Andrew Arnovitz - Vice President of Investor Relations & Strategy Marc Parent - Chief Executive Officer, President, Director and Member of Executive Committee Stephane Lefebvre - Chief Financial Officer and Vice President of Finance.

Steven Arthur - RBC Capital Markets, LLC, Research Division Fadi Chamoun - BMO Capital Markets Canada Benoit Poirier - Desjardins Securities Inc., Research Division Cameron Doerksen - National Bank Financial, Inc., Research Division David F.

Newman - Cormark Securities Inc., Research Division Ben Cherniavsky - Raymond James Ltd., Research Division David Tyerman - Canaccord Genuity, Research Division Tim James - TD Securities Equity Research.

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

Good afternoon,everyone, and thank you for joining us today. Before we begin, I need to read the following. Certain statements made during this conference including, but not limited to, statements that are not historical facts, are forward-looking and are subject to important risks, uncertainties and assumptions.

The results or events predicted in these forward-looking statements may differ materially from actual results or events.

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

You'll find more information about the risks and uncertainties associated with our business in our first quarter fiscal 2014 MD&A and annual information form for the year ended March 31, 2013. These documents have been filed with the Canadian securities commissions and are available on our website at cae.com and on SEDAR.

They've also been filed with the U.S. Securities and Exchange Commission under Form 40-F and are available on EDGAR. Forward-looking statements in this conference represent our expectations as of today, August 8, 2013, and accordingly are subject to change only after this date.

On the call with me this afternoon are Marc Parent, CAE's President and Chief Executive Officer; and Stephane Lefebvre, our Chief Financial Officer. After comments from Marc and Stephane, we will take questions from financial analysts and institutional investors.

Following the conclusion of that Q&A period, we will open up the line to members of the media. Let me now turn the call over to Marc..

Thank you, Andrew. Good afternoon to everyone joining us on the call. I'll first go through some of the highlights and challenges of the quarter, and then Stephane will provide a detailed look at our segments' results. I'll come back at the end of the call to talk about the way forward.

We maintained our market leadership this quarter with a high number of full-flight simulator sales in Civil and more orders in Military than we had at this point last year. In Civil, we had disappointing margin performance this quarter.

And while that clearly does not reflect the underlying strength of the business, we're off to a strong start to the year with 15 full-flight simulator sales booked in the quarter and another 8 announced today, bringing us to 23 sales for the year-to-date.

In Military, we sustained revenue and grew orders over last year, which demonstrates the resiliency of our business in the face of a challenging defense budget environment that's underscored by sequestration in the U.S. New Core Markets, we continue to perform well.

Looking specifically at Civil, some of the lower margin performance in the quarter was attributable to factors outside our control like softer market conditions in some regions, as well as increased competition.

That being said, our performance shortfall largely resulted from temporary factors that we do control, and we have a very clear view of what they are and how to address them. The Civil training business has a high degree of operating leverage, meaning that margins are sensitive to changes in volume and operating costs.

The factors contributing to the combined 12.5% operating margin in the quarter beyond market forces include a slower-than-expected ramp up of new simulators and training centers that we launched over the last 6 to 12 months. We have, as well, a high number of simulators in our network that are being relocated.

This entails both the cost incurred to move the simulators and the opportunity cost during a ramp down and ramp up of the simulators. And we've recently had to increase the number of planned simulator moves in response to softer conditions this year in Europe and South America compared to last.

Those markets are still attractive and growing in terms of air travel but at a more modest pace, and as a result, were somewhat ahead of the market in terms of capacity deployed.

Notwithstanding the issues affecting profitability in the quarter, we had a good performance order-wise, as I mentioned, in Civil with $315 million in combined segment orders for a backlog of $1.75 billion. In addition to this, we had $311 million of backlog related to our joint ventures. Now turning to Military.

Performance was largely as we expected at this point in the year. We continue to make progress to reduce our workforce in Europe, and we had a combined segment operating margin of 11.9%.

