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CAE Inc. (NYSE:CAE)

Q1 2015 Earnings Conference Call

August 13, 2014 01:30 PM ET

Executives

Andrew Arnovitz - IR

Marc Parent - President and CEO

Stéphane Lefebvre - CFO

Analysts

Benoît Poirier - Desjardins

Steve Arthur - RBC

Cameron Doerksen - National Bank Financial

David Newman - Cormark Security

Turan Quettawala - Scotiabank

Ben Cherniavsky - Raymond James

David Tyerman - Canaccord Genuity

Operator

Good day ladies and gentlemen. Welcome to the CAE First Quarter Conference Call. Please be advised that the 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. These include statements about our activities, events and developments that we expect to or anticipate may occur in the future including, for example, statements about our vision, strategies, market trends and outlook, future revenues, capital spending, expansions and new initiatives, financial obligations and expected sales. By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties associated with our business which may cause actual results in future periods to differ materially from results indicated in forward-looking statements. While these statements are based on management’s expectations and assumptions regarding historical trends, current conditions and expected future developments, as well as other factors that we believe are reasonable and appropriate in the circumstances, listeners are cautioned not to place undue reliance on these forward-looking statements as there is a risk that they may not be accurate. Except as required by law, we disclaim any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. The forward-looking information and statements contained in this presentation are expressly qualified by this cautionary statement.

You will find more information about the risks and uncertainties associated with our business in our first quarter fiscal 2015 MD&A and in annual information form for the year ended March 31, 2014. These documents have been filed with the Canadian securities commissions and are available on our website at cae.com and on sedar.com 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, August 13, 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 Stéphane Lefebvre, our Chief Financial Officer. After comments from Marc and Stéphane, we will take questions from financial analysts and institutional investors.

Let me now turn the call over to Marc.

Marc Parent

Thank you, Andrew. Good afternoon to everyone joining us on the call. We presented our first quarter results this morning at our Annual General Meeting. So, I’ll use the opportunity of this afternoons call to recap some of the highlights of the quarter. Stéphane will provide a detailed look at our financial results and then I’ll come back at the end of the call to discuss our outlook for the year.

Operating income for the quarter was up 16% over last year, on the back of a strong performance in civil. We continue to fill capacity in our training center and to ramp up new and redeployed stimulators. Civil operating income alone increased by nearly a third over last year. In Defence, we had stable revenue in the quarter and 7% lower operating income.

The Defence business is normally lumpy, owing to the mix of programs that progress in a given quarter. And in terms of fuelling more volume in Defence, a key enabler of higher margins, the story was much the same as it’s been. The budgetary environment is more stable and we continue to win our fair share; however, program awards continue to come at a slow pace.

In New Core Markets, we concluded a strategic review which served to reaffirm our conviction in Healthcare and led us to a decision to divest Mining. The outcome is that we’re now focusing our capital and resources on our three remaining core businesses, namely, Civil Simulation and Training; Defence and Security; and Healthcare.

Looking more specifically at developments for each of these business in the quarter starting with Civil, we obtained solutions contracts totaling $365 million, including 11 full-flight simulators for airline customers around the world. We also signed some significant deals for pilot training services for Air Canada, Air Nostrum, Scandinavian Airlines and British Midland Regional, as well as training centre operations services for Caverton Helicopters.

The Civil book-to-sales ratio for the quarter was 1.18 times and 1.32 times for the last 12 months, which supports a healthy growth rate going forward. The Civil backlog reached $2.4 billion in the quarter.

In Defence, we booked simulator orders, upgrades and services contracts with customers including NATO for upgrades to its AWACS aircraft simulators; Beechcraft for training support and maintenance services involving the T-6C aircraft for the Royal New Zealand Air Force and an undisclosed international customer for a KC-135 refueling boom trainer.

We had success this quarter beyond aviation in the naval domain with a contract to provide the Swedish Navy with a comprehensive Naval Warfare Training System. In total, we received $149 million in Defence orders this quarter, representing a book-to-sales ratio of 0.75 times. The ratio for the last 12 months was 0.92 times. In addition to those orders, we received another $93 million in unfunded orders. In all, our Defence backlog reached $2.5 billion in the quarter, which includes joint ventures and the unfunded backlog.

