CAE Inc. (CAE) Q2 2013 Earnings Report, Transcript and Summary

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

Good afternoon, everyone, and thank you for joining us today. Before we begin, I 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 nonrecurring 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'll find more information about the risks and uncertainties associated with our business in the MD&A section of our annual report and Annual Information Form for the year ended March 31, 2012. These documents have been filed with the Canadian Securities Commissions and are available on our website at cae.com and on SEDAR. They've 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, November 8, 2012, and accordingly are subject to change after this date. We do not update or revise forward-looking information even if new information becomes available, unless legislation requires us to do so. You should not place undue reliance on forward-looking statements. 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 call for members of the media. Let me now turn the call over to Marc.

Thank you, Andrew, and good afternoon to everyone joining us on the call. I'll first go through some of the highlights of the quarter and then Stephane will provide more details about our segmented results. I'll come back at the end to talk about our outlook. During the quarter, we had good order intake for the company as a whole, with book to sales of 1.15x on $590 million of new business and total backlog of $3.9 billion. In Civil, we made good progress integrating Oxford, and we had a strong demand for simulators with 12 more orders in the quarter for a total of 19 announced so far this year. In Military, we signed a more long-term recurring training services contracts and in New Core Markets, we had good growth and better margins. Looking more specifically at Civil, revenue for our combined Civil segments increased 36% in the second quarter to $288 million, and our operating margin was 16%. This includes a full quarter of Oxford, which at this stage of the integration process, represents about 3 to 4 percentage points of dilution on a combined Civil margin. The integration is a top priority and is well on track, but it required a fair bit of our operational focus during the quarter. Civil training saw a slower than usual summer and our results were further impacted by some disruption from our ongoing integration of Oxford. However, we made appropriate use of the summer period, when airlines are busy flying and not training, to make the kind of changes necessary to get us to the $22 million of cost synergies that we expect to realize by the time our integration work is done. We've been making significant adjustments to the combined workforce and we've taken some of our simulators off-line to relocate them within our global network to better match supply with demand. Turning to our Defense business, revenue for our combined Military segments decreased 2% year-over-year in the second quarter to $198 million, and our operating margin was 14.3%. The margin was helped by other gains about which Stephane will elaborate. Order activity was good in the quarter, with a high proportion of multi-year services contracts materializing from our pipeline. We like these types of contracts because they increase the predictability of our Military business, but they translate to revenue over a longer period of time than products. In addition to the effect of our order mix between products and services, our growth and profitability in Military was further impacted by the ongoing weakness in Europe, specifically Germany. We announced last May the restructuring of our Military operations, primarily in Europe, to adapt to lower demand. Since then, market conditions in Germany have further deteriorated, leading to new orders dropping off faster than we expected, and is taking longer to reduce the cost of our operations because of local labor laws. The result is lower revenue and profit in Germany during the quarter, which negated otherwise good performance in the rest of our Military business. In our New Core Markets, we generated $28 million of revenue for the quarter and we became more profitable with a segment operating profit of $2.2 million. We had continued success with positive market reception to new products we've just launched and we had some good sales of existing product lines. In Mining, we announced the strategic partnership with Devex, which is a technology company involved with mining operations management. This gives us more solutions to extend beyond mine planning and we have secured exclusive distribution rights for Devex technologies in a number of key markets. We continue to do well offering our existing software solutions also, with sales during the quarter to major mining customers in South America, South Africa and Australia. In Healthcare, we launched our new Caesar trauma patient simulator and we pre-launched our new VIMEDIX Women's Health ultrasound simulator, both of which are exciting new additions to our portfolio. We also had a number of strategically important deals during the quarter, with the sale of our center management system to the U.S. Veterans Health Administration for use in 159 of its centers throughout the U.S. and to the U.S. Air Force in 25 medical simulation centers around the world. Stephane will now take you through the financials.

