Marc Parent - President and CEO Stéphane Lefebvre - CFO Andrew Arnovitz - VP, Strategy and IR.

Steve Arthur - RBC Capital Markets Cameron Doerksen - National Bank Financial Turan Quettawala - Scotia Bank Benoit Poirier - Desjardins Securities Konark Gupta - Macquarie David Tyerman - Canaccord Genuity Sami Hazboun - Investors Group.

Good day, ladies and gentlemen and welcome to the CAE Second Quarter 2016 Conference Call. Please be advised that this call is being recorded. I’d now like to turn the meeting over to Mr. Andrew Arnovitz. You may now proceed, Mr. Arnovitz..

Good afternoon, everyone and thank you for joining us today. Before we begin I 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 that 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 2016 MD&A and in our annual information form for the year ended March 31, 2015. These documents have been filed with the Canadian Securities administrators and are available on our website at cae.com and on SEDAR.

They have also been filed with the US Securities Exchange Commission under Form 40-F and are available on EDGAR. Forward-looking statements in this conference represent our expectations as of today, November 11, 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 open the call to questions from members of the media. Let me now turn the call over to Marc..

Thank you, Andrew, and good afternoon to everyone joining us on the call. Our strategy continues to bear fruit and our progress this quarter and for the first half puts us on track to deliver on our outlook for the year.

We continue to win new business with comprehensive solutions in civil, defense and healthcare and we set a new record for the company reaching $6.4 billion of order backlog at the end of the quarter. We also had solid growth over last year with double-digit increases in operating income in both our civil and defense groups.

Looking specifically at civil, we had 10% growth in operating net income compared with the second quarter last year. Demand for training is seasonal and this quarter was typical with 64% utilization of our training network. Orders in civil include a series of training solutions contracts that affirm our leadership position.

They include 16 full-flight simulators as well as training programs for airlines and aircraft operators that cover the entire career lifecycle of professional pilots, from cadet to captain. Notable wins involve an order for two full-flight simulators from Air Canada for the new Boeing 737 MAX and another simulator order from Airbus for the A320.

We have renewed our long-standing services agreements with JetBlue Airways and we signed a new exclusive long-term pilot training with Eastern Airlines. In all, civil orders totaled $482 million for book to sales ratio of 1.32 times for the quarter. The ratio was 1.16 times for the last 12 months.

Our second quarter civil backlog crossed the $3 billion for the first time. Turning now to defense. Here too we had solid growth within the 11% increase in operating income compared with last year. We continue to have good success penetrating the market with our training solutions with orders now exceeding revenue for the third quarter in a row.

During the quarter, we signed training solutions contracts involving enduring platform like the MH-60 Seahawk Helicopter and the C-130J Hercules aircraft. And we saw an increased adoption of simulation based training as a way for defense forces to maintain readiness. We had ranger boarders during the quarter involving integrated training systems.

These include the expansion and extension of long-term training services for the US Air Force MQ-1 Predator and MQ-9 Reaper unmanned aircraft systems. The US Force KC-135 tanker and the US Navy T-44C fixed wing aircraft. We also signed a new service support agreement involving the German Air Force’s Eurofighter simulators.

In total, defense received $319 million in orders this quarter for a book to sales ratio of 1.41 times. The ratio for the last 12 months was 1.1 times. This is notable since this is the first time in nearly three years that the ratio has been above 1 time for the trailing 12-month period.

Our second quarter defense backlog reached $3.4 billion, which is also a record for the company. And lastly in healthcare, revenue was $25.4 million in the second quarter compared to $24.3 million last year. Second operating income was $1.5 million compared to $1.8 million last year.

Sales highlights this quarter include a contract for a comprehensive suite of simulator and center management solutions for the world-renowned McGill University Health Center to be used for research at the Center for Innovative Medicine.

We also expanded our relationship with a key scientific society with a view to increasing the use of simulation by educating and certifying healthcare professionals in the adoption of best practices and simulation.

Specifically, we partnered with INACSL, which is the International Nursing Association for Clinical Simulation & Learning, to include a healthcare simulation fellowship program for healthcare educators and professionals.

With that, I’ll now turn the call over to Stéphane who will provide a more detailed outlook and our financial performance, and I’ll come back at the end of the call to comment on the way forward.

Stéphane?.

Thank you, Marc and good afternoon everyone. Consolidated revenue for the quarter was up 17% over Q2 last year at $616.8 million and quarterly net income before specific items, including restructuring costs and a one-time tax item was up 14% to $47.7 million or $0.18 per share. Looking specifically at business groups.

