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

Kevin Cheng - CIBC Fadi Chamoun - BMO Capital Markets Jean-Francois Lavoie - Desjardins Capital Markets Kristine Liwag - Bank of America Merrill Lynch Cameron Doerksen - National Bank Financial Tim James - TD Securities Chris Murray - AltaCorp Capital.

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

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 2019 and answers to questions, contain forward-looking statements.

These forward-looking statements represent our expectations as of today, November 13, 2018, 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 these forward-looking statements.

A description of the risks, 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 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 line to calls for 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 discuss some highlights of the quarter and then Sonya will review the detailed financials. I will come back at the end to talk about our outlook. CAE had a good performance in the second quarter with 20% revenue growth, 15% earnings growth, and strong free cash flow.

I’m especially pleased with the continued progress we’ve been making with our training strategy as demonstrated by $986 million in orders in the quarter, giving us a record $8.7 billion backlog. Overall, our performance in the quarter, and year-to-date, supports our full-year outlook.

Looking at Civil, we generated double-digit growth during the quarter and we booked orders for $575 million, for a record $4.3 billion backlog.

These include a new 5-year Multi-Crew Pilot License cadet training program with Air Asia, exclusive pilot training contracts with CityJet, OceanAir, LOT Polish Airlines and Air Busan, and a new long-term training contract with Starspeed.

In products, we sold 16 full-flight simulators in the quarter, which brings us to 34 FFS sales for the first half of the fiscal year -- tracking above our initial outlook. Training centre utilization was 72%, which is up 2 percentage points from last year.

In Defence, we generated high single-digit growth during the quarter and we booked orders for $380 million, giving us a record $4.4 billion defence backlog. Orders include CAE’s new 700MR Series simulator for the Royal New Zealand Air Force’s NH90 helicopter. We also won the U.S.

Air Force C-130H aircrew training services contract, adding to our training systems integration programs, and we received orders from the Air Force for additional C-130J simulators. Also involving aircrew training services, we renewed a contract for the U.S. Air Force’s KC-135 aerial tanker training devices, which includes upgrades to the simulators.

The integration of AOCE, which we acquired in the quarter, is progressing well and we’re beginning to see benefits from our expanded access to higher-level security programs in the US.

And finally, in Healthcare, we launched a redesigned, fully portable, CAE CathLabVR interventional simulator, and together with the American Society of Anesthesiologists, we launched the Anesthesia SimSTAT Robotic Surgery module, the latest in a series of interactive screen-based courses approved for Maintenance of Certification credits.

With that, I will 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 second quarter was $743.8 million, and quarterly net income was $60.7 million or $0.23 per share. This compares to $0.20 in the second quarter last year, excluding the gain of approximately $0.02 per share from the divestiture of the Zhuhai Flight Training Centre.

Income taxes this quarter were $15.2 million, representing an effective tax rate of 19%, compared to 23% in Q2 last year, before the gain on ZFTC. Free cash flow improved in the second quarter, reaching $137.7 million compared to $63.5 million last year. We had a lower investment in non-cash working capital and higher cash from operating activities.

As in previous years, we expect a portion of the non-cash working capital investment to reverse in the second half. Uses of cash in Q2 included funding capital expenditures for $40.9 million, mainly for growth, and we distributed $25.7 million in cash dividends. We used another $37.2 million to repurchase stock under the NCIB program.

Our financial position continued to be strong with net debt of $795.1 million at the end of the quarter for a net debt-to-total capital ratio of 25.8%. Also, return on capital employed increased to 12.8% this quarter compared to 12.6% last quarter, excluding the impacts of fiscal 2018 income tax recovery related to the U.S.

tax reform and net gains on strategic transactions relating to our Asian joint-ventures. Now looking at our segmented performance. In Civil, second quarter revenue was up 24% year over year to $393.1 million and operating income was up 19% to $63.3 million, for a margin of 16.1%, excluding the gain on divestiture of ZFTC last year.