Thank you, Marc, and good afternoon, everyone. Consolidated revenue for the quarter was up 19% year-over-year at $514 million, and net income attributable to equity holders was $36.5 million or $0.14 per share. We had $9.8 million pretax impact from restructuring, integration and acquisition costs this quarter. Excluding these costs, net income attributable to equity holders was $43.5 million or $0.17 per share. More than offsetting these costs, however, were other pretax gains, including $8.3 million in foreign exchange gains and a $5 million gain on a contractual expiration and reversal of contingent liability related to a prior acquisition in Military. Income taxes this quarter were $12.5 million, representing an effective tax rate of 25% compared to 21% last year. The tax rate was lower in the second quarter last year due to the recognition of certain tax assets. Free cash flow was positive $17.7 million this quarter, which is up from last quarter because of lower investment in noncash working capital and more cash from operating activities. Free cash flow was lower, however, than the second quarter last year because of the higher investment in noncash working capital, which was only partially offset by more cash from operating activities. That said, we still expect a partial reversal of our working capital investment toward the end of the fiscal year. Capital expenditures totaled $44 million this quarter, including $33 million in support of growth and $11 million for maintenance. We still expect total CapEx for the year to remain within our $150 million estimate. Net debt at $995 million was stable compared to last quarter at 49% net debt to total capital. It remains our intent to decrease this ratio over time to around 40%. The integration of Oxford is going as planned and we still expect to be within our $20 million cost estimate, and we're on track to deliver $22 million of annual cost synergies by the time the initiative is complete in the coming fiscal year. As we announced this morning, we're implementing additional restructuring in Europe with an estimated cost of $15 million and the related charges will be incurred in the second half of the current fiscal year. Now looking at our segmented financial performance. In our combined Civil segments, second quarter revenue increased 36% year-over-year, reaching $288 million. Combined Civil operating income was up 9% to $46 million for an operating margin of 16%. Utilization for the quarter was 65%, down from 77% last quarter. Excluding Oxford from our results, utilization was 69%. As Marc said, our second quarter was seasonally slower than usual and this, combined with some disruption from the integration of Oxford, added pressure on the margins. For a same-store comparison, if we exclude the results of Oxford this quarter, the combined Civil margin was 19.4%. In our combined Military segments, first quarter revenue was 2% lower year-over-year at $198 million, and we generated a 14.3% operating margin. If we remove the benefit of nonrecurring gains in the quarter, margin would have been 10.4%. The lower results this quarter are mainly due to our German operations, before which Military would have shown modest growth and profitability more in line with our expectations. With that, I will turn the call back over to Marc.

