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

Good afternoon, everyone and thank you for joining us today. Before we begin, I would like to remind you that today’s remarks, including management’s outlook for fiscal year ‘20 and answers to questions contain forward-looking statements.

These forward-looking statements represent our expectations as of today, February 7, 2020 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 at www.sedar.com and the U.S. Securities and Exchange Commission on EDGAR at www.sec.gov.

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.

And following the conclusion of that Q&A period, we will open the line 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 will first discuss some of the 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 strong growth in the third quarter with revenue up 13%, segment operating income up 37%, and we secured $1.1 billion of orders for a 1.2x book-to-sales ratio. CAE’s total backlog at the end of the quarter was $9.4 billion.

Our performance continued to be led by Civil, which delivered strong operating income growth and we continued to have good momentum in the market with our innovative and comprehensive training solutions. Our customers continue to place their trust in CAE as their training partner of choice.

In Defense, we had good operating income growth in the quarter, which supports our view for a stronger second half. Also encouraging is the 1.11x book-to-sales ratio for the quarter. And in Healthcare, we had double-digit revenue growth and we continued to bring highly innovative solutions to market that make help healthcare safer.

Looking more closely at Civil, we booked $706 million of orders for training solutions in Q3, including a long-term pilot training agreement with JetSmart Airlines and 17 full-flight simulators, for a total of 37 for the first 9 months of the year. The Civil backlog at the end of the quarter was a record $5.3 billion.

To address the growing global demand for new pilots, we launched new multi-crew pilot license programs with easyJet and Volotea and a new cadet pilot training program with Jazz Aviation and Seneca School of Aviation called Jazz Approach.

CAE is working together with our industry partners to create a pipeline of highly qualified aviation professionals to support our customers’ growing needs for critical personnel. In business aviation, we signed a range of pilot training contracts with business jet operators, including JetSuite, Solairus Aviation and TAG Aviation Holdings.

Overall training center utilization was 70% this quarter on our network of 303 full-flight simulators. In Defense, we booked orders for $367 million, including contracts to provide the German Navy with a comprehensive training solution for the NH90 Sea Lion helicopter and to upgrade and modify the German Army’s NH-90 full-mission simulators.

These wins underscore CAE’s strong position on this helicopter platform. Other notable contracts include the next increment of a multiyear contract with the U.S. Air Force to provide comprehensive C-130H aircrew training services.

Defense also received orders to continue providing long-term maintenance and support services for Rotorsim, a joint venture between CAE and Leonardo and a contract for Abrams tank maintenance trainers for the U.S. Army.

Defense also launched the CAE TRAX Academy at the recent I/ITSEC conference, the world’s largest military training and simulation event. This is an advanced training continuum that delivers faster and more efficient military student pilot training.

Customer response has already been highly positive to this new training solution, which brings together our latest innovations in virtual reality and advanced analytics.

In Healthcare, we also continued to innovate by developing custom training solutions for Edwards Lifesciences to enhance physician training and we delivered a custom cardiovascular simulation to Cardinal Health.

Together with the American Society of Anesthesiologists, we launched a new Anesthesia SimSTAT module, which is a course approved for Maintenance of Certification in Anesthesiology credits. As well, Healthcare was awarded an EMS World Innovation Award for CAE AresAR, the Microsoft HoloLens application for our emergency care manikin.

With that, I will now turn the call over to Sonya who will provide a detailed look at our financial performance and 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 third quarter was $923.5 million, up 13% compared to $816.3 million in the third quarter last year and segment operating income before specific items was $155.3 million, up 37% from $113 million last year.

Quarterly net income before specific items was $98 million, or $0.37 per share, which is 28% higher than the $0.29 we reported in the third quarter last year. Net finance expense for the third quarter was $36.7 million, up from $19.3 million in the third quarter of fiscal 2019.

We had higher interest resulting from the issuance of unsecured senior notes since the fourth quarter last year and higher interest on lease liabilities because of the adoption of IFRS 16. Income taxes this quarter were $18.4 million, representing an effective tax rate of 16%, which is up from 15% for the third quarter last year.

The higher tax rate was mainly due to the impacts of tax audits in Canada last year partially offset by a change in the mix of income from various jurisdictions. We had good free cash flow of $275.3 million in the quarter compared to $155.1 million last year.

The increase results mainly from a lower investment in non-cash working capital and higher cash provided by operating activities. This is consistent with our expectations for significant reversal of investment in non-cash working capital accounts in the second half of the fiscal year.

