Good day, ladies and gentlemen. Welcome to the CAE Fourth 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 go ahead.

Good afternoon, everyone, and thank you for joining us today. Before we begin, I'd like to remind you that today's remarks, including management's outlook for fiscal year '20 and answers to questions, contain forward-looking statements. These forward-looking statements represent their expectations as of today, May 17, 2019, and accordingly are subject to change. Such statements are based on assumptions that may not materialize and are subject to risks and uncertainties. Actual results may differ materially, and listeners are cautioned not to place undue reliance on these forward-looking statements. A description of the risks factors and assumptions that may affect future results is contained in the CAE's annual MD&A available on our corporate website and in our filings with the Canadian Securities Administrators on SEDAR and the U.S. Securities and Exchange Commission on EDGAR. On the call with me this afternoon are Marc Parent, CEA's President and Chief Executive Officer; and Sonya Branco, our Chief Financial Officer. After remarks from Marc and Sonya, we will take questions from financial analysts and institutional investors. Following the conclusion of that Q&A period, we'll open the call to questions from members of the media. For your added convenience, we've posted a presentation on today's website to accompany this discussion of our performance and outlook. It also provides some highlights and the expected adoption by CAE of new lease standard IFRS 16. You can download this document entitled supplemental Q4 FY 2019 presentation at www.cae.com/investors. 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 discuss some highlights of the quarter in the year and then Sonya will review the detailed financials. I'll come back at the end of the presentation to comment on our outlook for the year ahead. We had an especially strong fourth quarter, as expected, with revenue up 42% and earnings per share up to 55% compared to the fourth quarter last year. For the year, we delivered a record performance, and we met our growth outlook. Annual revenue grew by 17% and earnings per share grew by 13%, and we generated strong free cash flow with a near 1:1 conversion of net income. Our vision is to be the recognized global training partner of choice, and I'm especially pleased with a record $4 billion in annual orders and record $9.5 billion backlog, which underlines CAE's positive momentum as the world leader in aviation training. Our continuous success winning our customers' trust further validates our training strategy and adds to the highly recurring profile of CAE's business. Looking specifically at Civil, we booked $1.1 billion of orders during the quarter, including an exclusive 15-year training outsourcing agreement with Avianca and a sale of 28 more full-flight simulators. We also successfully concluded the company's largest ever acquisition involving the Bombardier Business Aviation Training business, which greatly expands our position in this high-value segment. During the year, Civil booked a record total $2.8 billion in orders, giving it a record backlog of $5 billion, which is 22% higher than last year. Notable wins included a 10-year pilot training contract with easyJet, exclusive multiyear pilot training agreements with Asiana and CityJet and a record total of 78 full-flight simulator sales to customers worldwide. Overall, for the year, Civil grew…

Thank you, Martin. Good afternoon, everyone. Consolidated revenue for the fourth quarter was up 42% to $1 billion, and quarterly net income for specific items was $127.5 million or $0.48 per share, which is up 55% compared to $0.31 in the fourth quarter last year. For the year, consolidated revenue was up 17% to $3.3 billion and annual net income before specific items was $335.2 million or $1.25 per share, which was up 13% compared to $1.11 last year. Specific items in fiscal 2019 include the costs of the acquisition and integration of Bombardier BAT business. Specific items in fiscal 2018 include the income tax recovery related to the U.S. tax reform and net gains on strategic transactions involving our Asian joint venture. We generated $116.8 million of free cash flow in the quarter and $323.8 million for the year for an annual cash conversion rate of 98%, which is in line with our annual average conversion target of 100%. During the year, we had lower investment in noncash working capital and generated higher earnings, which converted into higher cash provided by operating activity. Overall, a good year from a cash flow standpoint, and we expect it to continue our focus on maintaining noncash working capital efficiency in the year ahead. Due to the cash involved, funding capital expenditures were $96.2 million in the fourth quarter and $251.8 million for the year, mainly for the deployment of new simulators to our global training networks in support of our customer life growth opportunity. In line with the consumer driven accretive investment opportunity that we see, we expect modestly higher CapEx in fiscal 2020, increasing by about 10% to 15%, primarily to keep pace with growing demand for training services from our customers and to secure new low long-term customer contracts and…

