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CAE, Inc. (NYSE:CAE)

F3Q 2014 Results Earnings Conference Call

February 11, 2014 01:00 PM ET

Executives

Andrew Arnovitz - VP Investor Relations and Strategy

Marc Parent - President and CEO

Stephane Lefebvre - Chief Financial Officer

Analysts

Steve Arthur - RBC Capital Markets

Cameron Doerksen - National Bank Financial

Turan Quettawala - Scotiabank

David Newman - Cormark Securities

Benoit Poirier - Desjardins Capital Markets

David Tyerman - Canaccord Genuity

Tim James - TD Securities

Ben Cherniavsky - Raymond James

Anthony Scilipoti - Veritas Investment Research

Operator

Good day, ladies and gentlemen and welcome to the CAE’s 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.

Andrew Arnovitz

Good afternoon, everyone, and thank you for joining us today. Before we begin, I need to read the following.

Certain statements made during this conference including, but not limited to, statements that are not historical facts are forward-looking and are subject to important risks, uncertainties and assumptions. The results or events predicted in these forward-looking statements may differ materially from actual results or events. These statements do not reflect the potential impact of any non-recurring or other special items or events that are announced or completed after the date of this conference, including mergers, acquisitions or other business combinations and divestitures.

You will find more information about the risks and uncertainties associated with our business in our third quarter fiscal 2014 MD&A and in annual information form for the year ended March 31, 2013. These documents have been filed with the Canadian securities commissions and are available on our website at cae.com and on SEDAR. They have also been filed with the U.S. Securities and Exchange Commission under Form 40-F and are available on EDGAR.

Forward-looking statements in this conference represent our expectations as of today, February 11, 2014, and, accordingly, are subject to change after this date.

On the call with me this afternoon are Marc Parent, CAE's President and Chief Executive Officer, and Stephane Lefebvre, our Chief Financial Officer. After comments from Marc and Stephane, we will take questions from financial analysts and institutional investors. Following the conclusion of that Q&A period we will open the line to members of the media.

Let me now turn the call over to Marc.

Marc Parent

Thank you, Andrew, and good afternoon to everyone joining us on the call. As per our usual practice, I’ll first review some highlights of the quarter and then Stephane will provide a detailed look at our results. I'll conclude the formal portion of the call by commenting on the way forward.

I'm pleased with the results we've achieved in the third quarter. We saw an across-the-board improvement in our performance with sequentially higher operating margins and stronger order intake. For the company overall, order backlog stood at $4.1 billion and we had an additional $421 million in backlog related to our joint ventures.

In civil, we expected the combined operating margin to improve to the high teens in the second half of the fiscal year and the 16% margin reached in the quarter puts us right on track. We’ve now completed the majority of simulator relocations and the higher margins owes mainly to the operational improvements we’ve made, higher volume and higher utilization in training which reached 69% in the quarter.

The increased profitability we achieved since the start of the year underscores the operating leverage that exists in the business. In civil products we sold 12 simulators in the quarter and 43 year-to-date which is a new record giving us good backlog visibility. Our strong sales this year are a testament to our market leadership and more specifically our ability to deliver what matters to our customers. That being said, we don’t take our success slightly and we constantly evaluate CAE’s winning formula.

Our customers tell us, they value CAE’s brand and the longstanding relationships that they’ve held with the company. They enjoy the seamless end-to-end experience they get by choosing us as their partner of choice and they value the technology and capability underlying our products as well as a broad portfolio we offer.

In training and services, we signed long-term agreements with airlines and operators including Japan Airlines, Virgin Australia Regional Airlines, Air Transat and Jetflite. In business aviation, CAE was selected since the end of the quarter as the exclusive Dassault-Approved Training Provider for the newly launched Falcon 5X long range business jet. This adds to our broad relationship with Dassault involving a full range of Falcon business jets.

In all we received $329 million in combined civil segment orders this quarter, for a book-to-sales ratio of 1.17 times and our civil backlog reached the record $2.1 billion.

In military, our business remained resilient this quarter. Revenue was up 2% over last year and up 6% over last quarter. The combined military margin got up above 15% driven by our restructuring in Europe and a strong program mix in the quarter.

