Andrew Arnovitz - Vice President, Strategy and Investor Relations Marc Parent - President and Chief Executive Officer Stéphane Lefebvre - Chief Financial Officer.

Steve Arthur - RBC Capital Markets Cameron Doerksen - National Bank Financial Benoît Poirier - Desjardins Capital Markets Turan Quettawala - Scotiabank Fadi Chamoun - BMO Capital Markets David Newman - Cormark Securities Ben Cherniavsky - Raymond James David Tyerman - Canaccord Genuity Ross Marowits - Canadian Press.

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, Vice President, Strategy and Investor Relations. You may now proceed, Mr. Arnovitz..

Thank you and good afternoon, everyone and thanks 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 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 third quarter fiscal 2015 MD&A and in our 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 at 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, February 6, 2015 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 be pleased to 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 will first review some of the highlights of the quarter and then Stéphane will provide a more detailed summary of our financial results. I will come back at the end of the call to discuss our outlook for the remainder of the year.

In our third quarter, we had double-digit earnings growth, with good free cash flow and solid order intake. In Civil, demand was especially strong for simulators, and airlines continued to choose CAE as their Partner of Choice by outsourcing their training to us.

In Defence, we received a range of orders on new and existing platforms that underscored the diversity of the aircraft platforms we cover and the geographies we reached. And in Healthcare, we continued our success in penetrating global markets with orders, including a large deal in Central Asia. Looking more specifically at each business.

In Civil, we signed a range of civil solutions agreements during the quarter with an expected value of approximately $452 million. We are very proud to have renewed our long-term outsourcing agreement with Iberia, for another 10 years and we formed a new JV for pilot training services with China Eastern Airlines.

China Eastern is a longstanding CAE customer, now with 23 CAE full-flight simulators in operation and has just become our joint venture partner at our flight academy in Melbourne, Australia. The airline purchased a 50% stake in our flight academy and will outsource to the JV the training of 650 pilot cadets over the next 5 years.

Other notable deals in Civil during the quarter include the sale of 18 full-flight simulators for a total of 31 for the first nine months of the fiscal year. We also signed a new training services agreement with Ryanair for the recruitment, selection and type-rating training of new pilot cadets and experienced captains.

And we signed an exclusive training services agreement with Jet Star for the group’s carriers in Vietnam, Singapore, and Hong Kong. The Civil book to sales ratio for the quarter was 1.4 times and for the last 12 months it was 1.17 times. Civil backlog for the quarter was $2.6 billion.

In Defence, we signed contracts to provide simulators and long-term support services for New Zealand’s Super Seasprite helicopter and to upgrade the UK Royal Navy’s Merlin helicopter training system.

We received product orders for a Predator UAV Trainer for an undisclosed customer, a C295 transport aircraft full-flight simulator for the Polish Air Force, a UH72 Lakota helicopter flight training device for the U.S. Army, and a KC-130J full flight mission simulator for the U.S. Marine Corps.

We also received training services contracts for our Rotorsim joint venture, the German Army Aviation School and a training needs analysis contract for the German-French Tiger Technical School. In total, we received approximately $201 million in Defence orders this quarter, representing a book to sales ratio of 0.93 times.

The book-to-sales ratio for the last 12 months was 0.83 times. And the third quarter Defence backlog was $2.4 billion. Lastly, in Healthcare, we entered agreements with new distributors for our products in Europe and across Asia and we sold our patient, surgical, and ultrasound simulators to hospitals in China.

In North America, we sold simulators to an Air Force training centre in the United States and to a Canadian university. We were also successful in Healthcare this quarter by leveraging the kind of solutions strategy that we employ in our Civil and Defence markets.

We signed a contract for $11 million turn-key training centre solution in Central Asia, which represents Healthcare’s largest single transaction to-date. With that, I will now turn the call over to Stéphane..

Thank you, Marc and good afternoon everyone. Consolidated revenue for the quarter was $559 million and net income attributable to equity holders from continuing operations was $52.1 million or $0.20 per share. Our income tax rate this quarter was 20%, compared to 19% for the same quarter last year.

The higher rate reflects differences in the mix of income from the various jurisdictions in which we operate.

Free cash flow from continuing operations was stronger this quarter at $70 million, with the increase coming mainly from a reduction of our investment in non-cash working capital and from higher cash provided by continuing operating activities.

