Andrew Arnovitz - VP Strategy and IR Marc Parent - President and CEO Sonya Branco - CFO.

Steve Arthur - RBC Kevin Chiang - CIBC Turan Quettawala - Scotiabank Cameron Doerksen - National Bank Tim James - TD Securities Charles Perron-Piché - Desjardins Capital Markets Chris Murray - AltaCorp Capital Konark Gupta - Macquarie.

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

Good afternoon, everyone, and thank you for joining us today. Before we begin, I’d like to remind you that today’s remarks, including management’s outlook for fiscal year 2017 and answers to questions, contain forward-looking statements.

These forward-looking statements represent our expectations as of today, February the 14th, 2017, and accordingly are subject to change. Such statements are based on assumptions that may not materialize and are subject to risks and uncertainties.

Actual results may differ materially and listeners are cautioned not to place undue reliance on those forward-looking statements.

A description of the risk factors and assumptions that may affect future results is contained in CAE’s annual MD&A available on our corporate website and in our filings with the Canadian Securities Administrators, on SEDAR at www.sedar.com and the U.S. Securities and Exchange Commission on EDGAR.

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

Following the conclusion of that Q&A period, we will open the call for 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. I’ll first comment on the operational highlights of the quarter, and then Sonya will take us through the key financial metrics by business units. I’ll come back at the end to comment on our outlook for the balance of the fiscal year.

The Company had a strong performance in the third quarter. Overall, we generated double-digit top and bottom line growth; order intake was robust; and we increased our substantial base of recurring business with a new record of $7.4 billion backlog.

Revenue and operating income growth was especially strong in Civil, as we filled our training centers to 76% capacity on higher demand for training. We also had higher activity on simulator product solutions, as we worked to deliver on our sizeable backlog.

Civil orders for the quarter, reached $363 million including training services agreements with airlines and business aircraft operators, and 12 full-flight simulators sales to customers including Southwest Airlines and China’s Xiamen Airlines.

Since the end of the quarter, Civil sold an additional six full-flight simulators, bringing the total number announced fiscal year to date of 39. We also signed new long-term service agreements with customers including Jetstar Airways Japan for crew resourcing, with Jet Airways for Boeing 737NG pilot training.

The Civil book-to-sales ratio for the quarter was 0.88 times and for the trailing 12-month period was 1.14 times. Civil’s backlog at the end of quarter was $3.3 billion. In Defence, our strategy to pursue a pipeline of comprehensive programs as a training services integrator is bearing fruit.

These large and complex programs involve the integration of live, virtual and constructive training into a complete training system, and it usually takes more time to convert from bid to award than more conventional programs.

We’ve been successful going after these types of programs, which are really at the center of CAE’s vision to be the recognized global training partner of choice.

Financial performance this quarter was in line with our outlook for modest growth this fiscal year and the more than $1 billion in defence orders and options we received in Q3, underscore our potential for growth in this market.

Notable program wins included a contract to upgrade and extend the Royal Canadian Air Force Nasal Flying Training in Canada program to 2023. We also received a long-term contract to train and qualify new Army helicopter pilots under the U.S. Army Initial Entry Rotary-Wing training program. And that’s a nice follow-up to our win last year of the U.S.

Army Fixed-Wing training program and is further testament to see strong position as a training services -- a training systems integrator. It also underscores CAE’s commitment to customers as their training partner of choice.

The Fixed-Wing training system is complex, just the initial rollout involves the construction of the new state-of-the-art training center, the manufacture and deployment of flight stimulators, and the delivery of new training aircraft.

And we’re very proud to have delivered all of this capability in under a year’s time and have become -- and to have become a sizeable employer in the state of Alabama. And this positive momentum has continued since the end of the quarter.

Just yesterday, we announced that Airbus awarded CAE a contract for our comprehensive C-295 training solution for Canada’s Fixed-Wing Search and Rescue program with an expected value including options of more than $300 million over the next 26 years.

Total defence orders this quarter were $601 million for a book-to-sales ratio of 2.46 times and the ratio for the last 12 months was 1.41 times. The defence backlog reached a record $4.1 billion compared to $3.3 billion at the same point last year.

And finally, in Healthcare, revenue and operating income was softer in the quarter and for the year-to-date than we would have expected by this point in the year. We attribute this mainly to the timing of orders, which are taking longer than we expected to materialize from our sales pipeline.

Nevertheless, we continue to make good progress on our strategy to position the business for strong growth over the longer term. During the quarter, we were awarded contract for simulators and training center management solutions for the CEGEP pre-university college system in Quebec.

