CAE Inc (CAE) 2017 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the CAE third-quarter conference call. Please be advised that this call is being recorded. I'd 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'd like to remind you that today's remarks, including Management's outlook for FY17 and answers to questions, contain forward-looking statements. These forward-looking statements represent our expectations as of today, February 14, 2017, and accordingly, are subject to change. Such statements are based on assumptions that may not materialize, and are subject to risks and uncertainties.

Actual results may differ materially, and listeners are cautioned not to place undue reliance on those forward-looking statements. A description of the risks, factors, and assumptions that may affect future results is contained in CAE's annual MD&A available on our corporate website, and in our filings with the Canadian Securities Administrators on SEDAR at www.SEDAR.com and the US Securities and Exchange Commission on EDGAR.

On the call with me this afternoon are Marc Parent, CAE's President and Chief Executive Officer, and Sonya Branco, our Chief Financial Officer. After remarks from Marc and Sonya, we'll take questions from financial analysts and institutional investors. Following the conclusion of that Q&A period, we'll open the line for questions from 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 comment on the operational highlights of the quarter, and then Sonya will take us through the key financial metrics by business unit. I'll come back at the end to comment on our outlook for the balance of the fiscal year.

The Company had a strong performance in the third quarter. Overall, we generated double-digit top- and bottom-line growth. Order intake was robust, and we increased our substantial base of recurring business with a new record CAD7.4 billion backlog.

Revenue and operating income growth was especially strong in Civil, as we filled our training centers to 76% capacity on higher demand for training. We also had higher activity on simulator product solutions, as we worked to deliver on our sizable backlog. Civil orders for the quarter reached CAD363 million, including training services agreements with airlines and business aircraft operators, and 12 full flight simulator sales to customers including Southwest Airlines and China's Xiamen Airlines.

Since the end of the quarter, Civil sold an additional six full flight simulators, bringing the total number announced at fiscal year to date to 39. We also signed new long-term service agreements with customers including Jetstar Airways Japan for crew resourcing, with Jet Airways for Boeing 737NG pilot training. Within Civil, book-to-sales ratio for the quarter was 0.88 times, and for the trailing 12-month period it was 1.14 times. Civil's backlog at the end of the quarter was CAD3.3 billion.

In Defense, our strategy to pursue a pipeline of comprehensive programs as a training services integrator is bearing fruit. These large and complex programs involve the integration of live, virtual, and constructive training into a complete training system, and they usually take more time to convert from bid to award than more conventional programs. We've been successful going after these types of programs which are really at the center of CAE's vision to be the recognized global training partner of choice.

Financial performance this quarter was in line with our outlook for modest growth this fiscal year. And the more than CAD1 billion in Defense orders and options we received in Q3 underscore our potential for growth in this market. Notable program wins included a contract to upgrade and extend the Royal Canadian Air Force NATO flying training in Canada program to 2023.

We also received a long-term contract to train and qualify new army helicopter pilots under the US Army's Initial Entry Rotary-Wing training program. And that's a nice follow-up to our win last year of the US Army Fixed-Wing training program, and is further testament to CAE's strong position as a training services and training systems integrator. It also underscores CAE's commitment to customers as their training partner of choice.

The fixed-wing training system is complex. Just the initial rollout involved the construction of a new state-of-the-art training center, the manufacture and deployment of flight simulators, and the delivery of new training aircraft. And we're very proud to have delivered all of this capability in under a year's time, and to have become a sizable employer in the state of Alabama.

And this positive momentum has continued since the end of the quarter. Just yesterday we announced that Airbus awarded CAE a contract for a comprehensive C295 training solution for Canada's fixed-wing search-and-rescue program with an expected value, including options, of more than CAD300 million over the next 26 years.

Total Defense orders this quarter were CAD601 million for a book-to-sales ratio of 2.46 times, and the ratio for the last 12 months was 1.41 times. The Defense backlog reached a record CAD4.1 billion compared to CAD3.3 billion at the same point last year.

And finally, in Healthcare, revenue and operating income was softer in the quarter and for the year to date than we would have expected by this point in the year. We attribute this mainly to the timing of orders, which are taking longer than we expected to materialize from our sales pipeline.

Nevertheless, we continue to make good progress on our strategy to position the Business for strong growth over the longer term. During the quarter, we were awarded contract for simulators and training center management solutions for the CEGEP pre-university college system in Quebec. And on the business development front, we hosted conferences in China and India to help expand Healthcare's reach internationally.