In civil, revenue increased 23% over the second quarter last year to $365.2 million and segment operating income grew 10% to $50.1 million. Last year’s quarter had some one-time gains before which civil’s operating income growth would be approximately 21% year-over-year.

The civil margin for the second quarter this year was 13.7% which is comparable to the normalized margin we had last year, but on higher revenue and at different business mix. In defense, revenue grew 8% over last year to $226.2 million and operating grew 11% to $28.4 million for an operating margin of 12.6%.

Our second quarter defense backlog reached the record level of $2.9 billion and what’s further amended to $3.4 billion with the inclusion of backlog from BMAT acquisition. This has no bearing on order intake or book to sales, but does add to our already substantial backlog.

And lastly, in healthcare, revenue of $25.4 million generated $1.5 million of operating income from the margin of 5.9%. Looking at some additional financial highlights, we had an income tax recovery this quarter of $17.2 million mainly from tax settlements related to favorable prior ruling on tax treatment of the sale of certain simulators.

Excluding the effect of these one-items, income tax expense would have been $12.2 million this quarter, for an income tax rate of 21%. On apples-to-apples basis, this compares to 24% for the second quarter last year. The lower tax rate results mainly from a change in the mix of income from various jurisdictions.

We continue to implement the process improvement program we announced last quarter and is intended to transform our processes and product offering and further strengthen our competitive position. We incurred net after-tax restructuring costs of $1.8 million in the quarter for severance and other related costs.

CapEx for the quarter was $25.2 million, down from $35.8 million in the second quarter last year. CapEx of $48.8 million for the first half of the fiscal year is in keeping with our outlook for lower capital expenditures this year.

Free cash flow from continuing operations was $101.7 million in the second quarter compared to negative $17.1 million in the second quarter last year. The increase was mainly due to a lower investment in non-cash working capital.

The sum of net cash from continuing operating activities and net cash used in investing activities was positive $65.5 million this quarter compared to negative $84.4 million in the prior year.

Net debt as of the end of September was $937 million, down from $1 billion last quarter and our net debt to total capital ratio was also lower at 33.5% compared to nearly 40% a year earlier. With that, I’ll turn the call back over to Marc who will discuss the way forward..

Thanks Stéphane. Our consistent leadership in competitive markets and record backlog are testament to the solid progress we're making to realize our strategic vision to be the training partner of choice. In civil, we continued to see favorable conditions for our comprehensive solutions.

Our outlook for strong simulator demand in line with last year is supported by high aircraft delivery rate, which in the case of narrow-body aircraft will according to Airbus be increasing yet again.

We continue to lead the market in simulator display and we’re widening the gap between CAE and the competition with the process improvement plan now underway which will transform the way we design, sell and deliver full flights simulators.

In commercial aviation training, we have a robust pipeline of opportunities that would see us increase our share of the much larger training market. Over the past 15 years, CAE has become a credible partner for airlines to realize even greater value from training.

And in business aviation, training demand is driven mainly by the utilization level of the active fleet of business jets. In the United States, the world's largest market for business aviation, aircraft activity levels continue to be well supported by macroeconomic factors like corporate profitability.

And we’re also making good progress globally by winning more market share with our unique solutions. Just this weeks at the Dubai Air Show, our CAE Emirates joint venture signed a new multi-year business aviation agreement with Arab Wings expanding training from three to 11 aircraft types and we see more opportunities of this nature in our pipeline.

For civil overall, we still expect higher margins for the year and double-digit operating income growth, driven primarily by higher utilization in our training centers.

In defense, we are continuing to build good momentum with our strategy to pursue larger programs and especially those involving complex training systems integration were we believe we have an advantage.

We’re now integrating the NATO Flying Training in Canada program, which gives us even greater capabilities in the live part of these comprehensive training systems.

We are now the prime contractor responsible for producing qualified military fighter pilots for defense customers, which is something that we believe will help unlock more opportunities for CAE as a training services and systems integrator.

We've been active on the business development front, and we've got nearly $2.8 billion in bids and proposals pending with customers, which represent a new high watermark for us in defense. We believe our efforts will continue to yield good results and that we’ll continue to win our fair share of these opportunities.

We have the underpinnings for a solid growth business long-term and we still expect modest growth for the current fiscal year as a whole. And in healthcare, we see more opportunities for synergies with our defense business.

Just last week, we were awarded an $8 million contract to provide the United States Air Force with another fuselage trainer, which includes the provision of our healthcare simulators to allow medical personnel to train as a team in an immersive aeromedical environment.

