CAE Inc.

Good day. Good day, ladies and gentlemen. 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. 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 fiscal year 20 and answers to questions contained forward-looking statements These forward-looking statements represent our expectations as of today, February the 7th, 2020, 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 these forward-looking statements. A description of the risks, factors, and assumptions that may affect future results is contained in CEED's annual MD&A, available on our corporate website. and in our filings with the Canadian Securities Administrators on CEDAR at www.cedar.com and the U.S. Securities and Exchange Commission on EDGAR at www.sdc.gov. On the call with me this afternoon are Marc Perrin, CEDAR's President and Chief Executive Officer, and Sonia Branco, our Chief Financial Officer. After remarks from Marc and Sonia, we will take questions from financial analysts and institutional investors. Following the conclusion of that Q&A period, we'll open the line to questions from members of the media. Let me now turn the call over to Mark.

Thank you, Andrew, and good afternoon to everyone joining us on the call. I'll first discuss some of the highlights of the quarter, and then Sonia will review the detailed financials. I'll come back at the end to talk about our outlook. CA had strong growth in the third quarter with revenue up 13%, segment operating income up 37%, and we secured $1.1 billion of orders for a 1.2 times book-to-sales ratio. CE's total backlog at the end of the quarter was $9.4 billion. Our performance continued to be led by Civil, which delivered strong operating income growth, and we continued to have good momentum in the market with our innovative and comprehensive training solutions. Our customers continue to place their trust in CE as their training partner of choice, In defense, we have good operating income growth in the quarter, which supports our view for a stronger second half. Also encouraging is the 1.11 times book-to-sales ratio for the quarter. And in healthcare, we had double-digit revenue growth, and we continue to bring highly innovative solutions to market that make healthcare safer. Looking more closely at civil, we booked $706 million of orders for training solutions in Q3, including a long-term pilot training agreement with JetSmart Airlines and 17 full-flight simulators for a total of 37 for the first nine months of the year. The civil backlog at the end of the quarter was a record $5.3 billion. To address the growing global demand for new pilots, we launched new multi-crew pilot license programs with EasyJet and Volotea, and a new cadet pilot training program with Jazz Aviation and Seneca School of Aviation called Jazz Approach. CAE is working together with our industry partners to create a pipeline of highly qualified aviation professionals to support our customers' growing needs for critical personnel. In business aviation, we signed a range of pilot training contracts with business jet operators, including JetSuite, Solaris Aviation, and TAG Aviation Holdings. Overall training center utilization was 70% this quarter on our network of 303 full-flight simulators. In defense, we booked orders for $367 million, including contracts to provide the German Navy with a comprehensive training solution for the NH-90 Sea Lion helicopter and to upgrade and modify the German Army's NH-90 full-mission simulators. These wins underscore CAE's strong position on this helicopter platform. Other notable contracts include the next increment of a multi-year contract with the United States Air Force to provide comprehensive C-130H air crew training services. Defense also received orders to continue providing long-term maintenance and support services for Rotor Sim, a joint venture between CAE and Leonardo, and a contract for Abrams Tank Maintenance Trainers, for the U.S. Army. Defense also launched the CAE TRACS Academy at the recent IITSEC Conference, the world's largest military training and simulation event. This is an advanced training continuum that delivers faster and more efficient military student pilot training. Customer response has already been highly positive to this new training solution, which brings together our latest innovations in virtual reality, and advanced analytics. In healthcare, we also continued to innovate by developing custom training solutions for Edwards Life Sciences to enhance physician training, and we delivered a custom cardiovascular simulation to Cardinal Health. Together with the American Society of Anesthesiologists, we launched a new anesthesia SYNSTAT module which is, of course, approved for maintenance of certification in anesthesiology credits. As well, health care was awarded an EMS World Innovation Award for CAE ARIS AR, the Microsoft HoloLens application for our emergency care mannequin. With that, I'll now turn the call over to Sonia, who will provide a detailed look at our financial performance, and I'll return at the end of the call to comment on our outlook.