On the order front, the Civil book-to-sales ratio for the quarter was 1.46 times and for the trailing 12-month period was 1.49 times. In Defence, second quarter revenue of $320.3 million was up 18% over Q2 last year, while operating income was up 2% to $34.1 million, for an operating margin of 10.6%.

Excluding the impact of reorganizational and integration costs related to the purchase of AOCE, Defence segment operating income would have been $36.1 million, or 11.3% of revenue, which is up 8% compared to the second quarter last year. The Defence book-to-sales ratio was 1.19 times for the quarter and 1.03 times for the last 12 months.

And, in Healthcare, second quarter revenue was $30.4 million, up from $28.3 million in Q2 last year.

Healthcare segment operating income was $1.3 million in the quarter, down from $2.2 million in Q2 of last year as a result of a higher investment in selling, general and administrative expenses and higher research and development expenses to support recent product launches.

To sum up, we had a good performance overall this quarter, with solid year-over-year growth in Civil and Defence, which would have been even stronger if not for the impact of the five-week work disruption in our Canadian manufacturing operations this summer.

The interruption reduced the number of product deliveries we could achieve in the quarter and also affected our ability to reach milestones on a number of programs. We had already expected revenue recognition to be more back-end loaded this year as a result of IFRS 15 implementation. The interruption makes it even more so.

We implemented a recovery plan in the second and current third quarter, with several measures designed to accelerate production capacity, including establishing a second assembly line for high-volume full-flight simulators.

The net result is that with this extra capacity running in parallel, we will reach a substantially higher level of delivery milestones in the fourth quarter compared to the current third quarter. Accordingly, deliveries in Q3 are anticipated to more closely resemble the levels we saw in the first two quarters of the year.

The overarching positive is that our recovery plan is on target, and with these measures, our full-year outlook for growth is intact. With that, I will ask Marc to discuss the way forward..

Thanks, Sonya. We continue to see good momentum with our training strategy, as evidenced by the important developments announced last week, which further strengthen our long-term growth investment thesis. We continue to be highly positive about our prospects in Civil.

In business aviation training, we’re well positioned to provide an excellent customer experience with our global reach and industry-leading solutions. The announcement that we’ve agreed to acquire Bombardier Business Aircraft Training, further solidifies our position.

The acquisition will expand our ability to address the business aviation training market and give us greater leverage across our training network. It fits right in our core and aligns very well our strategic objective to grow recurring revenues.

It also gives us the ability to leverage our expanded position on Bombardier business jet platforms across the entire CAE global network. The acquisition gives us a bigger position in the largest and fastest growing segment of the business aviation training market, which involves medium- and large-cabin business jets.

It gives us a broad portfolio of customers, an established recurring training business, highly talented people, and a modern fleet of business jet full-flight simulators. We also signed an agreement to extend CAE’s Authorized Training Provider status for flight and technician training to 2038.

Taken together, this is a major step forward in the progression of our growth strategy in aviation training, and it will have a positive impact on our performance.

In its first full year following the closing of the transaction, which is expected by H2 of calendar 2019, the acquisition is expected to provide CAE high single-digit percentage earnings accretion and is also expected to be accretive to free cash flow. We also expect to continue making good progress in commercial aviation training.

The announcement last week at the European Airline Training Symposium of a long-term training outsourcing agreement with easyJet is an example of the kinds of opportunities in our pipeline to increase our share of the airline training market, and to form new enduring customer partnerships.

Under the $170 million, 10-year agreement, all of easyJet’s pilots will soon be training at CAE in three European pilot training locations, including a new state-of-the-art training centre in London-Gatwick with a dedicated wing for easyJet.

In Civil products, based on our level of success in the first six months, we’re on track for our best year ever. In Defence, we expect to continue winning our fair share of programs, building on our successes as a Training Systems Integrator. We have good momentum with our recent wins of the U.S.

Air Force C130H Aircrew Training System and the New Zealand NH90 Programs. Our acquisition of AOCE positions CAE as a training partner to the U.S. Air Force’s Special Operations Command, training aircrews on variants of the C130J and HH60 Pave Hawk helicopter as well as a platform that is new to CAE, the CV22 tilt-rotor aircraft.