Looking now at Healthcare, we concentrated on enhancing our position for a larger business with new product introductions and new sales channels. We continued to expand our international reach with new distributor agreements in France, South Korea and India. And in terms of product portfolio expansion, we introduced CAE Replay, an audiovisual solution for debrief used to capture both medical simulation scenarios and live clinical events. We also began production of our first Fidelis Maternal Fetal Simulators. During the quarter, we received notable orders in the United States, the U.K., China and Korea from universities, hospitals and medical device companies for our audiovisual solutions, patient simulators and surgical simulators.

With that, I will now turn it over to Stéphane.

Stéphane Lefebvre

Thank you, Marc, and good afternoon everyone. Consolidated revenue for the quarter was $526.2 million. Net income from continuing operations attributable to equity holders was $43.8 million or $0.17 per share. The operational improvement we achieved compared to last year is evident in our operating profit which was $71.7 million, up 16% from $61.6 million last year.

The divergence between operating profit and net income arises from the low income tax rate in the first quarter last year, when in fact taxes were nil, because of the one-time tax benefit. This quarter, taxes were $11.6 million, representing an effective tax rate of 21%. The takeaway is that our underlying operational performance was much stronger this quarter compared to last year.

Free cash flow from continuing operations was negative $20.9 million for the first quarter. The decrease from last quarter and the first quarter of fiscal 2014 was mainly due to a higher working capital, involving an increase in contracts in progress assets and inventories. Our free cash flow is generally higher in the second half of the fiscal year and we expect that to be the case again this year. Capital expenditures totaled $39.7 million this quarter with $26.4 million for growth and $13.3 million for maintenance. Net debt was $901.6 million as at June 30, 2014, compared to $856.2 million as at March 31, 2014. Notwithstanding the typically higher consumption of cash in the first quarter, our net debt-to-capital ratio remained well within our target range at 37.9%.

Now looking at our segmented financial performance. For Civil, first quarter revenue was $308.9 million, stable year-over-year. Operating income for the quarter was up 32% year-over-year to $49.5 million, owing mainly to our ongoing operational improvements as well as higher volume and utilization. These factors gave us an operating margin of 16%, up from 12.5% last year. Training utilization was 72% in the quarter which is only 3 percentage points higher than the same quarter last year but underscores the kind of operational leverage that we get in training. In Defence, first quarter revenue was flat year-over-year at $197.9 million and operating income was down 7% at $21.9 million for a margin of 11.1%.

As Marc has said, program mix and volume largely explain the variances in margin from quarter-to-quarter. A 12-month span generally provides a better picture of performance especially when dealing with such long cycle programs. Looking at the Healthcare, revenue was $19.4 million for the quarter and operating income was $300,000. This is essentially flat with last year. We began production of some of our new products a bit later than planned, which mainly explains the delayed growth in the quarter, as well, we had some one-time cost that weighed on the margin. Finally, Mining will continue to operate as usual and be reported as a discontinued operation until it’s sold. The business recorded an operating loss in the quarter but most of this was triggered by the divestiture process itself.

With that, I will turn the call back over to Marc.

Marc Parent

Thanks, Stéphane. Our first quarter results underscore that the current major growth driver for CAE’s earnings is civil. We have the benefit of a record backlog and significant operational leverage remaining that will see us post higher margins in civil than last year. Underpinning our operational performance are continued strong market fundamentals. Global passenger traffic grew at nearly 6% in the first half of 2014, with emerging markets growing even more. Demand for pilot training in the United States is being led by the refleeting of regional and mainline carriers and also by stricter regulations.

Demand in Europe is resuming on the back of the early stages of an economic recovery. And in the Middle East, the continued high rate of growth is being driven by major long haul operators as well as low-cost carriers. In Asia, Chinese domestic travel and a robust low-cost carrier segment are driving steady traffic growth.