On the OEM front, we expect to see more progress with medical device manufacturers to provide them with the most innovative training solutions in support of their latest technologies. And we see potential to make more headway with scientific societies to advance the use of simulation-based training for healthcare students and practitioners.

For the year, we expect double-digit growth in healthcare with higher margins. Finally, and before we conclude, I'd like to take a movement on this remembrance day to acknowledge from a personal standpoint and on behalf of all of us at CAE, the immeasurable sacrifices made by our service men and women past and present.

We are very grateful for their contributions to ensure the continuity of justice and preservation of our freedom. Thank you for your attention and we're now ready to answer to your questions..

Operator, we’ll now open the line to members of the investment community for questions. We’d ask that people please limit themselves to a single-part question, and if time permits and they want to reenter the queue we can take more questions..

[Operator Instructions] Our first question coming from the line of Steve Arthur with RBC Capital Markets. Please proceed with your question..

Great, thank you. I guess just to start off with civil margins in the quarter, revenue is quite strong obviously, but 13.7% is a little bit below I think we've seen for a while.

I do understand that similar to the normalized rates last year, but I guess was there anything specific that happened in the quarter that weighed on these margins or is that just kind of what we should expect on Q2 type utilization levels?.

Let me start off Steve, its Marc. I think we stick with full-year outlook that we've given the higher average margins that we saw last year in civil. I think there was a number of factors that occurred in the quarter itself, maybe just go through those factors Stéphane for Steve..

I think we saw some good interesting increase in revenue and it came from both the service and product businesses that we have. You’ve seen the factors for the increase in revenue from our service business. We've got more utilization and the number of SEUs is also up and that typically generates good margins.

There was also a quite a significant increase in our product business, but dilutive to our margins for a number of reasons. The first thing is when I look at the composition of the backlog that we’ve executed in the quarter, Steve, the mix was not as favorable as it was in the same quarter last year.

So we had a few development program that require some more R&D effort. I think you can see as well on the P&L there is an increase the R&D, does not all come from the civil business, but there was quite an increase in R&D and civil, which are typically development costs for certain programs.

The other thing that I'll mention is that we continued to progress our process improvement program, but it's been quite disruptive to the operations during the second quarter, especially last December, where we changed layout of our shop floor facility in Montreal.

So we lost some productivity there, so it puts on pressure on the margins on the product side of our business. But so overall, I think, hopefully people will recall last year in the same quarter, we’ve had a one-time tax gain in one of our joint ventures.

So we generated 14% normalized margins last year, so we’re at similar margins, but on higher revenue. And I think what Mark said, we're still tracking for our margin guidance for the year..

So it's fair to assume that these are all short-term things and no change for the year and trending towards the upper teens over the next number of years, I would say?.

Well, I guess we haven’t gone that far I think Steve, but I think what we've said that’s made in the outlook is that there is really no change to what we’ve said, maybe a little bit more precision, will be hired in the average I think we’re at 16.3 for the full year as a whole in civil and certainly, what we see is like what we saw this quarter when you normalize it for the one-time last year, double-digit SOI growth at civil for the year for sure..

Okay, thanks a lot for the color..

Thank you. Our next question coming from the line of Cameron Doerksen with National Bank Financial. Please proceed with your question..

Here, thanks good afternoon. I just want to just follow up on the civil business.

I'm just wondering if you can talk a bit about the competitive environment there and what we're seeing from pricing in the full flight simulator business, especially with a couple of the sort of the newcomers to that market being fairly aggressive in the past couple of years?.

Well, I think Cameron to your question, I think the environment is pretty much the same it has been. I think it's pretty much of a status quo, these are neither worse nor substantially better, it’s per the expectation or the assumptions we had.

I mean, as Stéphane said, if you look at the quarter there's a number of factors that affect our margins and one of them is flight competition and not unexpected. So when we will look at year over year, I think that we're seeing some of that in products, but I think it's fairly stable, and again that's factored into the outlook that we've given..

Okay, thanks very much..

Thank you. Our next question coming from the line of Turan Quettawala with Scotia Bank. Please proceed with your question..

Yes, good afternoon. Sticking to the civil side I guess, Marc if you look at some of the recent order flow for the OEMs, I think we've seen a bit of a slowdown on that front. I know your products business is molding to deliveries here, but obviously that will flow -- that will have an impact as well on that over time.

Just wondering how confident are you about your order flow on the FSS here over the next two years, you've obviously had about three years of peak order flow here?.

