CAE Inc. (NYSE:CAE)
Q3 2016 Earnings Conference Call
February 10, 2016 01:00 PM ET
Andrew Arnovitz - IR
Marc Parent - CEO
Stéphane Lefebvre - CFO
Kevin Chang - CIBC
Kristina Lee - Bank of America Merrill Lynch
Fadi Chamoun - BMO
Cameron Doerksen - National Bank Financial
Benoit Poirier - Desjardins Capital Markets
Turan Quettawala - Scotia Bank
Konark Gupta - Macquarie
Good day, ladies and gentlemen and welcome to the CAE Third Quarter Conference Call. Please be advised that this call is being recorded. I’d 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 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 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 that 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 third quarter fiscal 2016 MD&A and in our annual information form for the year ended March 31, 2015. These documents have been filed with the Canadian Securities administrators and are available on our website at cae.com and on SEDAR. They have also been filed with the U.S. Securities & Exchange Commission under Form 40-F and are available on EDGAR. Forward-looking statements in this conference represent our expectations as of today, February 10, 2016 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. Following the conclusion of that Q&A period, we will open the call to 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. We had good performance in the third quarter, keeping us on track to meet our positive outlook for the fiscal year. In Civil we continue to see strong demand for our training solutions for customers in the Middle East, Europe, Asia and North America. We had 73% utilization in our training network and we sold full-flight simulators and training programs, totaling $390 million. We expanded our market share with new customer agreements for exclusive long-term pilot training including KLM Cityhopper and Air Europa, and we also renewed and extended agreements with customers including Arab Wings, Shenzhen Airlines and Spring Airlines.
In Business Aviation we booked orders for over a $100 million in training programs with more than 10 operators globally. These training contracts involving both new and renewed business are good examples of the recurring nature of our training segments in both commercial and business aviation and the headroom that exists to grow CAEs market share.
Indicative of our progress to grow the business the civil book to sales ratio was 1.16 times for the quarter and 1.11 times for the last 12 months. And third quarter Civil backlog reached a new all-time high of $3.09 billion. In Defense we were awarded a range of contracts involving enduring aircraft platforms. We sold a high-fidelity fuselage trainer for the U.S. Air force to rehearse aeromedical evacuation missions on the C-17 transport and KC-135 tanker aircraft.
Also for the U.S. Air Force, Defence was contracted by Lockheed Martin to provide a range of upgrades and updates to C-130J transport aircraft simulators. The existing install base is an important driver of recurring revenue for CAE. And during the quarter we received orders for upgrades for Lynx helicopter simulators from the NATO Support and Procurement Agency and from the Australian Defence Forces to upgrades MRH90 helicopter simulators. We also had business in the land domain this quarter from the U.S. Army for Abrams main battle tank trainers as part of a foreign military sale. In total, Defence received $129 million in orders, representing a book-to-sales ratio of 0.51 times. The ratio for last 12 months was 0.98 times and third quarter Defence backlog was $3.3 billion.
And in Healthcare, we continue to expand our offering with the release of new products including our Blue Phantom ultrasound training model, which is used for ultrasound guided evaluation and procedures for the knee. This is the first of its kind on the market, there continued to be good synergies between Healthcare and Defence this quarter as Healthcare received an order involving the U.S. Department of Defence or 57 patient simulators and training services for the tri-service Medical Education and Training Campus. Healthcare also sold patient simulators, courseware and staffing services for a U.S. military aeromedical training facility.
With that I’ll now turn the call over to Stéphane, who will provide a detailed outlook and our financial performance. I’ll return at the end of the call to comment on our outlook. Stéphane?
Thank you, Marc and good afternoon everyone. Consolidated revenue for the quarter was up 10% over the third quarter last year at $616.3 million and quarterly net income before restructuring of 1.5 million was up 14% to 59.4 million or $0.22 per share.
