Good day, ladies and gentlemen. Welcome to the CAE Third Quarter Conference Call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Mr. Andrew Arnovitz. You may now proceed, Mr. Arnovitz.
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 2020 and answers to questions, contain forward-looking statements. These forward-looking statements represent our expectations as of today, February the 7th, 2020, 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 CAE's annual MD&A available on our corporate website and in our filings with the Canadian Securities Administrators on SEDAR at www.sedar.com and the U.S. Securities and Exchange Commission on EDGAR at www.sec.gov. On the call with me this afternoon are Marc Parent, CAE'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 line to questions from members of the media. Let me now turn the call over to Marc.
Thank you, Andrew. Good afternoon to everyone joining us on the call. I'll first discuss some of the highlights of the quarter, and then Sonya will review the detailed financials. I'll come back at the end to talk about our outlook. CAE had strong growth in the third quarter, with revenue up 13%, segment operating income up 37%, and we secured CAD 1.1 billion of orders for a 1.2 x book-to-sales ratio. CAE's total backlog at the end of the quarter was CAD 9.4 billion. Our performance continued to be led by Civil, which delivered strong operating income growth, and we continued to have good momentum in the market with our innovative and comprehensive training solutions. Our customers continue to place their trust in CAE as their training partner of choice.
In defense, we have good operating income growth in the quarter, which supports our view for a stronger second half. Also encouraging is the 1.11x book-to-sales ratio for the quarter. In healthcare, we had double-digit revenue growth, and we continued to bring highly innovative solutions to market that make healthcare safer. Looking more closely at civil, we booked CAD 706 million of orders for training solutions in Q3, including a long-term pilot training agreement with JetSMART Airlines and 17 full flight simulators, for a total of 37 for the first nine months of the year. The civil backlog at the end of the quarter was a record CAD 5.3 billion. To address the growing global demand for new pilots, we launched new Multi-Crew Pilot Licence programs with easyJet and Volotea, and a new cadet pilot training program with Jazz Aviation and Seneca Polytechnic School of Aviation called Jazz Approach.
CAE is working together with our industry partners to create a pipeline of highly qualified aviation professionals to support our customers' growing needs for critical personnel. In business aviation, we signed a range of pilot training contracts with business jet operators, including JetSuite, Solairus Aviation, and TAG Aviation Holdings. Overall training center utilization was 70% this quarter on our network of 303 full flight simulators. In defense, we booked orders for CAD 367 million, including contracts to provide the German Navy with a comprehensive training solution for the NH90 Sea Lion helicopter, and to upgrade and modify the German Army's NH90 full mission simulators. These wins underscore CAE's strong position on this helicopter platform. Other notable contracts include the next increment of a multi-year contract with the United States Air Force to provide comprehensive C-130H aircrew training services.
Defense also received orders to continue providing long-term maintenance and support services for RotorSim, a joint venture between CAE and Leonardo, and a contract for Abrams tank maintenance trainers for the U.S. Army. Defense also launched the CAE TRAX Academy at the recent I/ITSEC conference, the world's largest military training and simulation event. This is an advanced training continuum that delivers faster and more efficient military student pilot training. Customer response has already been highly positive to this new training solution, which brings together our latest innovations in virtual reality and advanced analytics. In healthcare, we also continued to innovate by developing custom training solutions for Edwards Lifesciences to enhance physician training.
We delivered a custom cardiovascular simulation to Cardinal Health. Together with the American Society of Anesthesiologists, we launched a new Anesthesia SimSTAT module, which is a course approved for maintenance of certification in anesthesiology credits. As well, Healthcare was awarded an EMS World Innovation Award for CAE LucinaAR, the Microsoft HoloLens application for our emergency care manikin. With that, I'll now turn the call over to Sonya, who will provide a detailed look at our financial performance, and I'll return at the end of the call to comment on our outlook. Sonya?
Thank you, Marc, and good afternoon, everyone. Consolidated revenue for the third quarter was CAD 923.5 million, up 13% compared to CAD 860.3 million in the third quarter of last year. Segment operating income before specific items was CAD 155.3 million, up 37% from CAD 113 million last year. Quarterly net income before specific items was CAD 98 million or CAD 0.37 per share, which is 28% higher than the CAD 0.29 we reported in the third quarter last year. Net finance expense for the third quarter was CAD 36.7 million, up from CAD 19.3 million in the third quarter of fiscal 2019. We had higher interest resulting from the issuance of unsecured senior notes since the fourth quarter of last year, and higher interest on lease liabilities because of the adoption of IFRS 16.