This is in line with our outlook of our free cash flow being typically higher in the second half of the fiscal year, as we normally see improvements in these two lines of the cash flow statement in particular.

Capital expenditures were at $28 million this quarter, with growth investments representing 78% of the total and maintenance capital expenditures the balance. Net debt was lower at $971.7 million as at December 31, 2014, compared to $998.5 million as at September 30, 2014. Our net debt to capital ratio was also lower at 38.3%.

Now looking at our segmented financial performance, for Civil, third quarter revenue was $322 million, up by 14% year-over-year and operating income was up 19% year-over-year to $53.8 million for an operating margin of 16.7%.

We had a gain in the quarter involving two of our joint ventures and we received compensation for a terminated customer service agreement. This was offset in part by some non-recurring expenses including transaction costs in the quarter and the net effect of these items brings the Civil margin to about 15% on 68% utilization of our training network.

In Defence, third quarter revenue was up 7% year-over-year at $216 million, while operating income was 8% lower at $28.6 million, for an operating margin of 13.3%. This represents a 110 basis point improvement over last quarter and is within the range of our 12%, 13% margin backlog.

Lastly, in Healthcare, revenue for the quarter was $21.3 million and operating income was $0.5 million. These results are higher than last year, but lower than last quarter mainly due to the timing of some contract awards that moved into the fourth quarter. With that, I will turn the call back over to Marc..

Thanks, Stéphane. For CAE, third quarter performance gives us confidence in our outlook for a stronger second half of the fiscal year. Civil aviation market fundamentals remain strong, notwithstanding a still soft European market.

Globally, passenger traffic grew nearly 6% in calendar 2014 and the global fleet of passenger aircraft increased by 2.5% over the same period. As we look at our current fourth quarter, we see things developing the way we had expected with appreciably higher utilization and margins in the last quarter.

This means, for the year as a whole, we are still expecting strong revenue growth and even higher growth in operating income. We are continuing to book sizable, long-term contracts with airlines and business aircraft operators and our pipeline remains strong.

We are seeing more instances of airlines choosing CAE as their outsourcing partner than ever before and we expect this trend to continue. With 31 full-flight simulator sales in the first nine months, we are well on track to meet our outlook for about 40 full-flight simulator sales for the year as a whole.

We also expect to continue booking training and services contracts at a rate that gives us confidence in filling more of our available capacity. In Defence, our outlook is unchanged. We are working from a solid backlog of $2.4 billion and a bid pipeline of nearly $2 billion.

We expect Defence to continue to demonstrate resiliency for the year overall and we continue to position for growth in the medium to longer term. Last week, we announced our agreement to acquire Bombardier’s Military Aviation Training unit, which gives us a new capability and opportunity for growth.

Once the acquisition closes, CAE will become the prime contractor responsible for the highly prestigious NATO Flying Training in Canada program that produces world-class fighter pilots for the Royal Canadian Air Force and its allies.

Importantly, this tuck-in acquisition will significantly enhance our core capabilities as a global training systems integrator by adding support for live military flying while giving us additional experience with integrated live, virtual and constructive training systems.

And here in our home market, we will be strengthening our position to support Canada as the country begins to consider its future pilot training system as well as next-generation fighter program. Finally, in Healthcare, we’re developing a global market for our simulation products and audiovisual solutions.

And we see larger opportunities ahead for growth. For instance, we are finding an increased propensity by medical societies to adopt the use of simulation in the course of assessing and certifying practitioners.

As well, the multi-million dollar deal we signed in the quarter is a good example of what we can achieve with our unique and comprehensive offering, as well as our global reach. With that, thank you for your attention and we are now ready to answer your questions.

Andrew?.

Operator, we would now be pleased to take questions from analysts and institutional investors. Just before you do open the lines, I’d first ask that in the interest of fairness that participants please limit themselves to a single, one-part question.

And if there is time and you have additional questions after that, please feel free to re-enter the queue. Operator, please go ahead and open the line..

Thank you. [Operator Instructions] And our first question comes from the line of Steve Arthur with RBC Capital Markets. Please proceed..

Great. Thank you very much. I just want to dig into the Civil margins just a little bit, the headline number is 16.7% look quite solid, but the 15% number you mentioned was a little below our expectation and I think down sequentially from Q2, which also had a lower utilization rate of I think 62%.