And on the business development front, we hosted conferences in China and India to help expand Healthcare’s reach internationally. We also continued to innovate with industry-leading technologies. Two weeks ago, we announced the release of CAE VimedixAR, an ultrasound training simulator integrated with the Microsoft HoloLens.

CAE Healthcare is the first company to bring a commercial Microsoft HoloLens mixed reality application to medical simulation market and one of only a few authorized distributors of the Microsoft HoloLens worldwide. With that, I’ll now turn the call over to Sonya who will provide a detailed look at our financial performance.

I’ll return at the end of the call to comment on our outlook.

Sonya?.

Thank you, Marc, and good afternoon, everyone. Consolidated revenue for the third quarter was up 11% to $682.7 million and operating profit was up 17% to $98.6 million, reflecting operational leverage and further process improvements. Quarterly net income before specific items of $2 million was $69.6 million or $0.26 per share.

As in previous quarters, timing differences in the recognition of revenue on our standardized commercial aircraft simulators, resulted in deferral of approximately $0.01 of earnings per share. A full reconciliation of these timing differences can be found under additional financial highlights in this morning’s third quarter press release.

Free cash flow for the quarter was $124.7 million, which is higher than last year, mainly due to a lower investment in non-cash working capital as we normally expect in CAE’s second half, and an increase in cash provided by continuing operating activities.

Free cash flow year-to-date was a $167.5 million, lower than the same period last year due to a higher investment in non-cash working capital and higher dividends paid. This was partially offset by an increase in cash provided by continuing operations this year.

We continue to expect to see reversal of the non-cash working capital accounts through the balance of this fiscal year. Use of the cash during the quarter involved funding, capital expenditures of $35.8 million, mainly in support of growth.

We also distributed $20.8 million in dividend and repurchased and canceled 308,000 common shares under the NCIB program for another $5.9 million. We announce this morning CAE received approval from its Board of Directors to renew the NCIB program to purchase up to approximately 2% of CAE’s outstanding shares.

Notwithstanding the expected dilution this year on return on capital employed from the additional approximately $100 million to establish a U.S. Army Fixed-Wing training system, I’m pleased that we have held return stable through solid operational performance.

The fixed training program will begin to generate a return in March when it becomes operational. Return on capital employed was 11% in the third quarter, up from 10.7% last quarter and was stable compared with the same quarter last year.

CAE’s financial position remains strong during the quarter with net debt of $853.8 million at the end of December for a net debt to total capital ratio of 29.7%. This is down from 32.1% at the end of last quarter. Income taxes were $11 million this quarter for an effective tax rate of 14%.

This is up from 13% from the third quarter last year, mainly due to the benefit of certain U.S. tax incentives we received last year. This quarter, the rate was impacted by an audit settlement in Canada and a change in the mix of income from various jurisdictions.

Excluding the effects of the settlement, the income tax rate this quarter would have been 16%. I’ll conclude with a few brief comments on our segmented performance. Civil was indeed the growth driver in the quarter. Revenue was up 23% year-over-year to $412.8 million and operating income was up 29% to $71.4 million, for a margin of 17.3%.

The Civil margin in the third quarter last year was 16.5%. On an apples-to-apples basis, Civil revenue on operating income would have been $6 million and $2 million higher if not for the deferral effect from the standardized simulators.

In the Defence, revenue was 4% lower than Q3 of last year to $243.7 million and operating income was up 1% to $30 million for an operating margin of 12.3%. And in Healthcare, third quarter revenue was lower at $26.2 million compared to $28.3 million in Q3 last year and segment operating income was nil compared to $1.6 million in Q3 last year.

With that, I will ask Marc to discuss the way forward. .

Thanks, Sonya. We continue to make good progress with our training strategy and operational performance improvements, and I expect this momentum to continue through the balance of the fiscal year and beyond. Overall, we’re very pleased with CAE’s position and the progress we continue to make towards our vision, to be the training partner of choice.

In Civil, we’re on track to deliver on our annual outlook for low double-digit percentage operating income growth on higher utilization of our training network, higher production levels and some of the benefits of our improve processes.

Demand remains strong for CAE’s training solutions supported by healthy growth in commercial passenger traffic and stable usage in the business aircraft segment. We expect to continue increasing revenue and profit per simulator by driving more wet training across our network and penetrating a greater share of the total $3.3 billion market.

Demand for full-flight simulators also continues to be strong and with 39 sales announced year-to-date, we will surpass our previous outlook for the fiscal year as a whole. In Defence, we continue to expect modest growth this fiscal year.