Aircraft manufacturers have eight year backlogs and are delivering planes at a record rates. Boeing and Airbus combined are currently delivering nearly 80 narrowbody aircraft per month, which is up over 20% from just five years ago.

Taken together, there has never been a better time for commercial aviation and we’re in a good position to reap the benefits of the investments we’ve made in recent years. We’re off to a good start in orders with significant training contracts and with 11 full-flight sales announced in Q1. We see potential for about 40 full-flight simulators this year while maintaining our leading market share.

Overall, we expect Civil performance for the year to follow the usual seasonal patterns, whereby the second half is strongest. The summer months are quieter because of the annual shutdown of our main manufacturing facility and also because our customers are mostly in the air flying passengers and not on the ground training. For the year, we expect to see strong double-digit growth in Civil, and as I’ve said, with even higher margins.

Now looking at Defence, their short-term story is pretty much the same as it’s been. As we saw in Fiscal '14, the business proved to be resilient through some challenging market conditions and we continue to expect it to be resilient for the year overall in fiscal 2015.

Our confidence in both the short-term resiliency and the longer-term growth potential of our Defence business comes from a number of CAE strengths. We have a solid backlog involving enduring platforms and we have a strong bid pipeline from which we expect to win our fair share.

We also have a broad geographic reach involving growing markets like the Middle East and Asia. And lastly and most fundamentally, our confidence stems from the value proposition of simulation-based training and our leading position within this enduring segment.

In healthcare, we remain excited about our long-term prospects and we’re encouraged by what we see as a sizable opportunity for CAE to lead in what we expect to become a much larger market.

The demands placed on the healthcare industry by an aging population, limited access to live patients for training and the rising use of revolutionary medical technology are all driving the need for simulation-based medical training.

We got off to a slower start than planned in healthcare in the first quarter but we expect to resume double-digit growth and to see margins notch up with the higher volume. We’ve learned a lot about the business in the last three years and we have the right mix of subject expertise, innovation and leadership to see this through to the next level in an expanding market.

As for our decision to divest mining, it was the product of a strategic review and a strict adherence to our investment discipline. We like the business and it meets several of the criteria we originally established for diversification, but it no longer fits with our core.

We’ve remained true to our capital allocation priorities by selectively investing in market-led growth opportunities, maintaining a strong financial position and growing current returns for shareholders.

As you will have seen this morning, we increased the quarterly dividend by $0.01 per share for the fourth year in a row. This serves to underscores our confidence in our end markets and our ability to lead and grow within them.

To conclude, we continue to expect solid growth for CAE overall this fiscal year with strong performance in civil, continued resilience in Defence and the resumption of double-digit growth in Healthcare.

Thank you for your attention. We’re now ready to take your questions. Andrew?

Andrew Arnovitz

Operator, we’d now be pleased to take questions from analysts and institutional investors. Before we do open the lines, let me first ask in the interest of fairness that you please limit yourselves to a single, one-part question. And if you have additional questions after that and if time permits, please feel free to re-enter the queue.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Benoît Poirier from Desjardins. Please go ahead.

Benoît Poirier - Desjardins

Good afternoon. Just in terms of rational behind the divestiture of Mining, I was just wondering if you could provide more color and I was wondering if this means that all the other business units are core or does it mean that outside that Civil Defense, you won't have any interest to look at the other segments?

Marc Parent

I think just maybe to latter end of your question, we have said though we are focused and we said following the investments in the acquisition we have made in last couple of years and we were very focused on, what we defined as the core as you said and we relating the call, those are the business we are civil, military and healthcare, now within those segments you could have subcategories that we look, I think what the order of the day would be that we are into improve the return on assets of all of our business. So, if we have some dragging assets that wouldn’t be separately build us businesses that we report out, we would have a look at it but I don’t think it’s anything overly material here.