We also continued to innovate with industry-leading technologies. Two weeks ago we announced the release of CAE VimedixAR, an ultrasound training simulator integrated with the Microsoft HoloLens. CAE Healthcare is the first company to bring a commercial Microsoft HoloLens mixed reality application to the medical simulation market, and one of only a few authorized distributors of the Microsoft HoloLens worldwide.

With that, I'll now turn the call over to Sonya who will provide a detailed look at our financial performance. I'll return at the end of the call to comment on our outlook. Sonya?

Thank you, Marc, and good afternoon, everyone. Consolidated revenue for the third quarter was up 11% to CAD682.7 million, and operating profit was up 17% to CAD98.6 million, reflecting operational leverage and further process improvements.

Quarterly net income before specific items of CAD2 million was CAD69.6 million, or CAD0.26 per share. As in previous quarters, timing differences in the recognition of revenue on our standardized commercial aircraft simulators resulted in the deferral of approximately CAD0.01 of earnings per share. A full reconciliation of these timing differences can be found under additional financial highlights in this morning's third-quarter press release.

Free cash flow for the quarter was CAD124.7 million, which is higher than last quarter, mainly due to a lower investment in non-cash working capital, as we normally expect in CAE's second half, and an increase in cash provided by continuing operating activities. Free cash flow year to date was CAD167.5 million, lower than the same period last year due to a higher investment in non-cash working capital and higher dividends paid. This was partially offset by an increase in cash provided by continuing operations this year. We continue to expect to see reversals in non-cash working capital accounts through the balance of the fiscal year.

Usage of cash during the quarter involved funding capital expenditures for CAD35.8 million, mainly in support of growth. We also distributed CAD20.8 million in dividends, and repurchased and canceled 308,000 common shares under the NCIB program for another CAD5.9 million. We announced this morning that CAE received approval from its Board of Directors to renew the NCIB program to purchase up to approximately 2% of CAE's outstanding shares.

Notwithstanding the expected dilution this year on return on capital employed from the additional approximately CAD100 million to establish a US Army fixed-wing training system, I'm pleased that we've held returns stable through solid operational performance. The fixed-wing program will begin to generate a return in March when it becomes operational. Return on capital employed was 11% in the third quarter, up from 10.7% last quarter, and was stable compared with the same quarter last year.

CAE's financial position remained strong during the quarter, with net debt of CAD853.8 million at the end of December, for a net-debt-to-total-capital ratio of 29.7%. This is down from 32.1% at the end of last quarter.

Income taxes were CAD11 million this quarter, for an effective tax rate of 14%. This is up from 13% from the third quarter last year, mainly due to the benefit of certain US tax incentives we received last year. This quarter, the rate was impacted by an audit settlement in Canada and a change in the mix of income from various jurisdictions. Excluding the effect of the settlement, the income tax rate this quarter would have been 16%.

I'll conclude with a few brief comments on our segmented performance. Civil was indeed the growth driver in the quarter. Revenue was up 23% year over year to CAD412.8 million and operating income was up 29% to CAD71.4 million for a margin of 17.3%. The Civil margin in the third quarter last year was 16.5%. On an apples-to-apples basis, Civil revenue and operating income would have been CAD6 million and CAD2 million higher if not for the deferral effect from the standardized simulators.

In Defense, revenue was 4% lower than Q3 last year to CAD243.7 million and operating income was up 1% to CAD30 million for an operating margin of 12.3%. And in Healthcare, third-quarter revenue was lower at CAD26.2 million compared to CAD28.3 million in Q3 last year, and segment operating income was nil compared to CAD1.6 million in Q3 last year. With that, I'll ask Marc to discuss the way forward.

Thanks, Sonya. We continue to make good progress with our training strategy and operational performance improvements, and I expect this momentum to continue through the balance of the fiscal year and beyond. Overall, we're very pleased with CAE's position and the progress we continue to make towards our vision to be the training partner of choice.

In Civil, we're on track to deliver on our annual outlook for low double-digit percentage operating income growth on higher utilization of our training network, higher production levels, and some of the benefits of our improved processes. Demand remains strong for CAE's training solutions, supported by healthy growth in commercial passenger traffic and stable usage in the business aircraft segment. We expect to continue increasing revenue and profit per simulator by driving more wet training across our network and penetrating a greater share of the total CAD3.3 billion market.