And as we’ve seen so far this year, especially in last quarter, we’ve made good momentum in converting a large bid pipeline of long-term training programs into orders. This positions our Defence business for more substantial and more sustainable growth going forward as we penetrate a larger share of the market.

The macro environment is constructive and our bid activity continues to be strong. Our positive outlook for CAE in Defence is further supported by anticipated increases in defence budget, a high priority being placed by governments around the world on defence readiness, and intrinsic benefits of simulation based training.

These factors are driving a greater need for training and we believe that CAE is well-positioned. And finally in Healthcare, we still expect growth this year but at a lower rate than the double-digit percentage we previously expected.

We have a good understanding of the market, as it exists today, and we have a vision of what we believe it will eventually become as the use of stimulation based training expense. Notwithstanding the slower pace of orders so far this year, we remain confident that Healthcare will deliver a high rate of growth over the longer term.

Before we open the lines for questions, I’d like to mention on behalf of the CAE Board of Directors, the François Olivier as a new Director effective today. François has been President and Chief Executive Officer of TC Transcontinental since 2008 and we look forward to having a strategic counsel. With that, I thank you for your attention.

And we’re now ready to answer your questions. .

Operator, we would now be pleased to take questions from analysts and institutional investors..

Thank you. [Operator Instructions] And our first question is from the line of Steve Arthur with RBC. Please go ahead..

Great. Thank you. I guess just a follow-up on the Civil utilization rate. I know there is many, may moving parts beneath 76% figure that you report, but show a pretty considerable improvement throughout the whole year.

I guess looking ahead, are you happy with it and where it is at this current level or when you look at the various demand drivers out there, what kind of annual level would you see that targeting over the mid to longer term?.

It’s hard that far -- I don’t we ever do, Steve. But, look, I’m happy at 76% for sure. I think certainly, as I said, we’re continuing to see strong demand across our network.

And then, I certainly, for foreseeable horizon, I see that continuing and supported by as we said in the remarks, by the strong activity we see in passenger traffic, which is still a very high level. The stable, but still good for us activity levels, we see in business are back. [Ph] So, I think we’re at good levels right now.

And we expect that to at least -- as I said, I don’t want to go too far out, but certainly we for the foreseeable horizon, certainly covering this financial year. And of course, our goal is -- utilization rate of one metric; it’s not the only one we track.

What you have to look at is within that, there is I think more opportunity for us to, if you like more revenue of the same assets by getting better. [Ph] And that’s a strategic priority for us to go after more training, doing the training ourselves and therefore increasing, if you like, the yield on each asset.

And that’s where we’re spending a lot of time on, in addition to filling the existing capacity..

Right. And that has margin implications obviously..

Yes, absolutely..

Maybe just to quickly follow up sort of related to that, just on the joint venture relationship with Japan Airlines announced sometime ago now, maybe just a couple of questions related to that.

First, how is that progressing, on or above expectations? And then secondly, just any color on activity levels, discussions with other airlines; has that relationship kind of made others more optimistic about progressing with this kind of relationship?.

Well, certainly, I’ll start with the latter, Steve. Certainly, when you’re able to sign such a prestigious carrier like Japan Airlines, not only for basically outsourcing of their training center activity which we’ve done as merge as a joint venture but also you’ll recall that we’re also doing their initial pilot training using an MPL program.

I mean, it’s a strong testimony to the franchise that we have because this kind of -- you can only get this kind of contract, as I said, through a network carrier like Japan Airlines. People don’t trust you with this responsibility, unless you have a very strong record and credibility and delivery.

So that’s what it meant for us, that’s what it continues to be for us. I’ve had opportunity to meet with right up to the CEO and heads of flight operations in Japan Airlines. And I think the satisfaction on both sides of the relationships is very good.

And we’re very happy with how our training, our joint training center or training centers I should say because it’s more than one training center is panning out from an economic standpoint for both companies. So, I think we’re very happy with relationship and we see it going..

Is it resonating with other carriers? Sorry..

Yes, just following upside, yes, definitely, it opens up. You wouldn’t be surprised that it’s one of the calling cards we will use when we go to see other airlines. And as we’ve said before, today, we command about 25% of the potential order activity -- revenue opportunity in this market, a $3.3 billion market.

For us, it’s all about as you see, going to convince other carriers to allow us to take on either partially or just how these are training and there are opportunities like that, and we are pursuing them. As I said before, the big opportunities, if I can work one or two a year, we’d be doing really good.

But what really doesn’t come, well, I think you have to read between the results. When we announced that, we -- in the quarters, we pick up training services activity; and in a lot of cases, it’s us converting more of -- say, given airlines activity to giving us the training but maybe not in totality to see some of that.