So, we are focused on the business. We are at civil, military and healthcare. Now when you look at the rational from mining, I think it really follows the discipline that when we first got into this into new core markets, we said look, we are investing because we believe these businesses, mining has a characteristics that are similar to the ones that drive rest of our business and we believe that we can leverage our core capabilities of simulation modeling in those sectors. In case of mining, we got into it, into the business through an acquisition of Datamine at the time which is mainly a software business. We have grown that software business through our expertise but really it was for us to be able to use that as a platform to be able to really leverage that into sales of simulation equipment.

Now we have had some success in there but when I look at considering the environment that we are in, in the commodities market and how long it’s going to take us to reach the revenue and profit goals that we have to that business, it’s going to take longer than our horizon, that horizon we give ourselves. So, basically we decided to focus our capital and our efforts on those three businesses, not because we don’t like the business but that’s why we are treating it as a discontinued business and putting it for sale at this moment.

Operator

Thank you. Our next question comes from the line of Steve Arthur with RBC. Please go ahead. Your line is open.

Steve Arthur - RBC

Great. Thank you very much. Just following up a little bit more on Civil margins we do see a sequential decline from Q4 about 17% ex items to 16% this quarter. Is that strictly a function of the revenue decline or is there some other changes going on in there and I guess as you look out any way to quantify margin expectations for the business over the next while in the past we've talked about high teens.

Stéphane Lefebvre

Steve, this is Stéphane. I think you are pointing on the right thing, the top-line went from 323 million in Q4 to down to 308 million, so we have got a little bit less volume in Q1 and that’s what explain the drop in margin from 79% to 16%. It’s something that we have seen very often in the past, summer months a lot of our customers are not training, they are applying and it includes June, July and August. So, very often we see utilization rate go down during these three months and so the portion of that falls into Q1, so that’s the main reason for it.

Steve Arthur - RBC

And expectations looking ahead, is high teens still a rational place to be?

Stéphane Lefebvre

I think when we said that, I think we will continue to say, Steve, on the margins in civil, they are going to higher on average than last year and we expect to see higher peak parts than last year. So, last year I think our average margin is I think about 15.3 and we expect to be higher than that and I think our peak margins of 17.3, we expect to be higher than that. And that’s mainly fueled by volume expansion, increased utilization and training centers, the factors we talked about underscored by the market that we see out there that I talked about on the call.

Steve Arthur - RBC

And less assets being move around.

Stéphane Lefebvre

Yes, that’s true, less moving assets on our side and bidding down the one that we have.

Operator

Thank you. And our next question comes from the line of Cameron Doerksen from National Bank Financial. Please go ahead.

Cameron Doerksen - National Bank Financial

I guess question on capital deployment, I mean it’s nice to see the dividend increased here but your leverage is kind of where you want it to be or a little bit lower. It doesn’t look like you have any major acquisitions lined up and I would expect that your cash flow performance should be quite a bit better this year versus where you were last year given the improvement in civil. So, I am just wondering what your thought process is on additional cash returns to shareholders specifically further dividend increases or something we have already seen and potentially share buybacks, so I think that’s certainly something it looks like you could afford.

Marc Parent

Well, I think as you pointed out we are continuing to be true to our capital allocation priorities. We continue to grow to keep pace with the market and our customers with the difference from year maybe, that we’re focused on any investments that are -- very accretive to our goals of higher return on capital. But, and deleveraging you talk about, is we kind of like where we are. But yes, coming back again as we said, as you saw in the quarter with the fourth dividend increase in so many years and we’re confident in the business and the cash flow that we’ll generate so that’s why we’re confident in the increase that we’ve made. And look, I guess we don’t have a specific policy but you can see our actions that we’ve clearly set a trend here.

Now, with regards to share buyback I mean there’s something that's a regular dialogue with the Board. It's not something that we've done yet. But it’s not to say that we won’t. It’s something that we just, we keep discussing and depending on the circumstance we see over the year. Now that’s what I mean we will focus on those things and we’re not focused on major acquisition or anything like that.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of David Newman with Cormark Security. Please go ahead.

David Newman - Cormark Security

Just a quick question on the military side, Marc. I know you strategically sort of have taken a different tact toward looking at the larger programs, et cetera. What's the bid pipeline look like at this juncture and with that in hand, what do you anticipate in terms of military margin for this year or going forward in a steady State kind of basis?