We booked orders during the quarter in both established and emerging defense markets, including the sale of 3 full-mission simulators for the Hawk Mk127 trainer for the Royal Australian Air Force, which we announced today, and an AW139 helicopter simulator for Coptersafety in Finland. Under U.S.

foreign military sales programs, we were awarded a contract to expand the training facility for the Kuwait Air Force, and we received a contract for the KC-130R Hercules training services for the Japan Maritime Self Defense Force. Our force -- our first quarter military backlog was $1.96 billion.

And in addition to this, we had $250 million of unfunded backlog and another $126 million from our joint ventures. In New Core Markets, we maintained our positive momentum from last year. In CAE Healthcare, we've been successfully leveraging CAE's global reach.

We signed an agreement with a private hospital group in Brazil to establish a training center using our patient simulators and center management systems. We also sold our center management systems to a public research university in the United States and a private hospital group in Turkey.

In CAE Mining, we sold our resource modeling and mine planning software to customers in Russia, India and Mexico. A notable milestone during the quarter involved the delivery to Fresnillo, the world's largest silver producer, of our first turnkey mining training solution.

This is a unique offering because it's based on aviation standards and the way we train pilots. The solution involves our CAE Mining Terra simulators and e-learning courseware. With that, I'll now turn the call over to Stephane..

Thank you, Mark, and good afternoon, everyone. Consolidated revenue for the quarter was up 15% year-over-year at $530.4 million, and net income attributable to equity holders was $45.6 million or $0.18 per share.

The quarter included a onetime tax benefit of $11 million and severance costs of $2.8 million after-tax, excluding which, EPS would have been $0.03 lower. Income taxes this quarter were $0.3 million, representing an effective tax rate of 1% compared to 19% last year.

The decrease in the effective tax rate from the first quarter last year was mainly due to a favorable decision by the Federal Court of Appeal of Canada rendered April 17 of this year, 2013, with respect to the tax treatment of the depreciation and sale of previously used simulators in Canada.

Also affecting the tax rate was a change in the mix of income from various jurisdictions. Excluding the impact of this onetime tax benefit, our tax rate for the quarter would have been 25%. In terms of cash performance, I'm pleased with the progress we've made to improve the way we manage our working capital.

We had a $96.5 million improvement in free cash flow this quarter compared to the first quarter last year, which put us at negative $11.5 million. Most of this improvement comes from the low investment in noncash working capital. Our free cash flow is generally higher in the second half of the fiscal year, and we expect to be the case again this year.

Capital expenditures totaled $29.9 million this quarter, including $22.7 million for growth and $7.2 million for maintenance. This is down 13% from the expenditure level in Q1 last year. Net debt was $897.8 million as of June 30, 2013, compared with $813.4 million as of March 31, 2013.

This represents a net debt to total capital ratio of 42% stable with last quarter. Now looking at our segmented financial performance. In our combined Civil segments, first quarter revenue increased 27% year-over-year, reaching $302 million.

Notwithstanding this high revenue, combined Civil operating income was down 20% year-over-year to $37.6 million for an operating margin of 12.5%. Utilization rates in our training centers was 69% for the quarter, up slightly from 66% last quarter, but down from 77% last year.

The low utilization rate is primarily a reflection of the slower-than-planned execution in ramp up of assets deployed over the last 6 to 12 months, combined with some comparably softer demand in Europe and South America.

In our combined Military segments, first quarter revenue was up 1% year-over-year at $198.8 million, and we generated an 11.9% operating margin. In New Core margins, first quarter revenue was up 14% to $20.9 million, and operating income was $1.6 million.

Effective this quarter, we implemented a new IFRS 11, Joint Arrangements and the amended IAS 19 Employee Benefits. You'll note in our disclosure that we restated comparative figures for each quarter of the year ended March 31, 2013, to reflect the adoption of these accounting standards.

We have prepared tables to summarize the impact of the changes in the accounting of our joint ventures, which can be found on the Investor page of our website. With that, I'll turn the call back over to Marc..

Thanks, Stephane. Notwithstanding the lower margin performance in Civil, which impacted the quarter overall, the longer-term fundamentals of CAE's business remains strong, and we have a good handle on resolving our execution issues.