So, you’ll see portions of it that definitely [ph] will cost us the name being announced. But I think I’d still think in a nutshell that the pipeline opportunity is supportive of the outlook we’ve given..

Okay, good color. Thanks very much..

Thank you..

And our next question is from the line of Kevin Chiang with CIBC. Please go ahead..

Hi. Thanks for taking my question here. Maybe just turning to defence, a big increase in your backlog. It looks like you’ve had a number of a big wins in the fiscal Q3 and Q4 here. I’m just wondering how that plays out as we look out into defence margin. I think historically looked at that it being around 12% to 13%.

Is there a line of sight of moving above that range, as you start monetizing this backlog or do you think margins kind of hover around here, even as you start seeing accelerated revenue growth?.

Well, I think there is always potential. But, I think at the moment, our expectations are that the backlog we’re getting is in that range of 12% to 13%, and that orders that we’ve won are supportive of that.

Certainly, when you throw more revenue, there isn’t a possibility of doing more, I certainly would not discount that; we’ll update that as we go along. But I think our focus is on growing the absolute SOI dollars, absolute dollars come out of this. And I think what people look at as well as, the mix between products and services.

I think I’m happy to see that we have a good mix between -- and the orders that we’ve announced in the past period of time here, there is a lot of product orders in there, which are inherently delivered in a shorter period of time, say within a next couple of years.

And if you get more revenue, certainly you’ll have synergies in engineering, you’ll have synergies in operations, you control -- you have more overhead absorption. So, that in itself permits you to do better, if you can time them correctly.

And at the same time, beginning these long-term service awards, which means that not only do have a revenue, if you like quasi certainty for years to come.

But clearly, if I got that service revenue, I don’t need to bid on it, and therefore I can concentrate say, the current bid activity on a larger series of contracts, therefore not growing, if you like, my SG&A on revenues going up, which of course has margin implication as well.

So, at the moment, I think going back to the wins that we have or certainly support of 12%, 13% range, and I think this will keep up, but there is potential for more. But clearly, the SOI dollars in absolute, that’s what’s gone up..

That’s a good point there. And just secondly from me, continue to see free cash flow generation. If I recall correctly, when you originally announced NCIB, I think the purpose was to offset just a natural dilution that occurs to your stock option program.

But year-to-date, we’ve seen your shares outstanding decline as you repurchase more shares with growth CapEx presumably rolling over in fiscal 2018. Just wondering how we think about how you prioritize free cash flow around NCIB.

Should we think about your share count declining or maybe more dollars being put towards the buyback relative to the original expectations?.

Hi, Kevin, it’s Sonya. So, yes, very good free cash flow generation in the quarter. And we’re happy to see a reversal of non-cash working cap driven mainly by improved collection. So, good performance on that side. On your question regarding NCIB, the objective is really to offset dilution.

And you saw that with kind of a lesser level of repurchase in the quarter at about $5 million; it was a little higher in previous quarters. So, the objective remains to offset the dilution from our DRIP and option programs. And in terms of the mix between shareholder returns and investments.

We continue with our balanced approach and really focus on our three capital allocation priorities, which is investment accretive growth, market led opportunities that will generate additional return on capital, and continue return to shareholders via NCIB and dividends..

And our next question is from the line of Turan Quettawala with Scotiabank. Please go ahead. .

Yes. Thank you. Good afternoon. I guess, I wanted to just focus a little bit on the restructuring costs in the Lockheed acquisition. I think you’ve had about $6.5 million so far after-tax. Just wondering if you could give us some sense on how much is left on that as we go through the next few quarters maybe..

Yes. So, you’re right, about $6.5 million to date after-tax and the guidance we have provided was up $15 million to $20 million after-tax. And we’re still tracking to that guidance. So, there will be a higher level of restructuring and integration costs in Q4 as we finalize and complete the integration in the quarter..

I see. Okay, perfect.

And that will be after Q4, Sonya, it should be sort of out of the numbers?.

That’s right..

Okay. And then, I guess maybe one more question and it’s probably related a little bit. But, when we look at your Civil SOI guidance here at sort of I guess low-double-digit growth for the year, you’re obviously doing a higher than that here on a year-to-date basis.

So, as we think about Q4, implies a bit of a slower growth rate, I mean lapse a little bit higher.

But are you assuming some of these restructuring costs in there or what’s going on in terms of that Civil SOI growth?.

No, no restructuring costs assumed in our outlook. And Q4 is traditionally one of our strongest quarter, and we expect that pattern to maintain. And we are still tracking to our outlook of low-double-digit operating income growth..

We certainly don’t see a slowdown, Turan. .