Demand for full flight simulators also continues to be strong. And with 39 sales announced year to date, we will surpass our previous outlook for the fiscal year as a whole.

In Defense, we continue to expect modest growth this fiscal year. And as we've seen so far this year, especially in the last quarter, we've made good momentum in converting a large bid pipeline of long-term training programs into orders. This positions our Defense business for more substantial and more sustainable growth going forward as we penetrate a larger share of the market.

The macroenvironment is constructive, and our bid activity continues to be strong. Our positive outlook for CAE in Defense is further supported by anticipated increases in Defense budgets, the high priority being placed by governments around the world on Defense readiness, and the intrinsic benefits of simulation-based training. These factors are driving a greater need for training, and we believe that CAE is well positioned.

And finally, in Healthcare, we still expect growth this year but at a lower rate than the double-digit percentage we previously expected. We have a good understanding of the market as it exists today. And we have a vision of what we believe it will eventually become as the use of simulation-based training expands. Notwithstanding the slower pace of orders so far this year, we remain confident that Healthcare will deliver a high rate of growth over the longer term.

Before we open the lines for questions, I'd like to mention on behalf of the CAE Board of Directors the addition of Francois Olivier as a new Director effective today. Francois has been President and Chief Executive Officer of TC, Transcontinental, since 2008. And we look forward to having his strategic counsel. With that, I thank you for your attention and we're now ready to answer your questions.

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

(Operator Instructions)

Our first question is from the line of Steve Arthur with RBC.

Thank you. Just a FOL followup on the civil utilization rate. I knows there's many, many moving parts beneath that 76% figure that you report. But it showed a pretty considerable improvement throughout the whole year. Looking ahead, are you happy with it where it is at this current level? Or when you look at various demand drivers out there, what kind of annual level would you see that targeting over the next -- over the mid to longer term?

It's hard to go that far. I don't think we ever do, Steve, but, look, I'm happy at 76% for sure. I think certainly where as I said we're continuing to see strong demand across our network and I certainly, for the foreseeable horizon, I see that continuing.

It's supported by, as we said in the remarks, by the strong activity we see in passenger traffic, which is still a very high level. The stable but still good for us activity levels we see in business are back. So I think we're at good levels right now and I would expect that to at least -- I don't want to go too far out but certainly we -- for the foreseeable horizon -- certainly covering this financial year.

And of course our goal, utilization rate is one metric. It's not the only one we track. What you have to look at is within that, there's more opportunity for us to feel like throw more revenue at the same assets by getting wetter. And that's strategic priority for us to go after more training, doing the training ourselves and, therefore, increasing, if you like, the yield on each asset. That's what we're spending a lot of time on in addition to filling the existing capacity.

Great. And that has margin implications obviously.

Yes, absolutely.

Just to quickly follow up, related to that just on the joint venture relationship with Japan Airlines announced some time ago now, a couple questions related to that. First, how is that progressing -- on or above expectations? And then secondly, any color on activity with activity level discussions with other airlines -- is that relationship kind of made others more optimistic about progressing with this kind of relationship?

Certainly I'll start with the latter, Steve. Certainly when you're able to sign such a prestigious carrier like Japan Airlines, not only for basically outsourcing of their training center activity, which we've done as versus a joint venture, but also you'll recall that we're also doing their initial pilot training using an MPL program. It's a strong testimony to the franchise that we have. Because this kind of -- you can only get this kind of contract, as I said, through a network carrier like Japan Airlines -- people don't trust you with this responsibility unless you have a very strong record and credibility and delivery.

That's what it meant for us. That's what it continues to be for us. I've had opportunity to meet with right up to the CEO and heads of flight operations in Japan Airlines and I think the satisfaction on both sides of the relationship is very good. And we're very happy with how our joint training center -- or training centers, I should say because it's more than one training center -- is panning out from an economic standpoint for both companies. So I think we're very happy with the relationship and we see it growing.

Is it resonating with other carriers?

Just following up -- yes, definitely it opens up. You wouldn't be surprised that it's one of the calling cards we'll use when we go to see other airlines. And as we've said before, today we command about 25% of the potential order activity -- not active -- but a revenue opportunity there is in this market -- a $3.3 billion market. For us, it's all about -- as you say, going to convince other carriers to allow us to take on either partially or totality of their training and there are opportunities like that.

