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

Good afternoon, everyone, and thank you for joining us today. Before we begin, I’d like to remind you that today’s remarks, including management’s outlook for fiscal year 2020 and answers to questions contain forward-looking statements.

These forward-looking statements represent our expectations as of today, November 13, 2019, 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 on the U.S. Securities and Exchange Commission 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 calls 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 first discuss some of the highlights of the quarter and then Sonya will review the details financial. I will come back at the end to talk about our outlook.

CAE had good growth in the second quarter, with revenue up 21%, segment operating income up 28% and we secured nearly $1 billion of orders or 1.11 times book-to-sales ratio. CAE’s total backlog at the end of the quarter was $9.2 billion.

Our performance continued to be led by Civil, which delivered very strong operating income growth, higher margins and continued to have strong order intake.

The integration of the Bombardier Business Aircraft Training acquisition has gone very well and is substantially complete and we are continuing to win the confidence of our airline and business jets customers with our expanded and highly innovative training solutions. Defense performance improved from last quarter.

However, it reflects continued delays of orders for our higher margin defense products and the timing of program milestones or contracts that we are currently working on from backlog.

These are largely timing issues and I am encouraged by the 1.08 times book-to-sales ratio for the quarter, which gives confidence to our view of stronger second half in Defense. And in Healthcare, our expanded sales force secured a higher level of interest in our latest products, which will begin delivering over the next few quarters.

Looking more closely at Civil, we booked$603 million of orders in Q2, including new long-term training agreements with Sunwing Airlines, Loganair and Flightworks. We also sold 11 full flight simulators during the quarter for a total of 20 for the first half of the year.

To address the global demand for new pilots, we launched a new cadet pilot training program to train more than 700 new professional pilots over the next 10 years for Southwest Airlines Destination 225 program.

And just this week, we signed a long-term exclusive training agreement with easyJet to train more than 1,000 new easyJet cadet pilots under a Multi-Crew Pilot License program. Also evolving easyJet, we inaugurated new training facilities during the quarter in Gatwick, Manchester and Milan in support of our comprehensive 10-year training agreement.

In business aviation, we entered a strategic partnership and exclusive 15-year training outsourcing with Directional Aviation Capital and its affiliates.

Directional is one of the largest fastest growing and most innovative corporate aviation service companies globally, and in connection with this agreement, just last week we concluded the acquisition of a 50% stake in SIMCOM Holdings. Overall training center utilization was 69% this quarter on our network of nearly 300 full flight simulators.

Airlines train a bit less during the busy summer travel months and we have used this opportunity of this usual seasonality to perform some similar updates and relocations, coincident with the opening of our new three training centers during the quarter.

The utilization rate also reflects the effect of some of our recently added capacity that’s just beginning now to ramp up. In Defense, we booked orders for $362 million including KC-135 aircrew training services and simulator upgrades for U.S. Air Force and additional fixed wing flight training and support services for the U.S.

Army at the CAE Dothan Training Centre. We also received orders to upgrade the U.S. Navy’s MH-60 Seahawk helicopter simulators and to provide aircrew training on the Navy’s T-44C aircraft.

Other notable orders include a contract with Boeing to provide upgrades on P-8A simulators, a contract to upgrade the German Eurofighter and Tornado aircraft simulators, and a contract for Abrams tank maintenance trainers for the United States Army.

As well to further bolster our position in the United States, we entered a strategic collaboration with Leonardo to offer integrated helicopter training solutions together. In Healthcare, we continued to pursue larger segments of the healthcare simulation market with our expanded sales force.

In line with our strategy to expand our reach within hospitals, we have entered into an agreement with Premier, a leading healthcare improvement company, aligned with approximately 4,000 U.S. hospitals and health systems.

We also launched new products, including Vimedix 3.0 Ultrasound Simulator and together with the American Society of Anesthesiologists, we launched a new Anesthesia SimSTAT module, which is latest in a series of interactive screen based courses approved for Maintenance for Certification in Anesthesiology credits.

With that, I will now turn the call over to Sonya, who will provide a detailed look at our financial performance. I will 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 $896.8 million, up 21% compared to $743.8 million in the second quarter last year and segment operating income, before specific items, was $126 million, up 28% from $98.7 million last year.