Uses of cash in Q3 included funding capital expenditures for $51.6 million mainly for growth of 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 the prior year.

Other uses of cash include the distribution of $28.3 million in cash dividends and we used another $12.6 million to repurchase stock at a weighted average price of $32.69 per common share under the NCIB program, for which CAE’s Board of Directors just approved its renewal.

Our financial position continued to be solid with a net debt of $2.3 billion at the end of the quarter for a net debt-to-capital ratio of 48.5%. 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 44.9% 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 to 30 months.

Return on capital employed, before specific items and excluding the impacts of IFRS 16, was 11.6% this quarter compared to 11.7% last quarter and last year.

Now, looking at our segmented performance, in Civil, we had double-digit organic growth in the third quarter and in addition, we benefited from the integration of the Bombardier BAT business, which also performed very well.

Third quarter revenue was up 22% year-over-year to $558.1 million on 12 full-flight simulator deliveries and good demand for our training services with our expanded capacity. Operating income before specific items was up 42% to $123.4 million for a margin of 22.1%.

On the order front, the Civil book-to-sales ratio for the quarter was 1.27x and for the trailing 12-month period, it was 1.44x. In Defense, third quarter revenue of $332.4 million was up 1% over Q3 last year, while operating income was up 24% to $31.3 million for an operating margin of 9.4%.

We incurred some re-organizational costs this quarter to adjust our global structure for greater operational and commercial excellence. Before these costs, Defense segment operating income for the quarter would have been $33.2 million for an operating margin of 10%, which represents a 32% increase compared to the third quarter last year.

Defense benefited from a more favorable program mix in the quarter as well as some conversion of our active bid pipeline to orders. The Defense book-to-sales ratio was higher this quarter at 1.11x and it was 0.88x for the last 12 months.

Lastly, in Healthcare, we continued to see higher sales momentum with third quarter revenue of $33.0 million, up 19% compared to Q3 last year. Segment operating income was stable at $0.6 million reflecting a higher investment in R&D and SG&A to develop and support a larger future business. With that, I will ask Marc to discuss the way forward..

Thanks, Sonya. We continue to have a positive outlook for CAE for the balance of the year and over the long-term. In Civil, the industry expects approximately 4% long-term passenger traffic growth and this assumption continues to underlie our investment thesis.

Higher demand for air travel drives an expanding global in-service fleet of aircraft and a significant need to attract and create new pilots to meet industry needs. As a company, we are focused on providing comprehensive solutions for our customers to recruit, develop and maintain these highly critical personnel.

CAE has the privilege and responsibility of being the world leader in aviation training and we have a very good momentum in a large addressable market. As we look ahead, we expect more opportunities to materialize from the large pipeline of long-term training partnerships.

We also continue to expect another good year for full-flight simulator sales and to maintaining our leading share of the market. For Civil overall, we continue to expect operating income growth closer to 30% for the year on strong demand for our training solutions.

Since the start of January, we have received orders for 7 more full-flight simulators, including 6 for the Boeing 737 MAX. Boeing announced in early January that it would recommend simulator training for the MAX, which if confirmed by the aviation authorities, would indeed drive a higher rate of demand.

It’s our practice to respect the timelines of the OEMs and aviation authorities and not get out ahead of them, especially when it involves aircraft certifications or investigations.

So, I’ll refrain from speculating on what the training regulations might entail for the MAX’s entry into service and instead, I’ll summarize what has been CAE’s position so far on the aircraft type.

To-date, we have sold a total of 56 MAX full-flight simulators to airlines, which represents the vast majority of all sales to airlines of that simulator type. The fact is the majority of airlines that have ordered the MAX aircraft are indeed CAE customers.

So far, of the 56 simulators ordered, we have delivered 22 as of the end of December and in addition, we have already deployed 3 to CAE’s own training network and we are in the process of deploying more.

We mentioned on our last quarterly call that we begun to build additional inventory of MAX simulators in anticipation of pent-up demand and this continues to be our practice in view of the demand that we expect.

I guess the most essential point in all of this is that we have our customers covered as their training partner of choice and they recognize the support we bring to their most critical operations.

We have the capacity and the capability to respond to our customers’ training needs, whatever the requirements and we look forward to a successful and safe re-entry into service of the aircraft.

Now, turning to 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. We continue to expect modest growth for the year taking into account our year-to-date performance and our current expectations for reaching milestones on programs in backlog.