In Civil, full-flight simulator sales fiscal year-to-date, including today's announcement of another 8, gives us a strong start. We now expect to reach 40 sales by March 31. Our previous high was 38, so this would be a new record for the company.

The market has been consolidating, and competition has become more determined, but I'm pleased with our success to win business with our comprehensive solutions. Our broad portfolio and unique approach has enabled us to maintain our leading share of the market.

Price competition is a factor, but we are disciplined and deliberate in our pursuit of market opportunities. Our strategy involves being our customers' partner of choice, and we're most successful when competing on the basis of differentiation with our broad solutions offering, superior technology and reliable longer-term service.

At the same time, we continue to address our cost base so that we can offer our customers the best possible value and continue to win our fair share.

In terms of getting Civil unit margins back on track, the team in Civil, led by its new Group President, Nick Leontidis, is focused on the execution of its plan, and we fully expect the business unit's operating margin to reach high teens percentages in the second half of the fiscal year.

CAE is in a coveted position in terms of its global reach and offering within a large and growing civil aviation market. The underlying strength of our business remain intact, and our strategic priorities remain unchanged. In Military, signing contracts remains our priority, and we've been active on all fronts to develop our pipeline.

We currently have $2.3 billion in submitted proposals and another $780 million in process. This, together with our $2 billion backlog and new orders like the ones we announced today, will enable our Defense business to remain resilient.

Longer term, the fundamentals remain attractive for CAE with a well-diversified business geographically, a customer base of over 50 different national defense forces and strategic positions on enduring aircraft platforms.

During the Paris Air Show in June, we signed 2 strategically important memoranda of understanding with original equipment manufacturers. First with Lockheed Martin, which named CAE the preferred provider of Canadian F-35 training support, systems integration, operations and maintenance.

This would give us a position in a latest fifth-generation of fast jet program should Canada ultimately select the F-35. We also signed an MOU with General Atomics to pursue international opportunities for CAE to offer simulation and training systems for the Predator family of remotely piloted vehicles.

These aircraft systems are poised for long-term growth and represent a strategically important segment for our Defense business. We have a demonstrated capability in this space, and today's contract announcement for the U.S.

Air Force is further confirmation of our ability to win large competitive contracts of this nature in the world's largest defense market.

The contract has an expected value of approximately $100 million to be generated over a 5-year period, and it entrusts CAE to train the Air Force's total population of about 1,500 pilots and sensor operators of the Predator and Reaper remotely-piloted vehicles. This involves CAE providing classroom simulator and live flying instruction at U.S.

Air Force bases in New Mexico, Nevada, California and New York. In New Core Markets, we expect to maintain our positive momentum with double-digit revenue growth and expect to remain profitable. To conclude, I have complete confidence in the leadership team at CAE and our employees worldwide.

In Civil and for CAE overall, I expect that we'll see much better performance in the second half of the fiscal year. Thank you for your attention, and we're now ready to take your questions..

Operator, we'll now open the lines to members of the financial community. [Operator Instructions] Operator, we'll take calls from investors and analysts now..

[Operator Instructions] Our first question coming from the line of Steve Arthur with RBC..

Great. Just wondering if you can elaborate just a little bit more on a couple of points in the training and Civil margins. In particular, in the MD&A, you're talking about higher maintenance and repairs costs.

Are those largely behind you now, would you say? And as well, on the moves of the simulators themselves, any sense of how many we're talking about there and what the statuses of those moves? Will they be largely wrapped up by the end of the calendar or fiscal year perhaps?.

Well, let me take the first part of your question, Steve. The repair and maintenance costs in the first quarter were certainly higher than the run rate that we would have seen in last year and that we would see for the remainder of the year. It's -- it was, in the quarter, unusually high from our experience.

But I guess, you don't -- you need to react when some sims break down. But we don't expect this run rate -- the expense we had in the quarter, to be the run rate for the rest of the year. So that's certainly additional cost that we have to absorb in the first quarter.

As far as simulator moves, we finished last year at the end of fiscal '13, with 7 sims being in transit and being moved. We've completed some of those in the first quarter. Again, in reaction to some market softness in certain regions, and we talked about Europe, talked about South America, we also want to optimize our portfolio of assets.