Sonia? Thank you, Mark, and good afternoon, everyone. Consolidated revenue for the third quarter was $923.5 million, up 13% compared to $816.3 million in the third quarter last year. And segment operating income before specific items was $155.3 million, up 37% from $113 million last year. Quarterly net income before specific items was $98 million, or 37 cents per share. which is 28% higher than the 29% we reported in the third quarter last year. Net finance expense for the third quarter was $36.7 million, up from $19.2 million in the third quarter of fiscal 2019. We had higher interest resulting from the issuance of interest period senior notes since the fourth quarter last year, and higher interest on lease liabilities because of the adoption of IHRF 60. Income taxes this quarter were $18.4 million, representing an effective tax rate of 16%, which is up from 15% for the third quarter last year. The higher tax rate was mainly due to the impact of tax audits in Canada last year, partially offset by a change in the mix of income from various jurisdictions. We had good free cash flow of $275.3 million in the quarter, compared to $165.1 million last year. results mainly from a lower investment in on-cash working capital and higher cash provided by operating activities. This is consistent with our expectations for significant reversal of investment in on-cash working capital accounts in the second half of the fiscal year. Uses of cash in Q3 included funding capital expenditures for $51.6 million, mainly for growth of our global training network to deliver on the long-term exclusive training contracts in our backlog. We continue to expect total capital expenditures for the year to be about 10% to 15% higher than in the prior year. Other uses of cash include the distribution of $28.3 million in cash dividends, and we use another $12.6 million to repurchase stock at a weighted average price of $32.69 per common share. Under the NCIB program, for which the Board of Directors just approved this renewal. Our financial position continued to be solid with a net debt of $2.3 billion at the end of the quarter, for a net debt-to-capital ratio of 48.5%. Since we adopted IFRS 16 effective April 1, 2019, net debt now also includes obligations under lease contracts, which were previously accounted for as operating leases and therefore not included in debt. Excluding this impact, the net debt-to-capital ratio would have been 44.9% this quarter, We continue to expect to be at the lower end of our target leverage range, which is 35% to 45% on a pre-IFRS basis within the next 18 to 30 months. Return on capital employed, both for specific items and excluding the impacts of IFRS 16, was 11.6% this quarter compared to 11.7% last quarter and last year. Now looking at our segmented performance. In civil, we had double-digit organic growth in the third quarter, And in addition, we benefited from the integration of the Lombardia-backed business, which also performed very well. Third quarter revenue was up 22% year over year to $558.1 million on 12 full-flight simulator deliveries and good demand for our training services with our expanded capacity. Operating income for specific items was up 42% to $123.4 million for a margin of 22.1%. On the order front, the civil book-to-sales ratio for the quarter was 1.27 times, and for the trailing 12-month period, it was 1.44 times. In defense, third quarter revenue was $332.4 million, with up 1% over Q3 last year, while operating income was up 24% to $31.3 million, for an operating margin of 9.4%. We incurred some reorganizational costs this quarter to adjust our global structure for greater operational and commercial excellence. Before these costs, defense segment operating income for the quarter would have been $33.2 million for an operating margin of 10%, which represents a 32% increase compared to the third quarter last year. Defense benefited from a more favorable program mix in the quarter, as well as from conversions of our active bid pipeline to orders. The defense book-to-sales ratio was higher this quarter at 1.11 times, and it was 0.88 times for the last 12 months. Lastly, in healthcare, we continue to see higher sales momentum with third quarter revenue of $33.0 million, up 19% compared to Q3 last year. Segment operating income was stable at $0.6 million, reflecting a higher investment in R&D and SG&A to develop a support and larger future business. With that, I will ask Mark to discuss the way forward.