Quarterly net income, before specific items, was $74.7 million or $0.28 per share, which is 22% higher than the $0.23 we reported in the second quarter last year. Net finance expense for the second quarter was $34.3 million, up from $19.9 million in the second quarter of the fiscal 2019.

We had higher interest resulting from the long-term debt that we issued at the end of last year, higher interest on lease liabilities because of the adoption of IFRS 16, as well as higher investment in non-cash working capital in the first half of the year.

Income taxes this quarter were $15.5 million, representing an effective tax rate of 17%, which is down from 19% for the second quarter last year. The lower tax rate was mainly due to a change in the mix of income from various jurisdictions. Free cash flow was negative $7.1 million in the quarter, compared to positive $137.7 million last year.

Cash provided by operating activities increased compared to second quarter last year, while free cash flow decreased mainly from a higher investment in non-cash working capital accounts. Most of the increase is timing related as we usually see a higher investment in non-cash working capital accounts in the first half.

This increase reflects the timing of cash flows, involving accounts payable and contract liability. It also reflects higher inventory from recent strategic investments in simulator advanced builds to pre-empt customer demands that we anticipate for certain simulator products.

As in previous years, we expect a significant portion of the non-cash working capital investment to reverse in the second half.

Uses of cash in Q2, included funding capital expenditures for $58.8 million mainly for growth and specifically to add capacity to our global training network to deliver on the long-term exclusive training contracts in our backlog. We continue to expect total capital expenditures for the year to be about 10% to 15% higher than in prior years.

Other uses of cash included the distribution of $28.4 million in cash dividends and we used another $18.2 million to repurchase stock at a weighted average price of $34.06 per common share under the NCIB program.

Our financial position continued to be solid with a net debt of $2.4 billion at the end of the quarter, for a net debt-to-capital ratio of 51%. This reflects the issuance of the unsecured senior notes for the Bombardier BAT business acquisition and the higher usage of cash to fund working capital in the first half of the year.

Since we adopted IFRS 16 effective April 1, 2019, net debt now also includes obligations under lease contracts, which were previously accounted for as operating leases and therefore not included in debt. Excluding this impact, the net debt-to-capital ratio would have been 47.5% this quarter.

We continue to expect to be at the lower end of our target leverage range, which is 35% to 45% on a pre-IFRS basis within the next 18 months to 30 months. Return on capital employed before specific items and excluding the impacts of IFRS 16 was 11.7% this quarter, compared to 12% last quarter and 12.8% last year.

As we ramp up the large Bombardier BAT business acquisition and our other growth investments, we expect to reach 13% return on capital employed by fiscal year 2022.

Now, looking at our segmented performance, in Civil, we have strong double-digit organic growth in the second quarter and in addition we benefited from the integration of the Bombardier Business Aircraft Training business, which also performed very well.

Second quarter revenue was up 35% year-over-year to $529.9 million on 18 full-flight simulator deliveries and continued strong demand for our training services with our expanded capacity. Operating income before specific items was up 60% to $101.4 million, for a margin of 19.1%.

On the order front, the Civil book-to-sales ratio for the quarter was 1.14 times and for the trailing 12-month period, it was 1.45 times. In Defense, second quarter revenue of $336.5 million was up 5% over Q2 last year, while operating income was down 24% to $26 million, for an operating margin of 7.7%.

In Defense, product margins are typically higher than services and while we did see a more balanced mix compared to last quarter, we are still more weighted to services.

The lower segment operating income in the second quarter also reflects delays on product orders that we expect to conclude this year, as well as timing related factors related to reaching program milestones on some of the product contracts in our backlog.

These include our executions on R&D programs and external factors, including customer input and the readiness of their training facility. The Defense book-to-sales ratio was higher this quarter at 1.08 times and was 0.81 times for the last 12 months.

Lastly in Healthcare, second quarter revenue of $30.4 million was stable compared to Q2 last year and segment operating loss of $1.4 million in the quarter, compared to segment operating income of $1.3 million in Q2.

We had a higher investment in SG&A to support a larger future business and we also had some higher expenses related to launch of new products. With that, I will ask Marc to discuss the way forward..