So we started some -- a number of sims being moved outside of certain regions and being moved in places where the yield will be higher than where they were initially located. So we're not through our overall deployment of asset and moving of assets.

However, if I look at the -- going forward, for the rest of the fiscal year, we expect that by the second half of the year, there's a large number of those assets that will be RF -- re-RFP-ed in new regions, and will start generating some revenue and profit that will alleviate the weaker margin that we had in the first quarter..

Okay. Just maybe just to elaborate a little bit more on that question, Steve, as well, in addition to what Stephane was saying, let me just summarize again what Stephane was saying to answer the question. We had about 7 underway.

We decided, actually, in the latter end of the quarter, the last quarter and this quarter to move more in reaction to this market softness more than we anticipated. So you incur more costs of that and less -- and more opportunity cost because of you lose your revenue.

At the same time that we're doing that, we had -- as we had centers that were ramping up, and they weren't ramping up at the speed we needed them to, some of it's our own doing, to be very honest with you. Maybe we do -- you do the amount of work that we're doing all at once, I mean, some things fall, and inevitably, that's what happened.

And -- but when you look forward, as was mentioned in the outlook, we feel pretty good that we know what happened. A large part of the shortfall of the margin, as I mentioned, I mean, certainly competitive forces, certainly more than that, the factors on the market itself, and Europe and South America was the factor.

But large -- a large part of the shortfall was the issues that we can control and this is these moves of simulators. And if we're giving a guidance on that -- or sorry, an outlook for Q3, Q4, that we'll be back in the high teens as well, it's because we have a pretty good handle on our team in Civil led by Nick.

First of all, we understand the problem, and we have actions in place that will bear fruit in those periods. I mean, this business, as mentioned, has very high levers.

It's your costs are relegated to depreciation of the assets, leases on the buildings or the rental costs, maybe some people maintaining a sims after that, but you start throwing more revenue at them and the lever's pretty high. So those are some of the factors that give us confidence that we'll get back on track here..

That makes sense.

Just for context, and typically, over the last 5 years, how many sims would get moved around in your new network? And is that total number a lot more than 7 now or is it a couple extra?.

We have a lot more now. We don't -- I mean, it was lot more in this period. I mean, some of this is caused by the continuous -- continuation of what we decided to do as part of the integration of Oxford moving sims, move more because of the market softness, opening up new training centers. There's a lot.

A lot more magnitude, more disruption in our business than we've had on the run rate in the past years..

Our next question coming from the line of Fadi Chamoun with BMO..

So let's see. Along the same sort of line on the training side, I mean, there's some accounting changes, obviously, but it sounds like the organic growth in the training Civil was actually negative, almost in the order of 5%, and I think it's the first time we see that in a number of years now.

Is this a function of the simulator deployment that you're talking about? Is there a loss of share? Because you talked also a lot about increased competition. So would just like get your views on that..

There's no doubt, Fadi, that we have some competitive pressures, but that's not the lion's share of it.

A lot has to do -- if you look at -- if you compare it quarter -- or I mean, year-over-year quarter-over-quarter, last year, we were really banging on all cylinders in pretty much all markets, which qualify, for example, South America was on fire back then, I think we even used that expression.

And we -- that was reflected in the kind of the utilization we had last year. We had 77% last year to what we see now. You see -- there is definitely a factor that Europe is slower than it was. South America slower than it was.

But having said that, those factors being what they are, the fact remains that we had about -- if you take the number of sims that we're moving and the ones, the sims that we have, the late starts or the delayed starts on some of the new centers that we're opening up mainly in Southeast Asia, we have up to 20 sims worth in some state of flux.

So it's very hard to compare, and I don't think I would come up to that number that you came -- used -- came up 5%. I'm not sure I would have a number, to be honest with you. But I would say that's the largest part of the year-over-year.

I think a lot of it has to do with the sims moving, centers being delayed albeit with some effect of competition in the market. There's no doubt..

Okay. So as we go through the balance of the year then, it sounds like you're saying with the second half of this year, you're expecting some pretty meaningful revenue ramp up in order to, I guess, get you back to this high teen EBIT margin and to get some level of utilization on these assets that are being redeployed.