In Civil, revenue increased 4% over the third quarter last year to 334.7 million and segment operating income was up 3% to 55.3 million for a margin of 16.5%. We reported some one-time gains in the third quarter of last fiscal year before which Civil's operating margin was approximately 15%. Normalizing for these one-time gains in last year, segment operating income growth would be approximately 14% year-over-year, which demonstrates the leverage effect of third quarter utilization increasing from 68% to 73% year-over-year. For the first three quarters civil revenue was up 12% while segment operating income was up 9%, again normalizing for one-time gains. The year-to-date increase in the operating income would be approximately 17%.
In Defence, revenue grew by 17% over Q3 last year to 253.3 million and operating income increase by 4% to 29.7 million for an operating margin of 11.7%. For the first three quarters Defence revenue was up 9% and segment operating income was up 7% with a margin of 12.1%. Orders in Defence are normally lumpy from quarter-to-quarter and while the book-to-sales ratio was 0.51 times for the quarter. We believe the trailing 12 month ratio of nearly 1 time is more representative.
Moving to Healthcare, revenue was 28.3 million was 33% higher in third quarter last year and we generated 1.6 million of operating income for a margin of 5.7%, this compares to a margin of 2.3% in Q3 last year. Income taxes this quarter were 8.5 million for an effective tax rate of 13%, this compares to 20% for the third quarter of last year. The lower tax rate this quarter results from the change in mix of income from various jurisdictions and also some U.S. tax incentives for domestic manufacturers. Excluding the tax incentives our income tax expense this quarter would have been 10.9 million.
We had good free cash flow this quarter and I am pleased with our progress to reduce our investment in non-cash working capital. Free cash flow from continuing operations was 194.4 million this quarter compared to 70 million in Q3 last year. On a year-to-date basis net cash from continuing operating activity, less cash used in investing activities was 247 million, this compared to negative 24 million for the same period last year, representing a 270 million improvement. And finally net debt as of the end of December was 795 million, down from 972 million for the same period last year. From a capital structure standpoint, we continue to delever our balance sheet with net debt to total capital decreasing to 29% at the end of the quarter compared to 38% a year earlier. Third quarter CapEx was 29.2 million and for the year to date it was 78 million.
Taken together, good free cash flow, lower CapEx and lower net debt contributed to higher return on capital employed which reached 11% in the quarter. This is an improvement from 10.5 a year earlier.
With that, I'll turn the call back over to Marc who will discuss the way forward. Marc?
Thanks, Stéphane. Our performance year-to-date highlighted several positive characteristics underlying CAE's long-term investment thesis, these include a high measure of recurring income, larger markets with ample headroom for us to grow market share, a strong and defendable competitive position and attractive secular tailwind in our end market. These characteristics together with CAE's culture of innovation and a strategy focused on being the training partner of choice support our positive long-term view.
In Civil with expect to continue to make good progress increasing our share of a large training services market and we continue to see favorable conditions for our unique comprehensive solutions. Following a number of years of capital expansion to prefund growth and to establish our global training enterprise, we've been focused on increasing utilization of our training centers and we continue to expect higher utilization for the year as a whole.
In products with 39 full-flight simulator sales announced to-date we now expect to exceed our prior years’ Civil full-flight simulator unit sales, and for Civil overall we continue to expect double-digit operating income growth and a higher margin for the year as a whole. In defense, our year to date performance, robust pipeline and healthy backlog support our view for growth this fiscal year, long-term the positive inflection in defense spending and increasing use of simulation based training helped reaffirm our view that Defense offers solid growth prospects ahead. We currently have $3 billion in bids and proposals pending with customers and we continue to win our fair share of opportunities in the larger training systems integrator market.
And finally in Healthcare, we've really only just began to demonstrate what we believe is possible, in terms of long-term growth potential. CAE brings the advantages of technical innovation, training knowhow borrowed from Aviation and front-end synergies in segments like Defense that no other competitor can claim. Our success so far has come largely from our ability to bring new product innovations to market and we'll continue to pursue this strategy. In the immediate term, we expect to complete the year with solid growth and higher margins.