Thanks, Sonya. We continue to see good momentum with our training strategy, which is supported by secular growth trends across all of our markets, which underpin CAE’s investment thesis.

In Civil, the market fundamentals for commercial aviation remain supportive, with continued long-term passenger traffic growth and expanding global in-service fleet of aircraft and specific to our business, a significant need to attract and create new pilots to meet long-term demand.

CAE is the world leader in Civil Aviation Training and is a brand that’s become synonymous with training and increasingly with pilots. We are maintaining very good momentum in a large addressable market, and as we look ahead, we expect to see more airline outsourcing opportunities materialize from a large pipeline of long-term training partnerships.

We expect another good year for full flight simulator sales and to maintain our leading share of the market. In Business Aviation, we significantly bolster our position with the successful integration of Bombardier Business Aviation Training and with our recent strategic partnership with Directional Aviation Capital.

In this market segment, CAE’s business is driven mainly by the ongoing training requirements that involve the already in-service fleet of business aircraft globally. We also expect to benefit from demand for training involving the entry into service of major larger cabin business jets.

For Civil, overall, we expect to perform a bit better than our original outlook, now with operating income growth closer to 30% for the year on strong demand for our training solutions, as underscored by a 1.4 times trailing book-to-sales ratio and a continued high ratio going forward even on a growing revenue base.

In Defense, we continue to expect a stronger second half, which is a view supported by a healthy book-to-sales ratio in the quarter and a robust pipeline. Our revised outlook for modest growth for the year takes into account our progress year-to-date and our current expectations for reaching milestones of programs in backlog.

We also expect to conclude several more contracts in the remainder of the year. Although, we don’t control the timing of government decision making, I take confidence in knowing that we have already been downsized just for most of them.

Our long-term prospects in the large addressable defense market remains positive and I am encouraged by approximately $4 billion of Defense proposals we already written that are currently in the hands of customers’ pending decisions.

Finally, as previously announced, with news of Gene Colabatistto’s upcoming retirement, we are actively in the process of recruiting a new Group President, who will be responsible for our Defense growth strategy and execution in our global markets.

And lastly, in Healthcare, I am encouraged by the potential for CAE to leverage our leadership in aviation training and make Healthcare safer.

We are positioning the business to leverage the growing opportunities for hospitals, which now have major incentives in the United States specifically to address preventable medical errors and they see simulation as the logical way to ensure their practitioners are adequately trained in procedures.

The increased imperative on patient safety recently highlighted in no small way by the World Health Organization initiating the world’s first patient safety data. It’s just but one important factor that gives me confidence in the long-term prospects for CAE in this market.

We are continuing to roll out the most innovative products in the market and with our strengthened front end organization, a new team in place, we continue to expect double-digit percentage growth this year.

In summary, our overall outlook for CAE this fiscal year is largely unchanged, with expected higher growth in Civil, offsetting the lower expected growth in Defense. We benefit from a strong position and secular tailwinds in each of our core markets and we look forward to superior top and bottomline growth in the years ahead.

With that, I thank you for your attention and we are now ready to answer your questions..

Thanks, Marc. Operator, we would now like to open the lines to members of the financial community..

Thank you. [Operator Instructions] Our first question coming from the line of Konark Gupta with Scotiabank. Please proceed with your question..

Hi, there. This is Amina, Konark Gupta’s associate. I do have a question on the Defense segment. You revised the guidance, which implies a strong EBITDA growth in the second half.

Do you expect growth to be skewed in the third quarter or the fourth quarter? As well should revenue growth accelerate at the same time as delayed orders materialize in the second half?.

Well, I think, that we are guiding on the outlook for the growth of the business in line with what we have talked about in the remarks. And yeah, we expect a stronger Q3 and Q4 in that -- in the -- provide more Q4 than Q3.

But overall, we expect a much stronger second half as you would expect to be able to, as you said achieve the modest growth that we highlighted in our outlook for sure..

I do have a question on working capital, do you expect a reversal in working capital in the third quarter and are there any other one-timers this year that wouldn’t track on to working capital changes next year?.

So as we see, historically, there’s usually an investment -- a higher level of investment in the first half of the year, non-cash working capital accounts and usually we see a partial reversal in the second half and that’s no different this year.