Marc Parent

Well, I think the pipeline is big and it’s actually growing. We’ve increased and I have to get the number out here, but it’s growing I know that. Then we, I think we bid again a pretty substantial number of pipelines that support growth, so I mean support -- bid a pipeline in the first quarter supportive of a goal that’s, but I am sure. Going then what does that means per margin, I think what I look at this quarter I think we have 0.75 book-to-bills I think you got to look at a little bit deeper on that.

And when we talk about unfunded orders you had an extra 93 there. I think it’s important that -- I think we’re pretty conservative when we -- we don’t include that in the book-to-bill it is included in the backlog, but on the book-to-bill. But when we look at that, what we call unfunded backlog I mean these are orders that are going to happen, is just that we only, they’re typically orders that come in the U.S. and because of the U.S. only boats its budget every year, improves its budget every year.

So let say a multi-year orders like for example the contract we have to do training for the predator about -- which is seven contracts or a contracts like we do have KC-135 refueling tanker we will only include in the book-to-bill the orders of this year. But clearly when you look at that 93 billion it means that there is some orders coming up for many peers. So that gives me the confidence plus our backlog and other factors I mentioned for continue growth.

But in terms of margins, look coming backlog, long story to come back to your question on margin. I remain to what I am and what I said all last years that we will be resilient. If you look at the income number that we had last year I am pretty confident based on what I see. And we do have to win order we always have to win order, but I feel pretty confident that based on backlog pipeline that we will be able to be resilient then again. I’ll define resilient as maybe slight up, maybe slightly down. I mean last year we were slightly up, but not major variations from that.

David Newman - Cormark Security

Okay. So I guess if you look at Q1, you had 11% would you, will you typify that as being resilient or do you think it’s kind of in the 13%, 14%, 15% range like where would you be happy in the end of the year, not that, I am trying to bring it down but just to obviously for modeling purposes, we get a sense of what your view is on, just on what is resilient margin?

Marc Parent

Well, it takes a lot more. It makes me happy. But 11.1% I will think that on the lower end. It will move around, because we’ve said, we talk about it in last call, we talk about it many time. We’re executing, you talk at the behavior question about from large orders and it’s true we have large orders in our backlog, well something these large orders as they go through our revenue in the quarter. And that some of those, our lower margin and others so that is when we talk about mix of programs, is somebody’s -- one of this program that are going through with the quarter, than it will drag down just proportionally to markets. And that’s some of which you see there in the quarter.

David Newman - Cormark Security

Okay. And I’m just going to aim you. I’m try to squeeze one more in. Stéphane what’s your CapEx for the year you think for this year?

Stéphane Lefebvre

I think it will be very similar to what we have last year. There’s has been a number of years now we’re not short of opportunity the market is good, but I think we’re selected in where we invest our money. So what I see is that very similar level of CapEx is the one we had in fiscal '14.

Marc Parent

And David, just finishing the question on military, just to be complete there, so coming for 11, if we are going to achieve what I said about being resilient on absolute level of income for military for the year, it means that we expect pick up in the second half. I don’t expect that will pick up much which obviously by definition of the second quarter mainly because of the same factor that affects our civil business, mainly plant shutdown affect both the civil and the military, more civil than military but nevertheless.

David Newman - Cormark Security

So, backend loaded like the typical year.

Marc Parent

Like last year and like the year before and the year before that.

Operator

Thank you. Our next question comes from the line of Turan Quettawala with Scotiabank. Please go ahead.

Turan Quettawala - Scotiabank

Yes, good afternoon. I guess my questions also on the military side, just looking at you've talked quite a bit about resilience Marc, and you've definitely shown that at least over the last year so in terms of revenue. I guess my question is isn't there more on the cost side that you could do if I look at your margins from 2013 to 2014, I mean they're up but just only slightly. And I guess from what you're saying here for 2015 as well it doesn't look like the margins going to go up a whole lot. I'm just trying to understand on the cost side is there stuff you can do there and I guess you had a European restructuring there as well a few years ago so should we just maybe clarify that for me, thank you.