Before I conclude, I'd like to make a few comments about our capital management strategy and how this relates to today's announcement of a normal course issuer bid.
Our capital priorities remain unchanged. First and foremost growth remains our top priority and we see no shortage of attractive opportunities to enable our vision to be the recognized global training partner of choice. We’re selectively pursuing growth investments that are consistent with our training vision and where we can realize good value and attractive returns while keeping pace with our customers.
Our second priority, is to maintain a strong financial position and as you will have seen from our results, we have more than met our target for capital structure positioning us well for support growth. Our third priority, involved increasing current returns to shareholders, in the last five years we steadily increased CAE's dividend as we have maintained [ph] the company's sources of recurring cash flows and in keeping with the same capital allocation priority, I'm pleased that our Board of Directors today approved our intention to implement a normal course issuer bid for the repurchase of up to 2% of CAE shares.
The NCIB is intended to be used primarily to mitigate the dilutive effect of treasury shares issued under CAE's dividend reinvestment and stock option plans. Once approved this will give us another avenue to enhance current returns to shareholders.
With that I thank you for your attention and we're now ready to answer questions.
Operator, we'll now take questions from analysts and institutional investors.
Thank you very much. [Operator Instructions] And we'll proceed with our first question from the line of Kevin Chang with CIBC, go right ahead.
Hi, thanks for taking my question, maybe just turning to Civil margins, given you've kept your guidance for the year, just wondering, it looks like you'll need to put up an 18% margin in Q4 to achieve that guidance. What type of line of sight do you have to reaching that, it does look like a pretty big sequential improvement quarter-over-quarter. And then just more broadly speaking, how do you see margins trending over the next couple of years within Civil? Are you kind of stuck here between the 16% to 17%, or do you have line of sight to push above that as utilization rates improve here?
I think we broadly, I think we're aware of what's required to be able to reach our outlook in the civil margins in the fourth quarter and we're confident on being able to get there, and the line of sight we have is, obviously the product backlogs that we have, you know the similarities that need to be turned into revenue and earnings this quarter are already in backlog, so we know what we'll get from that. We know what utilization at our training center so far is and we have pretty good line of sight with this point of, who's reserved into our training centers.
So it's all of that, it's really you know as is the story for the longer term, the growth has got to come in, in terms of expansion of Civil margins, really comes across that increasing utilization of our existing training center network, increased utilization. That turning into -- I mean the lever effect is quite significant and we continue to see that. At the same time longer term the restructuring plan we put in place, the process improvement plan that we’ve put in place is well underway and I fully expect that, as we expect as starting in the next year we will start to see those improvements flowing into improving the Civil margin as well because it will give us another weapon in our competitive battle.
That's helpful and maybe just quickly on Defense, sounds like the outlook continues to get a little bit more constructive for you. What revenue level do you need or what revenue growth rate do you need for Defense margins to push above the 12% to 13% you're guiding to this year. Do you have that in your backlog or do you need to secure some of these 3 billion of bids and proposals in order to push above that 13% range?
I think the broader contributor to that, to the margin is the percent, it's not just the amount of orders, it's really the mix between products and services. Typically it’s two reasons, typically as we've highlighted before, typically services contracts. On the one hand we like them because it gives you a very good visibility on recurring revenues for the year to come and clearly you'll have to win them every year, so you save on business proposal costs so you can bid on other programs, but typically they'll be lower margins.
So depending on the mix between products and service you will -- that will affect our margins going forward, no matter what the level of revenue. But you know we continue -- if look overall with what we see in our backlog and in the I've mentioned about 3 billion of bids out there with customers you know, if we've to win our fair share as we expect we still see our margin expectation largely unchanged which means that you know in the 12% or 13% range.
That's helpful. I'll just back into the queue, thank you.