Well, we don't, as you know, Turan we don’t ever give any outlook beyond the full year, we’re certainly confident of the full year. You saw that 16 simulator orders in the quarter is I think the highest we’ve ever seen in Q2 that certainly looks well for our outlook that we’ve set for simulator sales as a whole.

From a macro going out few years – not to give you guidance, but as you said, it’s a function of deliveries out of the major manufacturers which of course we know who they are and the ratios haven’t really changed.

And the fact of matter is I mean, as I was saying in my remarks, I mean you look at certainly the OEMs themselves are speaking with their delivery rates, their production rates.

So I think Airbus has announced that they are going up to 60 aircrafts a month on the A320 and I know having in early part of my career, 20 years, you don’t increase production rates unless you are pretty darn sure that you will be able to maintain and because this is extremely costly to go the other way.

So I mean to me that’s a strong testimony of certainly the OEMs themselves. I think that this backlog and supporting delivery rates will last for quite a long time which of course supports our business..

Great. That’s helpful. Thank you..

Thank you..

Thank you. Our next question is coming from the line of Benoit Poirier with Desjardins Securities. Please proceed with your question..

Just with respect to your backlog, it’s up 17%. I was wondering if you could provide more color, how much is driven by the FX and especially on the military side, what is the split between – is there a big change in the mix between equipment and services? Thank you..

Yeah, Benoit, this is Stéphane. I am just looking at it, because we do disclose in the MD&A the adjustment that we put in defense for the FX. I think one reason why you are asking is we’ve also included the adjustment for the BMAT acquisition and so I will just pull the adjustment for FX. I will get back to that in a second..

Okay, thank you..

Thank you. Our next question is coming from the line of Konark Gupta with Macquarie. Please proceed with your question..

Hi, good afternoon. My question is on – sorry actually a clarification before the question on the civil margins.

So the no change in guidance for the full year basically implies pretty solid margins in the second half of this year versus last year, right and that's driven by any sort of one-time impacts that you could potentially have?.

No, it’s -- I mean, if you look at our seasonal pattern on a full-year basis, we tend to have a stronger second half driven by a couple reasons. One I think the biggest one is the fact that you tend to have higher training in the second half because it’s typically the winter months and that's where airlines specifically train the most.

And also the fourth quarter is also a big quarter for business aviation training where they attend the training in the early part of or late part of the winner, in February, March.

And that explains why you have more training and therefore when you have more trading of existing assets, well, that translates into better margins, obviously better bottom line.

Also the other thing that place into that to a certain extent is what we just experienced is we have our summer shutdown that affects manufacturing, which is our products business.

So all-in-all that's why per what we have seen in previous year, we see a stronger half, not driven by anything else but the normal business and the higher product sales that we have had and the higher sales that we have in the service business. .

Okay, thanks.

So on the defense side, Marc, I was just wondering the book-to-bill ratio or the book-to-sales has been improving quite a lot and obviously you are now above one trailing 12 month basis, so what's exactly happening on that side and what are your hearing from the US defense guys given the 2016 fiscal year is underway now?.

Well, I think it’s better than it was. I mean with these I don’t think the governments -- I don’t think nobody wants to make this on either part of the floor in the US to make this defense an election issue. I don’t think we will hopefully we're not going to be hearing sequestration again for a little while, we have continuous resolution.

So it's pretty much of a quasi normal kind of environment.

So what we're starting to see, what you're seeing is I think the fruit of all the bidding activity that we’ve done over the past few years, we've been talking for I think more closer to three years now about this backlog is bow wave of proposals that we were inviting and really what – and just backing up a step, we don’t typically write proposals on the military side unless we feel pretty good about our chances of winning, because it’s extremely costly and both in terms of time and money to bid on military contracts because of the very detailed requirements.

So the fact that we have this bow wave, this large bow wave now reach up to 2.8 billion of proposals out there, what we did not control and which is affected by government vagaries here that we’ve been talking about is when they actually get attributed. So now we're seeing a little more regularity about these contracts being attributed.

And we're seeing it come through and that's why you see this order intake coming through. We also see some larger contracts which is testimony to our strategy of going after big training services integration contract. These are the factors we're seeing. And as I said in my outlook, I mean that’s factored into our outlook for modest growth this.

You will start to see the book-to-bill above 1 on a 12 month basis, which is the better way of looking at it, because quarter to quarters can vary. And the bidding activity continues, it’s this largest, we have as large -- a proposal quantum as we’ve ever had. So I feel pretty good.