We also expect to conclude several more contracts in the current fourth quarter, and as always, we don’t control the timing of government decision-making, but I take confidence in knowing that we have already been down-selected for most of them.

Our long-term prospects in the large addressable Defense market remain positive and I am encouraged by approximately $3.8 billion of Defense proposals that we have written that are currently in the hands of customers pending decisions. Finally, Todd Probert officially became our new Group President, Defense & Security on January 27.

As with his predecessor, Todd is based in Washington, D.C., where he is very well connected within the U.S. defense establishment and has a clear view of the military’s future operational and mission preparedness requirements. He is a proven business leader. He brings an excellent defense industry profile to CAE.

He has the passion for artificial intelligence, machine learning and new development models and his interests, competencies and background are very well aligned with our emphasis on digital innovation. I am very pleased to welcome a leader of his caliber to our executive team, and I expect he will bring significant value to our company and customers.

And lastly, in Healthcare, I am encouraged by the response CAE is getting from the market. We expect to continue building on our current sales momentum with our highly innovative solutions. The increased imperative on patient safety was in full evidence at the International Meeting on Simulation in Healthcare, which took place last month in San Diego.

The event, which is the world’s largest conference dedicated to healthcare simulation learning, research and scholarship was an excellent showcase for CAE Healthcare and our latest solutions. We continue to expect double-digit percentage growth in Healthcare this year. In summary, our overall outlook for CAE this fiscal year is unchanged.

We benefit from a strong position and secular tailwinds in each of our core markets and we look forward to superior top and bottom line growth in the years ahead. With that, I thank you for your attention and we are now ready to answer your questions..

Thank you, sir. We will now begin the question-and-answer session. We will begin with our analysts first. [Operator Instructions] Our first question comes from the line of Steve Arthur with RBC Capital Markets. Please go ahead, sir..

Great. Thank you very much. Just a question first on the civil margins, they looked very strong in the quarter at around 22%. And if I remember correctly, that’s about as high as we have seen them.

Were there any one-time items in there that were supporting that or is this more a case of civil margins moving meaningfully higher with the evolving business mix?.

Thanks, Steve. With the acquisition, we guided that there would be margin accretion of 100 to 150 basis points and we see this coming through. Margin is also a reflection of the mix of training and the product business. So combined, good training margins, but also what it does reflect a good program mix in the quarter.

So that’s really kind of what’s driving some of those margins..

And I’d just add that, there is no one-timers, Steve..

Okay. Okay, good.

So then over the next several years, then we should continue to see that kind of 100, 150 basis point bump over to where you were into the low 20s?.

You will get our outlook for next year very soon but not at this call, but look, I think we are very happy with the performance we have with – I think we tend to as you have seen we like to guide on the operating income growth in the absolute terms. But look, I think that’s – there is no reason to expect our performance to go down..

Okay. And I guess related and probably a similar answer in the longer term, but Defense margins, you are calling for modest growth in the year, but you are down, I think 8% or 10% so far year-to-date implies a strong finish as I am sure you are aware. So I guess a couple of things.

One, just in terms of what do you see in the near-term that supports that jump in Q4? And then just looking out over the mid to longer term, are we right in thinking about this as kind of a 10% to 12% margin business as it has been historically or is something in the mix change there?.

Well, I think first and foremost, yes, the same answer to a certain extent with regards to longer term outlook, still it’s a growth business and we are quite confident of that.

I am going to leave some time for Todd Probert as the new Head of Defense to get his hands around the business, but clearly we expect that we can do well and longer term I fully expect us to beat market growth in defense.

What gives – but we will precise that as we have done as we get into the early part of next year as it relates to next year for sure.

In the short-term, yes, you are absolutely right, it implies a strong – very strong, actually I’d say fourth quarter, but we did that last year and we have the habit of doing that and is supported by you would imagine if we are basically committing to it is because we have a strong forecast to support staff, but it’s supported by the usual suspects is how we are executing the programs that we have in the backlog as the orders that we had in the quarter, as I said I was encouraged by the positive book-to-bill that we had in the quarter, especially the strong product orders like I talked about the NH90 order that’s very important.

But I would tell you, it does require that we win. There is a few orders that we need to win in the quarter and that’s the only difference. We always have to win orders in the quarter.

So, I think some of that variability and you saw bring us down slightly our outlook in the last quarter for Defense and that was basically on with some of the orders that we had, we are going to moving out of the year. But look again, I have confidence in the orders and because over 90% of the ones we need, we have already been selected on it.