Thanks, Sonia. We continue to have a positive outlook for CAE for the balance of the year and over the long term. In civil, the industry expects approximately 4% long-term passenger traffic growth, and this assumption continues to underlie our investment thesis. Higher demand for air travel drives an expanding global in-service fleet of aircraft and a significant need to attract and create new pilots to meet industry needs. As a company, we're focused on providing comprehensive solutions for our customers to recruit, develop, and maintain these highly critical personnel. CA has the privilege and responsibility of being the world leader in aviation training, and we have a very good momentum in a large addressable market. As we look ahead, we expect more opportunities to materialize from the large pipeline of long-term training partnerships. We also continue to expect another good year for full-flight simulator sales and to maintain our leading share of the market. For civil overall, we continue to expect operating income growth closer to 30% for the year on strong demand for our training solutions. Since the start of January, we received orders for seven more full-flight simulators, including six for the Boeing 737 MAX. Boeing announced in early January that it would recommend simulator training for the MAX, which, if confirmed by the aviation authorities, would indeed drive a higher rate of demand. It's our practice to respect the timelines of the OEMs and aviation authorities and not get out ahead of them, especially when it involves aircraft certifications or investigations. So I'll refrain from speculating on what the training regulations might entail for the MAX's entry into service. And instead, I'll summarize what has been seized positions so far on the aircraft type. To date, we've sold a total of 56 full-flight simulators to airlines, MAX full-flight simulators to airlines, which represents the vast majority of all sales to airlines of that simulator type. The fact is, the majority of airlines that have ordered the MAX aircraft are indeed CA customers. So far, of the 56 simulators ordered, we've delivered 22 as of the end of December, and in addition, we've already deployed three to CA's own training network, and we're in the process of deploying more. We mentioned on our last quarterly call that we've begun to build additional inventory of MAX simulators in anticipation of pent-up demand and this continues to be our practice in view of the demand that we expect. I guess the most essential point in all of this is that we have our customers covered as their training partner of choice, and they recognize the support that we bring to their most critical operations. We have the capacity and the capability to respond to our customers' training needs, whatever the requirements, and we look forward to a successful and safe reentry to service of the aircraft. Now turning to defense, We continue to expect a stronger second half, which is a view supported by a healthy book-to-sales ratio in the quarter and a robust pipeline. We continue to expect modest growth of the year, taking into account our year-to-date performance and our current expectations for reaching milestones on programs and backlog. We also expect to conclude several more contracts in the current fourth quarter. And as always, we don't control the timing of government decision-making. but I take confidence in knowing that we've already been down-selected for the most of them. Our long-term prospects in the large addressable defense market remain positive, and I'm encouraged by approximately $3.8 billion of defense proposals that we've written that are currently in the hands of customers pending decisions. Finally, Todd Probert officially became our new Group President of Defense and Security on January 27th. As with his predecessor, Todd is based in Washington, D.C., where he's very well connected within the U.S. defense establishment and has a clear view of the military's future operational and mission preparedness requirements. He's a proven business leader, and he brings an excellent defense industry profile to CAE. He has a passion for artificial intelligence, machine learning, and new development models, and his interests, competencies, and backgrounds. are very well aligned with our emphasis on digital innovation. I'm very pleased to welcome a leader of his caliber to our executive team, and I expect he'll bring significant value to our company and customers. And lastly, in healthcare, I'm encouraged by the response he's getting from the market. We expect to continue building on our current sales momentum with our highly innovative solutions. The increased imperative on patient safety was in full evidence at the International Meeting on Simulation in Healthcare, which took place last month in San Diego. The event, which is the world's largest conference dedicated to healthcare simulation learning, research, and scholarship, was an excellent showcase for CA Healthcare and our latest solutions. We continue to expect double-digit percentage growth in healthcare this year. In summary, our overall outlook for CA this fiscal year is unchanged. We benefit from a strong position and secular tailwinds in each of our core markets, and we look forward to superior top and bottom line growth in the years ahead. With that, I thank you for your attention, and we're now ready to answer your questions.

Thank you, sir. We'll now begin the question and answer session. We'll begin with our analysts first. If you would like to register for a question, press the 1 followed by the 4 on your touchtone phone. You'll hear a three-tone prompt to acknowledge your request. If your question has been answered and you'd like to withdraw your registration, press the 1 followed by the 3. Please note, we're now opening the question and answer session to our analysts first. Thank you. One moment, please. Our first question comes from the line of Steve Arthur with RBC Capital Markets. Please go ahead, sir.

Great, thank you very much. Just a question first on the civil margins. They look very strong in the quarter at around 22%, and if I remember correctly, that's about as high as we've seen them. Were there any one-time items in there that were supporting that, or is this more a case of civil margins moving meaningfully higher with the evolving business mix?

Thanks, Steve. With the acquisition, we guided that there would be margin accretion of 100 to 150 basis points, and we see this coming through. Margin is also a reflection of the mix of the training and the product business. So combined, good training margins, but also it does reflect a good program mix in the quarter. So that's really kind of what's driving some of those margins.

And I just add that, correct me if I'm wrong, there's no one-timers. Oh, no. Sorry. No one-timers, Steve. No.

Okay. Okay, good. So then over the next several years, then we should continue to see that kind of 100, 150 base point bump over where we were into the low 20s.

You'll get our outlook for next year very soon, but not at this call. But, look, I think we're very happy with the performance we have, you know, with I think we tend to, as you've seen, we like the guide on operating income growth in the absolute terms. But, look, I think that there's no reason to expect our performance to go down.

Okay. And I guess related and probably a similar answer on the longer term, but defense margins. You're calling for modest growth in the year, but you're down, I think, 8% or 10% so far year to date. Implies a strong finish, as I'm sure you're aware. So I guess a couple things. One, just in terms of what do you see in the near term that supports that jump in Q4? And then just looking out over the mid to longer term, are we right in thinking about this as kind of a 10% to 12% margin business as it has been historically, or is something in the mix change there?