In terms of new business, we book orders during a quarter for simulators upgrades and services on insuring aircraft platforms including the MH-60R Seahawk helicopters for the Royal Danish Navy, the P- 8 Poseidon aircraft for the US Navy, and the C-130 aircraft for the U.S. Air Force.

We have success getting orders on new aircraft programs for CAE, with contracts for a comprehensive ground-based training system for the T-6C aircraft for the Mexican Air Force, an Unmanned Aerial System Mission Trainer for the General Atomics Predator for the Italian Air Force, and an aircrew training services contract for the T-44C Pegasus for the U.S. Navy.

And we also had success broadening our core markets with a ten-year agreement with the Brunei Ministry of Home Affairs to establish a training centre and conduct emergency management training. This is our first major contract leveraging modeling, simulation and training in an adjacency such as public safety.

In total, we received $240 million in combined military segment orders this quarter, representing a book-to-sales ratio of 1.19 times. This quarter marks the first time in the last four quarters that we have seen book-to-sales above 1 time for both products and services.

Contract options were also significant and not included in the order intake is another $97 million in options. Third quarter military backlog was $2 billion and in addition to that we had another $435 million of unfunded backlog.

Looking now at new core markets, in CAE Healthcare, we made further inroads in the defense market with the sale of a record 44 Caesar Trauma Patient Simulators to the U.S. Navy Expeditionary Combat Command. We also sold our centre management, ultrasound simulators and patient simulators for a range of teaching institutions in the United States.

Since the end of the quarter, we unveiled CAE’s Fidelis Maternal Fetal Simulator at IMSH, which is the world’s largest healthcare simulation conference. Our R&D efforts are bearing fruit and we are already seeing strong interest in this new simulator ahead of its official release.

We at CAE are particularly proud of this solution, which will be used by healthcare instructors to improve training for the serious complications that can arise during child birth. Our vision for healthcare involves using simulation to help improve -- to improve the quality of patient outcomes, much in the same way we've made air travel safer with our simulation-based solution in aviation.

In CAE Mining, we released a major update to our flagship resource modeling software. And in terms of business activity, we sold our resource modeling, open pit and underground mine planning solutions and engineering services to customers globally.

With that I'll now turn the call over to Stephane.

Stephane Lefebvre

Thank you, Marc and good afternoon everyone. Consolidated revenue for the quarter was up 3% year-over-year at $513.6 million and net income attributable to equity holders was $46.1 million or $0.18 per share. We've had very good cash performance on a year-to-date basis, with $96 million of free cash flow generated through the end of December. This is $117 million higher than the first nine months of last year.

The improvement came mainly from favorable changes in non-cash working capital and an increase in cash provided by our operating activities. Free cash flow was negative $12.7 million in the third quarter, and as we look to the fourth quarter, we expect to see some improvement and be able to sustain a sizable improvement in free cash flow for the year as a whole.

Third quarter capital expenditures totaled $37.2 million this quarter, with $22.8 million for growth. This brings our year-to-date growth CapEx to $60.7 million. Maintenance CapEx was $14.4 million this quarter and $31 million for the year-to-date.

Net debt was $886.5 million as at December 31, 2013 compared to $810.4 million as at September 30, 2013. And our net debt-to-total capital ratio remained stable at 39%.

Now looking at our segmental financial performance; for combined Civil, third quarter revenue increased 3% year-over-year reaching $282.1 million. Operating income was relatively stable year-over-year at $45.2 million for an operating margin of 16%. And our combined Military segments third quarter revenue was up 2% year-over-year at $201.8 million, we generated 15.4% operating margin. And finally in new core markets, revenue was $29.7 million for the quarter compared to $28.7 million in the third quarter last year. Operating income was $1.4 million compared to $1.7 million last year. We continue to invest in SG&A and new products to develop larger business.

With that I’ll turn the call back to you, Marc.

Marc Parent

Thanks Stephane. Our discipline is continuing to drive positive results and we’re meeting the objectives we established for operational improvements and greater financial performance. In Civil, we expect to continue to lead the market and to see a higher combined segment margin in the fourth quarter as we continue to ramp up utilization in our training centers, grow our training network and work through our record volume in products.

Our business in commercial aviation customers expect CAE to continue offering the widest and most capable range of product and service solutions in the industry with the broadest global reach. Taken together, this puts us in a prime position to continue to lead within a large and growing civil aviation market.