Marc Parent

Never say never, I am a strong believer. There is always a better way and clearly as we demonstrated before if we feel that we need to take action to reduce cost, we will.

Turan Quettawala - Scotiabank

But at this point in time, you're not thinking that the margin will go up a lot from the cost side? Because it doesn't look like the revenue environment is changing a whole lot, right?

Marc Parent

Okay, given the level of revenue, look I think that the outlook that I've given with regards to margins include what our cost action would take. Where I would be in line with what you're saying is if we have to win orders. Look we have to win orders notwithstanding the backlog that we have. We have to win orders every quarter there's no doubt about that so if for some reason, the environment remains protracted then the orders in fact come in where we aren't going to clearly sit here without doing anything, we'll take action but I don't see anything at the moment where I'm sitting here talking to you. I don't see that right now. Doesn't mean I won't see it in three or six months but I think that the likelihood right now is based on everything I see we'll be able to meet the outlook that I talked about because we expect that order intake to come.

Operator

Thank you. Our next question comes from the line of Ben Cherniavsky with Raymond James. Please go ahead.

Ben Cherniavsky - Raymond James

Can you just maybe elaborate a little more on the thought pattern of divesting mining particularly at this point of time and how you separated that vision from staying in the healthcare business, why out of one but not the other?

Marc Parent

I think I don’t know if you missed, Ben, in the early part of the call, we had a question we talked about the rational. Do you want me to expand from there?

Ben Cherniavsky - Raymond James

No, I missed the first five minutes that have been the first question.

Marc Parent

Okay, that was the first question but look bottom line was that we set a horizon for ourselves when we got into this business of a discipline and if we didn’t think we were able to ramp up, our business and simulation modeling within a certain horizon that becomes material to CAE and then our outlook continues to demonstrate that. We are going to take actions and that’s what we did. I guess to exacerbate a little bit obviously because of what happened, it’s hard to predict about, what happened to the commodities market in last period of time but the real difference with healthcare. First of all healthcare, we are quite happy that this is a market that’s big enough for us to make a dent and it is expanding market, number one. And number two is it has the synergy that we have been able, first of all we saw is materializing in healthcare and really what I am talking about is our ability to leverage simulation and modeling.

When we got into mining really we got in there through an acquisition of Datamine and that was really a software business and we have grown the software business. But it really was a platform for us to leverage and the simulation modeling and simulators for the mining market. We have had some success but when I look at in the current environment, how it’s going to be able to take and how much investment it would take for us to be able to really achieve our goals and it’s beyond our horizon. Now that is not the case in healthcare that’s the difference.

Operator

Thank you. Our next question comes from the line of David Tyerman with Canaccord Genuity. Please go ahead.

David Tyerman - Canaccord Genuity

My questions on Civil growth side so first I just want to confirm Marc, can you say you expected strong double-digit growth in sales in Civil?

Marc Parent

Yes. I think I should clarify that because we’re mixing. I mix a couple of things there. I think that really just strong, I think -- what I really about is income, but if you look at to be clear on reconciling margins and revenue, I think I would say low double-digit revenue in civil with higher margins then we had last year.

David Tyerman - Canaccord Genuity

Okay, that's helpful and just to go to the sales side of it then, what's driving that? Is it all coming on the training side because I notice your FFS orders guidance is actually lower than what you did last year, so it sounds like the equipment business is plateauing or maybe even turning down a little bit so is it all coming from the training side?

Marc Parent

Well, there’s a lot coming from the training side. And the -- on the order it take on the 40 sims. I think that is a high end year, I mean in our market. If you remember last year when we went into the year we think we were guiding for about that as well. And what happened is there was two major orders and one quasi major orders last year that we won and Qatar and if you have and yes it take over and those were multiyear. So not only did they yield in a big order and take in term of number last year, but clearly they are now in orders that you’re going to get this year and maybe next year, because they are multiyear orders.