Well, I think, first and foremost, I actually predict the same answer to a certain extent with regards to longer-term outlooks. Still, it's a growth business, and we're confident of that. I'm going to leave some time for Todd Proberg as the new head of defense to get his hands around the business. But, you know, clearly we expect that, you know, we can do well. And longer term, I fully expect us to beat market growth in defense. But we will precise that, you know, as we've done, as we get into the early part of next year, as it relates to next year for sure. In the short term, yeah, you're absolutely right. It implies a strong – you know, very strong, actually, I'd say fourth quarter. But, you know, we did that last year, and we have a habit of doing that. And it's supported by, you would imagine, if we're, you know, basically committing to it, it's because, you know, we have a strong, you know, forecast that supports that. But it's supported by the usual suspects. It's how we execute in the programs that we have in the backlog. And the orders that we had in the quarter, you know, as I said, I was encouraged by the positive book to build that we had in the quarter, especially the strong product orders, like I talked about the NH90 order, that's very important. But I would tell you it does require that we win. There's a few orders that we need to win in the quarter, and that's no different. We always have to win orders in the quarter. So, I mean, some of that variability, and you saw it bring us down slightly, our outlook in the last quarter for defense, and that was basically on, you know, some of the orders that we had were going to be moved out of the year. But, look, you know, again, I have confidence in the orders because over 90% of the ones we need, you know, we've already been selected on them. So it's not a question of they're a competed contract. It's one that just decides can we reach the contract and we get the customers to sign on before the end of March. That's really what we're at on that one. So those are the elements that make up our outlook for the year.

Thank you. And just a final point just on the training centers and customers in China. Any comment at all in terms of what's happening with your operations there right now? Obviously no crystal balls, but have there been closures or what's the near-term status of some of the facilities right now?

Yeah, I think we're following what the recommendations are mainly of. WHO and governments around the world, as you might expect us to do. Obviously, our first priority is the safety of our employees, our customers around the world. You know, in terms of business impacts for us right now, you know, again, I just say we're watching this situation closely. We do expect to resolve itself. You know, we do see this as a short-term issue from our standpoint of what we see. But so far, the impact for us has been that we have pulled our personnel out of China. Now, we were, for example, installing a simulator, a civil simulator in China. So that simulator was expected to deliver this year. So it will not at this point. So that's, you know, one impact. We had some training customers that have canceled their training because of, you know, in some cases there were Chinese carriers. come to train with us, for example, in Dubai and other centers. So those are the kind of impacts we have. But, you know, we've modeled this, and it's reflected in the outlook that we have for the end of the year. So, you know, barring some catastrophic escalation of this, which has far bigger ramifications than what we're talking about here, we feel good that the effects are contained for us.

Okay. Great, Kelly. Thank you.

Thank you for your question, Mr. Arthur. Continuing on, we now have a question from the line of Karnak Gupta with Scotiabank. Please proceed.

Thank you, and Karnak's on a good quarter. Just wanted to follow up on the defense margin, and welcome, Todd. So margin has obviously come down below 11% over the past two years, and I know the mix has been more skewed to services lately. But should we not expect the margins to kind of remain below 11% as you continue to grow as a TSI business with more service proportion? I mean, is it not because of structural changes, or is it something else?

Well, look, I don't want to get out too much in front of that. We still have a backlog that reflects the outlook that we have today for the business in terms of margin performance. I think it really depends on You've got to remember that ours is a very international business. So, yes, on a typical basis, services tend to run lower than we've said before. Now, it doesn't necessarily have to be the case around the world. You can imagine that if we're putting capital at work, we'll be looking for a higher margin than that. But I think it's going to be based on where the revenue comes from, you know, from various jurisdictions around the world. And very, very importantly, it's going to be the product-to-service mix. As you said, services tend to be lower, but I am quite confident that we can continue to build our product business with the portfolio that we have. So, look, more to come, but, you know, I wouldn't come to the conclusion that the margin necessarily has to dip structurally.

Okay. That's a great color, Mark. Thanks. Thanks. And then on the MAX, so thanks for updating on orders and backlog. That's pretty useful. Can you talk about your plans for MAX simulator production rate and outlook? How do you foresee this backlog translating into production? And are you seeing any interest in upgrade of existing 737 NG simulators as opposed to new orders?

Well, look, I think it's early to tell with regards to upgrades. in some cases it will really depend on the airline you know there's typically upgrading a simulator is quite you know can be quite involved and sometimes you're better off to just buy a brand new simulator in the majority of cases that's what we see in our business even like for example replacing an old 320 with a new 320 you know or old 737 versus new one that people tend to buy new ones so that's been the history we'll see for the max if there's If there's a demand for it, we will certainly be there. You know, we have a very big aftermarket business, you know, and so we would do that as well. That would be part of that. There has been a step up in demand, as you saw, that, you know, a testimony by six MAX orders since January and, you know, big exploration as a result of the news that Boeing was recommending a MAX simulator train. But look, I think that you asked for production rate. I'm not going to get out there and tell you what the production rate is, but I can tell you we have increased it, but we have the capacity to increase it even more. We're still at a rate that we're below in terms of production rate, below what we were when we recovered from the strike last year, and we still have lots of capacity. So we're following this closely. But, you know, we have a bunch of, I've got to say how many, of sims, as we talked about last time, as what we call whitetails, ready to go. And there's interest out there. But I don't want to get out more in front of that because it's really going to be dependent on what the regulator decides. And, you know, the regulator hasn't come out yet. So I think we're holding our fire, but we'll be prepared.