In military, the U.S. Bipartisan Budget Act has given greater clarity to immediate spending priorities. In recent weeks, we’ve seen investment commitments in the U.S. and internationally to purchase enduring aircraft platforms where CAE has a strong position. In terms of our order outlook, we are continuing to build our bid pipeline, with more bids submitted fiscal year-to-date than all of last year. The increased level of orders booked in this quarter is the product of our increased bid pipeline and our global footprint and we expect this trend to continue.

In new core markets, our research and development initiatives are translating into unique new products and expanding interest in the kinds of solutions that CAE is bringing to market.

To conclude, we are working from a solid base, with a well diversified business, our record order backlog and a strong financial position. The commercial aerospace market is robust with unprecedented aircraft orders and deliveries giving us good visibility. This together with a clearer picture for defense bolster our confidence for the way forward and position us well for growth. Thank you for your attention and we are now ready to take your questions. Andrew?

Andrew Arnovitz

Operator, we would now be pleased to take questions from analysts and institutional investors. As we usually ask before we open the lines, in the interest of fairness I would ask that please limit yourselves to a single one part question and if you have additional questions after that the time permits, please feel free to reenter the queue.

Question-and-Answer Session

Operator

Certainly, thank you. (Operator Instructions). And we’ll proceed with our first question from the line of Steve Arthur with RBC Capital Markets. Go right ahead.

Steve Arthur - RBC Capital Markets

Great, thank you very much. Just wondering as part of your margin improvement programs, you can elaborate just a little more on the status of some of the simulator moves across your training network, just a recap perhaps of how many were being moved, how many have yet to land in their new spot? And then some sense on what the target utilization might look like for these relocated simulators; is it any different from what’s more broad linear base?

Marc Parent

Lots in that question Steve, but let me try to…

Steve Arthur - RBC Capital Markets

You only allowed one part.

Marc Parent

Yes, exactly, this is cheating. But look I will try to answer that. Well I think Stephane, I think he has exact numbers. But I think the majority of our relocations are going to be complete by the end of -- we’ve done a lot in Q3, why don’t you just go with the numbers that will be easy.

Stephane Lefebvre

Well, you may remember, we started the year with about in the first quarter having $0.20 being in instead of flux and we've relocated some of that in the second quarter as well as in the third quarter. At the end of the third quarter, we still had about $0.16 in the process of being moved or having been relocated but ramping up. And as we completed the year, we really see the bulk of the relocations being done at the end of Q4, there may will be a little one, a few more in Q1 but in the near term, we're planning to have the bulk of the relocation pretty much completed.

And so that will definitely play in the increase in utilization rate. I think Marc said that in his remarks. In Q3, our utilization rate was at 69%. And as we continue in Q4, as we continue ramping up some since that have been relocated and complete, some relocations, we expect to see some increase in our utilization rate going forward.

Steve Arthur - RBC Capital Markets

Okay. I guess just to clarify my question just with the simulators that have been moved to these new locations, is there unusually high demand in those areas or the utilization rates are in those particular sense should be higher or will they just kind of average at where the network is generally.

Andrew Arnovitz

Steve, it’s Andrew. They'd certainly be higher than where they have left their original locations. But I think on balance when you put it all together at 69%, we're still operating at a fairly low level of utilization. So you should expect that to continue to go higher as these simulators moving around are bedded down. But also remember in the first quarter we launched three new training centers, so those are ramping us as well, plus there is business aviation which in the small and mid-size segment really hasn’t picked up from the ’08, ‘09 period. So a lot of different factors that drive toward higher utilization rate.

Steve Arthur - RBC Capital Markets

Okay. That’s great. Thank you. I’ll pass the line.

Operator

Thank you very much. We’ll proceed to our next question from the line of Cameron Doerksen with National Bank Financial. Go right ahead.

Cameron Doerksen - National Bank Financial

Hey, good afternoon.

Marc Parent

Hi Cameron.

Cameron Doerksen - National Bank Financial

Question on the sim products Civil margins given that you’ve had a record backlog there which presumably means that the volumes or deliveries remain pretty high and the Canadian dollar is working in your favor. Do you think that these margins reported in Q3 which are pretty solid, do you think those are sustainable or could even go higher in future quarters?