Thank you very much. We'll go to our next question from the line of Ron Epstein with Bank of America Merrill Lynch, go right ahead.
Hi, good afternoon guys, it's actually Kristina Lee dialing in for Ron. First can you discuss the competitive environment? In the past few years we've seen U.S. based defense contractors enter the industry. So I'd like to understand maybe if you could discuss your win rate for Civil training solutions and the contracts that you're pursuing, and also pricing in that environment.
I think the way I would characterize it, it remains the same as -- it hasn't changed over the last few quarters it's still pretty intense. I wouldn't call it insane and I think I called it insane before but it's not, it's still very competitive, it's certainly something that affects our product margins for sure as we battle this out, having said that you know that's what factored into the -- and that dynamic is what we've been predicted and it's assumed in our margin expectations and growth of the business, we continue to win our historical, at least the last few years market share about 60%-70%. So we continue to win, but the competitive environment hasn't really changed as we had characterized it.
And then for civil products, can you discuss how many full flight simulators you could build per year without adding incremental capacity and where you are today?
I think there are two things to that, there is no real I would not characterize capacity being an issue with us to be able to ramp up production rate and that will get even better with the process improvement plan that we have underway, which will allow us effectively to produce even the existing number that we have, that we went per year using less assets.
And will go to our next question from the line of Fadi Chamoun with BMO. Go ahead.
What percentage of the business, Marc, Stéphane, maybe like percentage of revenue or even better percentage of EBIT, would you consider as a recurring sticky in a sort of changing demand environment, like the Aerospace cycle starts to flatten out here or even turn the other way? Just trying to understand the defensiveness of your business because that's obviously changed a lot in the past number of years.
Okay. I think today if you are to look at where we are in services, we are about -- business as a whole about close to 55% to 56% of our business is services, recurring services. And as we grow, clearly, I would characterize Civil, if I pick them apart a little bit. Civil, we see that as clearly our growth story. And the growth is going to come about increased utilization in our training network.
And that's really services, so you are going to expect that the recurring nature of our business should continue to grow, and that's a same thing in defense. We’re bidding, now that we have the full capability including the acquisition we made last year or this year of NFDC from Bombardier, bottom Bombardier military craft businesses, we’re bidding as a training services integrator in the military market and really that allows us to go after much bigger recurring contracts of the services nature.
I would say that if anything our business is going to get more services and more kind of recurring nature of revenue, as we go forward.
Okay. Maybe also on the CapEx, so you are on track for I guess about $100 million this year, prior to this year you’ve averaged close to $150 million and given sort of the utilization rates that you are running at right now, I'm wondering if you can venture into what you’d think next year CapEx would look like. More close to that low end of the range of 100 to 150 or do you foresee opportunities here to invest a little bit more as we go into 2017 year or I guess until the end of this calendar year?
Well. I wouldn’t venture into the forecast for next year at this point, but suffice to say that, as I've mentioned in my remarks our number one priority remains growth and we’re going to deploy the capital in such a way that makes sense in terms of being able to grow from an accretive point of view, first of all, and in line with our training services mission. So as we see the opportunities we’ll deploy the capital. We’re not going to hold back based on that metric. Now that doesn’t mean we’re going to go back to the level we've seen in the past, so I'm not going to venture at this moment what we would do, Fadi. I think we’ll focus on this year as we get into the next quarter, probably be able to give you a number on that one.
Thank you very much. Will take our next question from the line of Cameron Doerksen with National Bank Financial. Go ahead.
Yes, thanks. Just a question on the free cash flow and working capital. You had a very strong quarter for free cash flow, it seems like maybe a lot of it was driven by increasing payables. I'm just wondering if you can maybe talk about what happens and that's I guess probably true for last several quarters, if you could maybe talk about what has happened there and what your outlook is for working capital either usage or generation in Q4?