Okay, that's great. And lastly, Sonia, if I can ask you, So on the leverage ratio, you still said there is 18 to 30 months of normalization to happen here. But if you see any good opportunity out there, perhaps because of recent consolidation in the industry and if somebody wants to divest an asset or something, would you pursue that at current leverage ratio, or would you still wait for it to normalize? Thanks.

Even at this level, we're in a very comfortable balance sheet position and capacity. So, you know, on the heels of the cash generation of the acquisition and the other investments that we've made, we have a profiling that can take us to more deleveraging. So both on the organic business and the CapEx that we're deploying, all of this generates good free cash flow. And so it leverages, but if there are opportunities, we, of course, always look at various opportunities, whether they're organic outsourcing, whether they're GPs or even inorganic. We continue to look at those or even any items that may come up on the M&A space. So the balance sheet is flexible and has capacity. And we can, I think, comfortably with our cash flow generation balance, some deleveraging, and continue to invest in growth.

Okay, that's it for me. Thank you so much.

And thank you for your question, sir. Next question comes from the line of Kevin Chang with CIBC. Please proceed.

Hi. Good afternoon, and thanks for taking my questions here. Maybe first one for me, if I could ask it a little bit of a different way. You had a 70% utilization in civil, margins up at 22%, and I appreciate that mix and some of your recent acquisitions have aided in the improvement in your profitability. But if I think of that utilization rate getting back to, say, the mid to high 70% we saw maybe a year or so ago, is there a way to think of the upside to civil operating income as you get that better utilization through your training centers?

Well, again, I thought we're not going to get ahead of it, you know, because we're not giving our outlook for a few years here. And I think you correctly said there's a lot involved in the mix. So I think, look, we obviously take comfort, as you probably do, in inheriting your question about that we're able to generate this level of margin at 70% utilization. Yeah, for sure. A lot of the sins and the reason that we're at 70% is because we're moving a lot of simulators around. I mean, if you think about, we've added, we've gone in the last three quarters from 266 simulators to 303 over the last three quarters. So, you know, while we're moving SIMs or while we're bringing in SIMs, they're not fully ramped up in terms of their revenue potential. But at the same time, we have had short-term headwinds in Europe. You know, there's been the 737 MAX has caused some problems you know, disruption in the overall 737 market. We've had some market consolidation, remember, airlines such as Thomas Cook going under. So, look, is there room to grow earnings? Yeah, sure, there's room to grow earnings. How that reflects its absolute margin themselves, it will depend on the mix, because not all businesses are of the same, you know, earn the same in terms of margin percentage itself. But, you know, I think we'll probably continue to focus on absolute income growth as the measure will drive to.

I appreciate that. That's good color there. And then I know Todd over at, as a new group president in defense, it's a recent hire, but is there something you'd like to accomplish longer term within defense that you're currently not capturing in terms of opportunities, in terms of growth, or should we think of that long-term strategy essentially being the status quo, even with the change at the top of... at the top of that division?

Well, look, I think that if really what, if I would say anything about defenses, you know, you've seen a success that we've had in civil. There's a lot of things that we can bring from our business models, civil, that are eminently applicable in the defense market. So I think first and foremost, you'll see us applying some of those technologies, some of those lessons learned, some of those business models more and more into defense markets. Todd comes from a very strong business leader, comes from a very strong position and strong background in terms of the U.S. Defense Department specifically, but with international experience as well in his various roles. As I said before, when I was looking for a replacement for Gene Calabatisto in this market, we're looking for somebody that could do his way around, if you like, do his way around the Pentagon, do his way around the defense market in the United States and internationally, and had basically a good view of areas of the U.S. DOD that we don't necessarily, where we haven't been focused on. And I think those doors open. So I think first and foremost, it's concentrating on strategy, leveraging our core competencies for defense, capabilities, including the digital innovation that we've applied at Civil, applying them to defense. And TOG comes with strong capabilities in that regard. And then we'll see. But, truly, we're not signaling a change in strategy here. But, definitely, I think we bring strong expertise to the fold that I feel confident will, as I said, be very good for CAE and our customers.