Marc Parent

Well let me do it, Stephane will detail. I think that in terms of -- one thing maybe I should answer in your, part of your question there, in terms of the revenue I think these orders are translating through. So, we’ll be seeing a revenue pick up, I don’t think we’ve seen a lot of it yet, but as these orders take time to go through our revenue, I think you’ll be seeing some increased revenue steadily in the next few quarters. But as a result of the margins specifically, maybe I want you to take that one Stephane.

Stephane Lefebvre

So I mean the margin in SP/C specifically at 20.7% was high in Q3. You look at TS/C’s margin was at 13.1, so it averages out at 16% combined. So, we’ve seen some improvement on both sides of our business in terms of margin. What I find though is the numbers not necessarily do justice to all the improvements that we made in TS/C specific to the increase in utilization from prior quarter as well as the actual operational improvement that we made. And that's -- I don’t want to be too technical here Cameron, but that's a highly as a result of the way we account for our joint ventures. Every time that we sell a product with joint venture, it’s a plus on the product side, but it’s a minus on the service side. So we get all the profit in the product segment, but we eliminate the part of the profit that doesn’t belong to us in service.

And therefore that's what I mean by, I find that the results from this facility do well justice to improvements that we actually could see in operational performance in TS/C. Just some numbers, if I exclude the impact of the elimination of the inter-company process, there could be around 150 to 200 basis points of margin impact on TS/C, so that’s just on the operational performance itself.

Cameron Doerksen - National Bank Financial

Okay. But is it fair to say though just thinking about the products business that the weakness in the Canadian dollar we've seen should be positive for margins? Obviously you have hedging in place, but should we expect that over time, we will see the benefit of that?

Stephane Lefebvre

Well, I think over time, we will have, but I think you pointed there right I think I ran in terms of we are hedging policy because as we win contracts, we do hedge the not 100% but the large portion of our contracts to match our cost structure that's in Canadian dollar.

I was looking at in Q3 the exchange rate at which we converted our backlog into revenue and it was running at 1.03. If I look at the Canadian dollar, it’s at 1.10. So as we execute our backlog and as we flush out the hedges that we have at lower FX rate, we will see a pickup and my guess is probably in the latter part of next year.

Cameron Doerksen - National Bank Financial

Okay. Thanks very much.

Marc Parent

I guess the other help obviously Cameron is that clearly helps us being more competitive as we did.

Cameron Doerksen - National Bank Financial

Right, thanks.

Operator

Thank you very much. We proceed for our question from the line of Turan Quettawala from Scotiabank. Go right ahead.

Turan Quettawala - Scotiabank

Yes good afternoon. I guess maybe I will talk a little bit about the military business. Marc you mentioned the bipartisan deal here. And I think overall in your comments probably been a little bit more optimistic this time around than you have been in the past few quarters here for sure. Just wondering if you are seeing any opening up here of the spending side and maybe some comments there specifically on the military business and how the revenue environment looks there?

Marc Parent

Well, I think what you are sensing from me on optimism is, we need more clarity which actually is good clarity. I mean in the past you have closed a couple of years now we have been in a bit of a murk in terms of being able to understand what is going to be budgeted, what is going to come out. And we had most recently this whole sequestration affair, but now with this new agreement they have. Now we have clarity, I mean there is still going to be cut, there is still going to be significant cut. Now the cuts have been delayed, I have talked about the United States in principle. The cuts are going to be delayed to what was anticipated before.

And now we know which programs are going to be funded and how likely that is to translated to CAE’s business. And we have talked about in the past these what we call the enduring aircraft platforms, meaning platforms that have been around for a long time or will be around for a long time in the U.S. inventory, where we have a strong platform. And we talked about some of those in our remarks, but the C-130, the P-8, the MH-60R, the Predator, all of which CAE is a very strong franchise in terms -- and lot of those cases we're the only ones that have done simulators for those platforms.

And so that gives us some clarity with regards to what we would expect some of the orders that are in our big pipeline to come out as realized orders. So that's where my increased confidence comes from.

Turan Quettawala - Scotiabank

So, I guess can we expect sort of maybe this low single-digit kind of growth going forward now or this is sort of more of a one quarter kind of phenomenon for now?