The AOCE acquisition has us also working with other platforms new to CAE, providing training for the U.S. Air Force’s aircrews on the F15, F16 and F22 fighters. We recently signed a Strategic Agreement with the Government of a New Zealand to work together to address its long-term Defence training needs.

And, CAE is excited to part of the team selected as the preferred bidder for the new Royal Canadian Navy’s Canadian Surface Combatant Program. While too soon to quantify, both avenues present potentially sizable opportunities for CAE over the long term.

Overall, we’re continuing to pursue a large defense market, with over $4.9B of proposals in the hands of customers pending decisions. And finally, in Healthcare, our new products like CAE Juno and Ares are being well received by customers, giving us greater access to some of the larger value pools in the market.

We expect to see the Healthcare business ramp up to a more meaningful scale, and I continue to be optimistic about its potential as CAE’s innovative training solutions become more broadly adopted. In summary, we have good momentum in all our markets and we are on track to deliver on our growth outlook. With that, I thank you for your attention.

We’re now ready to answer your questions..

Thanks Marc. Operator, we'd now like to open the lines to take questions from members of the financial community, financial analysts and institutional investors..

Thank you [Operator Instructions] Our first question is coming from the line of Kevin Cheng with CIBC. Please proceed with your questions..

Maybe just a clarification question in regards to the acquisition of the business air crack training division from Bombardier. You've noted that it'll add about 100 to 150 basis points to you margin within Civil.

So just wondering how that -- how I should think about that flowing through seasonally within the divisions? When I look back over the past 4 or 5 quarters, your margins runs between, let's say, 16% to 21%.

Is it -- should I think of it just lifting everything by the 100 basis points to 150 basis points? Or does it have a greater seasonal impact in the low quarters because it's more wet training involved and the top end kind of fix around 21.

Just trying to get a sense of how this works through the year for you?.

Hi, Kevin, it's Andrew. Let me see how I can help you with that. I think the way I would look at it is that our references always on an annual basis. So, when we are looking at what Civil achieves on a yearly basis figure it on about 100 basis points to 150 basis points lift from the acquisitions.

Look when we've seen with our experience in business aviations that our fourth quarter tends to be a big quarter for business aviation, so not sure it's important enough to establish as a seasonal trend, but that's probably something that I would take into consideration..

And then just in terms of the back half of for the year, you've noticed some integration cost with AOCE.

Are there additional I guess integration cost drags to consider in the back half or you basically do most of that now?.

So, the integration is progressing well and working through kind of all the synergies. We do expect some remainder in integration cost in the back half of about a 1 million to 2 million..

And jus lastly for me. Just in the Healthcare, you are balancing around 30 million in revenue pretty consistently here and I know you are very positive on, on the long-term outlook.

But do you sense of when this revenue hits an inflection point that drives to a much improved margin profile? Or is this a situation where you are holding steady and eventually the market will come to you and you get that the revenue lift that you are expecting? Should I get a sense of -- do you have a sense of when revenue gets better? Or is this is more of a longer-term trend outlook?.

Well, I think that our expectations are, as you might expect are reflected in the outlook that we have given, so I do expect a lift.

I think what we are seeing look is that, we would have a bit of an inflection and that was occurred and occurring in our business where we have been shifting our strategy over the last year towards what we call, the larger value pool in this business, which is nursing training.

So, we have basically focused our R&D and coming out with new products that were specifically destined to enter this market and also CAE Juno and CAE Ares. And those products are what we are seeing -- we see those products being well adopted by the market, we are increasing the sale of those.

There are a lot of cost points in different market, less complexity, but ideal for that market. We see those progressing, but at same time what we see is in our existing markets which with high feudality bit more of a flat situation.

So always see us overcoming the, if you like the time flow which just made me now overcoming just the time it takes to penetrate that market, it's really going after penetrating share in that market.

We are confident that market exists products are resonating, and I think that -- again it will come up again where we expected to see the revenue will follow the expectations we have in our outlook.