I am just curious if there was any color on why that would have been down, the margins would have been down quarter-over-quarter.

And I guess, more importantly the factors you see driving the improvement in Q4 and where that heads into next year or two?.

Okay. Steve, this is Stéphane. Look you have – I think we have normalized the margin to take into account some of the transactions that I mentioned in my remarks. So, the 15% takes into account the gains that we were able to crystallize on some of those transactions and some non-recurring expenses.

Now, if you look at the why is the margin at 15%, then the first thing I will say is the – on the equipment side of our business. We have received quite a good number of orders in the third quarter as you saw. So, we have got more revenue than we had last year.

However, for a number of reasons, the equipment side of business did not contribute a lot in terms of bottom line and one of the impact that we saw is that you see that the weakness of the Canadian dollar is definitely a positive for us in the long-run, but we have had to face some revile of some U.S.

denominated costs in the quarter, which puts some pressure on the margin on the equipment side of our business. So that’s one of the big reason why we didn’t really pull the margins that would be higher than the 15%. The other element, I will mention is on the training side of the business. We did deploy a number of assets in the quarter.

I think if you go back to last year, we deployed about 10 additional SEUs and so those SEUs did contribute to additional bottom line from last year. But some of them especially the ones that were deployed in the quarter, deployed lower than – lower profit than they will in the next quarter and in next year.

The last point I think Marc alluded to it in his remarks, we have seen a little softness in Europe in the third quarter, hence the 68% utilization rate in Q3, that’s a little down from the utilization rate we had last year at 69%.

I think Marc mentioned it as well going forward we look at the Q4 and the next year, we definitely see a significant pickup in utilization by the end of the fiscal year..

And maybe some of the reasons for that going forward, Steve, our near-term, if you look at the historically Q4, what you see is in business aircraft, which you will remember is about 40% of our Civil training business is in business aircraft of that kind of order based on revenue that tends to be a strongest quarter for business aircraft because that’s typically where you get the greatest amount of training demand in our centers in Dallas and Dubai and Morristown.

And it is no different this year. We have pretty good visibility of the bookings that have occurred in January and are booked for February and April. So we feel pretty good that that’s the trend that we will see.

As well for the same reasons, in the commercial aviation training network, while you continue to see a continue ramp-up of the sims that we have added recently and in the past year, they tend to ramp up. More time that goes on, more customers you get on them.

But more importantly, again we look at specifically Q4, you can see the bookings coming forward. You can see again in commercial aircraft across our network, Europe was a bit as we – as Stéphane was saying softer than we would anticipate in the Q3.

But as we look at Q4 and looking at the bookings and when we talk to airlines, we can see that picking up in Q4 quite nicely. So that’s where we are confident. That’s trends that you are going to continue going forward.

And of course finally we got hit because of the precipitous rise of the Canadian dollar, which perversely hits us on the price business in the recent quarter, but that’s behind us. So, clearly FX is a tailwind going forward..

Okay. And just to sum that up then I guess just on the near-term, it looks stronger for Q4. A quarter ago you I think had a comment that Q4 peak margins should be better than a year ago and the full year better than a year ago.

Does that still kind of hold based on what you are seeing now on the order books?.

Yes, absolutely..

Okay, thanks very much..

Steve, just want to pick up on one of the comments you made that there is sequentially the margin hasn’t picked up. Just be careful in Q2, we had quite a large tax engine on one of our JV, so there is a quite significant pickup in margin in Q3. Just want to mention that..

Okay, thanks. I will check that..

Our next question comes from the line of Cameron Doerksen with National Bank Financial. Please proceed..

Yes, thanks. Good afternoon. I guess my question is on the foreign exchange, you got hit in the Q3 from the big move, but we had in your fourth quarter again a fairly significant move in the Canadian dollar.

So, I guess my question is, are we going to see a similar impact on the Civil margins in Q4 from that move in the Canadian dollar? And assuming that the Canadian dollar stabilizes at the current rate when are we actually going to see the bottom line benefit of the Canadian dollar weakness?.

Look I think, Cameron, I mean clearly for us the fact that the Canadian dollar is down clearly for us it’s a positive. We are an exporter and we have got a lot of operations outside of Canada that we translate back into Canadian dollars. So, I mean, clearly for us this can only be good news.