Marc Parent

Well, I don't think it's one quarter, I think it's bit too early to tell in terms of -- I think I would maintain what I have submitted in the past that we're going to continue to be resilient in this business. And I think so far this year, I think we've done pretty well on that. And longer term, I think this is a growth business, but it's a bit too early for me to be able to say much more at this point.

Turan Quettawala - Scotiabank

Okay. Thank you very much.

Operator

Thank you. And we'll proceed with our next question, it is from the line of David Newman with Cormark Securities. Go right ahead.

David Newman - Cormark Securities

Good afternoon gentlemen.

Marc Parent

Good afternoon, David.

Stephane Lefebvre

Good afternoon.

David Newman - Cormark Securities

If I look at year-to-date you sold $0.43 and then your utilization is starting to turn the corner as you bet down these the simulators and the training network. What does a high teens margin in civil imply for your production rates I guess going forward and your training assets utilization? Because it would seem to me that if you’re heading the high teens by the end of the year and your utilization is just beginning to ramp up and you’ve won significant amount of orders, you are record level, where the direction you think these margins could go to in the civil?

Marc Parent

Well I think they’re going higher. I mean that’s what I think we’ve implied. I mean we have said high teens so I think you could argue that we are there now. So I think that, it’s now higher teens, how about that?

David Newman - Cormark Securities

But I guess Marc, let’s say you did like 80% utilization and what your production rates are right now, probably 35, 36 somewhere around there?

Marc Parent

It’s hard to look at it that way to be very frank with you. We have a high number going through the plant right now which is good from absorption of overhead things, that’s where you’re seeing the margins. Part of the reason why you see the margins relatively higher in civil products.

But I mean the benefits we get of the factors you mentioned on utilization is mainly affecting turning sort of the civil -- I think I continue to look at this thing from a combined civil margins, Stephane talked about some of the problems by looking at margins and products alone versus margins and services alone, just because the way we account for joint ventures. So, when we look at combined civil margins. And also the fact that that’s the way we run the business. We really go up there trying to sell the complete solution whether it’s simulators or products.

And if I look at increased volume on one side and increased utilization based on more activity in our business and commercial centers and the fact that we as you said pretty much completed bending down these new simulators move it around and opening up three new centers all translates into we’ll have call it higher teens sales margins as we get into that back half of the year, for that last quarter.

David Newman - Cormark Securities

And the currency looks like it could have been on the margin side, Stephane around $3 million benefit around there in the quarter on the EBIT margin?

Stephane Lefebvre

Not really actually, you are looking at...

David Newman - Cormark Securities

You have the top-line you have the bottom-line, but I’m just kind of looking at EBIT margin that might have been helpful?

Stephane Lefebvre

Right. Well, as a matter of fact we've in the quarter in Q3, we have actually had $1 million loss of, as a result of effects, as a result of translation of some non-cash working capital accounts, our accounts payable that are dominated in U.S. dollar. So, in fact in Q3 alone, looking at just a quarter we've actually had to absorb $1 million hit.

David Newman - Cormark Securities

That means in top-line you had a benefit and the bottom-line you had a benefit, so why would you be negative on the EBIT side?

Stephane Lefebvre

Now there was a -- it depends again which quarter you compare. If you compared to just sequentially, look at the second quarter although the Canadian dollar did went down, we continue to turn revenue at an edge thinking about the product side of our business at our edging rates that haven’t moved that much from Q2 to Q3.

On the other hand, in Q2 we had nothing huge gain, but a small FX gain as I think it was close to $0.5 million in Q2 and in Q3 we actually had sort of a hit in the translation of our non-cash working capital account. So, one quarter over the other sequentially we've had a $1.3 million hit.

David Newman - Cormark Securities

Okay, very good, understood. Thank you.

Operator

Thank you very much. And our next question is from the line of Benoit Poirier with Desjardins Capital Markets. Go ahead.

Benoit Poirier - Desjardins Capital Markets

Yes, good afternoon. My question is more about the margin for simulation product military. So, it stood at 18.3% in the quarter so up obviously sequentially, but also year-over-year. Could you please give more color on the reason and also highlight whether it’s sustainable or we should see a little softness in the next quarter?