Thanks, Sonya. CAE continues to benefit from secular tailwinds in our markets, and we're well positioned for sustainable, profitable growth. As we look ahead, we'll continue building on our positive momentum as a trusted partner for our customers. We expect to continue exceeding underlying market growth as we deliver on a record backlog and convert a larger pipeline into higher market share and new enduring customer partnerships. Beyond the solid foundation of our financial results and record-setting orders in backlogs that we just reported, I'm highly encouraged by the continued evolution of CAE's strategy to garner sources of ROE and long-term competitive advantage. The management team and I last month completed our annual strategic review with CAE's Board of Directors, and we're indeed very enthusiastic about the company's prospects to continue growing and generating attractive returns in larger markets, which CAE benefits from an excellent position and a high degree of recurring business. In Civil, we expect to continue growing our market share as the training partner of choice with our innovative solutions. Market fundamentals remain supportive, with continued passenger traffic growth and expanding global in-service fleet of aircraft. CAE is a pure-play training company that's well defined as an innovation leader. We have the largest and broadest global training network, market-leading simulation products and support and most comprehensive offering a Cadet-to-Captain training solutions. And we're now differentiating even more with new data-driven solutions that provide our training customers with powerful new tools and deeper training insights than previously thought possible. We currently have an active pipeline of airline outsourcing opportunities, and I believe our well-differentiated position gives us even greater potential from more long-term recurring training partnerships for CAE. In business aviation, we're also bringing digital to the floor, pushing the boundaries of aviation train and enhancing our customers'…

Operator, we would now be pleased to take questions from analysts and institutional investors.

[Operator Instructions]. And our first question comes from Benoit Poirier of Desjardins Capital Markets.

First question is on the IFRS 16. Could you maybe quantify, Sonya, what should we expect in terms of amount of depreciation and finance expense that will be added from the IFRS 16 this year and how does the IFRS 16 impact your guidance in terms of operating income?

So first, all of the IFRS 16 has been reflected on the operating income guidance. So the main impact from new standard is to bring all the leases on balance sheet and the lease liabilities. So on the asset side, we see about $230 million of additional right-to-use assets and about $250 million on lease liabilities. On the P&L, it's really a question of nature and timing of expenses that's impacted, with the rent expense being replaced by amortization and financing expense, it can -- obviously, nothing changes, just on timing and classification. And the interest guidance that I just mentioned of the new run rate of about $30 million of quarter reflects the impact of the new debt that we just issued and also the impact of IFRS 16. Now there is some timing leakage that happens and so -- hence we see EPS headwind of about $0.01 for us by 2020.

Okay. Perfect. That's great color. And looking at Healthcare, Marc, could you maybe provide more color about the strategy under the new president in terms of greater scale and also return on investment? I would be curious when you talk about double-digit target, whether it's in terms of revenue or operating income?

Well, I think double digit would apply to top and bottom line, Benoit. And -- but I think the strategy is just basically seizing on a momentum that we have and taking us to the next level, and Rekha Ranganathan, our new leader, has a very strong track record of doing that as she was head of Philips Healthcare, one of major divisions, has strong network in the healthcare sector and brings a level of expertise and knowledge at the top management level in healthcare that I think we need as we go to the next level. The products we develop to attack the new sector that we targeted last couple of years in nursing specifically are paying off, the momentum is good and it's really now a question of obviously selling more. I think if we look at the past year, fourth quarter was very good. It took us a while to ramp up the sales force, but -- and that's been the drive that you see on the bottom line mainly, plus the development cost themselves. But those are additional sales force and products are starting to pay off and I think that the purchase we made to society [ph] all of that is going to lead to -- is factored into the guidance I have. And I think the strategy and changes basically will report that as we let Rekha get on her feet and take a look at the market and see if we might make any changes. But I think right now is steady as she goes.

Okay. And last question, if we look at the Civil business, Marc, could you talk a little bit about the training requirement that could come from the 737 MAX? And also whether the softness we see in some traffic numbers in Asia, whether it's impacting your Civil business?

Well, you know what, on MAX, you would understand that I'm not going to say much on that. It's CAE's policy in any event like this, never -- no matter what it is, never to comment on the situation itself for obvious reasons, there are investigations underway, but suffice to say that for us that you assume that as a world leader in aviation training, we're going to have a role to play in maintaining the safety and efficiency of the air transportation system as a major player. So for us, we've got capability, we've got capacity to support whatever transpires to get the airplanes back into the air, to support them, support the airline customers, OEMs, regulators, to ensure that training needs are met. That's all I'll say about that. And the last end of your questions is regard to -- your previous question was regards to Asia?

Just related to some softness that came from the traffic numbers in Asia. I was just curious given your involvement in Asia, your exposure, whether you see an impact on your training business?

No. Not really. I think demand for training is strong across-the-board. I mean we see some events -- to a certain thing we see, like, some airlines going out of business, but what we see is the demand being picked up pretty much immediately by other carriers. And at the same time we continue to win shares by segment. You saw the contracts we signed this year for ones I mentioned, like Avianca, easyJet, Asiana, just to cite those three. So overall, basically, things in terms of passenger traffic. For us it should be as it relates to training is still going up.

Our next question comes from Ronald Epstein of Bank of America Merrill Lynch.

It's Kristine Liwag calling in for Ron. Following up on your commentary on the 737 MAX, I was wondering, can the Boeing 737 NG simulators be converted to a 737 MAX simulator? And if it can, what does that entail?