And we are pursuing them. As I said before, big opportunities -- if I can convert one or two a year, we'd be doing really good. But really what doesn't come -- I think you have to read between the results. When we announced that we -- in the quarters we pick up training services activity, in a lot of cases it's us converting more of a given airline's activity to giving us the training. But maybe not the totality.

So you see some of that. You'll see portions of it that doesn't cross as a name being announced. But I still think in a nutshell that the pipeline opportunity is supportive of the outlook we've given.

Good color. Thanks very much.

Our next question is from the line of Kevin Chiang with CIBC.

Hi. Thanks for taking my question here. Turning to defense, a big increase in your backlog. It looks like you've had a number of big wins in the fiscal Q3 and in Q4 here. I'm just wondering how that plays out as we look into defense markets. I think historically you've looked at that at being around 12% to 13%. Is there a line of sight moving above that range as you start monetizing this backlog? Or do you think margins kind of hover around here even as you start seeing accelerated revenue growth?

I think there's always potential, but I think at the moment our expectations are that the backlog we're getting is in that range of 12% to 13%. And that's the orders we've won are supportive of that. Certainly when you throw more revenue, there is a possibility of doing more. I certainly would not discount that.

We'll update that as we go along. But I think our focus is on growing the SOI dollars. So dollars come out of this. I think what people look at -- as well as the mix between products and services, I think I'm happy to see that we have a good mix between the long term -- in the orders that we've announced in the past period of time here, there's a lot of product orders in there which are inherently they will deliver in a shorter period of time say within the next couple of years. And if you get more revenue, clearly you'll have synergies in engineering, you'll have synergies in operations.

You could throw -- you add more overhead absorption. So that in itself permits you to do better if you can time it correctly. And at the same time we're getting these long-term service awards, which means that not only do you have a revenue if you like quasi-certainty for years to come, but clearly if I've got the service revenue, I don't need to bid on it.

And therefore I can concentrate, say the current bid activity, on a larger series of contracts, therefore not growing -- if you like my SG&A on a revenue is going up which, of course, has margin implications as well. So at the moment, I think going back to the wins that we have are certainly supportive of 12%, 13% range. And I think that's where we will keep it but there's potential for more. But clearly the SOI dollars in absolute, that's what's going on.

That's a good point there. Secondly for me, you continue to see good free cash flow generation. If I recall correctly, when you originally announced your NCIB, I think the purpose was to offset a natural dilution that occurs through your stock option program. But year-to-date we've seen your shares outstanding decline as you repurchase more shares. With growth CapEx presumably rolling over in FY18, just wondering how we think about how you prioritize free cash flow around the NCIB. Should we think about your share count declining or maybe more dollars being put toward the buyback relative to the original expectations?

Hi, Kevin. It's Sonya. So, yes, very good free cash flow generation in the quarter. And we're happy to see a reversal of non-cash working cap driven mainly by improved collection. So good performance on that side. On your question regarding the NCIB, the objective is really to offset dilution. You saw that with a lesser level of repurchase in the quarter at about $5 million worth. It was a little higher in previous quarters.

So the objective remains to offset the dilution from our DRIP and option programs. And in terms of the mix between shareholder returns and investment, we continue with our balanced approach and really focused on our three capital allocation priorities, which is investment in accretive growth, market-led opportunities that will generate return, additional return on capital and continuing to return to shareholders via NCIB and dividends.

That's great. Thank you very much.

Our next question is from the line of Turan Quettawala with Scotiabank.

Thank you. Good afternoon. I wanted to just focus a little bit on the restructuring costs in the Lockheed acquisition. I think you've had $6.5 million so far after tax. Just wondering if you could give us some sense on how much is left on that as we go through the next few quarters maybe?

So you're right -- spent about $6.5 million to date after tax. And the guidance we had provided was about $15 million to $20 million after tax. And we're still tracking to that guidance. So there will be a higher level of restructuring in the duration costs in Q4 as we finalize and complete the integration in the quarter.

I see. Okay. Perfect. And then that will be the -- after Q4, Sonya, it should be out of the numbers?

That's right.

Okay. And I guess one more question, probably related a little bit. But when you look at your civil SOI guidance here at sort of low double digit growth for the year. You're obviously doing higher than that here on a year-to-date basis. So as we think about Q4, it implies a bit of a slower growth rate. The laps are a little bit higher, but are you assuming some of the restructuring costs in there? Or what's going on in terms of that civil SOI growth?