So it’s not a question of the – their competed contract, it’s one, it’s just beside can we reach the contract, can we get the customers to sign on before the end of March, that’s really where we are at on that one. Well those are the elements that make up our outlook for the year..

Okay, thank you.

And just final point just on the training centers and customers in China, any comment at all in terms of what’s happening with your operations there right now, obviously, no crystal balls, but have there been closures or what’s the near-term status of some of the facilities?.

Yes. Well I think we are following what the recommendations mainly of WHO and governments around the world as you might expect this to do. Obviously, our first priority is the safety of our employees, our customers around the world. In terms of business impacts for us, right now, again as you say, we are watching the situation closely.

We do expect to resolve itself as we do see this as a short-term issue from our standpoint of what we see, but so far the impact for us has been that we have pulled our personnel out of china that we were, for example, installing a simulator, civil simulator in China. So that simulator was expected to deliver this year. So it will not at this point.

So that’s the one impact. We had some training customers that have cancelled their training, because of in some cases – there were Chinese careers come to train with us for example in Dubai and other centers. So those are kind of the impacts we have, but we have modeled this and it’s reflected in the outlook that we have towards the end of the year.

So, barring some catastrophic escalation of this, which we have far bigger ramifications to what we are talking about years, we feel good that the effects are contained for us..

Okay, great color. Thank you..

Thank you for your question, Mr. Arthur. Continuing on, we now have the question from the line of Konark Gupta with Scotiabank. Please proceed..

Thank you and congrats on a good quarter. So, just wanted to follow-up on the Defense margin and welcome Todd, so margin has obviously come down below 11% over the past 2 years and I know the mix has been more skewed to services lately.

But should we not expect the margins to kind of remain below 11% as you continue to grow as a TSI business with more service proportion? I mean, is it not because of structural changes or is it something else?.

Well, look, I don’t want to get out too much in front of that. We still have our backlog that reflects the outlook that we have today for the business in terms of margin performance. I think it really depends on – you got to remember that ours is a very international business.

So, yes, on a typical basis, services tend to run lower and that we said before.

Now it doesn’t necessarily have to be the case around the world as you can imagine that if we are putting capital into – at work we will be looking for a higher margin than that, but it’s really going to be – I think it’s going to be based on where the revenue comes from for various jurisdictions around the world and very, very importantly, it’s going to be the products and service mix, as you said, services tend to be lower, but I have quite confident that we can continue to build our products business with the portfolio we have.

So, look, more to come, but I wouldn’t come to the conclusion that the margin initiatives to dip structurally..

Okay, that’s a great color, Marc. Thanks. And then on the Max, so – thanks for updating on orders and backlog. That’s very useful.

Can you talk about your plans for MAX simulator production rate and outlook? How do you foresee this backlog translating into production? And are you seeing any interest in upgrade of existing 737 NG simulators as opposed to new orders?.

Well, I think it’s too early to tell with regards to upgrade. I think in some cases, it will really depend on the airlines. Typically upgrading a simulator is quite – can be quite involved and sometimes you’re better off to just buy a brand new simulator.

In majority cases, that’s what we see in our business even though, like for example, replacing an old 320 with a new 320, our old 737 versus new one that people tend to buy new ones. So, that’s been the history. We will see for the MAX. If there is a demand for it, we will certainly be there. We have a very big aftermarket business.

And so, we would do that as well. That would be part of that. There has been a step-up in demand.

As you saw that testimony by 6 MAX orders since January and big exploration as a result of the news that Boeing was recommending MAX simulator training, but look, I think that you asked for production rate, I’m not going to get out there and tell you what the production rate is.

But I can tell you that we have increased it, but we have the capacity to increase it even more. We’re still at a rate that we’re below in terms of production rate below what we were when we recovered from the strike last year and we still have lots of capacity.

So, we’re following this closely, but we have a bunch of – I’m not going to say how many of sims as we have talked about last time as what we call white tail ready to go, and there is interest out there.

So, look, I don’t want to get out more in front of that because it’s really going to be dependent on what the regulator decides and the regulator hasn’t come out yet. So, I think we’re holding our fire, but we’ll be prepared..

Okay, that’s great. And lastly, Sonya, if I can ask you, so on the leverage ratio, you still said that is 18 to 30 months of normalization to happen here, but if you see any good opportunity out there, perhaps because of the recent consolidation in the industry and if somebody wants to divest an asset or something.