So how should we think about the revenue growth in the training services basically year-on-year? Is it -- does it get sort of gradually positive at the year? Do you see it higher year-on-year by the end of this year?.

Well, we would say we never really give outlook on revenue growth in Civil. I don't think we've done it in the past. But I think your assumption is correct that clearly, as I mentioned, because of the high operational levers of these sims -- I mean, at the moment, we have sims that are out there that are being moved.

We're paying the depreciation while they're moving. We're not getting the revenue. In a lot of cases, we're still paying the rental on the building because it hasn't gotten there yet.

So as soon as we start throwing more revenue as these sims become operational at their new location and the new centers are operationalized, then you're going to see a disproportionate amount of that revenue delta drop to the bottom line because the costs are already there. So that's really what we're talking about here.

And while we feel confident just because we can't really control what's going to happen with the market in -- or the airlines will do in South America and in Europe, albeit we know them pretty well, but we know what we can control, and we know what sims we're moving, we know the focus of our team.

And believe me, as I mentioned we are disappointed with this quarter. We're not happy with these results, and you can rest assured we have a full court press to get these sims online, earning revenue and the disruption slowed down to a dull roar..

Okay. Off along same line, I mean, your -- I find a bit of disconnect. I'm not sure why, but if we look on a sort of a higher level, the traffic growth that we're seeing in various markets, including Europe, continues to be fairly, fairly strong. And obviously, aircraft delivery rates are going up. So I'm trying to bridge that between the gaps.

You're saying there's softness in Europe and South America.

What are we missing in that?.

Well, I think when I compare with last year when -- if I look at year-on-year comparisons, maybe quarter-to-quarter, last year, I was just mentioning here, we had a very strong quarter in terms of utilization. The reason is we were doing a lot of initials, both in South America and in Europe.

When we do that, that's the difference between an initial course, which is a 3-week course typically, to a recurrent training, which is a 2-day course. So traffic is still good. And as I mentioned, those markets are still good in terms of traffic growth, but they're not as hot as they were, particularly in South America.

So frankly, I think -- I'm not sure where the disconnect is, but I think it's still growing, but it's really, for us, a question of the airlines that we're partnering with, if you think about Latam in South America, which are going through an integration, TAM just announced, I think, that they're laying off pilots.

We're exposed to them, clearly, in South America. You look in Europe, airlines that are our partners, for example, Iberia in Spain, Vueling. You would look at Europe, but you got to look at the airlines within Europe. And I think if you take it all in is what it resulted is less initials for us relative to what we had last year.

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

Our next question coming from the line of Benoit Poirier with Desjardins Securities..

Just to come back on the Civil side, you seem pretty confident the Civil margins will be back in the high teens in the second half.

So why are you so confident, or what are the actions that you are taking that make you confident that margins will bounce back in the second half?.

I mean, the first thing I would tell you is that we have a very strong team led by Nick Leontidis, who is very highly-experienced leading this charge in this business. And I have a complete confidence in the whole team in Civil to do this, and we're very focused on fixing that problem.

Specific issues that give me the confidence is that the training centers that we're ramping up in, for example, in Asia, we know, what they are. They're discrete.

We know we have plans, which, of course, we have to execute, but that's within our control as to when they will open, when the customers will start training on them and how much business we should expect from those customers.

We also know the sims that are being moved and when they will arrive at their destination and when they will be ready for training and when the, actually, the training revenue will ramp up on those assets.

Again, it's a highly rich business, so when the revenue starts flowing over those costs, you -- when I compare to what we have today, it's pretty clear where the revenue comes up. And there's other factors as well.

You look in this quarter, as Stephane was pointing out, we had severance costs in the quarter that affected Civil because of changes that we've made. We have maintenance cost, going back to Steve Arthur's question at the outset, that's in the -- higher in the quarter in Civil than we normally see.

We had kind of a perfect storm of issue that happened -- that hit us in Q1, some of this will linger in Q2 because we need -- you don't continue to move sims overnight. Nevertheless, I would see a positive trend, but I think by the time we get to Q3, Q4, we'll materialize.