I won't go further down the road on that one and additional years except that I continue to be confident that this is a growth story that we will achieve meaning scale for CAE. So, yes, I'm still confident based on what I'm seeing, but admittedly to your point the numbers will reflect that at the moment..

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

I wanted to ask that in the recent quarters we've seen a fluke of announcement in civil aviation.

Has something changed in the marketplaces that have unlocked these opportunities? Or is this just as the fruit of a lot of work that got into it to get the respondent? I'm just trying to understand if there is kind of an underlying trend here where airlines have become a little bit more open to these outsourcing deals to this kind of negotiations with you? Or is this just kind of a fluke that happened kind of all these deals happening in the last few quarters at the same time?.

No, it's definitely not a fluke, Fadi. I think I was in the couple of quarters at least on a call I had said that, I used to say going back two three years that when I looked at the market that we have the credibility to be able to identify a secure 1 or 2 deals like this in any given year. And that was about the market that we could see.

But in the recent quarters, we definitely see more appetite for that and clearly because airlines are really concentrating on what their core business, which is yet to efficiently fly passengers. And we've offered them a very credible alternative because that's how we do.

If you think about it what we do in, our airlines is look, it will take care of basically the pilot training parts of your operation, we're creditable at it. We have the capability. We have the scale. And because we train, I think our recent numbers are training more in the 180,000 prior to year.

We believe we've been able to develop an expertise in that. And to do that very efficiently with the entering the initiatives that we have that we announced over this past summer, but digital innovation being able to provide unique insights to our customers on their flight crews.

And flight -- obtaining pilots these days, able to secure that capability and manage the effectively becomes that much more important when pilots orders are getting to be the norm around the world. So -- and that particular dynamic is a conversation starter at many airlines just by itself.

So, it's not a fluke and I continue to see a good pipeline of those opportunities in the future..

Okay, I guess I wanted to ask as far as like the pipeline go, is it kind of getting stronger compared to say a year ago or two years ago? And I saw it's kind of raised your CapEx to handle almost that volume coming at you.

With this acquisition, does this kind of constrain your ability to go after some large outsourcing deal with because the CapEx need maybe significant?.

Well, I think the latter question, I would say, look, I think as you hopefully see in a result is that the CapEx we're deploying is highly accretive very soon to our numbers, and we look at them on that basis.

I think Sonya know, I would call you, but definitely even including the acquisition that we've just announced and the CapEx that we've increased for this year, I don’t think that puts a constraint on us being able to go after, definitely increased outsourcing and opportunity.

And don't forget that business aircraft itself generates a high degree of cash flow, it all wet.

So, as we said and this is highly accretive pretty fast; and Sonya, do you want to add anything?.

Yes, I just maybe to add, to add on that. So, the pro forma leverage that we've kind of guide to approving expected to be at 42% net debt to capital, which is comfortable within our target range for leverage.

And we expect to generate some good free cash flow out of this business jet operation, in addition to our own underlying cash flow, which allows for deleveraging to the lower end of that range in 24 to 36 months.

So between the cash flow generation, the strong balance sheet, it continues to provide good flexibility for us to capitalize on opportunities as they come along..

Our next question is coming from the line of Jean-Francois Lavoie with Desjardins Capital Markets. Please proceed with your question..

I just wanted to ask question about the contract with easyJet. You mentioned that easyJet will take a portion of your capacity at the new facility in London-Gatwick.

I was wondering, how much excess capacity would have to deploy to our new trainings contract with new customers?.

You mean Gatwick specifically or….

Yes, please..

Well, I don’t know the number of the handle. We are basically sizing a new facility there. So, we have already have facility at Gatwick, and we always size our opportunities to be, I would say, we basically walk a tight rope between having enough capacity through to be able to serve the market that’s there.

At the same time, we want to utilize the assets at a very high level. So, I think the short answer is, we basically size our capabilities, buildings number of simulators to the market. If there are very large markets in Europe specifically, we have a number of training centers in Europe.