So really, so look at the market supports more at our win rate we’ll get them, but at the moment based on what we see and usually one were within the 12 months horizon, we’re close to our customers so we’re pretty clear about their purchases intentions on simulation, so tend to be more precise. And if they decide to go in for larger orders and we’ll go after that but I think 40 is a good year. But it also means that we expect some pretty good order to take on the training side. But the growth in the revenue most of it comes from a ramp up of the activity we see both from training, more utilization in a training center dictated by the market fundamentals which I talked about on the call. And also from the higher volume going through our plans from the orders that we won last year, the year before, that’s what we see.

Operator

Thank you. And our last question is follow up question is comes from the line of Benoit Poirier of Desjardins. Please go ahead.

Benoit Poirier - Desjardins

Yes just looking at Healthcare, was quite impressed with your childbirth simulation this morning. Was just launched a few weeks ago and it seeps that has received a very strong market acceptance, I think with over 60 units pre-sold, so could you command a little bit about the overall market for the child birth simulation and also when should we expect those units to be delivered?

Marc Parent

Look, I can't, I don't know off hand specifically with regard to child birth simulator, some of it is we're breaking new ground here, in terms of the fidelity of the product you appreciate and saw and like it we sold over 60 sight unseen over the phone so I am very encouraged by that. So I think we'll have a very big market acceptance of that and those units will deliver, they deliver pretty fast. The time from us getting an order to us being able to deliver is relatively short within a couple of quarters.

Stéphane Lefebvre

We’re actually, Ben this is Stéphane. We’re actually, we delivered a few in Q1 but we’re delivering as we speak in the second quarter, so it doesn’t have a huge lead time to bring the product to market.

Benoit Poirier - Desjardins

Okay, perfect. Thanks.

Marc Parent

The other thing I like about that simulator, Benoit, is what you don't see actually is the underlying technologies from the circuit Board, things lick that are the same circuit Board we use in our new 7,000 XR simulators which is sold. You're not seeing but it translates into leveraging of technology which has cost implications itself and margin expectations so I think I like that as well.

Okay. Operator, are there any more questions?

Operator

We do have two follow up questions. The next question is a follow from David Tyerman from Canaccord Genuity. Please go ahead.

David Tyerman - Canaccord Genuity

Yes, I was just wondering if you could comment on the win Textron highlighted in their call on the 737 Max. That sounds like a pretty important program and I guess I wonder are they making some head way with the assets they bought against you.

Marc Parent

Well, I think that, it’s a good way to put them, I never like to lose orders, so they won that’s a good, like I said it’s a good win for them. And I can’t comment on why Boeing selected them. Boeing is our competitor training, having said that, look we want to more successful programs that we have is a 787, where we weren’t selected by Boeing either on the development program. So really for us it’s going to be, I mean Boeing as a manufacturer, orders simulator for their own use but I think really our attention is really now on the customers of the 737 Max and clearly we intend to be very competitive there and it’s full play I think.

Operator

Thank you. The next one is from Cameron Doerksen with National Bank. Please go ahead.

Cameron Doerksen - National Bank Financial

Yes, thanks. Just a follow-up on the sale of Mining. I'm just wondering if you have any expected timeline of when that might occur, whether you have any perspective buyers and should we expect there to be an accounting or a book loss on the divestiture?

Marc Parent

I can’t really comment on the horizon because we are continuing to operate this business. We think it’s a good business, a profitable business, I mean it’s below in the quarter but a lot of that has to do with everything that we did to be able to, that’s part of the divestiture process which kind of drives earnings but the business by itself is a profitable business. I think it has value there is no doubt in my mind, so we are not going to have a fire sale here and by that basis we don’t expect to book lock on this. Stéphane.

Stéphane Lefebvre

For obvious reasons Cameron, it’s tough for us to provide any, layout any value that we would expect but as Marc said this is a franchise that has a good catalogue of products, has generated some good EBITDA into past. So, we are going to see what the process can give us but we are not coming up with a specific value of our timeline but certainly our expectation is to sell this loss.