Income taxes this quarter were CAD 18.4 million, representing an effective tax rate of 16%, which is up from 15% for the third quarter last year. The higher tax rate was mainly due to the impact of tax audits in Canada last year, partially offset by a change in the mix of income from various jurisdictions. We had good free cash flow of CAD 275.3 million in the quarter, compared to CAD 165.1 million last year. The increase results mainly from a lower investment in non-cash working capital and higher cash provided by operating activity. This is consistent with our expectations for significant reversal of investment in non-cash working capital accounts in the second half of the fiscal year.
Uses of cash in Q3 included funding capital expenditures for CAD 51.6 million, mainly for growth of our global training network to deliver on the long-term exclusive training contracts in our backlog. We continue to expect total CapEx for the year to be about 10%-15% higher than in the prior year. Other uses of cash include the distribution of CAD 28.3 million in cash dividends. We used another CAD 12.6 million to repurchase stock at a weighted average price of CAD 32.69 per common share under the NCIB program, for which CAE's board of directors just approved its renewal.
Our financial position continued to be solid with a net debt of CAD 2.3 billion at the end of the quarter for a net debt to capital ratio of 48.5%. Since we adopted IFRS 16, effective April 1st, 2019, net debt now also includes obligations under lease contracts, which were previously accounted for as operating leases and therefore not included in debt. Excluding this impact, the net debt to capital ratio would have been 44.9% this quarter. We continue to expect to be at the lower end of our target leverage range, which is 35%-45% on a pre-IFRS basis within the next 18-30 months.
Return on capital deployed before specific items and excluding the impact of IFRS 16 was 11.6% this quarter compared to 11.7% last quarter and last year. Now looking at our segmented performance. In Civil, we had double-digit organic growth in the third quarter, and in addition, we benefited from the integration of the Bombardier BAT business, which also performed very well. Third quarter revenue was up 22% year-over-year to CAD 558.1 million on 12 full flight simulator deliveries and good demand for our training services with our expanded capacity. Operating income before specific items was up 42% to CAD 123.4 million for a margin of 22.1%.
On the order front, the Civil book-to-sales ratio for the quarter was 1.27 x, and for the trailing 12-month period, it was 1.44 x. In Defense, third quarter revenue was $372.4 million, was up 1% over Q3 last year, while operating income was up 24% to $31.3 million, for an operating margin of 9.4%. We incurred some reorganizational costs this quarter to adjust our global structure for greater operational and commercial excellence. Before these costs, Defense segment operating income for the quarter would have been $33.2 million for an operating margin of 10%, which represents a 32% increase compared to the third quarter last year. Defense benefited from a more favorable program mix in the quarter, as well as from conversion of our active bid pipeline to orders.
The Defense book-to-sales ratio was higher this quarter at 1.11x and was 0.88 times for the last 12 months. Lastly, in Healthcare, we continue to see higher sales momentum with third quarter revenue of CAD 33.0 million, up 19% compared to Q3 last year. Segment operating income was stable at CAD 0.6 million, reflecting a higher investment in R&D and SG&A to develop and support our larger future business. With that, I will ask Marc to discuss the way forward.
Thanks, Sonya. We continue to have a positive outlook for CAE for the balance of the year and over the long term. In Civil, the industry expects approximately 4% long-term passenger traffic growth, and this assumption continues to underlie our investment thesis. Higher demand for air travel drives an expanding global in-service fleet of aircraft and a significant need to attract and create new pilots to meet industry needs. As a company, we're focused on providing comprehensive solutions for our customers to recruit, develop, and maintain these highly critical personnel. CAE has the privilege and responsibility of being the world leader in aviation training, and we have a very good momentum in a large addressable market. As we look ahead, we expect more opportunities to materialize from the large pipeline of long-term training partnerships.