Well, look, I think, again, Kristine, I'm going to go back and I'm not going to comment much about anything related to the MAX simulator because of the situations unfolding but your short answer, it's pretty much any one of our simulators, no matter what type, can be converted to another aircraft type, and we kind of do that all the time. We even take simulators from other manufacturers and convert them to quasi-CAE simulators, and that's part of our aftermarket business that we do. So short answer is, yes, it's possible, just any type is possible to do that.

I see. And you mentioned that should there be more training required to get the aircraft back into service, you have the capability to meet this demand. Can you talk about what that means in terms of your capability? Does that mean you can build more full-flight simulators if needed or increase you utilization? Can you talk about to the extent that you can, if there is more demand, how could you meet it? Do you need to build more and add more capacity? Can you discuss that?

Well, I think we demonstrated again this year. If you look at how we were able to recover in the -- in past year. Remember we had a -- during our last fiscal year that we just reported on, we had a five week work stoppage because of strike in our manufacturing facility in Montréal, so we lost five weeks' worth of production. And we were still able to completely ramp up and stand up separate production line and basically recover all of the delivery that we had and then some, which demonstrates our capability to flex. And we don't have to add -- we have significant capability left in our factories. We're not on three shifts, we're about 1.5 shift so -- and we could ramp up to meet any demand, any of the work. But I think that substantial capacity on any aircraft type and we demonstrated and differentiated. We've got a million square of manufacturing capability in Montréal and we always find a way to able to optimize what we do. So long answer, but yes, we can scale up.

And then lastly, if I could. With your strong book to bill of Civil orders, I think it's 1.48x, can you parse out how much of that is from hardware versus service?

I don't have the number offhand. I don't know, Sonya, if have it offhand? But it's a mix of both.

Yes. It's a mix of both. We don't necessarily have or disclosed the split. But suffice it to say that it was a great year for products, but also on the services side and both grew very strongly.

Our next question comes from Turan Quettawala of Scotiabank.

I guess first few on the Civil side. Marc, I'm wondering if you could just comment a little bit about the order flow. I mean you obviously had a few pretty strong years of order flow on the FFS side with certainly 78 orders this year. When you talk to your sales channels, like, do think there's a few more years of this type of order flow or do you think we've kind of reached a peak here?

No. Look, we had a high number, more than we even anticipated. Often, as you can well imagine, at the end of the year, I mean all it takes is a couple of weeks for something to fall out of the year and into year, and we don't work that way. We sign them when they're ready to be signed. So look, I think the manufacturer's production lines are very high rates, they have very high backlog and the delivery of full-flight simulator or order of full-flight simulators is very highly correlated to the delivery of aircraft as a manufacturer, mainly Boeing and Airbus. So I mean that's really what dictates the demand for simulators. Now if I think a training as a whole, there's a lot of headroom in training. If you just -- similarly, in Asia, we'll double in the next 10 years, for sure. So that's a lot of training demand from in a way with the simulators.

And I guess just one more from me, on the margins in D&S, there was a lot of volatility margins last year I guess in fiscal '19. Just -- can you talk a little bit about whether we should expect a bit more of a volatile year in 2020 as well? And then, also, do you expect margin expansion in D&S in 2020?

Well, I think I'll let Sonya maybe comment in bit more detail. But I think I've always been pretty consistent in saying, you never should look at order intake or margins or even possibly revenue for defense on a quarterly basis because this is largely a contract business. So depending on which contract you execute during the quarter, you can have pretty interesting swings, as we've seen in the past. And when you sign contracts, it can vary. So it's best to look at on 12-month basis.

No. I agree, we shouldn't look at it on a quarterly basis because the variability is really a reflection of the defense business. And as we've seen in past quarters, the mix of products and services and the progressions of the programs and when we hit their milestones has a significant impact. Overall, the backlog as a whole, we continue to see it as 11% to 12%, but it will vary as it flows through the income and assets as we execute. So that's why we remain focused on the annual outlook and operating income growth as a whole, and our outlook for the next year is mid- to high-single digit percentage growth for 2020.

In the backlog you said, Sonya, was it 11% or 12%?

That's correct.

[Operator Instructions]. Our next question comes from [indiscernible] of BMO Capital Markets.

Just on for Fadi Chamoun. My first question is on your fiscal 2020 guidance. Typically, pace of the earnings are usually second half weighed, how do you see that playing out for fiscal 2020? And can you also confirm it's -- the guidance is based on the numbers excluding special items?

Excluding what, sorry?

The special items.

The special items. Okay, sorry got it. Well, I think it's reasonable to expect based on what we see on order flow on the deliveries of simulators, it will be a way towards a back half, for sure. Sonya, do you want to expand on...