Marc Parent

Again Benoit as we said in the several -- I would try to look at it the way we look at it as more combined military business because there are things that move over from training to products that we do to gain advantage and contracts that underlie. But I think specifically this quarter I think that a lot of that has to do with program mix. In the quarter in military sometimes we execute contracts that run at a higher relative margin and I think that’s what you are seeing in the quarter coupled with the benefits that we have had from the restructuring in the military business that we completed last year and this year. So, I think those are the things that you are looking at specifically in this quarter.

Benoit Poirier - Desjardins Capital Markets

Okay. That’s my one. Thanks.

Operator

Thank you very much. We’ll go to our next question is from the line of David Tyerman with Canaccord Genuity. Go ahead.

David Tyerman - Canaccord Genuity

Yes. So, my question is on new core markets. The sales growth has been fairly slow and the margins have kind of staled out in the mid single-digits. Could you give us some sense of where things are heading in that unit?

Stephane Lefebvre

What I would anticipate that that’s definitely not where we want to stay and that’s not where we will stay. I think that I think we'll have to indulge a little bit of patience here. But I think the new R&D that we're putting in we've rolled out two new products in the back-end of the year, one that's just coming online now with this maternal fetal simulator, which is nothing else out there in the market, which not only I think it will be a good revenue driver for CAE, but it's going to have a real to meet the cycle benefit here of improving the way that people are prepared to deal with at no melodies during birth. So, we're very proud of that. But in terms of the bottom-line, I think let’s have a little patience here, I mean as we'll ask here, but I see the trending positive as these new products come out.

David Tyerman - Canaccord Genuity

Okay. So, if I'm interpreting this correctly, you should have patience, but eventually things get better on those top-line and bottom-line?

Stephane Lefebvre

I guess, yes that's what I'm saying. Yes.

David Tyerman - Canaccord Genuity

Okay. Thank you.

Operator

Thank you very much. We'll get to our next question from the line of Tim James with TD Securities. Go ahead.

Tim James - TD Securities

Thank you. Just wondering if you could discuss the outlook for the pilot sourcing business in Oxford, I believe revenue was down slightly year-over-year there. And then not terrific it's related at all, but the decision to initiate a loan program for aspiring pilots in France. And I'm just wondering if that’s something that could be rolled out to other regions as well?

Marc Parent

I'll start with the backlog one Tim, the loan program is something that is very good, I mean it allows us, the aspiring candidates to be able to get financing for their studies, which you'll probably know that is very expensive to become an airline pilot. So, I mean that's a good thing, it's something that we try. We've done in the UK, now it's rolled out in France. It's something that gives us competitive advantage. So, that's something we’d definitely want to continue, it’s not really related to pilot sourcing. And I think the difference in the business and in terms of top-line revenue I think there is nothing really to point out specifically in this quarter I think very normal variations in the business.

Tim James - TD Securities

Is that sourcing business, I mean is it just an anomaly this quarter. I mean generally speaking and I realized the profitability of that business is not what it is in other areas of your training segment. But is it expected to be a growth business or more or less relatively flat business in the future?

Marc Parent

Well look, we’ve had it since the acquisition of Oxford so our sales are going to continue to good to grow and know this business. It’s a business that we would expect it grow and that is the goal for all of our businesses. It is a business that has inherently low margin, which we’ve disclosed at the beginning there and it’s remain that way. But I would certainly -- I would not expect to have a big surprise negative or positive in the next few quarters.

Tim James - TD Securities

Thank you.

Operator

Thank you very much. (Operator Instructions). And our next question is from the line Ben Cherniavsky with Raymond James. Go ahead with your question.

Ben Cherniavsky - Raymond James

Good morning guys. When I guess you wouldn’t really seeing your stock price lately, but there have been some observations and concerns that I’ve heard over the last sort of while about the investments you’ve made, the CapEx general lack of free cash flow and the declining returns on invested capital as you’ve gone out and done some major acquisitions and scaled up the training business. Is there any change in your strategic thinking of any change in your strategic thinking or priorities towards these variables, I mean are there -- do you recognize that these issues have been a drag on your performance and are you making any changes to how you are going to allocate capital and set priorities going forward?