Would you pursue that at current leverage ratio or would you still wait for it to normalize? Thanks..

Even at this level, we’re in a very comfortable balance sheet position and capacity. So, on the heels of the cash generation of the acquisition and the other investments that we’ve made, we have a profiling that can take us to more de-leveraging, both on the organic business and the CapEx that we’re deploying.

All of this generates good free cash flow. And so, it de-leverages, but if there are opportunities, we, of course, always look at various opportunities whether they’re organic outsourcings whether they are JVs or even inorganic, we continue to look at those or even any items that may come up on the M&A space.

So, the balance sheet is flexible and has capacity, and we can – I think comfortably with our cash flow generation balance, some de-leveraging and continue to invest in growth..

Okay. That’s it for me. Thank you so much..

And thank you for your questions, sir. Next question comes from the line of Kevin Chiang with CIBC. Please proceed..

Hi. Good afternoon and thanks for taking my questions here. Maybe first one from me. If I could ask it in a little bit of a different way, you had a 70% utilization in Civil, margins up at 22% and I appreciate the mix and some of your recent acquisitions have aided in the improvement in your profitability.

But if I think of that utilization rate getting back to say the mid-to-high 70% we saw maybe a year or so ago, is a way to think of the upside to Civil operating income as you get that better utilization through your training centers?.

Well, again, we’re not going to get ahead of it because we’re not giving our outlook for six years here. And I think you correctly said there is a lot involved in the mix. So I think, look, we take – we obviously take comfort as you probably do inherent in your question about that we’re able to generate this level of margin at 70% utilization.

Yes, for sure. A lot of the sims – the reason that we’re at 70% is because we’re moving a lot of simulators around. And if you think about – we’ve added that – we’ve gone in the last three quarters from 266 simulators to 303 over the last three quarters.

So, while we’re moving sims or while we’re bringing sims that are not fully ramped up in terms of revenue potential, but at the same time, we have had short-term headwinds in Europe. The 737 MAX has caused some disruption in the overall 737 market to have some market consolidation. Remember, airlines like, such as Thomas Cook, right now.

So, look, is there room to grow earnings? Yes, sure, there is room to our earnings.

How that reflects is absolute margin itself? It will depend on the mix because all – not all businesses are of the same – aren’t the same in terms of margin percentage itself, but I think we’ll probably continue to focus on absolute income growth of the measure that we will drive through..

I appreciate that. That’s good color there. And then, I know Todd over at – as a new Group President in Defense.

It’s a recent hire, but is there something like to accomplish longer term within Defense that you’re currently not capturing in terms of opportunities, in terms of growth, or should we think of that long-term strategy essentially being the status quo even with the change at the top of that division?.

Well, look, I think that, really what – if I would to say anything of our defenses, you’ve seen the success that we’ve had in civil. And there’s a lot of – there is a lot of things that we can bring from our business model in civil. They are imminently applicable in the defense market.

So, I think first and foremost, you’ll see us applying some of those technologies, some of those lessons learned of this business model more and more into defense market. Todd comes from a very strong business leader, he comes from a very strong position and strong background in terms of the U.S.

defense department specifically, but with international experience as well.

So as I said before, when I was looking for a replacement for Gene Colabatistto in this market, we’re looking for somebody that could knew his way around, if you look, knew his way around the Pentagon, knew his way around the defense market in the United and internationally and has basically a good view of areas of the US DoD that we don’t necessary where we haven’t been focused on.

And I think those doors opened. So, I think first and foremost is concentrating our strategy, leveraging our core competencies, core capabilities, including the digital innovation that we will apply at civil, applying them to defense and Todd comes with strong capabilities in that regard.

And then, we will see, but too early, we’re not seeing any change in strategy here. But definitely, I think we’ve reached strong expertise to the fold that I feel confident we will, as I said, be very good for CAE and our customers..

That’s a good color. And maybe just last one from me. Sonya, just to clarify, as I think about working capital maybe in the fiscal fourth quarter here, and maybe even the fiscal first quarter, so the next couple of quarters, you mentioned ramping up I think some of the inventory around the MAX simulators.

Should I think of the working capital, I guess, seasonality that we typically see maybe Q4, Q1 being a little bit different because of that inventory build or maybe it’s an immaterial impact in how your working capital flows over the next 3 to 6 months?.

It will have an impact, but I don’t see it reversing the overall cash profile, which usually is a first half investment and then reversal or partial reversal in the second half, and good performance in Q3 and reversing $180 million in the quarter and back to what we mentioned last quarter, we expect it to continue on that non-cash working capital efficiency to drive a significant reversal around 75% of that first half investments.