No restructuring costs assumed in our outlook. And Q4 is traditionally one of our strongest quarter and we expect that pattern to maintain. And we're still tracking to our outlook of low double digit operating income growth.

I certainly don't see a slowdown, Turan.

I beg your pardon.

We certainly don't see a slowdown in the fourth quarter. As Sonya said, Q4 is historically strong. It's a big quarter for business aircraft. And we don't have any indication that this year will be any different.

Okay. That's correct. I know it's a stronger quarter. I was just wondering, it would imply that you would have raise your guidance for the year, but you didn't. So that's kind of why we were answering the question.

I guess it's maybe the interpretation of what's lower double digit.

Okay. Thank you very much.

Our next question is from the line of Cameron Doerksen with National Bank.

Good afternoon. Just a question on the healthcare segment. I recognize it's still pretty small part of the overall picture for CAE, but it is at times a sore spot for investors, particularly when we see a quarter when there's no -- I guess 0% margin. I guess maybe you can address what kind of timeline should we expect a return to some more interesting revenue growth. And then of course you need the revenue growth to go higher so you can start to generate better margins. So I'm just wondering what kind of confidence you can give for investors and a return to growth in healthcare.

As we've said, we're no happier at results than you are, for sure. We'd have expected more, as we said in our remarks this year. But when we look at it in pretty exhaustive details, you might imagine about why we're in the situation we're in. And a lot has to do with orders, which is a bit unusual to have moved to the right in a quarter.

We fully expected to deliver this quarter, which did not. They do wind up in the fourth quarter. So we've got a pretty good view of growth in the fourth quarter and beyond.

So as we said in the outlook, although we've lowered it because realistically with the amount of time that's left in the year, it's a bit of a too far to be out there in terms of double digit growth. But certainly we see growth for the year and in the fall, definitely as we go into the next period of time, certainly in the next year and beyond, we certainly, to use your words, get growth that's a lot more interesting.

And we believe in the market. We believe in the market. The market is there. And as demonstrated by some of the product introductions we've made for example that we've highlighted this quarter with the Microsoft HoloLens, we're injecting technology into these solutions, which we provide, we think, optionality on top of the existing market that we believe could be very interesting over the years to come.

Okay. Just maybe very quickly on the defense, in the past you've talked about a dollar value of outstanding bids. You've won some pretty good amount of orders recently. Can you maybe just give us an update on where the outstanding bid pipeline is?

I think, as you could expect, that with having just signed all these contracts, I think probably $1.4 billion over the last very short period of time, the exact numbers are still towering. But certainly over $3 billion to date even with the recent wins we've had. So I don't think we're done here on orders. In fact I know we're not.

Great. Thanks very much.

Our next question is from the line of Tim James with TD Securities. Please go ahead.

Thank you. I believe at the Investor Day last year you talked about some dilution to return on capital employed in FY17 due to the investments and the timing of returns from the US military contract. Do you believe your return on capital employed will improve in FY17 relative to FY16? And would it be a material improvement, or is there anything you can provide in terms of helping us to think about where that goes for the year?

In terms of how we see [ROTEA], I think we'll go back to our outlook and it remains unchanged of about 13% in three to five years. The ROTEA for the quarter was 11%, which is holding relatively stable versus last year and that's factoring, like you said, the investment on fixed wing -- the US army fixed wing training systems despite the fact that they're not necessarily operational yet but will be soon.

So I think this underscores the return that's being generated by the rest of our asset base. And for the rest of the year, there's still some remaining additional CapEx that will put maybe some temporary pressure. But give or take a few basis points, it should remain relatively stable.

Okay. Thanks. Sonya, just wondering with the tax rate, I know you've talked about 22% in the past for full year, could you provide any color on what -- given it's been lower than that year-to-date -- what you expect for the fourth quarter? Would it be significantly above 22% therefore, or what should we expect?

In the quarter there was the impact on an audit that was settled in Canada, which brought down the rate by about 2%. Otherwise it would have been 16%, which is still on the low side, but a function of the mix of the profit and where we're earning our profit. Now as you can see the tax rate can be very -- fluctuate a lot from quarter to quarter. So I can't necessarily give guidance on a specific quarter, but rather over the long-term.

And I think it's better to look at it over a longer term. So on a normalized basis, if you go back the last three years and the normalized average, it's been around the 22% mark. So I continue to use this as a guide over the long-term. So for the year it won't be 22%, but a good guide going forward.