We don’t really call it out on a quarterly basis to look at this on an annual basis and a lot of that investment was higher last year, it’s driving impact by timing, impact on accounts payable and contract liability.

But in addition, we called out higher deliberate investment in inventories, some of it is work-in-progress inventory and that inventory that’s tagged the customer orders and deliveries, which is in line with our view on expected deliveries, which is higher in the second half.

But we have also invested deliberately on some pre-build, so some wet tails to address expected demand. Most of these are 737 Max simulators and when the situation and timing of enterprise or deliveries clarified, we are positioned to address that customer demand, okay..

Operator?.

Thank you..

Can you hear me now?.

Yeah..

Sorry.

I do have a question on the Civil segment, what is the cadence for the simulator deliveries for the next two quarters and do you expect EBITDA growth in the second half to be driven by joint ventures or can we expect material margin expansion to take place in the first half -- that took place in the first half?.

Well, I will just start with deliveries, I think, we don’t expect the market drivers to be different with regards to simulator sales, which are basically the kind of the strong catalyst delivery of aircraft out of the OEMs and notwithstanding I think only maybe if you like anomaly in this market right now is the delayed deliveries of 737 Maxes.

Other than that I think the -- there is no reason to expect that the market will be different and we are not seeing that. We are seeing that simulator orders in line with, as I said, delivery of aircraft, nothing we are offsetting with.

Do you want to add anything?.

On your question on EBITDA, ultimately our revised, I think, our revised outlook speaks to our view on operating income. That was a little higher than what our previous outlook and with operating income growth coming in closer to 30%..

Thank you. Our next question coming from the line of Kevin Chiang with CIBC. Please proceed with your question..

Hi. This is Krista on for Kevin. If I could just go back to Defense, you are calling for a strong second half, I am just wondering how this plays into 2021.

I know you are not providing guidance, but any reason not to expect the growth rate in Defense to return to a normalized level?.

Well, I think, I don’t think we already called out normalized level specifically. We called out an outlook every year. But, yes, I will continue good growth on -- in Defense, because the market fundamentals aren’t positioned to market and the demand for our services and probably most importantly on the pipeline of opportunities that we see.

As I mentioned, we have about 4 billion of proposals that we have submitted to customers already. So those, as I would say, we don’t control the pan of decision makers as to when they decide. But I think that -- a lot of them will materialize in the next few months. So that gives me confidence in our own prospects in the market.

And when you look as well as the market itself, the market itself is growing and we continue to expect to exceed the organic market growth for the longer term in Defense..

Great. Thanks. And if I could also just ask another one with the addition of Bombardier’s Business Aviation Training assets and the strategic partnership with Directional.

How does that shift the mix of wet hours and dry hours versus what we have seen historically?.

Well, I don’t have the numbers based on ASM but, I don’t think we do. But clearly Bombardier is essentially all wet. So, clearly, we will increase the amount of wet hours we do..

Yeah. Business Aviation represents about a third of our Civil activity, Krista. It’s all wet and of the commercial activity that we do about, probably, about a third of it is wet and growing..

Perfect. Thank you. And then if I could just ask one on Healthcare, margins have been impacted by elevated costs related to growth and launching new products.

When do you think you will lap these costs and should we expect this for the remainder of fiscal 2020?.

Well, I think, we expect it to reverse, it would continue to increase this year as testimony by our outlook for double-digit growth, obviously, that implies a strong second half and that’s what we see in front of us..

Perfect. Thank you..

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

Yeah. Good afternoon, everyone.

Could you provide more color with respect to the Civil guidance that has been revised upward and what are the main drivers for the guidance increase?.

Well, I think, it’s performance year-to-date, Benoit, and orders going forward. If you look at, as I mentioned, just in terms of orders and the trailing book-to-bill is 1.45 on top of quite exceptional revenue growth. So even though we are growing a lot, we are just continuing to fill the pipeline quite substantially.

And so that -- we know what capacity we have, we are not capacity limited. So we can see that we are going to be able to generate more business and the associated profit in the second half. That’s a large part. The other part is that, we have been very happy with the integration of our Bombardier business jet business.

But I think we are honestly firing on all cylinders there and so what -- we feel confident in the second half with regards to that business. So that’s really where we are coming from to be able to constantly increase that outlook..