I beg your pardon?.

We certainly don’t see a slowdown in the fourth quarter. As Sonya said, Q4 historically strong; it’s a big quarter for business aircraft. And we don’t have any indication that this will be any different..

Okay. No, that’s correct. I mean, I know it’s a solid quarter, I was just wondering would it imply that you would have raised your guidance for the year, but you didn’t; so that’s kind of why we’re asking the question..

I think, I guess it’s maybe that interpretation of much lower double-digit rate..

Okay. Thank you very much..

And our next question is from the line of Cameron Doerksen with National Bank. Please go ahead..

Yes. Good afternoon. Just a question on the Healthcare segment. I recognize it’s still pretty small part of the overall picture for CAE. But, it’s the time, a sore spot for investors, particularly when we see a quarter when there is no, I guess zero percent margin.

But I guess maybe you can address what kind of timeline should we expect to kind of return to some more interesting revenue growth? And of course you need a revenue growth to go higher, so you can start to generate better margin.

So, I’m just wondering what kind of confidence you can for investors in a return to growth in Healthcare?.

Well, as we’ve said, we’re not happier with results than you are for sure. And we expected more, as we said in remarks, this year. But, we look at it in a pretty exhaustive details, you might imagine about, why were the situation we’re in, and a lot has to do with orders.

It was a bit unusual to have moved to the right in a quarter we expected to deliver this quarter which did not. They do wind up in the fourth quarter. So, we’ve got a pretty good view of growth in the fourth quarter and beyond.

So, as we said in the outlook, although we have lowered it, because realistically with the amount of time that’s left in the year, it’s a bit of a too far to be out there in terms of double-digit growth, but certainly we see growth for the year.

And in the fall -- definitely, as we go into the next period of time, certainly in the next year and beyond, we certainly, to use our words, get growth that’s a lot more interesting. We believe in the market, the market is there.

And as demonstrated by some of the product introductions we’ve made, for example that we highlighted this quarter with the Microsoft HoloLens, we’re interjecting a technology into the solutions which provides we think optionality on top of the existing markets that we believe could be very interesting in the years to come..

Okay. Just maybe very quickly on the defence. In the past, you talked about I guess dollar value of outstanding bids. I mean, you’ve won some pretty good amounts of orders recently.

Can you maybe just give us an update on where that outstanding bid pipeline is?.

Well, as you could expect that with having just signed all these contracts, I think probably like $1.4 billion over the last very short period of time, the exact number is we’re still counting but it’s certainly over $3 billion to-date, even with the recent wins we’ve had. So, I don’t think we’re done here on orders..

And our next question is from the line of Tim James with TD Securities. Please go ahead..

Thank you. I believe at the Investor Day last year, you talked about some dilution to return on capital employed in fiscal 2017 due to the investments and the timing of returns from the U.S. military contract.

Do you believe your return on capital employed will improve in fiscal 2017 relative to fiscal 2016, and would it be sort of a material improvement or is there anything you can provide in terms of helping us to think about where that goes for the year?.

In terms of how we see rotary, I think we’ll go back to our outlook and it remains unchanged of about 13% in three to five years. The rotary for the quarter was 11%, which is holding relatively stable versus last year, and that’s factoring what you said the investment on fixed-wing, the U.S. Army Fixed-Wing training system.

Despite the fact that they are not necessarily operational yet, that will be soon. So, I think this underscores the return that’s being generated by the rest of our asset base.

And for the rest of the year, there is still some remaining additional CapEx that will put maybe some temporary pressure; but give or take a few basis points, it should remain relatively stable..

Okay, thanks. And so, just wondering with the tax rate, you talked about 22% in the past for full year.

Could you provide any color on kind of what, given that’s in lower than that year-to-date, what you expect for the fourth quarter, would it be significantly above 22% therefore or what should we expect?.

So, in the quarter, there was the impact of an audit that was settled in Canada, which brought down the rate by about 2%; otherwise, it would have been 16%, which is still on the low side, but a function of the mix of the profit. Now, as you can see, the tax rate can be very -- fluctuate a lot from quarter-to-quarter.

So, I can’t give guidance on that specific quarter but rather over the long-term. And I think it’s better to look at it over a longer-term. So, on a normalized basis, if you go back the last three years and the normalized average, it’s been around the 22% mark. So, I continue to use this as a guide over the long-term.

So, for the year, it we won’t be 22%, but a good guide going forward..

Okay. And then, finally, I’d like to sneak one quickly here. The Lockheed Martin flight training acquisition looks a very good revenue performance here in the third quarter.