As I’ve said for quite a while here that defense is a growth business for CAE. While we don't control when things get attributed, so we will continue to watch what the government does..

Perfect. Thank you very much..

Before we take the next question, Stéphane, did you want to respond to the earlier comment?.

Yes, Benoit, had a question on the impact of FX in the backlog for the defense business. The FX is about 77 million of the 460 million adjustment that we see in our defense backlog. So the rest is really the acquisition of the BMAT backlog that we closed in the quarter. So 77 million of FX.

I think Benoit another – second part of his question was on the service part. I'll just point out the fact that most of the unfunded backlog in defense which is 755 million is service based and we get a lot of new orders and service especially reaping the fruit from the training service integration strategy that we put forward.

So we get more bigger share of training and services contracts than we’ve had in the past and most of the unfunded backlog is service based..

Operator, we will take the next question..

Thank you. Our next question is coming from the line of David Tyerman with Canaccord Genuity. Please proceed with your question..

Yes, good afternoon.

My question is on the civil sales side, there was a pretty nice tick up in sales in the quarter, quite a bit above my expectations and I think the consensus also, so just wondering how much of that was foreign exchange and then whether there were any unusual things in there that might have cost the quarter to be a bit higher than normal..

I mean, not so much on the – nothing unusual on the revenue side, David. For the company as a whole, the translation of our foreign operations into Canadian dollar gave us about 40 million of top line and of course it’s spread across all the different business units.

I think I did the math even stripping out the FX impact for civil, we’d still get close to 10% revenue growth from Q2 last year and so pretty substantial..

Okay, thank you..

Thank you. Our next question coming from the line of Sami Hazboun with Investors Group. Please proceed with your question..

Good afternoon, gentlemen. I wanted to follow-up on the R&D expenses having – you say ticked up year-over-year in this quarter. In actual fact they are up 32% year-on-year for the year-to-date.

Should we expect that pace to continue or should it abate as we go forward with the year?.

Well, there has been quite a lot more of R&D in the year. I mean, part of it is the process improvement projects that we've undergone. Part of it is also some I’ve talked about it in the first quarter results on the defense side we're incurring more development costs than we had in the past.

And the other part is really specific civil programs that we've undertaken as well that require some R&D. So in total, and even if you include the deferred development cost, the capitalized cost, you will see some increase in R&D overtime going forward..

And if I may, related to the process improvement, as it would impact SG&A, it's not disordinately increased versus sales, but should we expect the benefit to SG&A as well as a result of the process improvement?.

There will be. I think we talked about it in the first quarter, the benefits really, we’ll start seeing it more in the second half of next year once the program is completed. But there will be some benefit on the G&A line as well..

Thank you very much..

Thank you. [Operator Instructions] Our next question is a follow-up question coming from Benoit Poirier with Desjardins Securities. Please proceed with your question..

Yeah. Just coming back on your free cash flow, there was a nice recovery in the working cap.

I was just wondering what are your expectations for the second half and also if you could elaborate on your cash deployment opportunities, given your net debt to cap improved a lot in the quarter?.

Yeah. We are pretty pleased with the performance in this quarter on non-cash working cap, Benoit. I keep seeing some improvement in the days sales outstanding. So this is always a good sign. It seems that our collection is pretty good.

Inventory is down and the volume of order intake seems that we sold in the quarter were typically we guess the non-payments on customer also generated some good cash flow. So we’re pleased with where we are for the first half of the year.

I think I have said in the past, we still see some investment in non-cash working cap needed for the year as a whole, as we get more service-based business. What I see so far and I’ll keep the same guidance as I’ve said in the past, I think we will see an investment in non-cash working cap lower this fiscal year than what we had last year..

Okay. That's great color. And on the healthcare side, you grew revenues by 5% year-over-year, you're still confident to grow double-digit this year.

So how much is in the backlog right now or what we should expect in the second half in order to meet the double-digit, Stéphane?.

Yes. We still see some -- I mean we’re within the guidance that we’ve given for healthcare as well, double-digit growth. Quite frankly, we were expecting a little bit more revenue in this quarter for healthcare. We've got some orders that we were just not able to fulfil in September and that slipped to the third quarter.

So you can expect a stronger H2 in healthcare than we really see, double-digit growth as we guided since the beginning of the year..

Okay..

Sorry, Benoit. I was just going to come back for -- just kind of come back to what you were saying for use of our capital there or free cash flow. Our capital allocation priorities haven’t changed.