Thanks, Stephane. With more than half of fiscal year 2013 now behind us, we've got a better sense of how we expect the year to shape up as a whole. In Civil, we're highly leveraged to a growth market with excellent long-term fundamentals and we're seeing a positive response from customers to our recent addition of Oxford and the expanded range of capabilities it gives us. We're still very much in the midst of a strong commercial aviation cycle and we've already have seen utilization in our training centers return to normal levels in October. We're expecting higher demand in the second half and increased margins as we continue to ramp up synergies with Oxford. In business aviation, we're bolstering our position in the large aircraft segment, which continues to outperform the small and midsized markets. Our recent agreements with Bombardier, naming CAE as Authorized Training Provider for all Bombardier business jet models in Europe, and naming us its worldwide Authorized Training Provider for the Global Express series business jets, are testaments to CAE's strong market position. In Products, we're continuing to see good momentum for simulator sales and with 19 already announced, our mid-30s target is well within reach. In Defense, the challenges presented by government budget processes are well known and while this has caused some uncertainty about the timing of orders, we do know the market for CAE solutions remains large. We have good reason to be confident in the long-term growth and profitability of CAE's Military business. There are 3 factors that distinguish our Defense business from the sector at large: first, we have a solid position in terms of platform exposure; second, we have a diversified global footprint; and finally, the fundamental value of our simulation-based solutions is even more compelling in an environment where defense forces are given the challenge to do more with less. Let me first talk about platforms. We have an excellent position on aircraft that remain highly relevant in the current context. And we've grown our portfolio of solutions for a long-legged platforms like the C-130 and MH-60 helicopter, which have an ever-increasing install base, not only in the U.S. but around the world. Next, in terms of global reach, we're continuing to make excellent progress developing new markets with over 1/3 of our orders year-to-date coming from the emerging markets. Our Defense customers in Asia and the Middle East are increasing investments in defense to modernize their forces and we expect these markets to continue to present significant opportunities for CAE. Just in the last 3 years, we've seen our Military orders from emerging the markets more than triple. The third factor that defines CAE's Military business and the most fundamental is the very nature of what we do. Simulation-based modeling and training is an important answer to the question about how defenses forces can maintain mission readiness at lower cost. The argument for increased use of simulation is strong and we see buy-in from heads of government and defense forces. In the U.S., the world's largest market by far, the government accountability office has clearly acknowledged the need for the U.S. Military to make more use of virtual training. And both the U.S. Air Force and the U.S. Navy have recently reiterated their explicit intent to increase the use of simulation for maintaining mission readiness. The U.S. Military currently uses simulation for training about 35% of the time and industry estimates it will increase to a targeted 50% over the next decade. Given the size of the U.S. installed base, this movement alone represents a very material opportunity for our industry and for our company. In Europe, the landscape is changing. Future opportunities are now expected to involve more training services integration than traditional products. This bodes well for CAE's expertise, but we need to align our capabilities in the region to this new reality. In light of the clarity, we now have about the magnitude of the expected restructuring of the German Armed Forces and the state of European business originating from our German operations, we're undertaking additional restructuring. In doing so, we believe we will have accounted for the full brunt of current and potential defense cuts in the region. Once the restructuring is complete, we'll be able to more profitably deliver existing defense programs in the region and be in a better position to meet the future needs of the broader European market. The long-term fundamentals of CAE's market position defense remain attractive, but we have also reason to be confident in the near-term. We currently have over $2.7 billion of Defense bids and proposals currently submitted, which is as large as our pipeline has ever been. That being said, we have a high proportion of long-term services contracts booked so far this year and they convert to revenue more slowly than products. This factor, combined with lower revenue in Germany, leads us to expect Military revenue to decline slightly this year. We expect Military margins to remain stable next quarter, and begin recovering towards the latter part of the year as we continue to restructure our operations. This view is based on the work we've already have in backlog and plan to execute, orders recently won and are currently negotiating with customers, and orders we believe we have a high probability of winning before the end of the year. Finally, in New Core Markets, I continue to be pleased with the progress our teams in Healthcare and Mining are making to develop our offering and penetrate the market. We've recently signed significant contracts with some of the most sought after government and industry customers, which is a testament to our innovative technology and the CAE brand. Just this week, we announced the bolt-on acquisition in Healthcare that is immediately accretive, and gives us additional capability and products in the rapidly growing ultrasound simulation market. Even without this acquisition, we're well on our way to generating $100 million of revenue this year and I'm encouraged by our increased profitability. To conclude, there's no doubt that this was a challenging quarter, but we know where the challenges exist and we're addressing them. We've already begun to implement additional measures that we believe reflective of conservative outlook for defense in Europe and also position us better to meet the changing needs of what remains a large and attractive market overall. We're a leader in our niche in the U.S. defense market and we continue to see large opportunities to support the expanded use of simulation. Adding to our long-term confidence in CAE, we're highly leveraged to a robust civil aviation cycle and we have a strong position in the more rapidly growing emerging markets. Our integration of Oxford is strengthening our position even more. And we expect our business to continue outpacing the global growth rate in air travel overall. Lastly, in New Core Markets, we're succeeding to foster additional long-term growth drivers for the company that leverage our unique capabilities. Thank you for your attention, and we're now ready to take your calls. Andrew?

Operator, we'd now be pleased to take questions from analysts and institutional investors. [Operator Instructions]

[Operator Instructions] Our first question coming from the line of David Newman with Cormark.