Okay. And then finally if I might just sneak one in quickly here, the Lockheed Martin flight training acquisition looks like a very good revenue performance here in the third quarter. Can you talk about the fourth quarter, and just give us a bit of a sense given how volatile that's been? Is that going to look more like the third quarter in terms of revenue or will it look more like Q1 or Q2.

When we purchased the Lockheed Martin acquisition, we took in to consideration that there would be some temporary dilution as we worked into through the existing backlog. In this quarter we actually delivered some of the work in progress that was purchased and therefore some revenue. And that's a line that was recognized in the quarter. And that drove the additional revenue and SOI contribution. Now it will fluctuate in the quarter as we work through the existing backlog of work in progress.

Okay so maybe just to round that out then, should we think about that business and the seasonality in that as just similar to your existing civil training business? Obviously the uptick in revenue in the most recent quarter was much more significant than we've ever seen historically from CAE, but going forward maybe think about that as being in line with the existing seasonality of CAE's legacy civil training business.

So as we work through the remaining backlog, what we'll see is a ramp down of that work in progress, which we've purchased. And ultimately this is being integrated into our existing product business. And other than that work in progress, we've purchased contracts and installed these as well as some assets in training centers. And that's just being integrated and has been integrated in to our normal civil operations.

Right. Sorry. I was referring to training, but it's the equipment side I meant to speak of. Okay. Thank you, Sonya. That's helpful.

Okay. Perfect.

(Operator Instructions)

Our next question is from the line of Benoit Poirier with Desjardins Capital Markets.

Good afternoon. This is Charles Perron filling in for Benoit. Thanks very much for taking my question.

I was just wondering if you could go back on defense. If you could provide more color on the implication from the changes in the administration in the United States on your business and also the same time provide more color about the revenue growth expected FY18, given the sizable book-to-bill that you recognize in Q3?

I think we haven't given our -- what we expect in terms of revenue growth, because we're going to -- we typically provide that next quarter in terms of what we expect. But certainly you would expect growth as we've said in the -- because of the orders that we've signed. And as per the outlook we've done on the market itself and the remarks, so expect growth and we'll precise that number at that time.

I think it's with the new administration in the United States, I commented on this last quarter. And I think they're very focused on maintaining and increasing readiness. And that in itself is driving a level of activity, which is up tempo. That's supportive of our business.

At the same time we see budgets beyond the increase pretty much in all the markets that we serve. Either because of a local issues that -- in the geographies that they have local threats or that people are boosting their defensive expenditures per their NATO commitments other such commitments. So overall for us we definitely see a market environment which is conducive to growth. And of course, what we do, simulation-based training, is absolutely invaluable to improve readiness while being very efficient from a budgetary standpoint.

Okay. Great color there.

And just on civil, wondering if you could provide an update on your full flight simulator ordered guidance for FY17, and if you see potential for other sizable orders in your crystal ball that could let you achieve more that the low [40s] that you mentioned in the past. Just wonder if you can pinpoint a more specific number to what you mentioned in you previous remarks?

Well I won't get pinned down to a specific number right now. Only for the simple reason that where we are now with a couple months to go, it's very easy for our orders to literally go over the end of March date, if you like. We certainly don't want to be in the situation of signing orders and making what I would consider less than optimal deal just to meet a number.

But suffice to say as we've said in the remarks that we'll exceed the outlook that we had, which was simulator last year, which spent about [40]. So we'll definitely do better than that because we've got [39]. As I said, the level of activity is still very strong. We've maintained our leading market share.

So there's a lot of bids, there's a lot of campaigns on the way. And I fully expect a lot of those to be successful. So it's not too early, I just won't be able to give you a precise number right now. Except it certainly will be in the [40s] for sure -- probably north of [45] I would think.

Okay. That's helpful. Thanks for your time.

Our next question is from the line of Chris Murray with AltaCorp Capital.

Thanks. Good afternoon.

Again, thinking about defense programs, Marc, can you talk a little bit about how the nature of some of those programs are going to progress over the next few years? You've alluded to the fact that they're getting a little bit larger where you're having to take a full approach to it. We saw that with the fixed wing search and rescue package.

But wondering if you could maybe give us a bit more color on how that's going to work and if there's any geographic differences. And as well, if you also can be kind enough to comment on where you guys stand with the TX program and any expectations on that.