It’s just the timing really of – we have a hedging policy in our product business and it’s just that sometimes it creates some leakage. And it’s just really the timing of getting some payments in U.S. from our customers, payments that we are not hedging against revaluating some of the U.S. denominated cost.

What I see is going forward Q4 and next year, it’s definitely going to help both sides of the business, the equipment as well as the training, flying training side of our business..

Okay.

So, we shouldn’t expect to see any impact in Q4 given that the Canadian dollar has further weakened during the fourth quarter?.

No, you won’t..

Okay, thank you..

Our next question comes from the line of Benoît Poirier with Desjardins Capital Markets. Please proceed..

Yes, good afternoon.

Just to come back on the Civil margin, just wondering whether you still target the mid 70% utilization rate in the Q4? And also whether the Canadian dollar weakness will allow you to outpace the kind of peak margin of the 18% you have been aiming at once you include Oxford?.

Well, maybe the last part of the question, I think we remain with the outlook that we have given before that’s higher average margins for the year, the higher peak margins. I mean, I think you are asking me to maybe qualify this more than that, but I think remain the same statement.

I that we are confident what we are going to get and utilization will definitely be higher in the fourth quarter, I can’t precisely say it will be 74% at this point, but it definitely will be higher just based on activity here we are seeing at the moment and what we foresee for the next 2 months and going into next year, there is no doubt about that..

Okay.

And then Stéphane maybe quickly could you quantify the expense related to the closure of your training location in Norway?.

That was actually in Q2. You know what Benoît, let me – while we are taking more questions, I will get back to you on this one..

Okay, thanks..

Our next question comes from the line of Turan Quettawala with Scotiabank. Please proceed with your question..

Yes, good afternoon. I guess maybe I will talk about the Defence business for a minute here. So, the U.S. air defence budget obviously there was some good news there.

Can you talk a little bit about how much this could help you and maybe how much or how fast it could manifest itself?.

I think that as I said before we are not changing – at least on this call we are not changing our view towards the – what our expectations are in the military business. And I wouldn’t expect frankly in a short-term any kind of radical change because the budget expected to go up next year which is good I think overall.

But if I look at it very modestly, it really surprises what kind of issues and compromises are still going to occur between the House and the Congress and the President and so we will see.

I guess the big issue that we have which I said before is because of this – the fact that there still continues to be uncertainty on the budgets whether or not I mean the threat of sequestration to a certain extent comes back, it goes away.

You have the issues of as I mentioned battles between the – in the Congress with the both houses now united against the White House, put it that way.

So really what that does is that plus the high operational tempo that you see which is new, the recent times you have the drawdown in Iraq and Afghanistan, but now you have renewed operational tempo caused by the events in the Middle East. Really what’s happening there is program office that give us contracts in the training industry.

These tend to be long-term training contracts and what we continue to see is delays in putting those contracts in place because people that put those contracts in place are afraid of is this morning going to be there a long-term. So before they give you the long-term contract, this is the dynamic that’s going on.

Now, that has positives, negatives because we actually have a lot of long-term contracts. So that is to a certain extent good like if you looked at training contracts we have the U.S. Air Force on the Predator, on the KC135 for example.

But in getting new contracts, what we continue to see is its taking longer than certainly we would like and anybody would like in getting these contracts in place. Now, having said that, all of that is really what you are hearing is my outlook hasn’t changed..

Great. Thank you very much..

Our next question comes from the line of Fadi Chamoun with BMO Capital Markets. Please proceed..

Okay, good afternoon. I think you have said in the past that you would expect the Civil revenues to be up double-digit this year, is that still the case given where we are so far year-to-date.

And it looks like you have a steep climbing in Q4, I just wanted to see how much visibility you still have on this target?.

Well, I think I have just as much visibility as I had when I said it’s the time which is I think is still positive. If you look at the typical increase that we get, yes, I think if you look at it in just absolute numbers it looks high and it is high.

But I go back Fadi to as I said to Steve Arthur’s question in the beginning, Q4 is our strong quarter and led by business aircraft and again we see the bookings. We see the bookings Civil aircrafts. So am I still confident in the outlook I have given for low double-digit revenue growth in Civil, the answer is yes..

Okay. And also just want to sort of revisit this target. In the past you have talked about combined 19% EBIT margin in Civil at some point once you have sort of ramped up utilization and sort of integrated Oxford and all this.