Just on the Military side, obviously, I think you got the European situation beginning to sort out. But the U.S., we've got elections behind us. You have the automatic spending cuts coming up ahead, I think, on January 3. There seems to be a political will to kind of derail this and perhaps unfreeze the spendings. So, I guess, my question is, does this have an impact? Do you think it will be derailed? Would it have an impact if the automatic spending cuts go in? How does the U.S. Military play out here?

Well, a lot of questions and a lot of uncertainty among which -- for anyone in defense industry. But, I mean, in the end of the day, I think that where we are today is -- procurement is still going to go on. They have a -- they're operating under a continual resolution. Platforms that we're good at are being funded in any kind of budget scenario that you see. We've talked about platforms like the C-130, the MH-60. And I look at, again, I talked about this $2.7 billion of bids and proposals we've got out there. But over $1 billion of those are in the U.S. alone, and they're based -- by the fact that they're active bids and proposals, it means that they're programs of record. They're not speculative at all. So the fact that they're able to continue to procure and that they have -- there is a very real requirement for those products and services that we're bidding. I mean, clearly, we'll have to see. If the fiscal cliff materializes, I don't think anybody really can -- can really make a prediction of what would actually happen in the short term. I personally don't think anything will happen in the short-term, to be very frank with you. And I think that this will be pushed we'll operate under a continuous resolution. And like everybody, you'd hope that, now that the election is over, the cooler heads will prevail and a compromise will be made in the interest of not only the defense industry, but from economy in general. So I don't think, in summary, this changes our prospects much one way or another for our business.

Okay, and just one last one, just the realignment of some of your training in Europe to emerging markets and elsewhere, do you think this is the leading edge of a shift or is this just tweaking? In other words, do you think we're going to see more of this in the future, where you're going to realign your business towards emerging markets and shift more of the sims out of that market as it stabilizes, if even maybe the growth prospects aren't there and just shift more down into some of the emerging areas?

Well, are you talking specifically in Civil?

Yes, Civil training. It seems like you're moving some sims over there into Europe -- into, sorry, in Asia and elsewhere?

Okay, yes. No. Well, I mean, obviously, you go where the market is. If you look at the past few years, the lion's share of the market for new airplanes has gone to emerging markets -- Asia Pacific, China and -- really, I mean, where there's airplanes, as you know, it's a regulated business. Every 30 narrow body airplanes that gets delivered to an airline, they have to -- they need -- there necessitates a need for a simulator's worth of capacity in the market. And if you have wide bodies, it's about double that, meaning that you need a simulator for every about -- every 15 aircraft. And in fact, what you see in Asia Pacific, there's a disproportionate number of wide-body aircraft. So I think that's where you're seeing the fastest growth. But having said that, the legacy markets -- or the way we call them, I mean, the North America, Europe's, are still very large and there's a lot of replacement opportunities as people upgrade their fleets to more fuel-efficient airplanes. So I think what you see us doing specifically, in the case of recently, is us taking simulators that were in Oxford, for example, where they were unutilized because of -- I mean, when we bought Oxford they had a limited scope for being able to move simulators within the network because they didn't have a global network, barring one center in Hong Kong. But we have a global network where we can move simulators around cost effectively. So that's really what you’ve been seeing us doing. And we'll continue to do that until we've completed our integration of Oxford and we'll continue to react to the market in placing simulators where the airplanes go.

So it sounds like it's just one time and -- one time or a couple of quarters worth and then once you've realigned, you're good to go?

Well, I don't -- I think that the -- I think if you're poking at the impact that the integration has had, I think it's safe to say that we've had a disproportionate effect, disruption to our operation. I think the large part is behind us. I mean, we will still have some simulators that we're going to move around, and I think we've talked about, when we had the initial calls about the acquisition of Oxford, that we're going to move about 12 assets. We're clearly not going to move them all at the same time. We took advantage of the fact that during summer, airlines aren't flying much. You try to move -- you try to do -- shutting down, moving simulators in that period. We still -- we haven't moved 12, clearly, but there's more to be done. But that will be done over a period of time. So I think the lion's share of disruption, coming back to it, was associated this quarter to moving simulators; to the fact that we've affected literally a third of the workforce within the combined workforce of Oxford plus CAE here; that people are worried about losing their jobs; and that has a bearing on the efficiency that we're able to run our operation. At the same time, when #1 buys #3 that it kind of attracts attention and we had an investigation by the Office of Fair Trading in the U.K., which kind of delayed us. What I'm happy to say, that's free and clear. We had a free and clear ruling from them. But all of these factors is really what hit us here and I certainly don't expect that to reoccur, not -- nowhere near to that level.