Can you about the fourth quarter and just give us a bit of a sense, given how volatile that’s been? Is that going to look more like the third quarter in terms of revenue or will it look more like Q1 or Q2?.

When we purchased the Lockheed Martin acquisition, we took into consideration that there would be some temporary dilution as we worked through the existing backlog, and this quarter we actually delivered some of the work in progress that was purchased.

And therefore, some revenue and SOI that was recognized in the quarter, and that drove the additional revenue and SOI contribution. Now, it will fluctuate in the quarter as we work through the existing backlog of work in progress..

Okay. So, maybe just to round that out then, should we think that business and the seasonality in there just similar to your existing civil training business? Obviously, the uptick in revenue in the most recent quarter was much more significant than we’ve ever seen historically from CAE.

But, going forward, maybe think about that as being in line with the existing seasonality of CAE’s legacy civil training business?.

So, as we work through the remaining backlog, what we’ll see is the ramp down of that work in progress which we purchased, right? And ultimately, this is being integrated into our existing product business.

And other than that, work in progress and so, as we purchase contracts and install base as well as some assets in training centers, and that’s just being integrated into and has been integrated into our normal civil operations..

Right. Sorry, I was referring to training, but it’s the equipment side I meant to speak of. Okay. Thank you, Sonya. That’s helpful..

Okay. Perfect..

[Operator Instructions] Our next question is from the line of Benoit Poirier with Desjardins Capital Markets. Please go ahead..

Hey. Good afternoon, this is Charles Perron filling in for Benoit. Thanks very much for taking my question. I was just wondering if you could go back on defence.

If you could provide more color and the implications from the changes in the administration in the United States on your business and also the same time provide more color about the revenue growth expected for FY2018, given the sizable book to bill that you recognized in Q3?.

Well, I think we haven’t given our -- what we expect in terms of revenue growth, because we typically provide that the next quarter in terms of what we expect. But certainly, you would expect growth as we said in the -- because the orders that we’ve signed.

And as per the -- kind of outlook we’ve done on the market itself and the remark, so expect growth. And we’ll precise that number at that time.

But, I think it’s -- with the new administration in the United States, I commented on this last quarter, and I think they are very focused on maintaining and increasing readiness, and that has helped us driving a lot of activity, which is up tent pole and that support of our business.

At the same time, we see budgets increase pretty much in all the markets that we serve, either because of local issues that -- in the geographies that they have, local threats, or that people are boosting their defence expenditures as per their NATO commitments or other such commitments.

So overall for us, we definitely see a market environment, which is conducive to growth. And of course, what we do, simulation-based training, is absolutely invaluable to improve readiness while being very efficient from a budgetary standpoint..

Okay, great color there. And just on civil, just wondering if you could provide an update on your full flight simulator order guidance for FY17. And if you see potential for other sizeable orders in your crystal ball, could let you achieve more in the low-40s that you mentioned in the past.

Just wondering if you could give a more specific number to what you mentioned in your previous remarks..

Well, I won’t get it pin down to a specific number right now, on for the simple reason that where we are now with couple of months to go, I mean it’s very easy for orders to literally go over the end of March date, if you like.

And we certainly don’t want to be in a situation of signing orders and making what I would consider less than optimal deals, just to meet a number. But, I mean suffice it to say, as we said in the remarks that we’ll exceed the outlook we had, which was simulator last year, which been about 40. So, we’ll definitely do better than that; we’ve got 39.

As I said, the level of activity still very strong, we’ve maintained our leading market share. So, there is a lot of bids -- there is a lot of campaigns on the way, and I fully expect a number of those to be successful.

So, I just won’t be able to give you a precise number right now, except that certainly it will be in the 40s for sure or probably north of 45 I would think..

Okay. That’s helpful. Thanks for your time..

Our next question is from the line of Chris Murray with AltaCorp Capital. Please go ahead. .

Thanks. Good afternoon. Just again, thinking about defence programs.

Marc, can you maybe talk a little bit about how the nature of some of those programs are going to progress over the next few years? You sort of alluded to the fact that they’re getting a little bit larger where you are having to take kind of a full approach to what we saw that with the Fixed-Wing Search and Rescue package.

But I’m wondering if you could maybe give us a bit more color on how that’s going to work. And if there is any sort of geographic differences.

And as well, if you also be kind enough to maybe comment on where you guys stand with the T-X program and any expectations on that?.

Maybe I’ll start with the TX. Just with that one, I think that we’re part of the current team there that was -- did M-346. We’ve been partners in the beginning. We believe in the aircraft. The aircraft has been successful in a number of countries. And I think it has the capability, meets the specs that are required of the U.S. Air Force.