Yes Cameron this is Stéphane. It wasn’t actually increasing payables, it's actually we received some payments ahead of the -- on some service contracts on payments and some service contracts, so we record those as differed revenue. So it's not actually stretching payables, this is -- in the quarter we had received quite a lot of deposits on some service contracts, so that's where the reason why you see it as an increasing payables, but it's in differed revenue.
Look I think overall looking at the results year-to-date, net cash operating minus all our net investments is 270 million better than what we had last year and so I think we’re very pleased with that performance and there is a number of reasons to highlight here including as Marc just talked about, the CapEx level was reduce, we've generated more cash on our operations. And the cash invested in non-cash working capital actually reserve 46 million year-to-date compared to an investment of 129 last year, so 179 million better.
A lot of it is related to the way we collect our receivables. I look at some of the statistics, this has outstanding down from 55 days last year to 48 days this year. So it really is improvement across the board, pretty much all of our non-cash working cap components. So we’re pretty pleased with that.
As far as your second question the guidance Cameron, we said I think early in the year, I said I can see for fiscal '16 again some investment in non-cash working cap, but lower than in fiscal '15, given where we are at after nine months we’ll defiantly have a better performance in fiscal year '15. I would probably even venture to say we'll probably be neutral on net cash from working cap for this fiscal year. It looks like a strong performance this year.
Thank you. We will go to our next question a line of Benoit Poirier with Desjardins Capital Markets. Go ahead.
Just to come back on the cash deployment opportunities, you announced a buyback for almost 2% of share outstanding, so I was just wondering in light of your strong free cash flow generation, whether this reflects more of a cautious stance or do you foresee some growth opportunity that may require cash investment in fiscal '17?
Look, I think I’ll start and I’ll let Stéphane go. I think we’ve historically been quite measured in our approached. I think that as you saw from our dividends we always -- for last five years increased our dividend every year. And though we don’t have a set policy we -- you can see we can surmise a certain behavior by our actions in terms of the kind of yields we like. So now we’re starting with NCIB, which we think is another good way of returning cash to shareholders in line with our third priority of doing exactly that. And it's a balance, it’s a balance between our three priorities. I think the second one, deleveraging I think we have achieved, now it’s a question of maintaining an optimal or close to an optimal balance in our capital structure which Stéphane can talk about.
But our priority remains growth, so we -- I think that would -- it’s not that we’re keeping powder dry, but we’re -- we have a -- we’re in a very good position to be able to capitalize on the opportunities to not only keep pace with our customers when we deploy CapEx going back to Fadi's question, lot of that has to do with keeping pace with our customers as they go their businesses, the Airline business and those that we have joint ventures with, but it's also to look at as we pursue our training partner of choice vision we see more opportunities to do outsourcings, in some cases that will require capital.
So it's really a balance, but its -- and maybe Stéphane you want to add or maybe just pick up on it?
The only thing I would add is, the training business is one that generates some good cash flow. And it allowed us in the few years to deleverage quite a lot. You will probably remember, Benoit, right after the Oxford acquisition our net debt to cap was about 50% and so we were able to bring it down to 29% at the end of December. And we have quite a strong cash balance at the end of the quarter.
So to continue with what Marc was saying we started from the stance of, what do we need to offset dilution from our option and drip [ph] plans and putting in balance our cash position and the cash need over the next year, both in terms of CapEx, opportunities as Marc mentioned, but also in terms of what we can repay in debt over the next 12 months. And without compromising the robustness of the balance sheet this is what we got approval from the Board to do at this point.
Okay perfect. And just looking at Healthcare, you reached 28 million of sales which is about your typical threshold of 24 million for profitability. Margins reached 5.7%, any color on what will drive margin upward going forward, was there more questions of ramping up your new line or more kind of the product mix impact in the quarter?
Mainly mix and within a quarter just like anything else you depending -- again, going back to mix, depending on which product you deliver in the quarter. And of course as we’ve talked about before, Benoit we’re -- even though we’ve grown that business, it's still relatively small number compared to our expectation of how we are able to grow this business. So we are continuing to invest in SG&A and R&D to achieve that business. So that weights a bit on margins, but overall we’re -- I’ve given you the outlook of growth in that segment and we’re still quite on track to able to do that for the future.