Our next question coming from the line of Benoit Poirier with Desjardins Capital Markets.

My question is related more about the SP/C. Could you maybe provide more color on the -- what impact the summer season and what was the utilization rate in the quarter? And when you say, it's back on track, where are you so far in the quarter?

Okay, Benoit, I think, you probably mean the TS/C, right?

Yes, yes. Sorry. Yes, sure.

Okay, then just coming back to saying, we're back to more normal, but what we consider normal is in line, kind of utilization for this period. I mean, we have October that we're looking at. We're back in the numbers that we usually see in this period of time, which is a big difference compared to where in the -- a couple of months there, during the summer.

Okay. And what was the number in the summer, Marc?

Well, we were 69% -- let me just look at the numbers here. Am I looking the right number?

It's 65%.

Okay. Yes, I'm looking at -- I'll give you 2 numbers, one with and without Oxford here for comparison. Just getting the numbers out for myself. We had 65% utilization in the quarter. If you were to normalize that you'd compare, say, with last year, for example, because Oxford gives you a dilution. It would have been 69%, but so the absolute value was 65%.

Our next question coming from the line of Hamzah Mazari with Credit Suisse.

It's actually Andrew here. I just wanted to know given the strong performance of the New Core Markets, even though it's off a smaller base, do you plan on spending more capital growing that business, given that the sense is a bit slower right now?

No. Well I don't think that it will attract any kind of capital that would really affect our numbers in any material way. We're going to continue to invest in those businesses in G&A, in R&D. We might do -- I don't have any imminent, I would tell you, but we might do some more bolt-on acquisition if we see the kind of technology that we're looking at. But I think we're going to spend in proportion to the size of that business.

Okay. And, I guess, just more of a broad question, if you could just talk to us about the impact of 4 more years with the Obama administration, if it has any impact at all on your business?

Well, look, I think that one, I was looking at statistics today of the -- what the 2 presidential candidates, what their platforms were. I mean, an immediate thing I know that, if you look at some analysis I've seen -- I saw Credit Suisse reported something just recently, you see under President Obama it's good for helicopters. Good for helicopters, good for CAE, that's one example. But so -- look, we had 4 years of that administration. I think we're going to have 4 years -- I think that in large part, I think -- I don't see much change one way or another. What I would say, that the day that the U.S. Defense budget seized -- the day that seized revenue is a proxy for the size of the U.S. Defense budget, then I'll kind of worry about that kind of issue, but we're not there yet. I think there's still lots of opportunity for us to grow within the largest defense market in the world.

Our next question coming from the line of Steve Arthur with RBC Capital Markets.

Just shifting gears a little bit, if we look at CapEx expectations of around $150 million for the year, that's implying something lower for the second half. So if we look at that, without getting into any specific numbers, is it fair to say that CapEx might be trending lower over the coming years? That it's still expansion but less aggressively in favor of cash flow? Is that the right way to think about it?