And I think it will be a very affordable platform. So, I think that we think that the team will be successful. With regards to the first question in terms of the defence business, the situation is literally, our strategy coming true, if you like.

Over the past few years, we’ve built the capability to be able to deliver all aspects of, if you like, how the military trains. I mean, the military doesn’t train obviously just using stimulators.

Historically, I’m going back a few years now, we would be a simulator manufacturer but the military, all branches of military, they trained not only using live assets, not only they used live assets, they use stimulators, they used what we call constructive tool, which is computer-based tool to be able to train, and they’d bring all together.

So, CAE now has not only the capability to deliver every one of them, it has the track record of doing it.

We have track record of being able to just, by the size of the company, our financial depth and breadth that we have, the capability that we have, we’re able to deliver a comprehensive solution to be able to train like the military trains and literally going after contracts where they essentially can outsource the whole operation to you.

And that’s exciting because then you can differentiate yourself because obviously there is not -- you reduce the number of companies that can actually deliver that level of capability; and that level of capability one stop shop is very attractive and you could bring synergies to it. So, those are the kind of contracts.

What we mean by bidding as the training services integrator, that’s what we mean. We integrate all aspects of the military’s training program.

And we’ve seen -- you’ve seen us do this with one of the last -- or not last, but one of the most recent tools in our toolbox for this was the acquisition we made in the last couple of years of the NATO Flying Training contract which gives us the full capability to be able to conduct military fast jet training.

Stimulators, aircraft, constructive assets, in fact, we run the actual base in Moose Jaw, for Saskatchewan. And then you look at follow-on to that, well, we were able to literally become the US Army’s training partner with the win on the U.S. Army Fixed-Wing program and followed by the selection we just had of the U.S.

Army Entry Rotary-Wing training program. And when you look at what -- I guess as I said on the remarks, you’ll look at the capability that we are able to deploy the Company now within -- we talked about this $100 million of investment, less than a year ago and here we are; that has been translated today into a training school.

There is a sizeable training school, aircraft on the ground, simulators on the ground and that unveiling, ribbon cutting on March 6, in Dothan, Alabama. And our first students of the U.S. Army are starting 11 months after us starting the program. So that’s the kind of contract. They are bigger. They take longer.

What I meant by -- in my remarks is, when you bid on such a program, it takes longer for these programs to be bid, takes longer for them to get -- takes longer to get a selection. But as we’ve been saying I think for a couple of years now, we’ve been sitting on a pipeline of opportunities.

And if you like a bow wave of bids that we’ve made that we believe that we had a good probability of winning.

And that’s what we’re seeing happening now that these -- as I said before, we don’t bid on the military programs unless we think we have a good shot at winning because it involves a lot of cost and assets and time to bid on those military programs. And I’m happy to say that our win rate has been quite high.

And I feel good about the bids that we have out there going forward..

Okay. Thanks. Along those lines, some of the future bids, I mean, I guess one of the issues you were talking about with a couple of other speakers was return on capital employed trend.

Is that something that you see becoming more meaningful, is may be having to make investments in winning some of these bids, and is that something that you’re still prepared to do if it comes up again?.

Well, I think -- you’re talking specific military here, I think?.

Yes, exactly..

Well, I think the investment we’ve made in the U.S. Army’s program, Fixed-Wing program, it’s kind of an exceptional program. Typically, you don’t have to deploy capital on military contracts, typically the government likes to retain the assets. So, that was bit of an exception. But having said that that’s going to be accretive the day we start it.

And as I said is like imminent. And everything we’ve talked about is supportive of the outlook that Sonya talked about a few minutes ago, which we talked about at the Investor Day in terms of return on capital of 13% range in three to five years..

Okay. Thank you..

Operator, I want to thank the analysts for their questions. And at this point, with the time remaining, I’d like to turn the question-and-answer period over to members of the media..

Thank you. And our next question is from the line of Peter Dick Niver [Ph] with IHS Jane’s Please go ahead..

[Foreign Language] A quick question regarding the possible retaliatory actions about countries against the United States, if Mr. Trump initiates tariffs against Mexico and China. One of the biggest, most venerable industries in the United States is aerospace.

For instance, Boeing exports 90% of its production and -- or just wondering whether CAE would be exposed to any retaliatory actions, into anything arising out of NAFTA in the coming months and years?.

Would you like [Foreign Language].

No, I’m sorry. Because I know you’re French, Marc, I’m sorry I just -- I’m forgetting which country I’m in..

Okay. [Foreign Language].

No, no, please respond in English..