Maybe I'll start with the TX just with that one. I think that we're part of the current team there that was the bit M-346. We've been a partner since in the beginning. We believe in the aircraft. The aircraft has been successful in a number of countries. And I think it has the capability, it meets the specs that are required of the US Air Force.

And I think it will be a very affordable platform. So I think that we think that the team will be successful. With regards to the first question, in terms of the defense bids, the situation we're in is literally our strategy coming true, if you like. Over the past few years we've built the capability to be able to deliver all aspects of a, if you like, how the military trains.

The military doesn't train obviously just using simulators. Historically, I'm going back a few years now, we would be a simulator manufacturer. But the military, all branches of the military, they train not only using live assets, they use simulators, they use what we call constructive tool, which is computer-based, tools to be able to train. And they bring that all together.

So CAE now has not only the capability to deliver every one of them, it has a track record of doing it. We have track record of being able to just by the size of the Company, our financial -- the financial depth and breadth that we have, the capability we have, we're able to deliver a comprehensive solution to be able to train like the military trains and literally go after contracts where they essentially can outsource the whole operation to you. And that's exciting because then you can differentiate yourself, because obviously there's not -- you reduce the number of companies that can actually deliver that level of capability. And that level of capability, the one stop shop, is very attractive you can bring synergies to it.

So those are the kind of contracts, what we mean by bidding as a training services integrator -- that's what we mean. We integrate all aspects of the military's training program. And you see us doing it with one of the last -- or not last but one of the most recent tools in our toolbox for this was the acquisition we made in the last couple years of the NATO flying training contract, which gives us the full capability to be able to conduct military fast jet training -- simulators, aircraft, constructive assets. In fact, we run the actual base in Moose Jaw, for example, in Saskatchewan.

And you look and follow on to that -- well we were able to literally become the US Army's training partner with the win on the US Army's fixed wing program and followed by the selection we just had of the US Army's Initial Entry Rotary Wing training program. And when you look at what, as I said on the remarks, you look at the capability that we're able to deploy as a Company now within -- we talked about this $100 million of investment less than a year ago, and here we are. That has been translated today into a training school, a very sizable training school, aircraft on the ground, simulator on the ground and an unveiling -- a ribbon cutting in March 6 in Dothan, Alabama. And our first students of the US Army are already starting 11 months after us starting the program.

So that's the kind of contract. They're bigger. They take longer. What I meant in my remarks is when you bid on such a program, it takes longer for these programs to be bid. It takes longer to get a selection. But as we've been saying I think for a couple years now, we've been sitting on a pipeline of opportunities and it feels like a bow wave of bids that we've made that we believed that we had a good probability of winning.

And that's what we're seeing happening now that these -- as I've said before, we don't bid on military programs unless we think we have a good shot at winning, because it involves a lot of costs and assets and time to bid on military programs. And I'm happy to say that our win rate has been quite high and I feel good about the bids we have out there going forward.

Okay thanks. Along those lines, some of the future bids, I guess one of the issues we're talking about with a couple other speakers was just a return on capital employee trend. Is that something that you see becoming more meaningful, is maybe having to make investments in winning some of these bids? And is that something that you're still prepared to do if it comes up again?

I think you're talking specific military, I think?

Yes, exactly.

Well I think the investment we've made in the US Army's fixed wing program is kind of an exceptional program. Typically you don't have to deploy capital on military contracts. Typically the government likes to retain the assets. So that was a bit on an exception.

But having said that, that's going to be accretive the day we start it, which as I said is like imminent. And everything we've talked about is supportive of the outlook that Sonya talked about a few minutes ago which we talked about at the investor day in terms of return on capital of 13% range in three to five years.

Okay. Thank you.

Operator, I want to thank the analysts for their questions. And at this point, with the time remaining, I'd like to turn the question-and-answer period over to members of the media.

Thank you. Our next question is from the line of Peter [McMeever] with HIS Janes. Please go ahead.

Hi, Marc. It's Peter from HIS Jane's. Quick question regarding the possible retaliatory actions about countries against the United States. If Mr. Trump initiates tariffs against Mexico and China, one of the biggest most vulnerable industries in the United States is aerospace. For instance, Boeing exports 90% of its production. And we're just wondering whether CAE would be exposed to any retaliatory actions or into anything arising out of NAFTA in the coming months and years.

(Operator Instructions) (Spoken in French) I know you're French, Marc, I'm sorry. I'm forgetting which country I'm in. (laughter) Please respond in English.