Marc Parent

Let me take a couple of those if I could, Ben. I think if I just go back to the acquisitions, if I take the biggest one, which arguably has the biggest impact, Oxford, I think one thing I think we’re saying now that the consolidation is happening in our industry has come to light in last few months there, a thing that was missed and part of that is I start talking too much about it was the fact that the Oxford acquisition there was a defensive nature to it, which was strong motivation to do that. And when we did in that business by acquiring Oxford we were able to acquire and gain a strong leadership position in training and arguably consolidate the only remaining business in training of any size where somebody want to get in the business could have acquired.

And at the same time because of our simulator training business and our flight schools, we could bring the more synergies to such a [vibe] by far. That being said, I mean at the end of the day you got to make money and I think as you see our margins and training as we're saying they’ve been proving sequentially every quarter in the -- if I look at combined Civil over the past, certainly this year and they will continue to trend higher.

And as we've been -- as we’ve looked about the capital intensity of the business and we have over the past few years invested to create a network that we have today, which is now the most globally diverse training network that exists. And that’s important because inherently commercial aviation is a -- it’s a local business and that gives you competitive advantage. The same way we've invested quite significantly into emerging markets which has given us quite a nice position in those markets. If you just look at the amount of simulators that we're selling in those markets gives you an idea of the success we've had.

Coming back to our capital allocation, I think we've said our priority, Stephane has stated our capital allocation priorities and they continue to be the same. They haven't changed over the past better part of a year now that the capital is going to continue to be sustain growth. Now having said that with all the capital that we've deployed and the leadership position we've established if all things being equal, I would expect the business to be less capital intensive going forward, certainly the training business which is the business which has the bulk of our capital. So going forward, we should be less capital intensive. If you look at just this year what we've pointed out and we haven't changed our outlook on that is that our capital deployment will be similar to last year even though our revenue is going up. So you can see some measure of capital intensity going down.

Our second priority was to increase for cash returns for shareholders. And again I think you saw last quarter we've increased the dividend for the third time in the last less than three years. And finally our last priority which has to been deleverage. And again I think that we're seeing our capital ratios trending in the right direction. We were at 50% net debt to capital at the Oxford, we're now at…

Stephane Lefebvre

39% net to debt capital, it's decreased just slightly below the target that we had initially, the 40% we had initially given ourselves actually in the last third quarter. So that a year or year after the acquisition of Oxford.

Marc Parent

So in summary of all that, I think roundabout way but I think the return on capital is the target, it's part of the management incentive compensation in a big way and that will improve as we grow earnings and ramp up those new investments.

Ben Cherniavsky - Raymond James

Because it's -- the short answer is no big changes to strategy, is that a yes or a no, I don’t -- there is no acknowledgement here. Well let me ask it differently. Would you have done anything looking back, recognizing hindsight is 2020 of course, would you have done anything differently in the last five years?

Marc Parent

The last time we would do it differently in no particular order but as you say, hindsight is 2020 and I am looking forward. And our strategy hasn’t changed in the light of how we run our overall business. And I talked about we're going continue to invest in, primary growth there is in support of our network. That's not going to change. Investments in R&D, we still have nearly 10% our profits into R&D which I think is important to maintain our technological edge. And I think that notwithstanding clearly, we've seen that the Oxford acquisition to a large extent has dragged our return on capital plus the capital. As I said, we invest less capital, also less capital intensive and frankly, I don't think we've talked about acquisitions in big way and that’s because we're not focused on that. We're focused on getting the juice out of our business. So I think as we see the next few quarters, I would expect that our strategy will be paying off. I’m mean we've been largely pre-funding growth for the last few years.

Ben Cherniavsky - Raymond James

Yes, and everyone has been sort of waiting for the returns. And I guess what you are seeing is we're starting to see them now.

Marc Parent

Yes.

Ben Cherniavsky - Raymond James

Say, accept in new core markets, I mean that’s another big, that was another big one in addition to Oxford, right, where you spent a lot of money.

Marc Parent

Yes, it was about a $100 million, right. Yes.

Ben Cherniavsky - Raymond James

So, no more acquisitions there?

Marc Parent

Well, what we said is that we don’t foresee any large acquisitions or any sizeable acquisitions in our radar scope right now. If we acquire some, it would be probably to seek particular niches in certain areas that products and it could be new core but it's not going to be, as I said, largely acquisitions are not something we’d look at. And the only exception I would make there is, always opportunistically somebody in our space became available and would help us as the industry consolidates. That's something we would look at. It's arguably, couldn't do it in the civil side because civil side, we have a strong leadership position and not much more we can do there. And you could do it on the military if something came up.