Okay. We’ll get this. Okay, alright. Well, look, I think there is lot of speculation going around. And to me, we deal in fact and the fact of the matter is that today, a third of our employees aiming in United States. We have about 2,500 employees and that’s in the United States, 750, more than we have just five years ago.

If I’m looking at the wins that we just had in the U.S., both on the fixed-wing contract and rotary-wing contract, we’ll have north of 400, possibly 500 employees, just in the state of Alabama within the next year or so. So, I think we are a quite sizable in the United States.

And in United States, I think it’s -- and by the way, a third of our revenue gets generated there, and the work is performed by U.S. workers. So, I think that there is a certainly any kind of -- I don’t see any retaliatory -- but, we’ll have to see what happens. I think everything is very highly speculative. But when we bid in United States, in the U.S.

Military, we bid out of United States as CAE USA. But, I think we’ll leave it at that. I think we’re quite -- I think overall, the administration that is in the United States has been a positive for us to see, because of simulating the level activity that I talked about in defence specifically..

And if I you could a follow-up question still connecting through, on the opportunity side.

Have you had any wind whether the Trump administration is pushing any of the NATO countries to meet their commitments? And if so, would that present any opportunities for CAE?.

Well, I’m not going to comment about what they’re doing, but I can tell you -- look, I read the newspaper just like you are and I think we all see that clearly they want governments to meet their NATO commitments.

And anecdotally, we certainly have evidence that governments are pushing to increase the defence expenditures, in a lot of cases, because of not only the NATO commitments, but the threats that they see.

I’ve talked about the past that we have a unique situation geopolitically that we haven’t seen the Cold War where there still is the threats out there, both from what was called and still today sometimes called the war on terror.

And now, we have the resurgent Russia, which states in Europe, in Eastern Europe take note of in their defence expenditures. We have the Middle East having its own stance on increasing their defence, and we have the continued pivot to Asia causing defence expenditure there as well.

So, really across the market we’re in, we see a positive growth market in defence..

Thank you very much..

And by the way, the last thing I’d say, even though we focus a lot on the U.S., I think it’s important to note that CAE deals with over 15 national defence forces worldwide where we’re strong positioned..

And our next question is from the line of Konark Gupta with Macquarie. Please go ahead. .

Hi. Good afternoon. Thanks for taking my questions. Just following up on defence, first, congrats on the strong order intake. I know you want us to wait for the guidance, but just let me try and ask it this way.

Is there a reason for you to believe that top-line growth would not accelerate to let’s say high-single-digit or low-double-digit from modest growth this year, given the amount of orders you have won so far?.

I think that was a double negative. But, I’m not going to get too out there on that. Look I think that the order activity that we’ve had, you look at the 2, 2.5, book-to-bill and the orders we’ve signed recently, clearly in support of a strong top-line growth. There is a lot of product orders in there.

So, I think if you allow us to be patient for the next quarter, very soon, we’ll let you what we think..

Okay. That’s great. And in terms with capital requirement, Marc, the fixed-wing is pretty much done here in terms of the capital outlay.

But for the new defence programs that you won, including the Canadian search and rescue, what’s the sort of the expectation on CapEx requirement for those contracts?.

I don’t think there is any, but I’ll let Sonya answer..

I’ll confirm. These contracts, as Marc just said, most defence contracts do not have capital commitments. The U.S. Fixed-Wing is a bit of an exception. And so, this is one that you just referred to the fixed-wing search and rescue, has no capital requirements with it..

Okay, perfect. Thanks. And just on civil quickly, it looks like there is some softness in the OEM markets for business jets and wide-body commercial jets. And then, one of your larger competitors is ramping up beginning operations in Europe.

So, given those two things together, do you think it will fair to assume the overall civil market grows at say 4% 5% rate, and then you can maintain your market share in various segments?.

You said 4%, 5% rate, have you talked about OEMs in business aircraft or commercial…?.

No, I’m talking about overall civil market you’re exposed to.

Can we assume that 4% to 5% growth rate is a fair assumption going forward?.

Well, that’s the long-term growth rate that I’ve always talked about. In terms of growth of passenger traffic which drives our training business, my assumption is and is well supported by the forecast out there is for an average 4% to 5% growth rate for next 20 years in civil passenger traffic. That’s the assumption we operate under.

I mean, clearly, there will be variations year-to-year, but I think that’s a pretty good number to use just based on every forecast you can get out there..

Okay. And given the competitive landscape....

Operator, I want to be respectful of our time here. And so, I want to thank investors and analysts for joining us on the call, as well as from participation of members of the media. If there are any remaining questions, of course the team and I are available for discussion after this call.

You can find a copy of today’s transcript on CAE’s website at www.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..