Well, I think you got to go back to the outlook that we gave in the last call, which we haven't changed. We haven't changed much in our -- and I think that what you're seeing is pretty much what we've indicated. Our priorities for cash remained that we're going to invest our CapEx. We're going to continue to grow our business and that's our first priority. We're going to invest our CapEx where we see specific opportunities that -- to grow. I mean, they're going to be a lot less speculative than it has been in the past. Target, for example, specific joint ventures where we are growing with our customers. For example, we have -- we did joint ventures last year with fast-growing carriers like Cebu Pacific; like Indigo through Integral, their parent; like Air Asia. So as they add airplanes, we'll be adding simulators and therefore CapEx to those joint ventures. But if there's an anchor customer, there's a guaranteed return. So those are the kind of things we're looking at. The second priority is to de-leverage and we're not uncomfortable with that -- Stephane can talk more about that, if you ask him, but we're not uncomfortable where we are. But having said that, after the acquisition of Oxford we're more leveraged than we were, certainly not unreasonable levels. But we think somewhere between where we were before the acquisition and where we are today is somewhere we'd like to trend. And finally, you saw us do a dividend increase in the first quarter, and first priority is to share with the shareholders, either by dividends or through looking at -- although we haven't done any, looking at potential share buybacks. But again, we haven't done any, so we're not indicating anything here except that it's a priority we'll look at.

Our next question coming from the line of Cameron Doerksen with National Bank Financial.

Just want to go back to the Civil training segment and you talked a bit about the fairly weak or unusually weak summer, I guess. I'm just wondering if you could maybe talk about why you think there was an unusually weak summer period and if that was a CAE-specific issue or was that really an industry issue? And I guess sort of secondarily to that, in what regions did you see that weakness in and are you seeing any pockets of weakness still in various geographies?

What we saw -- and to put in context there, it's best to look at it apples-to-apples because the dilution of Oxford tends to skew things. But really what you saw is, if we compare, normally what you see in summer periods is about a 5% drop in utilization. What we saw, apples-to-apples this year, is about 8%. So you're about 3% worse and that's what affected us end of day [ph], plus, as I said, all the other disruptions that we've talked with the integration of Oxford. But really, I mean, certainly there's not a -- we don't see an industry issue here. The issues we specifically had was what -- actually just a couple of airlines located in India, Asia and Europe and, frankly, they're all airline-specific issues. And I call them issues, they're just -- they did -- they're pattern of initials versus recurrent training changed during that period. In one specific case in India, you had Kingfisher Airlines, I'll use their name just because they went out of business and we were training them, so that affected us specifically there. But now those pilots that work at Kingfisher redeployed to other regions -- to airlines in the regions, so we'll see a pickup. But I mean, those are the issues that affected us. And like I said, when we go -- when we look at -- underlying that, we don't see an industry issue here, is that we're back to more normal levels as early as October.

Okay and are you seeing any changes in this quarter versus previous quarters on the business aircraft side? I mean is it still the same trends, soft on the mid- and light side, but still pretty song strong in the large side?

Yes, that's what we see. I think that we're actually starting to see maybe a little bit of weakness on the -- further weakness on the light side, but the large cabin is still very strong. The seasonal disruption, specifically, in business aircraft was pretty much in line with what it usually is. So I don't see any big changes so far. Nothing terribly good, nothing terribly bad.

Our next question coming from the line of Fadi Chamoun with BMO Capital Markets.

Question on the Military. I hear you in terms of your comments about the outlook and you sound fairly comfortable and confident and -- but we're still coming off, here, 2 rounds of restructuring back-to-back in Europe. How comfortable are you that this is not likely to get worse or occur in some other regions, in terms of your Military business?