So, I think we would have capacity, I can't tell you exactly how much. And frankly, I would hope it's not too much right now because exactly we'd have access that wouldn't be fully utilized. But I think what market led with whatever market is out there, you can expect to see what size itself to be able to handle it.

We could do it pretty fast because our turnaround we usually size our building and land, that’s associated with them to have capacity for growth. And the way we architect our centers because as you met, we have a lot of tenders out there around the world.

We architect them in a fashion that is pretty simple for us to add existing similar base by having it's like a plug-and-play [indiscernible] to extra, if you like add next that we will have to building and we met the secured land before him..

And maybe again on that contract, I just wanted to -- if you could provide the split between the incremental portion of that contract that will be for CAE?.

The incremental -- you get that one, Sonya.

So, the incremental growth from that contract, is that your question?.

Yes, exactly..

So, the contract is a 10-year full outsourcing with exclusive to CAE with easyJet. We are already serving easyJet by essentially what it serves is about a 40% increase in growth..

Our next question is coming from the line of Ronald Epstein with Bank of America Merrill Lynch. Please proceed with your question..

It's Kristine Liwag. Marc and Sonya, you guys have now acquired Lockheed's commercial flight training business and you have acquired these assets from Bombardier.

Are there opportunities like first out there where you can acquire more training businesses from the OEMs? And is there a consolidation that you could do?.

Well, I think what we have said in the past is that we have the -- this is our business, this is our focus; however, our vision is to be the training partner of choice for our customers.

So, you would expect that if there are opportunities out there and they fit our criteria for the type of the business, the type of assets and of course the financial liability of that, we will be open to it. I can't talk for any OEMs particularly or anybody else, who have their business, but certainly we seem to form partnerships with those OEMs.

And if an acquisition works out, we will certainly be receptive. On under the provides that as I said that has to make sense so for us financially for how we can serve our customers and grow our business along the lines to achieve the vision that we have..

And as OEMs walk away from these businesses, can you discuss how that's effected the pricing environment?.

Well, I don’t think that's a factor in the pricing environment to be very frank. I mean there all of these businesses are still very competitive.

So, the margins that we would have is the one that we've talked about it in our outlook, and I don’t these particular deals in itself would affect the one way or another to margin expectations that we would have..

And shifting, I guess, to margins. It's a good segue.

Can you discuss what you saw in margins in the quarter? I mean there was just a little bit weaker than we expected? And then also with such strong growth and your strong book-to-bill, how does these orders are compare with your existing business today? Should we expect these orders to be accretive to margins as they convert to revenue?.

Well, I think the latter definitely the order should be accretive to revenue to for sure. In terms of the margin profile, I wouldn’t read too much about margins in the quarter as we were frank off to get that, Q2 is always -- particularly at Civil, always the quarter where we have lower actual numbers and lower margins.

And because a couple of factors, number one, in line, if you take training part of our business, airlines are flying a lot in the summer months. And when they train aircraft to full and literally, they're not training, they are flying. So, our utilization typically in our training center is low and you see that.

At the same time in our products business, that is time where we rehab and again this year, we have a summer shut down of our activities and where people take vacation, we are trying to refurbish the plan, so we basically our activity earning the revenue and profit out of our full price simulator business back with us as well.

And in this quarter, you had the additional effect of we have a five week work stop which has result of the strike in our mainly facility in Montreal.

So you sort that all in and you see the margins that you have, but I'll point to the fact that the absolute number take Civils up to the 19% overall in earnings in this quarter, I think that we're quite happy with the number itself. If you look at in Defence, I think you have to consider maybe less, maybe Sonya to add an additional color.

But then you had answer when you take into account that we acquired AOCE or some couple of million of acquisition costs in there that are in the quarter, but -- and Sonya do you want any thoughts?.

I guess just to compliment that. Overall, I wouldn't read anything too meaningful into margin, strong year-over-year growth on the operating income and holding on the outlook for each of the segments. But just to compliment what Marc was saying on the Defence side, you did see a bit of impact of the integration cost.

And also as AOCE acquisition kind of ramps up, although it's positive and contributed in the quarter that have a bit of margin dilution in the quarter..