So now it feels like you have got the wind in your back, the cycle is strong, do you feel confident about hitting that full year target of 19% and when would you think this is realistic to think about, is it a couple of years away, 3 years away?.

Well, look I don’t think we never give outlook that far, but I am confident that we can hit that and go beyond, the answer is yes. I mean if you just look at our peak margins last year, we are 17.8 I think Stéphane, is that right. So 17.8 and what we said is we think that we can hit the higher peak margins than we did last year.

So it didn’t take much to get close to 19% and beyond. And clearly with FX tailwind I think that’s clearly in the realm of possibility although I wouldn’t guarantee it at this point..

But you would you able to do that on a full year basis within a short timeframe like that, because I am not talking about Q4 as opposed to whole year?.

Are you talking about next year or the year beyond is that what you are saying?.

Yes..

I am just going back to what I have said in the past, I think what we said in the past is 19%.

What did we say? Remind me of what we said in the past, I am just – I’m just getting back to what you are saying, is it possible? Absolutely, absolutely, but I think it’s going to – but what we have always said is when we get to those kind of margins as you have to assume that we are at the peak of the cycle, which we are definitely in the commercial aviation, but it has to be accompanied by a really solid market in business aircraft.

A business aircraft – and that’s where we have said this outlook, which before we acquired Oxford, I think it was 22% and we said adjusted for Oxford is 19%. So, when we get back to peak of the business both Civil and Batz, for sure we can get the 19%.

Now, I guess my uncomfort of being able to tell you when is to really see when the business aircraft would get back to a peak margin or peak of the cycle. I mean, people have been trying to predict that for years and haven’t been successful. I mean, what we do see is, we see higher activity in business aircraft and that continues this quarter.

And on a full year basis, business aircraft is still high, but if you look at comparing with the kind of market activity that you had before the financial crisis, I mean, business aircraft, especially the smaller and the medium-sized jets is still significantly lower than it was at the peak of the cycle before the financial crisis..

Okay, thank you..

Our next question comes from the line of David Newman with Cormark Securities. Please proceed..

Good morning, gentlemen. Good afternoon, I should say. Just on the Defence side, it sounds like a bit of a longer tail. You do have – you are bidding on quite a bit, but I think you said the execution is taking a bit longer.

And you had about a 13.3% margin, I did notice that some of the – it was a little lower on the unfunded backlog moving into the funded, so kind of a testament to the longer time it’s taking. So, in the past, you sort of said resilience – is resilient and it’s been moving around in terms of margins overall.

The 13.3% in the quarter is better than the last several, but year-over-year it was a little lower.

So, as you head into the back half of the year, are we still talking about that kind of range, 13%, 14%, or is there anything else that could conceptually move it higher?.

David, I think I have been guiding for a few quarters now that I believe that we have about 12%, 13% margin business in our hands right now. And so with this kind of volume that’s what I can see. And you will see that in certain quarters, for instance, we have exceeded that guidance in Q3.

If I recall, I think at the beginning of the year, it was a bit lower at 11% business. It’s a business in which you can see some 100 basis points up or down, but I think we are kind of within that range of 12%, 13% and that’s what you can foresee.

Up until there is a more significant pickup in revenue, in volume, then we can see the margins going back to over 13% on a recurring basis..

Okay.

And then just on the – obviously you flag, I guess in your MD&A the fall-out from 5% of your business being related to helicopter offshore business overall, but are there any larger impacts that you might see from a crude oil perspective? I know you have a lot of Middle East customers, etcetera and as well as Canada that could obviously feel the impact either through governmental budgets or whatever.

Any expected fall-out in either side of the business that could come out of that?.

I think the – short-term I think is positive fall-out in that. I guess, it’s – when you look at what is done to the Canadian dollar, I think that’s….

Yes..

For us that’s the short-term impact. As you say a bit of not much yet a little bit, but it was really due to the helicopter market. It’s having some impact, but I wouldn’t say it’s huge right now in terms of offshore operators, but definitely it could, because the offshore operations that we support so far are pretty – they are held up pretty well.

Longer term, I think – I guess, it really depends how long is this going to last? And I don’t think it’s – I would be hard pressed to predict that. But in regions like the Middle East you talked about, they have been making very significant investments in air transportation and that’s not a short-term thing.