Well, I think I'll start with what happened in Germany, specifically. What we had in Germany is we had an operation there, which is the only operation outside of the mothership, you say, in Montréal and Tampa, where we actually had a sizable -- quite sizable engineering operations program management, full operation and that's a legacy. It's a legacy of a way of doing business that we're not in, in other regions now. And we've kept it because we -- there's orders in the European region, and in Germany specifically, that underpin that. But the market has changed quite dramatically. I mean, the restructuring of the German Armed Forces, specifically, is the most pronounced. I mean now that's coming to light, it's the most pronounced since the end of the second World War. So unfortunately, when we did our first restructuring, we were taking the view that we are going to be able to continue to win orders, and there was programs out there that we could see and that would sustain our operations. Although we'd be at a lower level, we'd still be able to sustain that operation. The reality is the depth of the cuts that means the orders just aren't there, certainly not on our products and to sustain the level of activity. So what we've taken the view is that we are sizing that operation now to a conservative view of what that market will be. And we're consolidating now the operations in Germany to be in line with, let's say, for example, what we do in other countries like the United Kingdom. We will have still -- we are certainly not abandoning that market. It's a strong market. We will do services. We will do -- we will have personnel to be able to do support to the customer, customer service running a few platforms that we have over there like the Tornado as an example. So and coming off, the first -- the second part of your question there, I think Germany and Europe as a whole, I think we've sized our self, what I would hope to be pretty conservatively. You can never be totally sure, but I feel pretty good that we've done -- that we've taken an aggressive view here, from a conservative standpoint. Now when you look at the rest of the world -- and I take your point. Look, at the end of the day, we've got to win the orders, but that's no different than we ever have been. We have been in -- we have been operating in the last couple of years in this kind of environment where delays and procurement have been kind of the order of the day. But where I take the strength, Fadi, and where I take my confidence is, again, I'm looking at this backlog of business. Two points -- sorry, not backlog, but my bids. And I have -- we have -- I'm looking at and believe me, we look at this in a very detailed manner, $2.7 billion of bids written and proposals written against real customer requirements. Now there's always -- so if those come to fruition, I have absolutely no problem about growing and growing strongly. Now, do I expect that to happen the way it will? No. I fully expect that things will continue to get delayed and that those $2.7 billion will be stretched over a longer period than we currently anticipate. So I'm taking the view that we're going to be -- we have to get through this period of uncertainty. But I feel confident that with the backlog of proposals we have out there, the pipeline is strong and that we'll be able to continue to be successful. And in terms of if it doesn't, I think when you look at what we had to do in Germany, it's quite costly to reduce your operations in the European context. It takes a lot of time to be able to, unfortunately, be able to lower your workforce. It takes a lot of time to negotiate with worker councils, for example, and take the time. And that there's a process. There are laws to be done and it's very costly. And I don't see that same main -- if we have, and heaven forbid, to reduce more in the rest of our operations, I'm not -- first of all, I don't anticipate that. But if -- should it happen, I'm not seeing -- I'm not anticipating that level of cost. So, look, a long-winded answer, but it comes back we have to win orders. I'm looking at this pipeline and I believe we are going to win orders. I can't -- I just can't predict. I'm not the one writing -- as I've always said, I don't predict when the government procurement will actually press the button and give the order. I don't think nobody can.

Okay that's helpful. And Stephane, maybe a quick question, do you expect to be working capital neutral this year?

Well, definitely I'm expecting some reversal of noncash working cap. What we've seen this quarter, I think last quarter -- last year at the same quarter, we started reversing some noncash working cap, earlier in the year. And this time around, I can see the reversal starting in the third quarter as opposed to the second quarter. So I'll see a portion, maybe not all of it, Fadi, in the remainder of the year. I don't think we'll be noncash working cap neutral by the end of the year, but you'll see a portion of that reversing. I'm quite -- I mean, I'm quite pleased with certain areas of our noncash working cap that we've managed especially looking at our receivables. The aging is better than it was a year ago. Even the DSOs are better than last quarter. But we -- going through this quarter we had, through Q2, we had to pay some payables that we inherited from the acquisition of Oxford. And the other drive to the noncash working cap was the delay in some Military procurement that reduced the deposit on contract that we typically have. But just going back to my initial answer, I don't see it all reversing towards the end of the year, but a portion of it will reverse in the second half of the year.

Okay. And related to the restructuring in Military, if I take out the gain this quarter, your margins were in the low 10 around, I guess, between 11 and 10. How do we -- should we think about the progression back, sort of mid-teens in the next few quarters?

Fadi, I think you need 2 things to go back to where we are before. Marc just talked about the impact of the restructuring in Germany will have. I guess, the issue we have is you know what you have to do, but it takes time before it's costs are actually out of the plans. So you end up with a much lower volume of business, in a location where you still have to observe your fixed overhead. So the first thing that will need to happen is, well, actually cutting costs and having those costs of our manufacturing plant in Germany. And the second thing is volume. In the past year, you're looking at the 15% plus that we've guided last -- that we've been guiding for quite a while, and we had a second half of the year in our Military business where the volume would increase by quite a bit. So once you got both, you get back to the 15% types of margin that we've guided to.