That's good color. And maybe just last one for me, Sonia, just to clarify, as I think about working capital maybe in the fiscal fourth quarter here, and maybe even the fiscal first quarter, so the next couple of quarters, you mentioned ramping up some of the inventory around the MAC simulators. Should I think of the working capital seasonality that we typically see, maybe Q4, Q1 being being a little bit different because of that inventory builder, or maybe it's an immaterial impact in how your working capital flows over the next three to six months?

Well, it will have an impact, but I don't see it reversing the overall cash profile, which usually is a first half investment and then reversal or partial reversal in the second half. And And good performance, I think, in Q3 in reversing $180 million in the quarter. And back to what we mentioned last quarter, we expect to continue on that non-crash working capital efficiency to drive a significant reversal. We can tell that around 75% of that first half investment. And that's with some continued investment in the inventory. Some of it turns even quicker in the quarter or in Q1. There may be some variation there. I don't suspect it will change the overall cash profiling between the first and second half, but we are driving to further reversal in Q4.

Thanks for the clarification. That's all for me. Thank you very much.

And thank you so much, sir, for your question. Our next question comes from the line of Cameron Dorkson with National Bank Financial. Please proceed with your question.

Thanks. Good afternoon. Maybe a question for Sonia. Just on the, I guess, the leverage question that was earlier, I'm wondering if you can maybe talk about your ability, if you want, to pay down debt earlier than expected. I mean, is there a way that you would potentially accelerate debt retirement here, or are you kind of restricted on what you can do on a yearly basis just on the terms of that debt?

So, in terms of the level of financing, we have the private placements that we issued last year and last tranche in the quarter. We do have also some flexibility with term loans, so if we wanted to accelerate that, that is an option. We do continue to see very good options for investment, and I'll go back to our capital allocation priorities, and first and foremost, you know, continuing to invest in accretive growth organically, and if there's any inorganic approaches to it as well. But to your question, if we... We do have the flexibility to do so if we wanted to shift a little bit of the balance.

Okay, that's fair. Just secondly from me, maybe a question for Mark, just on the end markets. We have seen a little less activity on business jet flying. I'm just wondering what you're seeing in your business jet training centers. Are you seeing any change in the level of demand? Obviously, you've got the new acquisition that's driving the year-over-year growth. I'm just wondering on the sort of legacy business there, do you see any change in the demand for training on business aircraft?

Not really. It's very dependent on which platform and what market. But overall, I would tell you, we don't have to really disclose it, but I can tell you that the growth in our training activity organically is very strong. And a big component of that is business aircraft and that when you break down business aircraft, I think a lot of the growth comes from the acquisition that we made. But equally, we have, in fact, I think we can talk about it. Yeah, well, actually, I was going to look for it to see if we had the breakdown, but we don't have it. But in terms of the organic growth in business aircraft training, it's actually been pretty good. We've been outpacing the market itself overall. there's the number of the flight activity itself, which is a metric, but there's a lot of pilots changing jobs as well, and that stimulates a lot of training activity. And in the higher-end business jets, there's a lot of activity. So overall, we're doing well, and the organic growth is pretty good.

Do you feel that you've gained some market share in that sub-segment?

Yeah, we have. We have, and if you look at the Contracts that we had just this quarter, you know, we had like three-year, just in business share cap alone, three-year training renewal with TAG Aviation Holdings. That's a very big contract in itself with TAG. Six years with JetSuite, four years with Solaris Aviation. So, yeah, there's no doubt we've gained share, and we're quite happy with the customers that have moved over to CAE.

Okay, great. That's all for me. Thanks very much.

Thank you so much, Mr. Darkson, for your question. Up next, we have Fadi Shamoon with BMO Capital Markets. Please go ahead, sir.

Okay, thank you. Good afternoon. Just one question, if you can clarify the acquisition you made from Bombardier. If there were to be a change in control of those assets, do you have any exposure? Do you have kind of solid long-term commitment under that transaction that you've done with Bombardier?

Yeah, we have a 20-year exclusive ATP agreement and exclusivities that, you know, would flow over to any potential buyer, Fadi.

Okay, that's great. And on the 56 max orders that you've received or you've sold, received, all Do you know off the top of your head how many airlines that represent?

How many total? I know it's probably all of them, but I'm not sure how many airlines. We could probably get to that number later. I don't remember exactly how many airlines it is, but as I said, the high majority of all the airline customers that have bought the MAX have bought our simulators. Okay, thank you.

If I get the number, I'll come back and tell you what it is. We're looking.

Thank you, Mr. Chamoun, for your question. The next question comes from Mr. Jean-François Lavoie from Desjardins Capital Markets. The floor is yours. Please go ahead, sir.