And that’s with some continued investment in the inventory. Now, some of it turns even quicker in the quarter in Q1. There may be some variation there. I don’t suspect it will change the overall cash flow filing between the first and second half, but we are driving to further reversal in Q4..

Thanks for the clarification. That’s all from me. Thank you very much..

And thank you so much sir for your question. Our next question comes from the line of Cameron Doerksen with National Bank Financial. Please proceed with your question..

Thanks. Good afternoon. Maybe a question for Sonya, just on the I guess, the leverage question that was earlier. I wonder if you could maybe just talk about your ability, if you want to pay down debt earlier than expected.

I mean, is there a way that you would potentially accelerate debt retirement here or are you kind of restricted on what you can do on a yearly basis just on the terms of that debt?.

So, in terms of the level of financing, we have the private placements that we issued last year and the last tranche in the quarter. We do have also some flexibility with term loans. So, if we wanted to accelerate that that is an option. We do continue to see very good options for investment.

And I’ll go back to our capital allocation priorities and first and foremost, continuing to invest in accretive growth organically, and if there is any inorganic approaches to it as well, but to your question, if we do have the flexibility to do so, if we wanted to shift a little bit of the balance..

Okay. That’s fair. Just secondly from me, maybe a question for Marc just on the sort of end markets, so we have seen a little less activity on business jet flying. I’m just wondering what you’re seeing in your business jet training centers.

Are you seeing any change in the level of demand? Obviously, you’ve got the new acquisition that’s driving the year-over-year growth.

And I’m just wondering on the sort of the legacy business there, do you see any change in the demand for training on business aircraft?.

Not really. It’s very dependent on which platform and what market. But overall, no, I think the – I would tell you, we don’t typically disclose it, but I can tell you that the growth in our printing activity organically is very strong. And big component of that is business aircraft.

And when you break down business aircraft, I think a lot of the growth comes from the acquisition that we made. But equally, we have the fact I think we can talk about. Yes, we – actually, I was going to look for if we have the breakdown, but we don’t have it.

But in terms of the organic growth in business aircraft training, it’s actually been pretty good. We’ve been outpacing the market itself overall. There is a number of the flight activity itself, which is a metric, but there’s a lot of pilot-changing jobs as well.

And that stimulates our training activity, and in the higher-end business jets, a lot of activity. So, overall, we’re doing well and the organic growth is pretty good..

Do you feel like you’ve gained some market share in that sub-segment?.

Yes. We have. And if you look at the contracts that we had just this quarter, we have like 3-year just in business aircraft alone, three-year training renewal with TAG Aviation Holdings. That’s a very big contract in itself with TAG; six years with JetSuite; four years with the Solairus Aviation.

So yes, there is no doubt we’ve gained share, and we’re quite happy with the customers that have moved over to CAE..

Okay, great. That’s all from me. Thanks very much..

Thank you. Thank you so much, Mr. Doerksen, for your question..

Up next, we have Fadi Chamoun with BMO Capital Markets. Please go ahead, sir..

Okay. Thank you and good afternoon. Just one question, if you can clarify the acquisition you made from Bombardier.

If there were to be a change in control of those assets, do you have any exposure – do you have kind of solid long-term commitment under that transaction that you have done with Bombardier?.

Yes. We have a 20-year exclusive ATP agreement and exclusivities that would flow over to any potential buyer, Fadi..

Okay. That’s great.

And on the 56 MAX orders that you received or you’ve sold or received order from, do you know off the top of your head how many airlines that represent?.

How many in total – I know it’s probably all of them, but I’m not sure how many order – how many airlines that we could probably get to that number later. I don’t remember exactly how many airlines it is. But as I said, the high majority of all the airline customers that have bought the MAX have bought our simulators..

Okay. Thank you..

If I get the number, I’ll come back and tell you what it is we are looking..

Okay..

Thank you, Mr. Chamoun for your question. [Foreign Language] Next question comes from Jean-Francois Lavoie from Desjardins Capital Markets. Please go ahead, sir..

Yes. Good afternoon and thank you for taking my question. I just wanted to come back on the military side. You mentioned in the past that the business mix would evolve favorably in the second half. I think it remained fairly stable in Q3, but the margin has still increased fairly significantly in the quarter.

So, I was more wondering if we should expect a similar performance in Q4, and if the mix will change accordingly..