And yes, I don't -- maybe to underline what we don't control, we don't control the market. We don't control the competitive pressures, but we take -- we have a pretty good idea of them, of course, because we're close enough to our customers, and we're close to this market because it is our business.

So we've taken those factors and our assumptions upon them to factor in the outlook that we've given..

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

Yes, my question is just on the Military.

I mean, I guess this will somewhat depend on orders for the rest of the year, but I'm just wondering if you can maybe give us your thoughts on whether you think we're going to see some revenue growth in the Military segment this year and what we should sort of expect for the margins to trend for the rest of the year..

I think I'll maintain my outlook that I think we'll be resilient. And I think I said before, it would be similar to last year and in that region, albeit last year, it was a decline, but I don't think we'll be -- should not be in that region. I think we'll remain resilient, which means to be stable.

But going back to what you said, you're absolutely right. It depends on orders because we have a very good backlog. But in the end of the day, we eat at it everyday, obviously. And we need to continue to win product orders. I'm very happy that we've won more product orders in the quarter than we won last year or year-over-year. That's very positive.

I'm very happy with the amount of proposals that we have out there because, I mean, that's our leading indicator. Those orders, obviously, are a lagging indicator. I mean, by the time you get them obviously, it's done.

What gives us confidence is as we look forward, we look at how many proposals we have out there -- we've got out there, and that we're writing, and it's as high as it's ever been. Even though big contracts, like, for example, KC-46, which weren't selected, they're out of what we're bidding.

So you can see by it that there's a lot of proposals in there. The thing that really is exacerbating this, if you look at the U.S., sequestration is an issue. I mean, the -- and it's really the time it takes for the government apparatus, the bureaucracy, to get and make decisions on appropriations.

A lot of it's to do with layoffs of personnel and to the fact that there's 4-day weeks being worked out at the -- being worked on at the Pentagon and along the contractors and military personnel that is making these decisions. Now having said that, we're not expecting the ramp up or orders being placed at the rate that they normally have.

We're assuming that it'll be slower. The question's how much slower. So I think we'll have to watch this space. But lots that I've said here is going to depend on orders, but I believe we will remain resilient..

Our next question coming from the line of David Newman with Cormark Securities..

Just in terms of the Civil side once again, more on the manufacturing side.

How many units did you produce in the quarter? What I'm sort of getting at is what is the pricing pressure that you're seeing on the market? How aggressive has it? And then maybe just a bit of color on L-3, Lockheed Martin and now, Rockwell Collins partnering with the Chinese.

How -- that looks like it could be a longer-term issue for you guys just in terms of pricing overall, and have you factored that at all, any pricing improvement, into your margin improvement towards the second half? A lot of questions all built in one..

Maybe I'll start with -- yes. That's a smart way of asking a question. Three questions in 1. Let me think about what they were....

Units produced..

10. We produced 10 in the quarter -- delivered. Yes, I'm sorry. Delivered. Delivered 10 in the quarter. Thank you, I'm sorry..

Okay.

You're ramping to 40 this year, you think?.

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

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

Good. Okay. And now just on the pricing market, maybe..

Going back to the, maybe the latter end of your question. The answer which you said is when we talk about the high teens in the Civil market in the second half. Implicit in that outlook is our assumptions on pricing. There's no doubt that -- so we are taking it to account.

So you asked about the competitors L-3, Lockheed, there's no doubt that they're being aggressive out there. Competition is certainly a factor. It's pretty -- it's predetermined, to use a word I gave there. And I think that we're going to be disciplined, and we are being disciplined and deliberate.

We're going to protect our market share, and we've been in this market for a long time. We've been a leader in this market for a long time.

I think that, that affords us some level of closeness with our customers that helps in -- when they go buy simulators and I -- and so I believe this is not going to be, in the end, a price shootout down the last cent everywhere. And that's not the kind of game we play. We play a game of differentiation based on our total solutions.

So yes, they're aggressive. You would expect them to be aggressive. But I'll point out, we've been facing -- this is not the first time we face competition. We faced competition from large and small players for years, and we've managed to continue to be able to win profitably in this segment. I mean, it's our business.