Ben Cherniavsky - Raymond James

Okay, thanks very much.

Marc Parent

Thank you.

Operator

Thanks you. And we will get to our next questioner from the line of Anthony Scilipoti from Veritas Investment Research. Please go ahead.

Anthony Scilipoti - Veritas Investment Research

Thanks very much. Maybe my question will just follow on from Ben somewhat. Maybe if we look forward, Marc, we can, let’s say, what is it -- you had great, I think, if you look at all the segments, the book-to-bill has been strong and improving and yet we haven't seen sharp increases in revenue in general. So, I am wondering when is this, maybe that is the key to answering your question there is when is this backlog going to turn into revenue over what sort of period and what margins can we expect? I mean you know what you sold, you know the price and you’ve probably hedged out the cost so you have a good inclination of what the margins going to be. So maybe you can answer the question that way if I can suggest and that might give us some clarity on where the business goes go forward. Thanks.

Marc Parent

Well, I think a lot of the, a lot of where -- thanks Anthony, a lot of the revenue hike coming out of these record orders will come out of clearly the civil business in terms of both products. And products, we put that -- we see that in SP/C. I mean, really what you are seeing there is that the record intakes that we have had has not really gone through our backlog. Part of that is because we've been executing over the last few years a number of programs which are going to deliver not over one-year forward, there were development programs, they were programs that were ordered now but only going to be delivered in three or four years. So you are not seeing the ramp up. You will start to see it, you will start to see it. I would expect that you are going to start see it in a more material way in Q4 and you will be seeing even more material as the next few years -- sorry, as the next, not the quarters, next year will fold out. It's for sure that you will see some consistently stronger quarters there, which is normal, typically an order on a sim product site, typically takes a month -- a year to 18 to months to go through our backlog to revenue typically. I mean the development programs take longer and that’s what you are seeing there.

On training side, well it’s really a question of higher utilization in our training centers and bedding down all these simulators. That's going to continue to rise in Q4. And as I mentioned in my revenue, my margin expectations in that area, military is harder to predict. I mean what we've shown I think is that this business is definitely not going off the cliff, it’s resilient. And we're still going through a period of time where it's difficult for the military giving clarity. We're getting more clarity now. Our bidding, as I said, our bidding year-to-date is higher than we've had all of last year. And our -- it's not that we're enlarging our net that much in terms of what we're bidding on. And as I’ve said before, we don’t bid in the military until we feel pretty confident that we can win because it costs so much to bid on the military. So, I would expect that you will see a growth business in that area.

Andrew Arnovitz

Operator, thanks very much to all participants on the investor portion of the call. In the interest of giving some time to members of the media, I would ask that you please now open the call to members of the media.

Operator

Absolutely. (Operator Instructions). And we do have a question queued up from the media side, it's from the line of [Ross Morovic] with Canadian Press. Go right ahead.

Unidentified Analyst

Yes, just wanted to follow up on the bidding in the military. Are you expecting a higher success rate or just that you are bidding more and therefore you will get more as a result of that?

Marc Parent

Mainly because we'd be bidding more and we're expecting that our win rate will be similar. I think between the combination of bidding more and I think that’s the lion share that we would expect. Yes, go ahead.

Unidentified Analyst

And are you seeing more competition in bidding?

Marc Parent

Yes, we are. I think the fact that our business is simulation based-training, which is a nice solution in the time of budget cut. With simulation, typically you can do simulation based training for an aircraft at about 10% of the cost of training on a real aircraft. Results from the fact that it's very attractive as budgets are being cut. So this is an effective segment of the market. And if anything that’s going to grow in this kind of environment, simulation based-training likely will and inevitably that will attract some more competition.

Unidentified Analyst

Thank you.

Operator

Thank you very much. (Operator Instructions).

Andrew Arnovitz

Operator, if there are no other questions from members of the media, I wish to thank members of the investment community and the media for the participation on this afternoon’s call. And I would like to remind you that the transcript of today’s call will be made available on CAE's website at cae.com. Thanks again.

Operator

Thank you very much. And ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask you to disconnect your lines. Have a good day everyone.

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