That’s not a program that’s going to stop and a lot of that is related to diversifying their economies away from oil based revenue. And that’s not a trend that’s going to stop based on short-term dynamics of oil prices. At least that’s not what I see..

Okay, just last one, if I could squeeze one in.

Just on the healthcare guys what do you think it takes to get this thing on steroids pardon the pun?.

Just before I answer that, the one thing obviously that I negated to say is what is an overwhelming positive for us on the oil is that it least to more profitable airlines. And if I look at the latest IATA prediction for airline profits, it’s going up and going up quite significant.

Profitable airlines is a good thing for us, good thing for the whole industry. So beyond that dollar that’s the short-term effect. Going back to healthcare look, I think I am continuing to be very excited about this business.

And to use your term what’s going to drive it on steroids, really what it would be is that just like our training business overall in aviation is that you see adoption of regulations that basically mandate that training for healthcare procedures, our personnel are done using simulation-based training tools.

That – there is very little of that done, almost nothing that is done today that way. But clearly there is a growing, growing consensus that that has to happen. And we have a significant number of pretty involved dialogues with medical societies that are discussing those very topics. So that’s really what would turn this on steroids.

But in the meantime I think just the growth that we see just by more global market penetration of our products and services and us stimulating market with new products themselves for the RD that we brought to it, best I guess it minimized this year the Lucina birthing simulator I think is going to drive the kind of growth that I have talked about in the past.

So look, I think this quarter I mean if we look at the number I guess you can’t get too excited by the number, but I think it won’t take long before we will start to see some number back more we were at Q2 and beyond..

When do you anticipate, I mean these things take a long time, but when do you anticipate sort of a regulatory change, did that take a long time like several years of what do you think the timeline is of that Marc?.

I can’t predict it I think you are in the years for sure as a wholesale, but one thing that when you get into it towards that you learn which is anybody that’s in the healthcare arena will know as this is a very, very diversified business.

And there are a huge number of societies that control all sides of the sector from interventional from including surgical, from ultrasound for example, which we are in a big way, non-invasive surgery. What you see is you don’t have to have a wholesale change in the people or societies adopting regulation.

I think my prediction is that what you’ll see is you’ll start seeing more of them, it could start in the short-term. You will see some adopting it. And I think this will grow and I think this will snowball at some point..

Very good. Thanks guys..

Our next question comes from the line of Ben Cherniavsky with Raymond James. Please proceed..

Good morning guys..

Good morning..

I guess I want to clarify first of all a lot of talk about the back half of the year and I just want to clarify how you are defining the back half or I mean a fiscal year where in mid-February and you end in March. So I mean presumably you have got – we are almost through this period.

So what’s the reference you are thinking about when you talk about in the big improvement in the back half of the year?.

It was Q4..

So Q4, so you have – and clearly you have got some visibility on that so far being in February?.

Yes. We have the numbers for January at this point and it’s no secret. We have said that the growth comes largely from training and training typically – we have pretty good visibility, because people have to sign up for training, because obviously it’s a slot-based business, you have to reserve.

So when we look at the level of bookings, it’s very strong for the quarter as a whole meaning what’s remaining, February and March. .

And what’s the sustainability of, I mean, I am beating a dead horse here a little bit, but the sustainability of those margins into next fiscal year? I am thinking more about the Civil product side just given the order intake where you are at, where you were last year, unless you have got a lack of orders coming in the next 6 weeks, which I know is lumpy, maybe that’s what’s happening, but the volume-related component of your margins and throughput, overhead absorptions and such, doesn’t that become more of a challenge for next year unless you get another increase in total orders?.

Well, we haven’t given any outlook for orders next year. What I would tell you is that without giving any guidance as I maybe insinuated it on the call is that the demand remains very strong. There is no shortage of things to bid on either on products or services.

So, I am not overly concerned about continuing a solid kind of volume to support our factories. And yes, you are right, it absorbs overhead, but I don’t see – I don’t see any negative to that at this point..

So you think you can sustain order intake in the 45% to 50% range for the next year or two.

I mean, let me ask it this way, if you don’t get that kind of order intake, you think you can still see your margins go up?.

I can’t comment on if we don’t or we do. Ben, I can only comment on facts. And when we give the outlook, which we always give in the first quarter, we can comment at that point.

All I am saying is that at this point without giving you specific number, I guess I am repeating myself as well, but I see strong demand in our end markets, lot of people looking to buy simulators..