We sell simulators, we deliver training. We got to be good at it, and that's the game we play. And I believe we will be -- continue to be successful at doing that. Notwithstanding, there is pricing pressure, as I mentioned. It is affecting -- if you look closely in our margin, part of it is competitive pressure that's affecting that -- those margins..

For sure. And then just....

Collins in China there, I'm not overly concerned about that, to be honest. I mean Collins is a smart company, and I trust that they know what they're doing. But at the end of the day, if you look at our performance in China, we are selected on a C19 aircraft for the full-flight simulators. We're selected on ARJ21.

Before that, we were selected on AVIC medium[ph]-transport aircraft. And we have -- we've sold very high market share in China last year, and we've got a very good solid JV with China Southern, the largest airline in China.

I think, once again, I would qualify about China, which is, I think, germane to our business is as they go about growing their aviation infrastructure, they are extremely focused on the highest levels of safety and adopting the global standards in terms of safety.

So -- and that's part of the reason they select CAE is because we have been and continue to be the gold standard in terms of safety and aviation training. And we expect we'll be able to continue to be successful in that market..

Okay. Just if I squeeze one more in.

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

Look, I don't know. To be honest, I don't think so. I mean, that would be a question for key [ph] government to be honest. But our game is on -- and my game is to grow this business with the plan that we've put in front of our board, and that's the game we play. I certainly couldn't comment on anyone's willingness to acquire CAE.

I mean, we're a widely held company. We have no majority shareholders, so, I mean, people would do what they want. But our game is not that. We've got a good growth plan, and we're out to execute it..

Our next question coming from the line of Ben Cherniavsky with Raymond James..

I guess most of my questions have actually been asked. I'll maybe just beat the dead horse a little further though on the margins. You talked a lot about the margin pressure in Civil training, but I was a bit surprised to see the products, the margin pressure there as well.

And I mean, you talked about not competing on price and selling the whole package and I understand your strategy clearly, but I'm just trying to reconcile that with the actual numbers. I mean, this -- I've always understood this business to have a lot of operating leverage to it as well. I'm talking about the manufacturing of simulators.

You've got a relatively small volume of units sold every year, and when you -- when that number's going up, your allocation of fixed cost per unit has quite a bit of leverage to it. At least it has in the past.

So help me explain -- or help explain how your revenue and your deliveries can be going up, manufacturing levels up and your margins down without competing on price?.

Well, if I said that we're not competing on price, then I misspoke. What I would've said, and I think I said, but doesn't really matter. I'll repeat it. It's not only about price.

We compete on solution selling, which is leveraging everything that we can, and it includes training, who's -- the simulator itself, it includes updates, long-term service contracts, pilots, pilot leasing.

So that's part of our solution selling, which we're uniquely and exclusively in a position to be able to lever, as well as other factors like the technology that CAE can offer and the long-term service support. So all of this gives us an opportunity to differentiate beyond pricing. But there is no doubt that, Ben, that pricing is being -- is a factor.

Competition is a factor, and it is showing up in our results. But what I would tell you as well though is -- I mean, if you look at things quarter-to-quarter, there's always ups and downs when you look at a quarter depending on which programs we're executing. So I tend to look at this more on a longer-term basis.

And coming back to it, if I look at combined Civil margins, I remain to what I said there. The competitive pressure assumed in our outlook when we give the outlook for high teens by the second half..

Is it costs -- is the price pressure as much a function of a few new entrants as it is changes in the legacy players? Or is it just because you got more players now in the market?.

I think it's a combination..

Because total industry volumes are up, right? So that's--.

Yes. But I think it's a combination of both. I think the -- when you look at some of these orders out there, they're very big orders. So you could expect that, I mean, you have very big orders. First of all, we're going to defend very aggressively because it's our, typically, our customers.

And usually when there's very big orders, then the customer has an advantage, right? You would expect them to get favorable pricing, and that's certainly the case. And again, as I mentioned, we will compete, but we'll compete on a complete solutions offering. There's no doubt that we'll have to compete on pricing.