Okay. That’s perfect, Marc.

And are you confident to still deliver a similar number of full-flight simulators this year comparable to last year, which was around 58, Marc?.

You are talking about deliveries now, Benoit?.

Yeah. Yeah. Yeah..

Yeah. So what we see is that, it will be higher in the second half as it was last year, probably, in the 50%s and that’s been incorporated into our outlook and our outlook of closer to 30% operating income growth year-over-year..

Okay. Perfect.

And could you provide an update on the 737 Max, whether you have more color on the upcoming training requirement and the impact so far we have seen for CAE?.

Not really. We don’t have any more because the, I mean, the aircraft has returned to service. So I think we don’t know nor does anybody else exactly what the training requirements will be.

I think it’s -- in terms of our position that we are going to support our operators, and to support Boeing and support the regulators and accept that we -- that they want our support in all jurisdictions.

So our assumption is that there, obviously, is going to be a lot of pent-up demand when those airplanes start flying and that emphasizes the number of whitetails that we have created to be able to secure that demand.

And also sales continue to do well of the Max simulators and deliveries go well, I mean, so far this year if you look at maybe remind me the numbers....

Five orders to date and delivered nine deliveries to date on the 737 Max and they expect a similar number in the second half as well..

And if you look at….

Okay..

… we sold 48 737 Maxes so far and that’s the majority of market share. So, hopefully, the airplane will fly again relative in the near future, but we are well positioned when that happens..

Okay. That’s great color, Marc.

And with respect to the utilization rate, the 3% decline year-over-year, is it fair to say that it was mostly driven by the acquisition of BAT that typically where business jet utilization is typically lower given the nature of the business, Marc?.

That’s certainly a part of it. There is a normal seasonality, as you know, but I mean, even if you look at last year’s 72% some of it is what you said, this is our capital share because we -- they will train in midnight hours. However, I’d caution that we don’t assume them to do -- when we estimate an utilization.

We don’t necessarily assume full utilization like that on a business aircraft. A lot of it has to do as well with -- remember we opened up three new training centers at Milan, Manchester, Gatwick, so we relocated a bunch of simulators and updated.

We have taken the advantage of the summer months to update the simulators and while we are doing that, well, it’s either a transit or an update, they are not earning revenue and they are not -- they are part of that utilization. So -- and some of it 737 pilot training controls.

So, all of that, I think gives you the 69%, which to me is not surprising whether everything we have done this quarter..

Okay. That’s perfect.

And last one for me, Sonya, in terms of working cap, you expect a good reversal in the second half, but in terms of working capital usage for fiscal ‘20, could you provide maybe a range or what kind of dollars we could expect for the full year and fiscal ‘20, Sonya?.

Well, where we are standing today, we expect a significant part of that to reverse in the second half. So that will be as we kind of continue to optimize non-cash working capital convert to net inventory investment in the second half, but we will have some investment.

One, some of that inventory won’t necessarily convert completely in -- before March 31, but also as we continue to see strong growth on the services side that services model drives investment in AR, which is usual because the services get billed and collected after the services are rendered.

So while -- won’t necessarily give a range but it’s a substantial proportion of it will be reversed in the second half..

Okay. Thank you, Sonya. Thank you..

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

Yes. Hi. Thank you for taking my question.

Maybe first on quickly on directional aviation, can you offer up kind of how you think about the contribution you would expect from this once you close it, is it kind of consistent with what we would be attributing kind of ROIC for this business like an low double-digit ROIC basically on that $85 million is that a fair way to think about it?.

Well, I’d start by saying maybe it’s slightly accretive, we expect it to be slightly accretive in the next 12 months as we open up our new training center and we start populating with simulators now, we go to the inspirations.

Andy, if do you have anything to add?.

Yeah. I know I think that it really begins to take last year two, year three and beyond. The biggest value in that that is really the 15-year exclusive with directional, which is a really large fleet in aggregate with all the affiliates of 175 business jet aircrafts, so almost like a really large airline outsourcing.

So for us, the returns really begin to take a whole a year, two, three and beyond, first full year will be the sort of modestly accretive..

Okay.

And is there, is there any contribution assumed for this year from a directional?.