Operator

Thank you and this is our last follow-up question. It comes from the line of Turan Quettawala with Scotiabank. Please go ahead.

Turan Quettawala - Scotiabank

Yes, thank you. Just Stéphane, I wanted to clarify something maybe I misheard you but when you talked about the margins and the sales side the margin was down on a quarter-on-quarter basis and you mentioned utilization. But utilization was actually up Q-on-Q, right? Or maybe flat I guess, but just trying to understand is that the reason behind the lower margins or maybe something on the PC side?

Stéphane Lefebvre

No, it’s actually not the utilization itself, I think you pointed out rightly, Turan, the utilization rate has gone from 71% to 72% but what we have seen is mix of the training matters and mix of product and service matters as well. And the main reason from going to from Q4 to Q1 for the decrease in margin is we have had less training revenue in certain of our centers as I said in June because some of our customers have been flying aircraft at a training, this is not something new, this is something that we have seen every year for the number of years, so that’s one thing. The other thing is the fact that we had some advanced built in Q4 more than what we had in Q1, point to last thing, Turan, and in Q4 we also had a gain on disposal of assets which we didn’t have in the first quarter of this year. So, all these three factors led to a 16% margin in Q1.

Turan Quettawala - Scotiabank

Thank you, that's very helpful and I guess maybe just on a follow on basis here, if I look at Q1 versus Q1 last year the utilization is up about 300 basis points from 69-72, should we expect that to accelerate as we go through the year?

Marc Parent

Well, look it's hard to predict. I think utilization will go down inevitably in Q2 because people as we said are flying, they aren't training. Q3-Q4 it will pick up. There's no doubt.

Turan Quettawala - Scotiabank

No but on a year over year basis, sorry Marc, I understand the seasonality there.

Marc Parent

It should. And it will because you know last year, we had a number of training centers that were opening that where we're ramping up and so in this fiscal year, these centers will have been in operation for a little while, so I would certainly expect that.

Stéphane Lefebvre

I think you have to in the end of the day, I think you're poking out the real question and which is margin progression and as we said for all those factors we see high volume, high utilization, we see margins on average being higher in the whole year than we had last year and higher peak margins than we saw last year which we saw in the fourth quarter.

Turan Quettawala - Scotiabank

Fair enough.

Stéphane Lefebvre

And that's due to the revenue growth that we talked about.

Turan Quettawala - Scotiabank

Fair enough and I guess maybe if I can ask one more on the CapEx side just looking from a longer term perspective I know you said flattish CapEx here over the next couple of years and I understand no acquisitions. Are there any special sort of contracts on the airline side that maybe will lead you to spend more on training centers as you gear up maybe for the training on these contracts with the new aircraft coming in or something like that, that we should be mindful of?

Marc Parent

No look, we don’t go that far out in terms of providing CapEx guidance to you. The only thing that would be more general in saying that we expect our business overall to be less capital intensive than it has been previous years because we have created the network of training centers that we have. Now it's not because, we’re not going to continue to deploy CapEx, we will, but all things be equal, it will be less capital intensive. Now I think the one offs you may be talking about I think is the potential for which I referred on the call outsourcing, outsourcing is if we get them would be a good thing. And I don’t see a change to people doing that, but I do see more appetite for that. So if we were able to done this airline to outsource their training centers to us, either as an outright, our sale or joint venture, I mean we would invest in that every day of the week as long as it’s very highly accretive to return on capital. So that might be something that would lead us to put more capital. But I would see that more in the line of almost an acquisition. But again in the next period of time, I think we’ll just go back to the outlook that we said that CapEx should in line with what it was last year of the year.

Operator

Thank you. And there are no further questions on the phone line at this time.

Andrew Arnovitz

All right. Operator I wish to thank all participants this afternoon for joining us on our first quarter fiscal '15 conference call. And to remind our listeners that a transcript of today’s call can be found on CAE’s website at cae.com. Thank you very much.

Operator

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

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Source: CAE's (CAE) CEO Marc Parent on Q1 2015 Results - Earnings Call Transcript
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