We always said and we’ll continue to say that we continue to look for growth and we see growth opportunities, but in terms of -- our outlook of CapEx hasn’t changed, it’s just what we’ve given, the 100 million for the year and we're tracking to that.

But we keep our eyes open for investment opportunities that are accretive to return on invested capital in a relatively rapid fashion that includes if we can do some outsourcings of trading centers, that kind of opportunity.

So we will constantly look for that, so that would be number one, plus continuing to invest and that's part of our CapEx guidance into simulators to grow our network. Again, business aircraft or supporting our joint ventures, things like that.

Second priority is continuing to de-leverage and you've seen us do that I think quite handily in the quarter again. And finally, continuing cash returns to shareholders and I think our dividend story continues to be coincident with that or consequence of that I would say..

Okay. That is very good color. And last one just in terms of product mix for healthcare, it seems that it was the main reason for the margins.

So could you elaborate a little bit on the product mix impacting your margin in healthcare?.

I think two things I would say. Really, we sell a whole host of kind of products in our healthcare division, and depending on -- and what I am talking about there is you have a whole series of different types of Americans, not all run at the same margins, but depending on which ones you sell in that quarter, we’ll dictate the margin.

That same thing for other types of products like our interventional simulators, which are essentially surgical simulators, servicers will do for OEMs. So all of that is what you see. So you would expect, and I think you will continue to expect some differences depending on the flow of product mix we have in the quarter.

So I think that really explains the story plus the other fact is that we are not at the end of this business. Clearly, we want to get to a larger business here. So we’re continuing to invest in SG&A and R&D to make this a larger business. So I think that in itself contributes a little bit as well..

Okay. Thank you very much for the time..

Benoit, before you go, I think Stéphane has a clarification..

Yeah. I just want to clarify the response that I gave I think to one of the questions on the impact of FX on the civil business, on the top line, the increase over Q2 of last year, FX neutral, would have been 18%. I gave another number, but it's actually 18%, not 10%. Sorry for the confusion there..

Thanks..

Thank you. Our next question is a follow-up question coming from the line of Konark Gupta with Macquarie. Please proceed with your question..

Hi, guys. Just follow-up questions. One is on the return on capital employed by, call it, segment. I'm just kind of doing a quick math on the segment, civil and defense and using basically the EBIT or segment operating income and dividing that by the capital employed number that you are going to provide.

So to me, it sounds like the civil return on capital is pretty stable this year versus last full year, but there seems to be some decline in the defense return on capital.

So am I reading that correct or is there something else I should be factoring in?.

Yeah. The way we look at it is, Gupta, we look at the return on capital employed pre-financing, but after tax and if I may, well, we're talking about it. We’ve reported 11% royalty for the quarter, and so it's improving compared to the 10.3% that we've had in the first quarter. So it's trending in the direction.

As far as the trend for the defense business alone, I wonder if there isn't any temporary distortion from the BMAT acquisition, but I’d have to go back and check, maybe the case, but there is nothing that comes to mind right now.

What specifically -- which quarter are you looking at?.

I was just looking at the second quarter, I'm looking on the trailing 12 month basis basically, so I’m taking the trailing 12-month EBIT dividing that by average capital employed?.

Well, one thing is we've got -- a lot of our capital employed in defense is U.S.-based and so I'm sure that the fact that we translated cap employed in Canadian dollar, I'm sure that it had quite a significant impact on the cap employed, so that's what I can think of..

Okay. That makes sense. Okay. Thank you.

And quickly on the second question, just on the healthcare side, so I understand and I can see how healthcare can actually grow double digits year-over-year on revenue side, but what are your thoughts on the margin profile for this year as well as next year? Should we expect a meaningful improvement in margin this year, and similarly next year or will that be somewhat sort of muted?.

Well, we haven't given any for next year, but I think what we’ve said is certainly double-digit growth in revenue which should translate into pretty good margin pickup at the bottom line and maybe that’s as far as I’ll go for this year..

Okay. Thank you..

Operator, we do want to keep the last minute of time allotted for members of the media. So we’ll draw to a close the Q&A session for investors. I would remind analysts and investors on the line if you have any follow-up questions or we haven’t responded to your questions, please do follow up with me after the call.

And if you would now please open the lines to members of the media..

Thank you. [Operator Instructions] There are no questions from the media at this time..

Okay. Operator, if there are no other questions, we will conclude the conference call for this afternoon. I want to thank all participants for their time for joining us and we’d remind all participants that a transcript of today’s call can be found on our website at cae.com. Thank you..

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