Well, it’s very small and it’s already in the near 30% growth has booked that we provided..

Okay. My second question on Defence, I mean, I can appreciate the lumpiness quarter-over-quarter and these kind of things. But if I think you kind of look at the last few years in Defence the -- you have had a very strong improvement in revenues, you have deployed over $300 million of capital in that division.

But the incremental have been kind of on the low single-digit both in terms of ROI and margin.

Can you offer up any kind of insights into what’s, what’s really kind of driving this, is it all mix and whether there is an opportunity that can improve over the next couple of years, I guess, if these are programs that are in a early ramp up stage?.

I think maybe of just a high level that definitely, I think, what you have seen in a large in a macro level is increased we shift to services and product services business change and that’s cause you know a lot of that shift the lower margins overall.

Now going forward, I’d tell you that we fit to our view that, we should be able to deliver in 11%, 12% range, that would be our expectations for the longer term and that’s in terms of accretive to the overall returns CAE, so certainly not dilutive and contributing to value creation. That’s our position and that’s the way we are bidding in the market.

Sonya, if you want to add anything to it?.

Yeah. It’s really a reflection and a transition between the products and services links, but as you grow the size scope on services and drive the product program it will drive higher margin contribution on return..

Okay.

Great and maybe one last question, are you prepared to share how many white tails have you built for MAX or?.

Well, I think we built....

We won’t share the numbers. We think that’s competitively sensitive, but maybe I don’t know....

No our guess is over….

So no….

No..

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

Yeah. Thanks. Good afternoon.

Just as a follow-up on the 737 MAX and though the white tails, I mean, I guess, maybe I am reading too much into this, but the fact that you have may built some white tails 737 MAX sims, is that suggested that maybe airlines are telling you that they might have a requirement for new sims as opposed to using their existing 737-NG sims..

Well, I think, -- well, look, I will tell you, I think, it’s prudent to say that you have both 737 MAX operators and a lot of a lot of airplanes sitting on the ground right now and they are going to have to come up the -- come up to speed with regard to pilot training and you just don’t ramp that up overnight, okay? So we want to be there, being able to support all the demand and the long-term prospects this aircraft is very equipped, but Boeing has had a very strong backlog in aircrafts.

This will get fixed in the near and shorter term. So we want to be ready and we are taking assumptions with regards to what training happens and what your restriction. But I think we have no crystal ball anymore to use to, anyway that we would share and we would share our assumptions on what training will be done.

But our customers aren’t guiding as one way or another, I think the -- and our experience though is that the airlines rarely do just of what there is the minimum that the regulators will ask us.

And so we fully expect that that as was already happened somewhere even should the training requirements be negative as same as before, I believe we expect that some airlines or longer airlines will go beyond that because they want to have that getting 737 simulators for their own reasons. So we will be ready for that..

Okay. No. That’s great. And just secondly, just on M&A, I mean, you have done a couple of acquisitions here in the last 12 months just in the Business Aviation Training segment.

I am just wondering, if there is anything else out there that you maybe you feel underrepresented either Civil or Defense that could be an M&A opportunity?.

Well, the way that we look at M&A, it’s really focusing on training outsourcings and partnerships and whether they become organic opportunities, like, easyJet outsourcing or M&A, like, this recent SIMCOM transaction really developed with that partnership.

So we continue to focus on outsourcing and continue to have a good pipeline of conversations with airlines and partners.

And if there are any other strategic opportunities that enable expanded market access, some technology capabilities or client program, we keep an eye out for these and all this kind of a value buyer if there is something that is of interest..

Okay. Thank you..

Thank you..

Thank you..

Picking up on Cameron’s last question, I would also add that, even though it’s hard to takeout in our Defense results to-date, I would tell you that we are quite happy with the acquisitions we have done in Defense last year in the top secret world.

I think that’s performing very -- quite nicely and a lot of the revenue growth you are seeing -- well, a good portion of that’s coming from that business. So we feel good about that..

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

Hey. Good afternoon guys. It’s Kristine Liwag..

Hi, Kristine..

Hi..

Hello, Kristine..

For the 737 Max, since the aircraft hasn’t been recertified yet, how does the timing work for when you get the final software package from Boeing and when you can deliver your first full-flight simulator?.