Our next question coming from the line of Chris Bowes with Canaccord Genuity.

I just have a housekeeping question. I'm wondering if you can help me with how those unusual gains run through the segments?

Sure, I can. Well, the biggest -- I mean, there are 2 main ones. One of them is specific to Military, and it's a $5 million reversal of a provision that we booked on an acquisition that dates back to 2009 for, call it, an earn-out provision that we reversed as the contractual deadline came up for us to make that payment in the quarter. So we didn't have to make the payment. We reversed that provision. The other big item is some FX gains and I'll -- there's a $8.3 million of FX gains in the quarter. I'll split that in 2 parts. The first one is specific Oxford and when we acquired the business we looked at the basket of currencies that the company Oxford had and the exposure on the different currencies, more specifically, in relation with some lease obligations. We've applied our hedging program to those obligations and those leases are now hedged and along the way, we crystallized some FX gains. The other part is not in relation with Oxford, but in relation with our internal loan financing structure that we have in place like many companies that both did structure and we'd restructured some companies during the second quarter. The company that we had bought Oxford also had a similar vehicle. So in preparation for merging the 2 vehicles we organized some companies and some gains were crystallized along the way.

Fair enough. So the $5 million, is it fair enough to assume that it went through SP/M and the FX is all Civil?

Yes, so the $5 million went to SP/M and the FX -- the first part that I talked about for Oxford leases went to TS/C, that's a $2 million FX gain and the rest was not specific to a segment. So it's spread across all 4 segments.

[Operator Instructions] Our first question coming from the line of Ross Marowits with Canadian press.

I'm wondering if you could first -- the restructuring in Germany, is there any impact on Canada?

If there's -- not immediately. If there is some, we don't anticipate. Now, we don't know. But I can't categorically, rule it out. We don't anticipate some right now.

So you don't anticipate job losses as a result in Canada?

No, we don't anticipate some right now.

And are -- is there a number to how many job losses will be in Germany?

Yes, we -- well, I mean it's in the neighborhood -- I'm just hesitating here because of what we've told our own population here. But I think it's -- a total job loss, it's not only in Germany, we're sizing at approximately 100.

100, okay. And you talked about in terms of the U.S. election that there isn't much difference with the result. But if the Republican -- if Romney had won, where might you have seen potential for increases?

It's hard for me to get in that level of details because we're talking so much "what if" there. For us, what I look at is no matter what kind of administration was coming in, the kind of platforms that are important to us, helicopters and transport aircraft, are being funded. But as a broader answer to your question is -- a question like you have has, obviously, a very big impact if you're a major defense contractor in the United States, a company, I don't know, like Lockheed Martin, like Northrop Grumman, like Boeing. I mean, obviously those kinds of questions are very material because depending on their view of their major platforms, whether it be a joint strike fighter or nuclear submarine, whatever, it matters. But us, I mean, we have a strong Military business, but let's be honest we operate at the margin of defense spending in the U.S., which is actually good in the sense that it's a great big market for us and we can go -- so we can go get more. And I think what the effect for us, and it really doesn't matter which administration it is, is that there's delays that are being caused because of difficulty in reaching decisions. I mean, perversely, I mean, the fact that we have the same administration means that you don't have a big disruption time when -- that's caused. When a new administration comes in, as you can well imagine, all the personnel change, all the people in the White House change, the people who supported him have changed and that whole administration, by the time it changes, that in itself causes anything from a 6- to 9-month lag in some decisions being made. So clearly we're not having a change in administration, so on that basis alone that'll be a positive.

[Operator Instructions] There are no further questions from the press at this time.

Operator, thank you very much for handling the call, and I'd like to thank the members of the investment community and the media for joining us today for the second quarter conference call. And I'll remind you that a transcript of the call can be found on our website at CAE.com. 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. Have a great day.