I will leave it to Sonya a little bit, but I guess it has to – we’re going to beat the outlook that we said we are, which we – again, as we have confidence in achieving it.

I would caution as well, as I usually do and we’ve said that many times, it’s kind of hard to look at the military business on any of the major metrics on a quarterly basis because of the size of the contracts themselves and whether their service or product. This quarter, we had kind of flat revenue, but much higher earnings.

Last time, we had the contrary. So, I think it’s best to look at it over a number of peers, and maybe 12 months is the best way to look at it, but Sonya you want to....

Absolutely. It’s really because of that variability, always best to look at it over a longer annual basis – at least annual basis. In the quarter, there was a more favorable program mix drove a higher contribution and contribution of orders signed and started in the quarter.

So, that drove some of that margin and while the revenue was relatively stable. I’ll also point to the fact that revenue doesn’t – our revenue line doesn’t capture the revenue from JVs, which are accounted for as equity pickup and included in the EBIT.

And so, some growth that came from those joint ventures is not necessarily reflected on the revenue line..

Okay, that’s great color. And if we get back to the Civil segment, I think you mentioned in the MD&A, lower utilization rate in Europe.

So, I was wondering if you could talk a little bit more about the utilization there please?.

Well, I think Marc spoke to it. And ultimately, we are seeing some – a bit of headwinds in Europe. There is a little bit from consolidation that we’re seeing with certain airlines. Now, we see this more as a short-term, because as they consolidate, they’ll generally – the traffic will generally be picked up with other CAE customers.

And we will recuperate at that way, but there is a bit – we see a bit of headwind in Europe on the utilization there..

And just to add and to reiterate what Marc said before, some of that headwind is owing to the MAX having been out of service for quite some time now. And so, our 737 simulator training in Europe is directly affected by that as well..

Okay. Thank you for the color.

And maybe a last one from me, Sonya, on the CapEx, I know you don’t want to provide guidance for next year, but just directionally, would it be fair to assume some growth in fiscal year ‘21 as the pipeline for opportunities remain robust in both civil and military?.

I will come back next quarter with a view on all of the guidance for next year. For this year, we will stick to our guidance, which is slightly higher than last year’s 10% to 15% over last year..

I think it’s important to add though that as a ratio of operating cash flow or of revenue, that number has been declining. So, whatever the quantum, but as a ratio of the size of the business, which continues growing, it has been declining..

Okay. Thank you very much..

Operator, I guess that’s all the time we have for questions from members of the financial community. We now want to open the lines to members of the media..

Absolutely. Thank you. [Operator Instructions] Our first question from the media comes from the line of Allison Lampert with Reuters. Please proceed with your question..

Thanks very much. Just two quick questions on the MAX, first, you talked about demand for the MAX simulator before.

Would you say that is the most popular simulator that you’re selling right now for – during fiscal year? And secondly, you also mentioned that you would deploy more in your training centers, where are you looking?.

I think that – well, I don’t think we’ve actually developed all the locations happening here. But I think first, wherever the customers are, but....

Yes. And the three that we have deployed is in Toronto and Singapore and in the midst of deploying in Dallas right now. And we’re looking at other sites, but those are the ones that have been deployed..

Right now, do you have any idea of where you’re looking in terms of the other sites? I was thinking maybe Europe, then I understand that there is not many – not much – not many simulators there. So, that might be an interesting location..

As Marc said, we are looking at where the customer demand drives us..

Fair enough..

Yes. It’s reasonable to expect that one would go there, yes, at least..

Right.

And just my other question, would you say, is the MAX simulator your most popular, your strongest selling model at the moment?.

I really haven’t looked at their breakthrough. But look, I think that certainly in the last – since the beginning of January, yes, six out of seven. But for the year as a whole, look, I wouldn’t expect it, it wouldn’t be normal to be because the airplanes have been grounded.

So, inevitably, while the airplanes have been grounded, orders have slowed for the 737 MAX type. But going forward, with the backlog of aircraft, I mean to me, there is – I don’t want to get in front of regulators, to me, there is no doubt that the aircraft will resume flying and the backlog of 737 MAX aircraft is very large.

So, we’ll be delivering sims for quite a while. And I think the ratio is of simulators aircraft will be the same as other narrow bodies. So, I think that will presage many simulator sales for 737 MAX in the future..

Thank you..

Thank you, Mr. Lampert for your question. [Foreign Language] Please proceed..