Okay and last one, just related to pilot shortage in the U.S. The new rules that require first officer to fly over 1,500 hours, finds -- seems to be kind of a big distort market for pilot. So any thoughts on whether it’s a positive net or negative net for simulation?
Well I think it does, it has a positive net for simulation in the sense that pilot, when they actually do apply for airline job, they need to get type rating and type rating is done in a -- that type rating means you're getting essentially a license to fly an airline, say a CRJ or Dash 8 or Boeing 737 or Airbus A320, whatever. So you do that in a simulator.
So, we're actually getting lot of that activity right now in Europe, number of training centers are fully occupied with people doing type ratings for airline that are growing and taking on new pilots, specifically going back to the 1,500 hour rule, what helps us is not only simulations, but a little known fact is, we are the largest flight training organization in the world. Our network of flight training school which we have a very large one in Phoenix, Arizona is clearly benefiting from that.
So I think, it's for sure it’s a net positive for us.
Thank you. Proceed to our next question from the line of Turan Quettawala with Scotia Bank. Please go ahead.
My first question is also on the training center utilization. The utilization obviously was very strong here in the civil side in the quarter. I'm just wondering if you can give us some sense of whether you expect that to continue in terms of a mid-70s type utilization here.
We haven't given any forecast on that Turan. I think that it's possible for sure to get into those level. I wouldn't predict when, typically Q3-Q4 are high quarters, but I'm not going to venture to say how much you can get, how much we'll get at this point
Fair enough. Marc, was there some kind of a blips here in the quarter or is this more of a longer-term trend?
It’s certainly not a blip, it's what we would have expected, in terms of margin. And when we gave the outlook for the year, the utilization that we're getting and the resultant impact on the profitability margins that results from that high utilization is pretty much right at what we expected. So there is no surprise from our side.
Okay, great. And another question, somewhat on the same lines of the Aerospace cycle here, there's obviously a lot of worry out here in the market based on that. I'm just wondering, you have a great sense of what the pulse is of global airlines here. Are you hearing anything from your airline customers? Is there concern that things could change for the worse here? Obviously we haven't seen any changes yet on the traffic level side, but I'm just wondering if there's concern.
Not that we’re hearing. We're selling -- our business which is close to that -- which is the closest tied to delivery rates at the OEMs is our product business and if anything as you see, we're selling more than we even thought for the year, which is a nice positive surprise. We still see the manufacturer’s still not going away from increasing delivery rates, training demand is very healthy. The airlines have just had their most profitable year ever. So, I'm going to knock on wood, but I don't really -- I'm not hearing that kind of worry that seems to be out there.
Great, thank you. Just a couple of clarification here for Stéphane. First of all, is it possible to parse out those ForEx gains between the segments?
Look the 4 million FX gain that we disclosed in Q3 is not just for one single business or one single segment, its spread across all the three segments. One thing Turan if I may, I'll mention as well is that, this is a gain really, ForEx gain on that we get typically on cash working capital accounts, we also have -- within our joint ventures we have also a similar effect quarter-to-quarter and in Q3 we actually had the reverse, we had a 2 million noncash working capital FX loss that's not included in the 4 million that's disclose in note 10 to the financial. That's actually in part of our results of our 12.9 million profit result that we've disclosed on the P&L. And so we didn't get a 4 million FX windfall in the quarter there was another FX loss in the GV line and the other thing I'll mention is we also had some non-operating expenses that were higher than the normal and these were mainly pension related, share based compensation, we didn't call those out because one point in time, [indiscernible] normalized for everything. But it neutralizes entirely the 4 million of FX gain that you'd see there in note 10.
That's helpful. Thank you, Stéphane. And just last question, do you have a sense of the tax rate here for the full year? It's really moved around here this year, right?
