always ups and downs when you look at a quarter, depending on which programs we're executing. I tend to look at this more on a longer term basis. And coming back to it, if I look at combined civil margins, I remain to what I said there. The competitive pressure assumed in our outlook, when we give the outlook for high teens by the second half.

Is the price pressure as much a function of a few new entrants as it is changes in the legacy players, or is it just because you've got more players now in the market?

I think its competition.

I mean, the total industry volumes were up, right?

Yes, but I think it's a combination of both. You look at some of these orders out there, there are very big orders. You can expect that when you have very big orders, first of all, we're going to defend very aggressively, because it's typically our customers. And usually when there is very big orders, then the customer has an advantage, right? You would expect them to get favorable pricing. Then that is certainly the case. Again, as I mentioned, we will compete, but we'll compete on a complete solutions offering. There is no doubt that we will have to compete on pricing. Pricing is part of the equation, just to say it's not the only part. And that's why we're not going down full to the mat on this.

Okay, thanks very much.

Operator, we have time for one more question from the financial community, and then we will open the lines to members of the media.

Thank you. David Tyerman from Canaccord Genuity.

Yes, good afternoon. My question is on the military margins. I was wondering if you could give us idea of where you see those going? They were low in the quarter. Was that an aberration, and what do you see for the remainder of the year?

If I look at the -- actually, when we presented our results of the last fiscal year, I think I commented on the margins in military. And I've explained, if you look at the margins that we delivered last fiscal year, removing all the noise, because if you look at the reported margins we put some details in our MD&A. They include some benefits, especially some [significant] gains in certain quarters. If you remove all that, we started the year with a portfolio in our hands that is running in the low teens. I think I've said it's probably around 11%, 12%, So the margins that we saw in the first quarter were pretty much were in line with the portfolio that we are executing.

As far as going forward for the rest of the year, it's really highly dependent on the product orders quarters that will be coming in. Two things will happen. Number one is we've embarked on a restructuring program, mainly in Europe that will be completed towards the -- in the fiscal year, but we'll see the benefits of the completion of that restructuring program probably in the second half of this fiscal year, so Q3, Q4. The other thing is, which will have a benefit impact on the margins. The rest, really, depends on the volume of business that will be coming our way.

Just to clarify, the baseline 11%, 12% and then things like restructuring should help some?

Correct.

Okay, and do you have any broad sense of what that restructuring benefit should be, roughly?

I have said you can get about a couple of percentage points on the restructuring, depending on the timing of the programs that are executed in a given quarter, and that's why in a given quarter it can vary a bit. But as a sense of -- getting a sense of magnitude, where I've said probably a couple of percentage points related to the completion of our restructuring program.

Thank you.

Operator, I want to thank members of the investment community for participating on the call. We will now open the lines to members of the media.

Thank you.

(Operator Instructions)

Thank you. Mr. Arnovitz, there are no questions at this time.

Given that we have some time left, why don't we reopen the queue to members of the financial community, if there are any other questions.

Thank you. Tim James with TD Securities.

Thank you. Could you provide some additional granularity or specific examples of what Company-controlled influences have been causing the slower than expected ramp-up in revenue from relocated simulators in the civil network?

I won't split them up into too much detail, but I think some of the factors is are what was said previously, like you have the higher repair and maintenance cost that were higher in the quarter -- quite a bit higher than we normally see. We don't expect that to reoccur. We had the restructuring in the quarter that affected civil in a probably disproportionate way. We had three -- so that is not going to reoccur.

We have three new centers that are in process now, a large part of the cost being incurred, and they are going to -- they are going to be operationalized over the next few months. And there's quite a number of simulators that are currently in flux, i.e., in state of movement. Either being ramped down in preparation for being moved or either being moved, or either just starting to be operationalized but not full revenue. Those are all the factors. I don't think I've missed any there. I think those are the main factors of which we control, Tim.

Maybe just to build on that question a little bit. You said earlier that you were disappointed with it. What would you do differently, if you were to go through this process again?

I think that -- I think we had a good handle on what we were doing on the integration of Oxford. I think what we probably underestimated -- and I would say certainly underestimated, is the amount of disruption that this causes. And perhaps everybody always goes through this on integration, and I hate to say we did it again or we did it, I should say. But we moved a lot of things at the same time. And what happens then is you are talking -- you are sometimes challenging or taxing -- tasking the same people in doing the same things, and asking to do them in such way that its just hard to do at the same time. Now that being said, at the same time, we started moving other things because of the market softness, particularly in Europe and South America. So we kind of amplified the problem. So you put all of that together, you wind up in some of the issues that we have here today.

If I was to do it anything different, I think probably we would have taken -- we would have maybe spread things out a little bit more. And we have been tighter on our control, of the execution of a lot of those factors. And that is as honest as I can be, but I really am confident, you can expect that we spent a lot of time on this. I spent personally just in the last couple of weeks, I was in Europe visiting the majority of our training centers in Europe. We have a pretty good handle on what happened, where we are, and what needs to be done. I can tell you, if I spent that amount of time -- our leadership team in civil led by Nick Leontidis with 25 years of experience at CAE, both in products and in training, we have a very tight focus on what needs to be done to fix this.

Great, thank you very much.

You're welcome.

Operator, we will conclude the call now. I want to thank, again, members of the financial community for their participation, and remind everyone that a transcript of today's call can be found on our website, 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.