And just to finish up maybe, none of this is highly unexpected and it was kind of factored in when we came over, we trade our outlook this quarter and again we basically numbers we give you, which reiterating our full year outlook for all the businesses..

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

Sonya, I just wondered if you could maybe just sort of walk through, I guess, particularly in Civil, how the quarters kind of looked. You mentioned, obviously, it's going to be a back-end loaded year, but if I could get some color around sort of, individually, Q3 and into Q4.

So maybe just if you could just sort of reiterate what you said there, what we sort of should expect in Q3 and Q4? It sort of sounded to me like we'd have a much stronger Q4, maybe Q3, kind of more typical from what you did last year?.

So, we have invested and as I mentioned in my remarks in Q2 and Q3 to create additional parallel assembly line, and this will increase our production capacity to make up for the work stoppage.

So, we do expect to increase the delivery milestones in the second half, a bit in Q3, but that one as I mentioned should look a bit like Q1 and Q2, and the majority of the remaining deliveries probably in Q4.

So I would expect there could be more deliveries in Q4, and when comparing to previous year, you will note on the IFRS adjusted profile that Q3 was actually the strongest quarter last year because it had a peak deliveries. So, we expect that to be a little bit different this quarter and the peak deliveries in Q4..

And just on the full-flight simulator market, I mean, like you said, you are on pace to have basically a record year for new orders for full-flight simulators.

Can you just talk about what you're seeing out there as far as kind of market share? Is this something where you think you've gained some share against some of the other manufacturing OEMs for full-flight simulators? Or is it just that the pie is much bigger this year versus last year or previous years?.

I think it’s a pie really, but we are still maintaining our leadership in market share. Market share, I think 70% that’s probably above right. And so -- and don't you heard by just to me, it's size of a pie, lots of activity this year..

Our next question is coming from the line of Tim James with TD Securities. Please proceed with your question..

Looking at to fiscal '20, I was wondering if you can talk about any potential headwinds that there might be to margin expansion in both, the civil segment and the defense segment whether its contract mix competitive changes anything like that? I'm making sure I'm sort taking into account or thinking about anything that might moderate any margin expansion that we could see next year..

Well, we haven’t given any guidance that far out so, and I'm not going to give it from here right now Tim, but based on the backlog that we have and the dynamics that we see in our markets and all the segments that to me what we see is strong tailwinds everywhere. So, I'm not expecting something on toward.

I mean I can't predict the future and future admittedly is not that far away, but based on the future I see is good..

That’s helpful, that's kind of the way I was thinking about it. I just wanted to make sure I wasn’t missing something that might be a bit of the headwind, but okay that's helpful.

Can you tell us approximately what percentage of current Civil revenue comes from business aviation, but before do mean to account obviously the future of Bombardier business training acquisition?.

Okay, before the acquisition how much….

Tim, its Andrew. We haven't really broken it that way, but training makes up good two thirds of our Civil business and business aviation is probably the 40% of that. So that gives you some sense award of magnitude..

And then my last question just looking to AOCW acquisition, could you tell us how much of the backlog or how much backlog was acquired with that transaction?.

So, we acquired about CAD500 million where the backlog. Now, that doesn’t flow through any order intake, it's adjusted into the funded and unfunded a backlog, but not necessarily added on it order intake in the book-to-bill metric..

Our next question is coming from the line of Chris Murray with AltaCorp Capital. Please proceed with your question..

My first question just going back to Civil and looking at the delivery just I'm trying to understand and you have a fairly significant step down in the quarter, and I guess if anything that was little surprised that the revenue actually held better than I thought.

I guess the way to think about it or how should we think about the proportion of simulators that are being recognized as like on through the contract versus still on some sort of percentage of completion.

I guess what I'm trying to do is figure with the magnitude of the step jump is going to look like when you get to the back half of the year?.

So, the revenue growth first of all was driven by not only the product business but the training business, so good growth on both sides.

Now, it might be a little bit counterintuitive given the lower deliveries because they are the major drivers of revenue on the product side, and the majority of the simulators are, call it, accounted for at delivery.