And pricing is part of the equation, just to say, it's not the only part. And that's why we're not going down full to the mat on this..

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

Our next question coming from the line of David Tyerman with Canaccord Genuity..

Yes. My question's on the Military margins. I was wondering if you could give us an idea of where you see those going. They were low in the quarter.

Was that an aberration? And what do you see for the remainder of the year?.

If I look at the -- actually, when we presented our results of the last fiscal year, I think I commented on the margins in Military, and I explained the -- if you look at the margins that we've delivered last fiscal year, removing all the noise, if you look at the reported margins, we put some details in our MD&A, they include some benefits, especially some FX gains in certain quarters.

But if you remove all that, we started the year with a portfolio in our hands that's running in the low teens, and I think I've said it's probably around 11%, 12%. So the margins that we saw in the first quarter were pretty much -- were in line with the portfolio that we're executing.

As far as going forward for the rest of the year, it's really highly depending on the product orders that will be coming in. Two things will happen.

Number one is we've embarked on a restructuring program, mainly in Europe that will be completed towards the -- in the fiscal year, but we'll see the benefits of the completion of that restructuring program probably in the second half of this fiscal year, so Q3, Q4.

And the other thing is which will have a benefit impact on the margins, and the rest really depends on the volume of business that will be coming our way..

Okay.

So just to clarify, the baseline's sort of 11%, 12%, and then things like restructuring should help some?.

Correct..

Okay.

And do you have any broad sense of what that restructuring benefit should be roughly?.

I've said you can get about a couple of percentage points on the restructuring depending on the timing of the programs that are executed in a given quarter, and that's why in a given quarter, it can be -- it can vary a bit.

But as a sense of getting a sense of magnitude where I've said, probably, a couple of percentage points related to the completion of our restructuring program..

Operator, I want to thank members of the investment community for participating on the call. And we'll now open the lines to members of the media..

[Operator Instructions] Thank you, Mr. Arnovitz. There are no questions at this time..

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

We do have a question coming from the line of Tim James with TD Securities..

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

Well, I won't split them up into too much detail, but I think some of the factors is what was said previously, like you have the higher repair and maintenance costs that were higher in the quarter, quite a bit higher than we normally see, and we don't expect that to reoccur.

We had a restructuring in the quarter that affected Civil in a disproportionate way. We have 3 -- so that's not going to reoccur. We have 3 new centers that are in process now with a large part of the cost being incurred, and they're going to be operationalized over the next few months.

And there's quite a number of simulators that are currently in flux, i.e., in state of movement, either being ramped down in preparation for being moved, or either being moved, or either just starting to be operationalized but not full revenue. Those are all the factors. I don't think I've missed any there.

I think those are the main factors of which we control, Tim..

Okay. Maybe just to build on that question a little bit. You said earlier that you were disappointed with it.

What would you do differently if you were to go through this process again?.

I think that -- I think we had a good handle on what we were doing on the integration of Oxford.

I think what we probably underestimated, and I would say, certainly underestimated, is the amount of disruption that this causes, and perhaps everybody always goes through this on integration of -- and I hate to say, if we did it again, or we did it, I should say, but we moved a lot of things at the same time.

And what happens then is you're talking -- you're sometimes challenging or taxing -- tasking the same people in doing the same things and asking to do them in such a way that it's not -- it's just hard to do at the same time.

Now that being said, at the same time, we start moving other things because of the market softness, particularly in Europe and South America. So we kind of amplified the problem. So you put all of that together, you would wind up in some of the issues that we have here today.

So if I was to do anything different, I think probably, we would've taken -- we would've maybe spread things out a little bit more, and we would have been tighter on our control of the execution of a lot of those factors, and that's as honest as I can be, and I -- but I'm really confident. You can expect that we spent a lot of time on this.

I've spent personally just the last couple of weeks I was in Europe visiting the majority of our training centers in Europe. We have a pretty good handle on what happened, where we are and what needs to be done.

And I can tell you, if I spent that amount of time, our leadership team in Civil led by Nick Leontidis, with 25 years of experience at CAE both in products and in training, we have a very tight focus on what needs to be done to fix this..

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

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