Look, I think, it will be -- it will, probably, be coincidence, I think, we are working in last step with Boeing.

And I am quite confident as soon as the software load that we need to be able to upgrade the simulator come from Boeing and we are -- as I mentioned, we are last step with them and I don’t expect any delay with regards to having to update simulator from that standpoint..

And in fact, Kristine we delivered nine Max so far in the first half of the year. So even what we are delivering currently will have to be updated with the new aircraft system load, automatic software -- software which has done pretty bad..

I see.

And for the simulator advanced builds that you are doing right now, how many of those already have basically indication from your customers that they will order it versus a speculative build on your part?.

Yeah. I think the whitetail basically, when we say whitetail it means that it’s not contributing, it’s not tagged to a customer.

So we are building them and they wind up either in our training centers, so we can serve the market -- make it as a separate customer to buying 737 Max or upper and our training network or we will have airlines buying the simulators and we deliver to them. But when we talk about whitetails we mean they have been attributed at this moment..

Okay. You are not even a soft -- not even a soft indication of interest, so it’s all purely speculative to confirm..

It isn’t that unusual for us to do some advance building especially on high volume platforms like the A320 or the Max. But, yes, we are making some call in terms of there being a pent-up demand given the fact that the aircraft been out of commission for as long as it has been in the deliveries as well. So that’s what we see.

So it’s not a particularly bold measure on our part, we think it’s just smart pre-empting the demand that we expect..

That’s helpful. And maybe switching gears to Healthcare.

Marc, can you walk us through what you need to achieve for Healthcare to be profitable in the long-term?.

Well, I think, it’s a question of revenue growth. It’s not -- I have said this before, well it’s not a question of the profitability of our products and services, they are actually very profitable.

In fact, they are more profitable on a unit basis than probably there’s certainly a lot of the products that we have in rest of our business issue with volume. We need to grow the business and that’s why you see us investing in new products and investing in the sales force. I mean, SG&A which remain in sales force.

And I would say a stronger team, and we have started with Rekha Ranganathan, who is a seasoned executive from the Healthcare sector. We are now growing the team, the leadership team and that’s part of the -- part of what we are doing that could have seen reflecting in cost.

They are bit -- that change in our strategy with the new team in place, which is really going after the hospital business. You look at value-based care in the United States.

That is driving -- as we said in our remarks, that is driving hospitals to be able to have to invest more into training to make sure that they reduce the amount of medical errors that are happening as a result of -- if you like less than perfect training and that’s -- we have demonstrated that space in aviation industry.

And as I have said many times before, the healthcare industry as -- it’s large, it’s looking to aviation as the model as they look at this. So that’s really where we are at. And when we look at the certainly short-term, rest of the year, we certainly expect that based on the orders we have gotten to-date.

I mean we don’t monitor, we don’t report out the size of the business book-to-bill in the healthcare business, but I can tell you already in this quarter, we are seeing, if we support backlog, we would be showing a backlog that’s increasing. Now it’s not all delivering for a number of reasons.

The -- at the time to basically complete an order on the hospital sector is a bit longer than it is in our traditional teaching hospitals, for example, so that’s reflected.

But having said all that, I feel confident in the growth outlook that we set of top and bottomline, double-digit growth this year, implying a stronger second half and certainly a stronger -- a larger business going forward or else we wouldn’t be in this business..

Sure. And I don’t want to hold you to some sort of long-term guidance, but I kind of just want to get perspective from how you think about this business.

If -- do you think this business will be $100 million revenue business on a quarterly basis in the next two years, three years? And then also, I am just understanding the size that this could be? And then at what point do you have a threshold in which you decide to sell it and walk away from healthcare?.

Well, on the last part, we are committed to the business and so I am not going to comment that we are sticking to it.

But as we have done in any business that you saw in mining a few years ago, if we feel that there’s going to be a -- it’s not going to be the market opportunity we think or that we think it’s going to take too long that will re-evaluate our options in that regard, but that’s certainly not our thinking at this moment.

So -- and as I say right now, I am not going to be able to -- I am not going to comment to in terms of any kind of shortly quarterly revenue targets at this moment.

I can tell you that we will be satisfied until this business is substantially regarded, it’s now in concert with our expectations on market and certainly not bloody minded about it though..