Okay.

You think you can deliver higher margins year-over-year on lower volumes?.

Ben, this is Stéphane. If you look at the order intake that we have had last year and we have given guidance for this year, Marc said in his remarks and we are on track to meet that guidance. We will enter into a year – the next year with quite a large backlog that we are going to be executing.

So, I don’t see at this point a reduction in volume getting to next year and I don’t see quite frankly an issue and overhead absorption and what have you. So, that’s one part of the equation. The other part in Civil is us continuing increasing utilization rate and we will have deployed a number of assets this year.

So, I think definitely it sets the foundation for growth both top line and bottom line next year..

Yes.

I mean, I guess, that sort of leads to my second question is just trying to clarify your guys’ commitments to sweating the assets harder and ROIC and utilization rates and so forth, because the last couple of quarters, utilization rate is down or at least of your last five quarters, that last two have had lower utilization rates than the previous three.

Margins are, I mean, they are kind of creeping along and return on capital was down in the quarter. Your debt to cap was where it was at the start of the fiscal year.

So, I would just – how are you guys defining this commitment to those kind of targets on return on capital and free cash flow and so forth?.

Well, again, it’s the items that we have talked about and you’ve reiterated right there. It’s that higher utilization, which we are confident will occur and overall growth in the volume of business that we are going to have. The training business is a largely quasi-fixed cost business. So again, we throw more – more revenue across the same assets.

And we are confident that it will be there. And that’s going to drive a large part of the revenue and income growth that we see in the future and their commitment is exactly that is sweating those assets. And as we look at….

Let me ask it a little more bluntly then, because you guys have been talking about these sort of commitments for a couple of years now frankly, I mean, do you have a sense of urgency to start delivering it?.

Well, I would think yes, absolutely. Absolutely, Ben..

Okay, great. I’ll look forward to that. Thank you..

Our next question comes from the line of David Tyerman with Canaccord Genuity. Please proceed..

Yes, sort of a follow-up I think in a way here. On the backlog turnover, your backlog is up I think 9% year-over-year in Civil, it’s down 8% in the military side.

Does the backlog turnover change with those numbers, which would – what I am driving at is does the higher backlog imply higher sales for fiscal ‘16 for Civil and lower for military?.

No, I guess the – I mean, the profile in each of the Civil and military backlog, the only change that I can see is we have signed – I know we have signed a lot of products business in our Civil business, but we see more and more long-term training services as well.

And so what it does as for me at least it reduces the risk when we look forward in the mid to long-term. So that could be a bit of a shift and I see kind of the same trend in the Defence business as well. If you look at the kind of contracts that we currently signed, although the year-to-date book to sale is slightly below 1-to-1 at this point.

The kind of contracts that we sign are more service-based rather than product-based and they tend to be repeatable. They tend to be a little longer term. From what I can see it does that if you combine both it does support growth for coming into the next fiscal year.

We always look at much of our revenue over the next 12 months is in the backlog and we are pretty much where we used to be in the past. So, we haven’t seen any degradation in the kind of backlog coverage that we currently have. .

Okay, so just to clarify that, Stéphane, so if I understand what you just said, it sounds like your backlog turnover is stretching, because you have got more training – long-term training contracts.

So, wouldn’t that slow down the revenue generation out of backlog? And if you have a negative year-over-year comp on the Defence side, wouldn’t that imply lower sales in fiscal ‘16 than in fiscal ‘15?.

Well, no not necessarily. It really depends on the timing in which we receive the orders, David.

Even so far if you look at where we are at, at the end of Q3 and Mark said a few times, we see our defence business, it’s tough for us to say what kind of growth that we see whether it’s going to go up or down by a couple of percentage points and that’s why Mark very often refers to do that business as being resilient, but I think the timing of signing some product orders plays a lot into whether we can see some growth in the future.

The other point that I will make is that and we see that very often, we sign contracts on the defence side, the service contracts and then we generate more revenue than what the contracts look for..

Okay, great. That’s my question..

Yes..

Operator, we have run over a lot of time somewhat here. So, I would ask that we now open the lines to members of the media. So they have an opportunity to engage in the Q&A. And if there are any investor questions remaining of course the team and I are available after the call. Operator, if you could please open the line now to members of the media..

[Operator Instructions] Our first question comes from the line of Ross Marowits with Canadian Press. Please proceed..