Yes. No. So the way that we see deliveries and kind of the order backlog flowing through, it will be, like other years, kind of H2 heavier. And in terms of the outlook, it's on the number before specific items, so just for specific items.

And then my second question, just on -- you have a great training franchise with the dominant market position, but your capital intensity, it's kind of -- remains kind of high. Are there levers that you guys can utilize to improve asset returns and improve your cash flow and ROIC?

So we spent about $250 million in CapEx this year and we do see a bit of an increase next year, but really this is a reflection of the good momentum that we see in the market, and we continue to see really good opportunities through market demand continue to outsourcing. And we certainly we see this opportunity, we will continue to invest in accretive growth, accretive to earnings and accretive to return on capital. And as we've seen, all the new capital that we've deployed, it goes to work very quickly and within, call it, about 24 months, it generates 20%, 30% accretive incremental return and cash flow. So really this is a reflection of the market demand that we see out there. Should there be any change, well, then we would revise our investments accordingly and really look to our capital allocation strategy and balance the investment that we -- investment in growth, cash return to shareholders and a solid balance sheet. And our first priority remains investing in growth.

And speakers, I'll turn the call back over to you. We have no further questions at this time.

Thank you, Operator. We'll now open the line to members of the media, should there be any questions.

[Operator Instructions]. And our first question comes from Allison Lampert of Reuters.

Just to get back to the MAX, given the public expressed interest by ceratin regulators and pilot seniors for simulators in the wake of the grounding, have you seen any increase in demand for your MAX simulators or demand by carriers for this aftermarket service you described that could convert the NG simulators to MAX simulators or any type of simulators? And just to give us an idea, how much would it roughly cost to make such a conversion?

Look. Again, as I was saying to analyst, I'm not going to comment much about the specific MAX situation itself. But what I can tell you, it's actual is that we sold 43 Boeing 737 MAX simulators to date, which is highest proportion of the [indiscernible] because of our market share, the simulators that have been sold, we delivered 10 so far. I don't want to comment about the changes in the dynamics. And to be frank, that dynamic will continue to be paced by delivery of aircraft unless there was dramatic change in how training is done. But I'm not going to comment or opine on that one way or another because it's still in the hands of regulators.

And what about the cost? How much does it roughly cost to make such a conversion?

Convert from what to what? I'm sorry?

Convert -- you said it's possible to convert, for example, an NG simulator to a MAX simulator?

Well that -- again, I'm not going to go back because you would have to assume that what is the change that you're trying to make. So I can't really comment because the scope of what you're can be very, very -- you can go from a small change to a massive change that reflects everything in the aircraft, which you don't necessarily have to do to absolutely represent a 737 MAX. So I can't answer your question with any precision. And frankly, I really -- again, going back to what I said, don't to comment. It's our policy never to comment on specific situation on -- involving accidents.

Our next question comes from [indiscernible], Quebecor.

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[Operator Instructions]. Our next question comes from Michael Bruno of Aviation Week.

I'm curious as to how much interest do you see from the OEMs, like Boeing or Airbus, to get into your business of pilot training. Certainly, Boeing is going into more vertical integration in some of its business portfolio. And I'm of curious if you feel any kind of concern or do you see a threat out there from the OEMs trying to do more of what you do?

Well, I think that all OEMs have got a service strategy, and Boeing is not the only one out there. What I would tell you is that a lot of companies, actually most companies in aerospace industry. Sometimes we partner particularly on the defense business. For example, Boeing, we're the exclusive provider of Boeing P-8A simulators for Boeing, and we're proud of that. And I think we have a very great working relationship. We incorporate a number of factors. But yes, they have a strategy to go in aftermarket services. As I said, all OEMs do. For us, I'll be very frank with you, we focus on our end customers and those are the airlines with business aircraft operators, and we do what we have -- we can't dissatisfy the needs of our end customers. And I think we've grown a very successful franchise of -- as largest training company in the world. And you would expect us to be able to do that CAE is really a pure-play training company and it's largest in the world in what we do, largest in selling simulators, largest in terms of deploying network and largest airline training company in the world. So for us, if we stay focused on our game and it's a large market. So I think what you see is, OEMs in large case providing the initial training support for their customers as they deliver aircraft, and I expect them to continue to do that. But I can't answer for them. But we play our own game, and we focus on innovation and being the innovation leader to provide the highest level of -- basically advancement of the science of learning as applied to airline pilot training, and that's what we do.

We show no further questions. I'll turn the call back over to our hosts.

Operator, thanks very much for hosting our call today, and I want to thank all participants, members of the financial community and media for joining us this afternoon. And I'll remind you that a transcript of today's call can be found on CAE's website. Thank you.

And that does conclude the conference call for today. We thank you for your participation, and ask you to please disconnect your line. Thank you, and have a good day.