Okay. We'll get this. I think there's a lot of speculation going around. And to me, we deal in facts. And the fact of the matter is that today one-third of our employees are in the United States. We have about 2,500 employees and that's in the United States, 750 more than we had just five years ago. If I'm looking at the wins that we just had in the US, both on the fixed wing contract and the rotary contract, we'll have north of 400, possibly 500 employees just in the state of Alabama within the next year or so.

So I think we're a quite sizable employer in the United States. And in the United States I think it's -- and by the way, one-third of our revenue gets generated there. And the work is performed by US workers. So I think that there's -- certainly any kind of -- I don't see any retaliatory, but we'll have to see what happens. I think everything is very highly speculative.

But when we bid in the United States in the US military, we bid out of the United States as CAE USA. But I think we'll leave it at that. I think we're overall, the administration that is in the United States has been a positive for us at CAE because of it's stimulating the level of activity that I talked about in defense specifically.

And if I can ask a followup question? I don't know if I'm still connecting through. On the opportunity side, have you had any wind whether the Trump administration is pushing any of the NATO countries to meet their commitments? And if so, would that present any opportunities for CAE?

I'm not going to comment about what they're doing. But I can tell you -- look, I read the newspapers just like you are and I think we all see that clearly they want governments to meet their NATO commitment. And anecdotally we certainly have evidence that governments are pushing to increase their defense expenditures in a lot of cases because of the -- not only the NATO commitments but the threats that they see.

I've talked about in the past that we have a unique situation in the -- geopolitically that we haven't seen since the Cold War where there still is the threats out there both on what was called and is still today sometimes called the war on terror. And now we have the resurgent Russia which states in Europe, in Eastern Europe take note of in their defensive expenditures.

We have the Middle East having its own stance on increasing their defense and we have the continued pivot to Asia causing defense expenditure there as well. So really across the markets we're in we see a positive growth market in defense.

Thank you very much.

And by the way, the last thing I'd say, even though we focus a lot on the US, I think it's important to know CAE deals with over 15 national defense forces worldwide where we have strong positions.

Our next question is from the line of Konark Gupta with Macquarie.

Good afternoon. Thanks for taking my question.

Just following up on defense, first comments on the strong auto and tech -- I know you want us to wait for the guidance, but just let me try to ask it this way. Is there a reason for you to believe that top line growth would not accelerate to let's say high single digit or low double digit from modest growth this year, given the amount of orders you have won so far?

I think that was a double negative. I'm not going to get too out there on that. I think that the order activities we've had, 2.5 nearly booked-to-bill in the orders we've signed recently, clearly in support of a strong top line growth. There's a lot of product orders in there. So I think if you allow us to be patient for the next quarter, very soon we'll let you know what we think.

Okay. That's great. And then in terms of the capital requirement, Marc, the fixed wing is pretty much done here in terms of your capital outlay, but for the new defense programs that you won, including the Canadian search and rescue, what's the expectation on CapEx requirement for those contracts?

I don't think there is any, but I'll let Sonya answer.

I'll confirm to these contracts, as Marc just said, most defense contracts do not have capital commitments. The US Army fixed wing is a bit of an exception. And so this that you just referred to, the fixed wing search and rescue, has no capital requirements with it.

Perfect. Thanks. And just on civil quickly, looks like there's some softness in the OEM markets for business jets and wide-bodied commercial jets. And then one of your larger competitors is wrapping up training operations in Europe. So given those two things together, do you think it would be fair to assume the overall civil market growth at say 4% or 4.5% rate and then you can maintain your market share in greater segments?

You said 4% or 5% rate -- are you talking about OEMs in business aircraft or commercial?

I'm talking about the overall civil market you're exposed to. Can we assume that 4% to 5% growth rate is a fair assumption going forward?

Well that's the long-term growth rate that I've always talked about. In terms of growth from passenger traffic which drives our training business, my assumption is -- and that's well supported by the forecaster out there, is for an average 4% or 5% growth rate for the next 20 years in civil passenger traffic. That's the operating assumption we operate under. Clearly there will be variations year-to-year. But I think that's a pretty good number to use, just based on every forecast you can get out there.

Okay. And given the competitive landscape of the -- .

Operator, I want to be respectful of our time here. And so I want to thank investors and analysts for joining us on the call as well as from participation of members of the media. If there are any remaining questions, of course the team and I are available for discussion after this call. You can find a copy of today's transcript on CAE's website at www.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.