Now, despite the lower number of deliveries and mix of simulators had an impact, so we had a higher proportion of simulators that included DP&E, which is data products and equipment. And that's where CAE flows through the value of the OEM, data, parts and equipment, so higher revenues but same operating income.

And so, that had an impact on the margin as well and the revenue growth. So, those were the major drivers. In addition, they are still from development and customize simulators which are accounted for under PUC, but that's the proportion is much less than at delivery..

And then, just thinking about your production rate, is it fair to think that what's the booking numbers that you are doing? It's really to bring it to a kind of a 1 to 1 book-to-bill? Or is it that you just to try to built some extra backlog just to give you some more flexibility?.

You mean in term of the -- because of the anticipated higher deliveries in the latter assets that why you're asking the question?.

Yes, I guess, what I'm trying to think Marc is that you had some pretty strong order intake over the last sort of while. And if we even look at your trialing, the trailing quarters, you are certainly trailing behind that one-time book-to-bill basically because you don't putting out.

Just wondering the changes you've made in the process are intended to speed up your production rates, so we should expect a step up in the next year on actually on deliveries that would be maybe dragging down book-to-bill a little bit, but more on a catch up basis?.

I'm not sure we are coming from where it was [indiscernible] on a settlement that's 20 on the dropping book-to-bill because that’s why I don’t see that.

But our new process that we, with the fully in places, has been for quite a number of quarters now that was started in the year when what we call a quest program a couple of years, which is complete allows us to be able to deliver to manufacture simulators in less time.

So, we have increased our production rate right now and in the last half of the year it's going to be much higher because we are recovering from the strike and we have the summer. So, we are accelerating delivering, we have actually a parallel line on simulators running for a high volume simulators or separate facility producing simulators.

That’s why we think we can catch up, but we expect it will catch up in the second half because we want to make sure, we don’t disappoint our customers that’s expecting simulators. So, look, we will match our delivery rate to the numbers of orders we can expect in the market. We are not production limited. We can get the personnel that we need.

So, we are not capacity limited in terms of what we can do. And maybe when I look at -- if you look at the number of sales we had the -- don't forget the day or don't all delivery in the next year, some maybe delivering over two three years for example. So, I don’t know if that helps, but that’s what I would say to that question..

Just two questions around the transaction with Bombardier.

First of all with the increased training mix and just some geographic changes, any thoughts about how this changes your tax profile?.

Well, the business jet training is a high margin and high cash generating. So, as we have guided, we expect our earnings accretion in the first year and also free cash flow accretion. So, it should contribute to the highest cash generating of the Company..

Yes, I'm thinking about, does it change your tax rates or anything like that with the source of income in the U.S.

sort of I think that?.

The majority of the operations I hear in North America, so we will increase our exposure in North America, but one of the benefits of this acquisition is really expanding through the new platforms and a halo effect across our global network. So, I believe I will change the mix throughout the world.

So, right now, it doesn’t really change my view on tax, but as we close if it changes materially, we will guide..

And then, the last question for me just on the royalty agreement. I'm assuming because you are taking a discount on, I would assume to be kind of recurring payments and just lump sum it and depreciated over the life of the agreement.

What kind of margin impact should we be thinking about in terms of the Civil margin over the -- once you have got that in place?.

So, you're right, this was basically future cash flows that we have discounted back and prepaid in exchange for APP agreement up till 2038, at an attractive discount rate about our cost to capital. What we will see is of course I guess capitalization and we will call it depreciation overtime in the P&L.

Now, the impact of this transaction has been included in our guidance which is the high digits, single digits earnings in the first year in the first 12 months after closing..

Okay, so the guidance included the royalty impact as well as the training impact?.

Absolutely..

Operator, I think that we now want to use the time remaining to open the lines to members of the media. I want to thank all the participants from the investment community for their questions. Operator, if you will please open the lines to members of the media..

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

Okay, well, I want to take this opportunity once to thank all participants on the call today and to remind you that transcript of the call can be found on CAE's website. Thank you very much..

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