Yeah, good afternoon, and thank you for taking my question. I just wanted to come back on the military side. You mentioned in the past that the business mix would... evolved favorably in the second half. I think it remained fairly stable in Q3, but the margin has still increased fairly significantly in the quarter. So I was wondering if we should expect a similar performance in Q4 and if the mix will change accordingly.

I'll leave it to Sonia a little bit, but I guess it has to if we're going to beat the outlook that we said we are, which again, we have confidence in achieving it. I would caution as well as I usually do, and we've said that many times, it's kind of hard to look at the military business on any of the major metrics on a quarterly basis because of the size of the contracts themselves and whether they're service or product. So, you know, this quarter, you know, we had kind of flat revenue but much higher earnings. Last time we had, you know, the contrary. So I think it's best to look at it over a number of periods, maybe 12 months is the best way to look at it. But, Sonia, you want to?

Yeah, absolutely. It's really because of that variability, always best to look at it over a longer annual basis, at least an annual basis. In the quarter, there was a more favorable program mix, drove a higher contribution, and contribution of orders signed and started in the quarter. So that drove some of that margin. And while the revenue was relatively stable, I'll also point to the fact that our revenue line doesn't capture the revenue from JVs, which are accounted for as equity pickup and included in the EBIT. And so some growth that came from those joint ventures is not necessarily reflected on the revenue line.

Okay, that's great, Carla. And if we get back to the civil segment, I think you mentioned in the MD&A lower utilization rate in Europe. So I was wondering if you could... Talk a little bit more about utilization there, please.

Well, I think Mark spoke to it, and ultimately we are seeing a bit of headwinds in Europe. There's a little bit of consolidation that we're seeing with certain airlines. Now, we see this more as a short term because as they consolidate, the traffic will generally be picked up by other CAE customers. and we'll recuperate it that way. But there's a bit, we see a bit of headwind in Europe on the utilization there.

And just to add and to reiterate what Mark said before, some of that headwind is owing to the MAX having been out of service for quite some time now. And so our 737 simulator training in Europe is directly affected by that as well.

Okay. Thank you for the call. And maybe a last one for me, Sonia. On the CAPEX, I know you don't want to provide guidance for next year, but just directionally, would it be fair to assume some growth in fiscal year 21 as the pipeline of opportunities remain robust in both civil and military?

We'll come back next quarter with a view on all of the guidance for next year. For this year, we'll stick to our guidance, which is slightly higher than last year, 10% to 15% over last year.

I think it's important to add, though, that as a ratio of operating cash flow or of revenue, that number has been declining. So whatever the quantum, but as a ratio of the size of the business, which continues growing, it has been declining. Okay. Thank you. Thank you very much. Operator, I guess that's all the time we have for questions from members of the financial community. We now want to open the lines to members of the media.

Absolutely. Thank you. We now welcome the press and media to feel free to press the 1 followed by the 4 to register for a question. Thank you. One moment, please. Our first question from the media comes from the line of Alison Lampert with Reuters. Please proceed with your question.

Thanks very much. Just two quick questions on the MAX. First, you talked about demand for the MAX simulator before. Would you say that that is the most popular simulator that you're selling right now to bring this fiscal year? And secondly, you also mentioned that you would deploy more in your training centers. Where are you looking?

I think that, well, I don't think we've actually developed all the locations, have we, Sonia? But I think, first of all, wherever the customers are.

Yeah, and the three that we have deployed is in Toronto and Singapore and in the midst of deploying in Dallas right now. And we're looking at other sites, but those are the ones that have been deployed.

Right. No, I was thinking, do you have any idea of where you're looking in terms of the other sites? I was thinking maybe Europe, from what I understand, that there's not many simulators there. So that might be an interesting location.

As Mark said, we're looking at where the customer demand drives us.

Fair enough. But, yeah, it's reasonable to expect that one would go there, yes, at least.

Okay, and... Right. Just my other question. Would you say is the MAX simulator your most popular, your strongest selling model in the moment?

I really haven't looked at it very so much. Look, I think that certainly since the beginning of January, yes, six out of seven. But for the year as a whole, I wouldn't expect it to be. And I wouldn't expect it to. It wouldn't be normal to be because the airplane has been grounded. So inevitably, while the airplane's been grounded, orders have slowed for the 737 MAX type. But, you know, going forward, with the backlog of aircraft, to me, there's, you know, I don't want to get in front of regulars, but to me, there's no doubt that the aircraft will resume flying. And the backlog of 737 MAX aircraft is very large. So, you know, we'll be delivering sims for quite a while in December. And I think the ratios of simulators to aircraft will be the same as other narrowbodies. So I think that will presage, you know, many simulator cells for 737 MAX in the future.