Thank you. I have two questions. About the fact that United announced yesterday or two days ago that they would buy a new flight academy.

Is it something that is just – does it make you nervous or not? And second question, could you repeat what you said that the coronavirus add in any effect in your operation?.

Well, I talked about the coronavirus. I mean, as I mentioned before, the first priority for us is the safety of our employees around the world, safety of our customers. So, we’ve taken precautions that are very similar to and in line with the recommendations of the Canadian government and WHO in that regard.

So, our personnel that were in China have left China. We have – we had business impacts with regards to one simulator was being installed in China. So, we, of course, put our people moving back to Canada, then that activity has been delayed for the moment. We have some training of Chinese customers that has been postponed for the same reasons.

We have put very strict hygiene protocols in all of our centers around the world to get to protect our personnel, our customers. So, that’s I guess the answer on coronavirus.

With regards to your previous question, on the center for United, no, look, I think it just reflects the fact that what we’ve been saying is there is a global pilot shortage out there, and it’s affecting airlines around the world and airlines are moving to be able to ensure that they have the proper source of highly-skilled workforce.

So to me, it’s just testimony that they need that’s out there. Now, as a company – and I think I’ve said this before, we never pretended to want to control the full capacity in this market. I mean – but yes, we’ll look – I am very proud of the customers that we have in our training centers at the moment.

We have very great contracts with on having initial pilots, which are new pilots like this, which you talked at United, with American Airlines, with Southwest Airlines, with JetBlue, just in the United States alone. So, those are cadets being trained from start to getting an airline type rating with CAE.

So look – and in fact we’ve been leading the market out there in terms of initiatives to increase diversity. We have given scholarships to five deserving women around the world, so they become airline pilots. So, look, United is a very, very good customer of ours. And they are taking action.

I can’t answer for them, but I think all it does is reflect the need out there for pilots..

Okay.

And about China, how many employees do you have over there that stopped working or that you brought back?.

Well, Canadians, look, I don’t remember the exact number, but it’s not a huge number, probably less than 50..

Less than 50? And do you have operation....

Let me correct that. It’s less than 20. What I was talking about more of the 50 that were in country..

Okay.

You said – so, you said less than 20?.

Less than 20 Canadians returned back to Canada..

Did you return other employees that were from other countries, US or anywhere else?.

No..

No? And do you have permanent employees that are not Canadian in China?.

Yes, we do..

Are they still working, or you have to close operations?.

It depends where we take the same in detail. I mean, we have not shut down operations, but I think most people would be. We don’t have a training center over there. So, it’s not the plan of exposure. I think we would have people, I’m getting outside my zone.

Sonya, do you have anything to add on it?.

Yes. So, we have people in Beijing and Shanghai and Hong Kong, and we are following the measures led by the government. So, yes. .

A lot of it – most of it is work from home that we will be doing at the moment..

Okay.

And grossly talking, it would be how many people working from home or in the three cities you’ve mentioned?.

Well, probably the majority. I can’t tell anything specifically, but it would be a majority of the remaining employees that we have..

But would there be 100 employees, or there would be 20?.

No. Look, I don’t know the exact number, but I – it’s not more than the 50 employees total that we have in China..

Okay, okay. Perfect. I will let you go. Thank you very much..

Thank you. [Foreign Language] Our next question comes from the line of Henry Canaday with Aviation Week. Please proceed with your question..

Yes.

Could you talk a little bit about what portion of your full-flight simulators for commercial aircraft have been upgraded for the FAA UPRT, the upset prevention and recovery training requirement?.

Look, of our civil simulator, I can’t tell you the number, but I do believe it to be 100%. And then we get back to, but I think that was the requirements. I’m pretty darn sure that’s 100%..

Is that just for the US or upgrades going on internationally or....

I think it would be around the world. And I think we – I think we should get back to make sure I’m right, but it will follow the regulatory requirements, but we led the industry in terms of driving UPRT training, including this is [ph] used in simulators. So, my belief is we’re 100% and – but we have to maybe get back to an exact number..

Sure. Thank you very much..

Okay. You are welcome..

Thank you, Mr. Canaday..

Sorry, operator. I think that’s all the time we have for the call this afternoon. I want to thank all of our participants from the investment community as well as members of the media for having joined us. And I would remind you that a copy of the transcript of today’s call can be found at CAE’s website. Thank you..

Thank you and that does conclude the conference call for today. We thank you all for your participation in us. You please disconnect your lines. Thank you once again. Have a great day everyone..