Yes.

I am wondering first of all if you could talk about the business that you are buying from Bombardier what is the opportunity going forward? And when you say they will strengthen your position to about future pilot training and next-generation fighter program, what do would you mean about that?.

Well, I think that on the next generation fighter program, I mean the cadets just as a started I think when you look at the pilots that were graduating. These are fighter pilots that are going to – that are going straight into the next fighter program – into Canada’s next fighter when come.

So we have a lot more visibility, a lot more intimacy with the Canadian Air Force. We are adding 200 employees in Moose Jaw and Cold Lake fighter bases.

So there is a lot more intimacy with Canadian Air Force and that gives us a much better visibility into the next generation fighter program and our chances to secure a strong position in training for whichever fighter that the Canadian Air Forces decides to buy.

With regards to your – the first part of your question, I am sorry, what’s the – say it again, the first part…?.

What do you see as the outlook because, like is there a dollar figure, how much you think you could boost this business by?.

We haven’t provided one yet, but do I think we know this business. The answer is yes and significantly. And I think that’s going to come not only from the what we can do in Canada, but this is strategic for us because what it does it suddenly we now have, which is called past performance of the military.

So we now have not only credibility, but we have an established track record to be able to bid on military contracts for live military flight training. I mean, we already do that on Civil business. I mean, we are the largest in the world with Oxford Aviation Academy. We fly in over 200 airplanes around the world.

Now what we have is, we have the capability in the military area and on none other than fighter jets. So the opportunity now is when you look at the number of bids, there is a number of bids throughout the world. They were asking for that capability before we wouldn’t have been eligible to bid those and now we can.

So, those are the really new capabilities. It provides us to be able to increase the size of that business..

So, without this you wouldn’t have been able to bid on the next-generation fighter program?.

No, we would have in Canada on the next-generation fighter, the virtual part of it, but just like this contract here NATO flying contract in Canada. This contract what it does, it trains pilots for Canada. And it also trains pilots for NATO countries, so allies of Canada.

So there is potential for us to be able to grow and get more pilots from foreign air forces to come and train in Canada, Moose Jaw and Cold Lake.

But what it does is, there are number of these contracts in the world that we can now be eligible to bid live training, not the virtual part, but the live part, where we wouldn’t have been able to bid before and these tend to be very large contracts. I will give you some examples.

A few years ago, the United Kingdom outsourced air pilot training and they called that the MFTS program, which called Military Flying Training System and they outsourced all of their military airplane flight training to private contractors, a consortium bid that and won that at the time it was lockheedmartin.com. They won that contract.

So we wouldn’t have been eligible to go after that multi-billion dollar contract. Now what we did win out that contract when that consortium basic went out for bid for simulators to support the training, we won them.

We won two Hawk simulators at the time, but we wouldn’t have been eligible to bid on the big contract, which encompasses live, virtual and what’s called constructive, now we can..

Also, I’m wondering what is the impact on CAE of Bombardier’s decision to pause the Learjet 85?.

We don’t have an impact on it. We were selected on the Lear 85. And we have started the manufacture, but we have been – I mean, if you look at how much money that we have been transacted with Bombardier on that program. We don’t have the financial exposure on that program one way or another. We were basically selected to do the training on that.

We are doing the stimulator. We have started the simulators construction, but we have been paid for what we have done and we have stopped the production. It’s basically the sum total of it..

Okay, so you never delivered the prototype to them?.

No, no..

Okay..

No, what we can do is – what we have done is covered. I mean, we don’t have any financial exposure. So, I guess beyond the fact that we will not be doing the simulator as a whole there is no other impact..

And finally Bombardier’s financial issues and their efforts to cut cost is that affecting you, are they squeezing you in anyway?.

No. Well, I can’t comment on Bombardier one way or another. And we never talk about any other supplier or customer one way or another, but the short answer is not anymore than any other time. I mean, Bombardier is a strong company and we have very, very solid contract with them.

And we are their partner on most in fact all of their business aviation platforms on the CRJ. So we have very strong relations with them, but they always drive a hard bargain..

Thanks very much..

Thank you, operator. I believe that’s all the time we have for this afternoon. I wish to thank all our participants, members of the investment community and the media for their time this afternoon, listening to us, our third quarter remarks. I’d remind you that a transcript of today’s discussion will be available on CAE’s website at 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..