Thank you. You're welcome. Thank you, Ms. Lampert, for your question. The next question comes from Martin Jolicoeur of the Journal de Montréal. The floor is yours. Please proceed.

Thank you. I have two questions. About the fact that United announced yesterday or two days ago that they would buy a new flight academy, is it something that is just not – does it make you nervous or not? And second question, could you repeat what you said that the coronavirus ad in – in any effect in your operation?

Well, I talked about the coronavirus. I mean, as I mentioned before, I mean, first priority for us is the safety of our employees around the world, safety of our customers. So we've taken, you know, precautions that are very similar to and in line with the recommendations of Canadian government and WHO in that regard. So, you know, our personnel that were in China, you know, have left China, We had business impacts with regards to one simulator was being installed in China. Of course, with our people moving back to Canada, then that activity has been delayed for the moment. We have some training of Chinese customers that's been postponed for the same reasons. We have put very strict hygiene protocols in all of our centers around the world to protect our personnel and our customers. So that's, I guess, the answer on coronavirus. With regards to your previous question on the center for United, no, look, it just reflects the fact that what we've been saying is there's a global pilot shortage out there and it's affecting airlines around the world. And airlines are moving to be able to ensure that they have the proper source of highly skilled workforce. So, to me, it's just testimony that they need that's out there. Now, as a company, and I think I've said this before, we never pretended to want to control the full capacity in this market. I mean, but, you know, look, I'm very proud of the customers that we have in our training centers at the moment. We have very great contracts with on ab initial pilots, which are, you know, new pilots, like what you're talking, United, with American Airlines, with Southwest Airlines, with JetBlue, just in the United States alone. So those are all cadets being trained from start to getting an airline typewriting with V8. So, look, and in fact, we've been leading the market out there in terms of initiatives to increase diversity We've given scholarships to five discernment women around the world so they become airline pilots. So look, United is a very, very good customer of ours, and they're taking action. I can't answer for them, but I think all it does is reflect the need out there for pilots.

Okay. And about China, how many employees do you have over there? That stopped working or that you brought back?

Well, Canadians, I don't remember the exact number, but it's not a huge number, probably less than 50. Less than 50? And do you have operations? Let me correct that. Less than 20. What I was talking about more of the 50 that were in-country.

Okay. So you said less than 20? Yeah, less than 20 Canadians returned back to Canada. Okay. And did you return other employees that were from other countries, U.S. or anywhere else? No. No? And you have permanent employees that are not Canadian in China? Yes, we do. Are they still working, or you had to close operations?

It depends where we take the same detail. I mean, we have not shut down operations, but I think most people would be, you know, we don't have a training center over there, so it's not the time of exposure.

I think we would have people. I'm getting outside myself. Sonia, do you have any to add on it?

You know, so we have people from Beijing and Shanghai and Hong Kong, and we are following the measures led by the government. So, yeah.

A lot of it is work from home.

that we would be doing at the moment. Okay. And grossly talking, it would be how many people working from Omar in the three cities you've mentioned?

Well, probably the majority. I can't tell every city, but it would be the majority of the remaining employees that we have.

But would there be 100 employees or there would be 20?

No, no. No, no. It's... Look, I don't know the exact number, but it's not more than 50 employees total that we have in Canada. Okay, okay, okay.

Perfect. I'll let you go. Thank you very much.

Thank you. Merci, Monsieur Jolicoeur. Continuing on, our next question comes from the line of Henry Canaday with Aviation Week. Please proceed with your question.

Yes. Could you talk a little bit about what portion of your full-flight simulator's for commercial aircraft have been upgraded for the FAA UPRK, the Upset Prevention and Recovery Training requirement?

Look, of our civil simulators, I can't tell you the number, but I do believe it would be 100% that we get back to, but I think that was the requirement, so I'm pretty darn sure that's 100%.

Is that just for the U.S., or are upgrades going on internationally, or...?

I think it would be around the world. And, you know, I think we should get back to make sure I'm right. But, you know, it will follow the regulatory requirements. But we led the industry in terms of driving UPRT training, including, you know, its use in simulators. So, you know, my belief is we're 100%. But, you know, we'll have to maybe get back to an exact number.

Sure. Thank you very much.

Okay. You're welcome.

Thank you, Mr. Kennedy. Sorry, operator, I think that's all the time we have for the call this afternoon. I want to thank all of our participants from the investment community as well as members of the media for having joined us. And I would remind you that a copy of the transcript of today's call can be found at CAE's website. Thank you.

Thank you. And that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect your lines. Thank you once again. Have a great day, everyone.