Great. Thank you, guys..

We are very confident in this market and I think that -- we were very confident that this the society will need here and we are the ones that are best positioned to be there to support the increase in patient safety..

Great. Thank you for the color, Marc..

Thank you..

Thank you. Our next question is a follow-up question coming from the line of Fadi Chamoun with BMO Capital Markets. Please proceed with your question..

Yeah. Thanks for squeezing me in again.

Sonya on the working capital, if I look at this $300 million working capital investment, so far this year, half of it is declining kind of liabilities and payables and half its kind of from the asset side, including inventories and what’s -- so what’s the driver behind this liability and payables declined, just trying to understand how much of that really comes back in the back half of the year?.

Yeah. So on the inventory, we spoke about that, it’s a combination of what work in progress and that inventory that takes to customers and that’s -- as we build the simulators to deliver in the back half, as well as the that whitetails that we have invested is pre-empted for demand that we see.

Now the accounts payable side, it’s really a question of timing on different types of payments. So there is some annual payments that get paid in the first half of the year that are higher than last year and then some new payments that are larger related to kind of interest and so on new profiling.

So that is paid out in the first half of the year and there’s always a bit of variation that’s driven by the shift in volume whereas the second half usually has a higher volume than the first half. So it kind of contributed to that investment in the first half.

So, all to say that, it’s a slightly higher investment, but we do expect a substantial part of all of that coming from payable, the inventory and liabilities probably around call it three quarters of that to reverse in the second half of the year..

Okay. That helpful. Thanks..

Operator, we will now conclude the session with investors and open the line to members of the media should there be any questions..

Thank you. [Operator Instructions] We do have a question coming from the line of Ross Marowits with The Canadian Press. Please proceed with your question..

Yes. Hi.

I am wondering if you could talk a little bit about what the impact both financial and otherwise has been on CAE from the Max issues and the grounding?.

Well, I think, it’s mainly in terms of the impact, it hasn’t been really consequential to-date in our numbers. In terms of deliveries of our simulators, they are continuing, we have delivered a number of them this year already in line with our expectations. But we fully expect to deliver actually the number total is 19 that we have delivered to date.

So we fully expect to continue to deliver this year because airlines will need them as the Max comes back.

So I don’t -- so the impact hasn’t been, as I mentioned, consequential to see these results and we never expected them to be based on what is expected to be the return to service data, it’s not public and private what you read in public regards in terms of when that aircraft will start playing again.

So I think that’s what we basically that’s kind of what else characterize it..

And I guess, the flip side to that or addition is, what impact will -- are you expecting, you have built some whitetails, so what impact are you expecting once it resumes?.

Well, I think, I should have said actually because we repeated in the -- repeating what we said during the analyst questions. I mean, the one impact obviously is working capital, because we will have these simulators that we built that are whitetails, which means that they are sitting in work in process inventory.

And then what will happen is, when the airplanes start to -- starting to deliver -- start entering service back or re-flying with airline, obviously, some of those will deliver, because we fully expect people to order some and we will be in a position to put -- add those simulators to start training network and expect the -- that extra capacity be useful to make sure the airplane regained service flying status quickly as with the need to retrain a lot of pilots come to floor..

And all of them will require software updates?.

Well, the simulators that are done certainly, we will have to be -- as is always the case, we will have to be representative of the aircraft. So whatever the final configuration of the aircraft we will be supplied that -- those changes by the manufacturer and we will incorporate them. So every simulator will have to represent the final configuration.

So, yeah, we will have to update them all. But as I said, I wouldn’t expect, because we have been updating as we go along, I wouldn’t expect that to be a long process..

Okay. Thank you..

You are welcome..

Thank you. Our next question coming from the line of Julien Arsenault with La Presse. Please proceed with your question..

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[Foreign Language].

Okay. [Foreign Language].

[Foreign Language].

Okay. [Foreign Language].

[Foreign Language].

Okay. That’s it. Merci..

Thank you..

Operator, that’s all the time we have for the call today. I want to thank members of the media and, of course, members of the investment community for joining us this afternoon. A transcript of today’s call will be made available later today on CAE’s website. Thank you very much..

Thank you. That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines..