Andrew Arnovitz - Investor Relations Marc Parent - President and CEO Stéphane Lefebvre - Chief Financial Officer.

Steve Arthur - RBC Capital Market Benoît Poirier - Desjardins Securities Cameron Doerksen - National Bank Financial Turan Quettawala - Scotiabank Ben Cherniavsky - Raymond James David Newman - Cormark Securities David Tyerman - Canaccord Genuity Kevin Chiang - CIBC Anthony Scilipoti - Veritas Investment Fadi Chamoun - BMO Capital Markets.

Good day, ladies and gentlemen. Welcome to the CAE Second 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.

These include statements about our activities, events and developments that we expect to or anticipate may occur in the future including, for example, statements about our vision, strategies, market trends and outlook, future revenues, capital spending, expansions and new initiatives, financial obligations and expected sales.

By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties associated with our business which may cause actual results in future periods to differ materially from results indicated in forward-looking statements.

While these statements are based on management’s expectations and assumptions regarding historical trends, current conditions and expected future developments, as well as other factors that we believe are reasonable and appropriate in the circumstances, listeners are cautioned not to place undue reliance on these forward-looking statements as there is a risk that they may not be accurate.

Except as required by law, we disclaim any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. The forward-looking information and statements contained in this presentation are expressly qualified by this cautionary statement.

You will find more information about the risks and uncertainties associated with our business in our second quarter fiscal 2015 MD&A and in annual information form for the year ended March 31, 2014. These documents have been filed with the Canadian Securities Commission and are available on our website cae.com and on SEDAR.

They have 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, November 12, 2014, and, accordingly, are subject to change after this date.

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

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

Thank you, Andrew, and good afternoon to everyone joining us on the call. I’ll first recap some of the highlights of the quarter and then Stéphane will provide a more detailed summary of our financial results. I’ll come back at the end of the call to discuss our view of the way forward.

Our overall performance for the second quarter was in line with the outlook we shared at the start of the fiscal year. In Civil, we had growth year-over-year during the typically slower summer period, and we reached some important strategic milestones with our comprehensive solutions, which underscore CAE’s market leadership.

In Defence, we continued to be resilient with top-line and operating income growth, and we booked a range of orders on long-term contracts and from our installed base of customers. And in Healthcare, we made some good progress with strong growth in the quarter. Looking more specifically at each business.

In Civil, we’re proud to have signed a joint venture agreement with Japan Airlines to provide flight crew training services across Northeast Asia. Starting in April of next year, Japan Airlines, one of the world’s most preeminent airlines, will conduct all its training at the CAE-JAL joint venture.

This marks an important step forward in the application of CAE’s solutions strategy. Other notable deals we signed during the quarter involve a range of Civil solutions agreements with an expected value of approximately $300 million.

We secured a long-term contract extension with LATAM Airlines in South America, which includes training for the new Airbus A350. We signed with Air Algérie in Africa to train 200 new cadets over the next four years to address the airline’s need for pilots in a high growth market.

And, we expanded our relationship with Jet Airways in India, with the airline consolidating its training activity into CAE’s Bangalore training centre. The Civil book-to-sales ratio for the quarter was 1.01 and for the last 12 months it was 1.11. Our Civil backlog was $2.4 billion, which does not yet include the joint venture with Japan Airlines.

In Defence, we continued to expand our base of long-term, recurring services contracts and our worldwide customer fleet of flight training devices with new deployments, contract extensions and technology upgrades. The U.S.

Air Force exercised options on existing contracts to provide training services for the Predator/Reaper remotely piloted vehicles, and the KC-135 tanker aircraft, while the U.S. Navy did the same for its T-44C aircraft.

We also received contracts to upgrade simulators for the German Air Force’s Eurofighter, the Royal Canadian Air Force’s CP-140 Aurora, the U.S. Air Force’s C5 Galaxy, and the Royal Australian Air Force’s Orion aircraft. As well, during the quarter, we won orders for a UH-72A Lakota helicopter simulator for the U.S.

Army, and a C130 Fuselage trainer for the U.S. Air Force Reserve Command. The latter contract includes a suite of high-fidelity trauma patient simulators from CAE Healthcare, to create an immersive aeromedical evacuation training environment. In total, we received $167 million in Defence orders this quarter, representing a book-to-sales ratio of 0.80.

The ratio for the last 12 months was 0.89 and our second quarter Defence backlog was $2.4 billion. Looking now at Healthcare, we saw increased volume in our second quarter as our new products and sales channels began contributing to results.

We were successful across a number of healthcare markets involving sales of our patient and ultrasound simulators, audiovisual solutions, courseware, and training. In Defence, our customers included the U.S. Navy and U.S. Air Force Reserve Command as well as a military training centre in Saudi Arabia.

In nursing and health science education, we sold patient simulators and multi-year services to the Southeast Technical Institute in the United States. And in the professional and OEM segment, we developed a simulation-based training solution for physicians using the Impella heart pump in partnership with medical device manufacturer, Abiomed.

With that, I will now turn the call over to Stéphane..

Thank you, Marc, and good afternoon everyone. Consolidated revenue for the quarter was $529.4 million and net income attributable to equity holders from continuing operations was $42 million or $0.16 per share. Our income tax rate this quarter was higher than in previous quarters at 24%.

This compares to 17% for the same quarter last year and 21% in the first quarter this year. The higher rate is mainly due to differences in the mix of income from the various jurisdictions, in which we operate. Free cash flow from continuing operations was negative $17.1 million for the second quarter.

The increase over last quarter was mainly due to a lower investment in non-cash working capital, partially offset by lower cash provided by continuing operating activities. The decrease from the second quarter last year was mainly due to unfavorable changes in non-cash working capital.

Historically, our free cash flow is higher in the second half of the fiscal year and we expect that to be the case again this year with improvements in both working capital and higher operating cash flow.

Capital expenditures were $35.8 million this quarter, with growth investments representing 51% of the total and maintenance capital expenditures the balance. Net debt was $998.5 million as at September 30, 2014 compared to $901.6 million as at June 30, 2014. Our net debt-to-capital ratio remained within our objective range at 39.9%.

Now looking at our segmented financial performance. For Civil, second quarter revenue was $296 million, up by 10% year-over-year and operating income was up 16% year-over-year to $45.4 million for an operating margin of 15.3%.

We had a tax gain in the quarter in one of our JVs, as well as some non-recurring expenses, the net effect of which brings the Civil margin to about 14%, which is still better than last year on a normalized basis. Training utilization was 62% in the quarter, which reflects the impact of seasonality on training demand during the summer months.

In Defence, we continued to be resilient with second quarter revenue up 9% year-over-year at $209.1 million and operating income up 2% at $25.6 million for an operating margin of 12.2%. And finally, in Healthcare, revenue for the quarter was up 37% year-over-year to $24.3 million and operating income was $1.8 million for a margin of 7.4%.

This compares to $400,000 last year and a margin of 2.2%. The higher margin results from our ability to absorb SG&A and development costs with higher volume, which underscores the healthy gross margins on our healthcare product lines. So with that, I will turn the call back over to you Marc..

Thanks, Stéphane. As we look ahead to the second half of the fiscal year, we continue to expect a stronger performance across all business segments. We remain highly encouraged by the Civil aviation market and our opportunities for growth.

Market fundamentals remain robust, with commercial OEM aircraft backlogs and delivery rates at historical levels and global passenger traffic continuing to grow at a healthy pace; it was up by nearly 6% for the first nine months of the year. In business aviation, the market is showing signs that a broader recovery may be underway.

According to the U.S. Federal Aviation Administration, the number of business jet flights has increased by 3% over the last 12 months and has increased consecutively, every month for the last year and a half. In September, business jet operations were up 5.7%.

All of these factors bode well for our Civil business and we continue to expect better results in the last two quarters of the year as we benefit from the usual seasonal pick up. For the year, we’re still expecting low double-digit revenue growth and even higher growth in operating income.

Our pipeline remains strong and building on the 13 full-flight simulator sales and training deals we’ve announced so far; we reiterate our outlook for about 40 full-flight simulator sales for the year. We also expect continued booking training and services contracts at a rate that’s supportive of a positive book-to-sales ratio for Civil overall.

In Defence, we also continued to expect a stronger second half of the year. We have a solid backlog and a robust bid pipeline, which gives us the confidence to maintain our view that Defence will remain resilient for the year overall.

The value proposition of simulation-based training together with our platform and geographic coverage, gives us the confidence that we will grow in Defence over the longer term. Finally, in Healthcare, we have made good momentum with our new products and sales channels and we expect to do even better in the second half as we achieve greater scale.

We continue to be encouraged by our prospects and we expect to benefit from a larger market opportunity over the long term. Thank you for your attention. And we are now ready to take your questions.

Andrew?.

Operator, we’ll now welcome investors and analysts to ask questions. And we’d ask that participants please limit themselves to a single part question. And if they have additional questions to please reenter the queue so that everyone has a chance. Thank you operator. We’ll now open the line..

(Operator Instructions). Our first question comes from Steve Arthur with RBC Capital Markets. Please go ahead..

Great, thank you. Just want to follow-up on the Civil margins a little bit further. They’re down sequentially to I guess 15.3% or it sounds like 14% ex some one-time factors and utilization was lower. Both of those were a little lower than I might have expected.

Can you comment on why that might have been? Is there anything weighing on that other than regular seasonality? And I guess more importantly, your perspectives on the trajectory of those margins through the balance of this year into next?.

I’ll just start it Steve. I think really what you’re seeing largely is, is seasonality. I mean we expected and we saw a pretty high level of loads, and we can see the load factors at airlines from different sources very high during the summer months.

And you couple that with the fact that in our products business, we shut down the plant during the summer and that’s largely contributed to -- the low utilization plant shutdown contributed a lot to the results you can see and maybe it’s just a little bit deeper dive on that Stéphane..

Why don’t I give you a little bit more indication on the margins that I talked about in my remarks Steve. You see the margins that we’ve reported 16.4%; in actual fact, we’ve got in one of our JVs in Malaysia and we’ve got a note in the financial statements on that effect.

We’ve got a -- we’ve had an important gain on a tax incentive that were able to get from the Malaysian government. So that gave us $9.4 million benefit in the Civil in the quarter. On the other hand we’ve had observed some one-time costs in the Civil division as well.

I guess one of the biggest item is related to the consolidation of one of our helicopter training operations in Stavanger. So there has been some termination cost, termination lease cost and moving cost associated to that. There has been some termination cost and SG&A as well in the business.

And the other element that I will bring is we’ve had a bit of an FX hit in the Civil business from the translation of some non-cash working cap from one of our operations in Brazil. So, the net of all that is as I said in my remark, the normalized margins in Civil end up at around 14% as opposed to the 15.3% reported in the MD&A..

And just on the last piece of your question Steve, the trajectory is as we said in our outlook, is high.

And I’ll reiterate what we said in my notes there in terms of the low double-digit revenue growth in Civil for the year overall and even a higher growth in operating income and I think reiterate what we said last quarter that for the year we expect higher average margins in civil than we did last year and higher peak margins than we did last year.

And really pretty much that comes on the back of the higher product flow that we’re getting through, going through with the orders that we signed in previous quarters and a big way just increases utilization. I mean as we know, it’s a recurring business; if you don’t train during the summer, you’ve got to train sometime.

And which means when we look at the third and fourth quarter, we see that activity coming back. And of course, we throw as you know, we throw move revenue off our existing network for training centers and that has a positive effect on the bottom-line and that’s what we expect to see..

So, higher peak margins, I guess that would imply as something like your comments this time last year of high-teens towards the end of the year..

Well, I guess that’s higher than -- higher average margins in a year and higher peak margins.

I think -- what was our peak margin last year?.

79..

79. So, higher than that as one peak and higher average than we did for the year ago. That’s what we said before, and we maintain that..

Great. Thanks very much..

You’re welcome..

Our next question comes from Benoît Poirier with Desjardins Securities..

Yes, good afternoon.

Just wondering if you could provide more color about the free cash flow expectation for this year especially when we look at your performance year-to-date and also what we should expect on the debt side going forward?.

Yes. I can take this one, Benoit, and I think if you look at the negative free cash flow in the second quarter highly related to the investment that we made in non-cash working cap and I would say highly related to some project-related accounts.

We didn’t sign a lot of the product orders in the second quarter and usually as we sign product orders there is always some down payments that come with orders.

Some of the orders we’re expecting to sign in the second quarter were pushed to the right, so that’s why we ended up with the free cash flow and again in results that we had in the second quarter. Now with what I can see for the rest of the year, as Mark said, the market is strong, we see pick up both in our product and our service businesses.

And so, we could see -- we always target a conversion of net income into free cash flow of 100%. And I can certainly see the second half of the year being robust in terms of free cash flow and what we can generate out of non-cash working capital accounts..

Okay. Thanks for the color. I’ll get back in the queue..

Our next question comes from Cameron Doerksen with National Bank Financial. Please go ahead..

Yes. Good afternoon. I guess just a question on the outsourcing deal that you’ve done with JAL, it’s obviously a pretty good strategic win for you.

Are you thinking that you can sign additional deals like that in the next year or two or you’re seeing more interest following that deal from other airlines?.

I’m not sure that we’ve seen more uptake just as a result of that one deal, but yes, as I said before, we see more interest in outsourcing than -- and certainly what the JAL deal does is clearly other airlines will see if the carrier like JAL does that and I think even more importantly that with I guess the reputation of JAL trusting and trusting CAE with the trusting of all the aircrew, the training of the aircrew, I think it says a pretty strong statement towards their airline.

So yes, we are pursuing a number of these deals. As I’ve said before, to me, I don’t see a sea change in behavior of airline so far. But there is definitely more interest and certainly in next year or two I’d certainly see one or two these year coming up. That’s what made my expectation based on what we see in the market right now what we’re pursuing..

Okay. Thank you..

Our next question comes from Turan Quettawala with Scotiabank. Please go ahead..

Yes. Good afternoon. I guess maybe I’ll talk a little bit about the Defence business here. The margins were a little bit weak, although it’s nice to see the revenue being quite strong there.

I know there is some pricing pressure in the business there, but is there anything else maybe that’s going on the quarter that you could highlight in terms of mix or something that maybe is affecting the margin? And then just maybe based on the environment today if you look forward here, maybe you can give us a sense of the trajectory on the margin on the Defence side?.

Look Turan, there is nothing really exceptional in Defence in the second quarter. We [target] up the year with a margin at about 11% if you recalled in Q1 and I think we had said at the time, it really was based on the different mix of the business that we executed in the first quarter.

I used to guide for quite a few quarters now that we’re running a business that’s generating around 12%, 13% margin and that’s where we’re back on for the second quarter. There is for us to gain -- we’ll gain momentum on margin as we win more orders and get the volume growing for us.

But it was nothing like, nothing specific in Q2 to get to the margins we got..

Great, thank you..

Our next question comes from Ben Cherniavsky with Raymond James. Please go ahead..

Hi guys..

Hi..

Hi..

Just a bit of a housekeeping item, I’m trying to understand the FX impact, there was a lot of discussion in the MD&A about how currency on a year-over-year basis lifted revenue, but I didn’t see anywhere a quantification of that.

I’m wondering if you could just clarify what was the consolidated impact of the lower Canadian dollar on your revenue base year-over-year..

Yes. You can actually, Ben, you can actually see it; I think we’ve got a section in the MD&A that quantifies that for the company as a whole. The additional revenue from the change in the Canadian dollar was $18.9 million that’s for the quarter against the same quarter last year.

And the impact on net income was $400,000, so we’re less than $0.5 million..

Okay..

Yes. That’s -- you’ll get that in, I think section four of the MD&A. That’s on the -- that’s where we quantify the impact of movement in FX on the translation of our operations..

Okay. Thanks for explaining that again..

Thank you..

Sure..

Our next question comes from David Newman with Cormark Securities. Please go ahead..

Just a quick housekeeping one, then I’ll ask my question.

Just in terms of the civil training utilization in the quarter guys, what was it?.

62%..

62%.

So, it’s basically where it was last year’s same quarter, right?.

Correct..

Okay. And if you look at just the other -- everybody’s asked about the Civil military result, so I’ll take a shot at the other segment. I mean you seem to have hit an inflection point in the Healthcare overall, obviously the top line saw some good impact there.

How much of that was related to sort of pent up demand for the maternal simulators and what do you think the revenues and margins could be going forward on that, will we see a check back to a certain degree or how do you see that playing out?.

Well, some of it was due to delivering the backlog of -- as we entered into production of the Lucina simulator, the one you talked about.

But having said that, I think when I look at where the revenue came from and the stability of the business, I think you’re going to continue -- we’re going to continue to see a higher revenue than we’ve seen in the past. It’s a bit early for us; I mean still a lot we’re learning about the seasonality and the cyclicality of this particular business.

And in terms of the strength of the product line, I think what you are seeing in addition to the backlog of the Lucina product line, what you are seeing is that the investment in the products that we’ve made, not only in that simulator, the rest of our simulators and our audiovisual solutions and our training network or training systems is really come to fruition.

And it was expected. I as I said before we expect for the year as a whole pretty strong double-digit revenue growth and you’re starting to see that. So, I would say early days, but I certainly wouldn’t expect to see significant check back. Although, it we vary, but I’m not expecting a big pull back there..

Okay.

And just on the margin, I mean how much leverage is in that model you had 7.4% in the quarter; I mean is it the new normal or what is the new normal in that one?.

Well, I think that what you look at is we’re over -- we said in the past that one of the reasons that our margins were low is because the investments we’re making in SG&A and in R&D to develop these products are to a certain level to create and sustain a higher level of business. I mean we’ve never been aiming for a business at the level we’re at.

So as you’re seeing the revenue growth, you’re seeing more drop to the bottom-line and I think that’s sustainable. We’ll continue to invest in SG&A and R&D, but I think the level you see that is not going to grow proportionate to the revenue line. So I think that margins you look at, I guess I think we’re at seven points something in quarter.

At this level, I mean you could expect it at range, but it will vary, I mean could go down. I mean we’re talking about relatively small numbers, things can float off between; I don’t know 5 to 10 that anywhere in that level. If you sustain revenues above 20, which we’re at 20, 23, you’re probably going to be in that range of 5% to 10%..

Okay.

And then the last one, just part of that is the mining sale, any update on level of interest on the mining unit?.

Look David, we’ve got a process going, received some expressions of interest. I won’t say more; we expect to close the deal by the end of the fiscal year..

Very good. Thanks guys..

Our next question comes from David Tyerman with Canaccord Genuity. Please go ahead..

Yes, good afternoon gentlemen. Just a question on the civil sales guidance. So, you’ve done 6% revenue growth in the first half. So, to get to double-digit, you’re going to have to put a pretty big number up in the second half and your backlog hasn’t been changing very much.

I was wondering what is driving or what’s going to drive the pretty strong sales growth in the second half?.

Just to be clear David, you’re talking about revenue or order intake?.

Sorry, revenue..

Revenue was -- I think really what you’re going to see is the pickup in activity in our Civil Training center, more utilizations, more airlines and more business jet operators training. That’s the large part..

Okay. So, is there something that’s changed here Marc, is this -- seems that we’re being put at the new locations and then coming up or it just seems like a pretty big step change from H1 to H2..

Well partly, part of it is some of those coming on line. Part of it -- we thought we’re completely over in moving sims but as Stéphane talked about it, one of the if you like events that hit the quarter is we basically made a consolidation of the training centers and helicopter side.

And so that helicopter training center which does a lot of offshore oil, the big part of our offshore oil exploration helicopter training that was pretty much down in the second quarter. So, weren’t seeing a lot of revenue there. So, there is going to be a pick up on that. But there is nothing changed.

I think you’re seeing -- I guess when you see what explains the low utilization in the second quarter, because airlines again are flying, they’re flying a lot, well at the end of the day, they have to train. As long as they fly, they have to train.

The fact that they’re training, they’re flying a lot means that in the third -- in the fourth quarter they have to train a lot. And we don’t expect to lose the customer, lot of them are anchored customers in our joint venture centers.

The way we come up with our revenue forecast is based on a pretty exhaustive center-by-center simulator-by-simulator view. So, it’s not -- we don’t look at this as a gross number, it’s a roll up of pretty much the forecast we have for every center and every simulator we have in our network. So, we have a pretty good confidence on that number.

I think it could change, obviously airlines can move things out, literally maybe three months at a time, but there won’t be a much more than that..

Okay.

And does the product side make much contribution there to the growth rate?.

It’s high, it’s growing, but I don’t think I mean we’re already at pretty high level.

And I think the one thing that you will see is that I think where it will make a difference, because we were largely shutdown for three week -- well we were shutdown for three weeks of a quarter in second quarter, so during that time, you don’t see -- you see a much slower revenue from a product segment so that will contribute..

But that’s normal, isn’t it?.

Pretty much, yes..

Okay..

But don’t forget that this year we had, benefiting from the orders that we’ve got in the last two years, plus we did have I think we have -- going back to the initial part of your question, we did deployed CapEx, which resulted in more sims being out there..

Okay, great. Thank you very much..

Our next question comes from Kevin Chiang with CIBC. Please go ahead..

Hi, thanks for taking my question. Just a follow-up on the utilization rate, it sounds like there is lot of pent up demand in the back half of the year. It looks like you did about 70% last year.

Can you give us a sense of how much higher that can be in the back half of this year, maybe how far you are from what you view as being a normalized utilization rate in your network?.

Sorry, I was waiting who was going to answer that question. I don’t think we usually give forward-looking utilization rates frankly and what -- look I think that if you look at the 10 year average and maybe I’ll leave it at that, which typically what you’ve seen in Q3, Q4 is in the range of 73%, 74%.

And I’m giving you like I said the 10 year average number there. And I’m not sure that we’ve given in the past what our projections for going to be for the upcoming two quarters. But I’m pretty darn sure that it’s not going to be lower than that..

That’s helpful. Thank you..

Our next question comes from Anthony Scilipoti with Veritas Investment. Please go ahead..

Thanks very much. Sort of going back to some of the things that were talked about by others and I think my question is going to relate mainly to the Defence segment. I noticed that your EBIT margin is down, but the EBITDA margin is sort of up by 20 basis points.

And when I look at the consolidated numbers, my suspicion is that this is because of a pretty significant reduction in SG&A, about 6 million or so from last year quarter. So, I’m just trying to understand, why the reduction in SG&A? I know it’s the second quarter consecutively that’s happened pretty sharp decline in SG&A.

So maybe you can explain what’s happening there? And then also tied with that perhaps is what’s happening with maintenance CapEx as we’re starting to see it go up as a percentage of the total CapEx and go up in absolute? Thanks..

Let me deal with the second part, Anthony right away. As far as the maintenance CapEx is concerned, in the quarter we saw the maintenance CapEx go up against what we have seen previously and that really is specific to certain platforms on the Civil side that we’ve had to update to get to the new model in that operation in some of our customers fleet.

So there has been a peak in maintenance CapEx. And overall, you look at the run rate for the first six months, I think we spent what, $75 million in total, total CapEx for the six months. We gave a guidance that we should be giving a -- for the year, spending the amount at very similar level of the CapEx that we had last year at 157 million.

So, I believe that we should be in the range of $150 million overall for the year as a whole.

Just maybe on the SG&A side, look, I’d have to get into more of the specific -- I know that Gene has continued reducing its operating cost in the business and that’s I think the change that you see and the level of SG&A in the business that’s in some parts of the world where he hasn’t rehired in G&A as he would have done in the prior year.

So, he is really containing his level of G&A overall in the business..

So, we could expect to see the growth, sort of the SG&A level as a percentage stay around sort of at these lower levels?.

I think so, yes, I think so..

And then I guess tied with that what’s happening at the gross margin level because we can’t dig into that on a segmented basis, but we can see that over the last two quarters, there has been a reduction in the gross margin, consolidated..

Consolidated? It’s really -- and you’ll see that when there is a drop in volume sequentially that’s certainly something that you’d see. And you’re talking about see as a whole.

Right?.

Yes..

Yes, so sequentially that’s something that you see. The other element and I think I’ve talked about a few times in previous quarter is that is more crucial for the Defence business but as we’re getting more of a service based organization than product, our services contracts tend to generate lower margins there.

They’re very often longer term contracts, lower risk but lower margins. So, that plays in putting some pressure on margins in the Defence business..

But it should create a better return on capital or not?.

Well, it should, yes..

Okay..

The only exception is if there is ever a new complete outsourcing contract in Defence that would require some outsourcing; sorry some investment, then you’ll see the return on cap being diluted in a very early stage of the program and then picking back up. But we love those contracts..

Thanks..

Okay. .

Our next question comes from Fadi Chamoun With BMO Capital Markets. Please go ahead. .

Yes, good afternoon. I just came up to the call, but I am still not clear why at this point we’re still seeing your capital employed growing 20% and revenue growth well below that, I think it 10% in the quarter in Civil margin, in the Civil side.

I would have thought at this point we would see kick up or intensity come a little bit slower and/or or pass towards higher ROIC, I am not sure if we can sort of go into more specific about that?.

Yes. I think we got hit more than we thought on capital employed by FX unfortunately. This is a quarter where we don’t have a high volume of business in the year; and at the end of the quarter, we had to convert our capital employed with a very low Canadian dollar, so it hit us.

So, you can see I think we’ve got some language in the MD&A to that respect..

Okay. But the increase is a lot higher than what would be explained by FX alone.

So my question maybe is, are you pre-deploying some capacity at this point that you expect to ramp up in the next few quarters, like should we think this normalizes in the next year or so?.

Well, I think if you look at the -- maybe I’ll ask you here, Fadi. If you look at the deployment of sims, we’ve got 8 more SEUs deployed in the quarter. I talked about the CapEx that we’ve spent in the quarter and what I believe it will be for the year. I don’t think it changes our posture from what we said initially.

If I look at the overall level of CapEx for the year, probably not going to be different from what we said earlier probably in the range of what we had last year. It may just be the case that in this quarter we’ve had the level of investment if you’re saying CapEx combined with lower deposits on contracts for lower product ordering and some FX hit.

So, the combination of all that is just put some pressure on our ROIC..

Okay. You’ve sort of indicated in the past, I think that the military margin should set a trend around 15%, close to 13% depending on the mix. Can you share with us what’s your target margin this year in Civil and in Healthcare? What should we be aiming at as a full year margin of these segments? Thanks..

Are you talking about, sorry you’re talking about the margin performance profitability, Harry?.

No, no.

What is your target EBIT margin in Civil and Healthcare for this year?.

Yes. Well, I think Marc touched based on it earlier. We haven’t given a specific number for the year. I mean it’s certainly going up and certainly going up from where we are right now and certainly going up from what we saw last year, as Marc said, average and peak margin..

So, we’re just repeating, Fadi, higher -- I mean obviously I’ve started with higher revenue. So, we expect for the year as a whole for Civil to have year-over-year low-double-digit revenue increase.

Then on top of that, we expect and largely because of that, we expect to have margins, average margins in Civil for the year higher than the average we had last year and higher peak margins that we had last year. We haven’t quantified how much more, but it will be higher..

Okay. Thank you..

(Operator Instructions). We have follow-up -- I’m sorry. Go ahead..

Operator, we do want to leave some time for members of the media. We could take one more question from investors and then we’ll switch over to members of the media..

Perfect. We have a follow-up question from Benoît Poirier with Desjardins Securities. Please go ahead..

Thanks. Just to come back on Defence, book-to-bill was 0.8 during the quarter.

Just wondering if you could provide more color between the mix services and equipment and what we should expect going forward in terms of book-to-bill for Defence?.

Yes. We’re just getting the information. Do we have the mix offhand? It’s in the MD&A..

I don’t have the mix..

We don’t have it right now. We could provide you separately, Benoît. But I think we have more product orders than we get services in the quarter, I know that..

Okay. I’m just curious because typically the margin story is related to leveraging the equipment. So I’m just wondering whether this deal is starting to play out..

Okay….

On the ERP, you invest about 12 million during the quarter which was up versus 4 million a year ago.

Just wondering if there was anything special to mention with respect to ERP and software?.

Yes, there is -- we’re just about to go live on the implementation of a portion of our operation I this facility here in Montreal. So, we’re at the kind of the last weeks before a go live..

Okay. So basically we should expect this number to come back to more normalized level in Q3..

I was going to say I think we should go live in about a month. So after that the investment will go down..

Okay.

And for CapEx you provided the color for the year but should we still expect maintenance to stand at about 30% of total CapEx, Stéphane?.

Yes, I don’t think the mix will change a lot..

Okay. And last question just for the sim order. Two orders in the quarter is basically the weakest performance since fiscal ‘10, the second quarter.

Just wondering if there was any cancelation or is more kind of the orders or push-out towards the second half, and if you are able to still maintain your 70% 75% market share?.

Not to worry about that. I think it was a little colder for the industry as a whole. I think probably a consequence for the airlines again being busy. I think there was about three orders that we can see out there, market as a whole we won two.

So again, if I look at the amount of orders that we’re currently negotiating or in contracts negotiations and the pipeline, I don’t have any worry about the 40 this year..

Okay. Thanks again for the time..

Thank you to all our investor and analyst participants for joining us on the call today. And we’ll now open the call for members of the media if they have any questions..