It is, well look, last this quarter normalize or what I talked about the sort of the U.S. tax credit that we've had in Q3, normalized would be at 17% last quarter, without the huge the big tax gain we've had we would been at 22%. So last year we were at 22% overall for the year and so it's tough for me to predict quarter-to-quarter but I continue using 22%-23%, more probably 22% for planning purposes myself.
[Operator Instructions] And our next questions from the line of Konark Gupta with Macquarie, go right ahead.
Just a clarification before I ask my question. On defense backlog, what's the split between product and services?
We don't break it out but I think we can -- we don’t actually breaking out, that number Stéphane, I don't know if we can provide the color but -- on it?
I'll have to get back, I think it's probably 60% services.
That would have been my guess, 60%-40% services base. That’s probably close.
Because you said the services on the military side is lower margin, right? And that's an area that you are expecting more growth basically.
So to my question, it’s actually more broad-based. Obviously, a lot of people look at ROCE here, and, historically speaking, you have been at, call it, 15%, 16% ROCE, and today, it's 11%. Now I understand some of that has gone with the change in the business mix after, call it, Oxford Aviation acquisition, et cetera. So, let's say the normalized peak would have been something like 13% ROCE.
My question is, what will get you to get to that 13% ROCE number from 11% today with respect to your capital plans, as well as obviously we are seeing right now there's been some overcapacity concerns in the commercial aviation market, and the business aviation market indicators are not as solid as they used to be. So, how will you go from 11% to 13%? And how much time that might take you? Is your plan for the next two or three years or are you talking more about five years? Because the utilization levels in your training center is roughly same as 70% what you had when you had 15%, 16% ROCE, I think.
I think the path to return on capital employed is largely the path to returns. And returns are going to come as we talked about as increasing our utilization of our training center network that we believe we can do that. We believe we can capture a larger share in the training services market where contrary to our products market where we have about typically 60%-70% market in the training market. The training market itself is about six times larger, in that market we have about 25% market share which is by the way a commanding share, we are the largest player by quite a large margin in that market.
We believe and I think we're starting to demonstrate that there is an ability for us to continue to grow our market share in that segment which is a market that itself is growing at the rate of passenger travel. So that's really where it's going to come from in our parts, at the same time we believe there is a growth story in defense. But I think largely the path is through increasing returns, where as you can see our capital deployments have gone down over the past, clearly this year we're down by about 50% year-over-year in terms of our CapEx. So disciplined capital deployment in line with keeping pace with our customers, maintaining our existing assets out there and looking at opportunities that are accretive. I think, it's all going to come from that. There's no more secret than that.
Marc, in terms of CapEx basically, if you assume flat line CapEx of, call it, $100 million for the next couple of years, do you think with the utilization that the trend we are seeing right now, and if you assume you get more share in the training services, do you think something like 12%, 13% ROCE is achievable in the next two or three years?
We're not going to go that far right now in terms of our outlook, but definitely 12%, 13% ROCE is definitely possible but I think look, we have -- we haven't had an Investor Day for a long time and I think that we're going to schedule -- we have one scheduled at the end of March, and I think at that time we have an opportunity to maybe go deeper in all of our lines of businesses and get into some of the details which underlie what our view and our confidence is, it really goes to the heart of some of those questions that you're asking.
Okay, thanks for that.
Operator, I believe that's the questions we have from investors and analysts this afternoon. I'd now like to open the Q&A session to members of the media.
Certainly [Operator Instructions].
And Mr. Arnovitz, we seem to have no questions queue up at this time. I turn it back to you.
Okay. Thank you very much operator. And I want to thank all participants today for joining us on the call. I’d like to remind you that the transcript of the call can be found on CAEs website at cae.com and also appreciate that Marc mentioned the upcoming Investor Day on March 30th, an invitation for which will be going out shortly. Thank you very much.
Thank you. 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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