We also continue to expect another good year for full flight simulator sales and to maintain our leading share of the market. For Civil overall, we continue to expect operating income growth closer to 30% for the year on strong demand for our training solutions. Since the start of January, we received orders for seven more full flight simulators, including six for the Boeing 737 MAX. Boeing announced in early January that it would recommend simulator training for the MAX, which, if confirmed by the aviation authorities, would indeed drive a higher rate of demand. It's our practice to respect the timelines of the OEMs and aviation authorities and not get out ahead of them, especially when it involves aircraft certifications or investigations.
I'll refrain from speculating on what the training regulations might entail for the MAX's entry into service, and instead, I'll summarize what has been CAE's position so far on the aircraft type. To date, we've sold a total of 56 MAX full flight simulators to airlines, which represents the vast majority of all sales to airlines of that simulator type. The fact is, the majority of airlines that have ordered the MAX aircraft are indeed CAE customers. So far, of the 56 simulators ordered, we've delivered 22 as of the end of December, and in addition, we've already deployed three to CAE's own training network, and we're in the process of deploying more.
We mentioned on our last quarterly call that we'd begun to build additional inventory of MAX simulators in anticipation of pent-up demand, and this continues to be our practice in view of the demand that we expect. I guess the most essential point in all of this is that we have our customers covered as their training partner of choice, and they recognize the support that we bring to their most critical operations. We have the capacity and the capability to respond to our customers' training needs, whatever the requirements, and we look forward to a successful and safe re-entry to service of the aircraft. Now turning to Defense, we continue to expect a stronger second half, which is a view supported by a healthy book-to-sales ratio in the quarter and a robust pipeline.
We continue to expect modest growth for the year, taking into account our year-to-date performance and our current expectations for reaching milestones on programs and backlog. We also expect to conclude several more contracts in the current fourth quarter. As always, we don't control the timing of government decision-making, but I take confidence in knowing that we've already been downselected for the most of them. Our long-term prospects in the large addressable defense market remain positive, and I'm encouraged by approximately CAD 3.8 billion of defense proposals that we've written that are currently in the hands of customers pending decisions. Finally, Todd Probert officially became our new Group President, Defense and Security on January 27th. As with his predecessor, Todd is based in Washington, D.C., where he's very well connected within the U.S. Defense establishment and has a clear view of the military's future operational and mission preparedness requirements.
He's a proven business leader, he brings an excellent defense industry profile to CAE. He has a passion for artificial intelligence, machine learning, and new development models, his interests, competencies, and background are very well aligned with our emphasis on digital innovation. I'm very pleased to welcome a leader of his caliber to our executive team, I expect he'll bring significant value to our company and customers. Lastly, in Healthcare, I'm encouraged by the response CAE is getting from the market. We expect to continue building on our current sales momentum with our highly innovative solutions. The increased imperative on patient safety was in full evidence at the International Meeting on Simulation in Healthcare, which took place last month in San Diego.
The event, which is the world's largest conference dedicated to healthcare simulation learning, research, and scholarship, was an excellent showcase for CAE Healthcare and our latest solutions. We continue to expect double-digit percentage growth in healthcare this year. In summary, our overall outlook for CAE this fiscal year is unchanged. We benefit from a strong position and secular tailwinds in each of our core markets, and we look forward to superior top and bottom-line growth in the years ahead. With that, I thank you for your attention, and we're now ready to answer your questions.
Thank you, sir. We'll now begin the question-and-answer session. We'll begin with our analysts first. If you would like to register for a question, press the one followed by the four on your touchtone phone. You'll hear a three-tone prompt to acknowledge your request. If your question has been answered and you'd like to withdraw your registration, press the one followed by the three. Please note we're now opening the question-and-answer session to our analysts first. Thank you. One moment, please. Our first question comes from the line of Steve Arthur with RBC Capital Markets. Please go ahead, sir.
Great. Thank you very much. Just a question first on the Civil margins. They looked very strong in the quarter at around 22%. If I remember correctly, that's about as high as we've seen them. Were there any one-time items in there that were supporting that? Is this more a case of civil margins moving meaningfully higher with the evolving business mix?
Thanks, Steve. With the acquisition, we guided that there would be margin accretion of 100 to 150 basis points. We see this coming through. Margin is also a reflection of the mix of the training and the product business. Combined, good training margins. Also, it does reflect a good program mix in the quarter. That's really what's driving some of those margins.
I'd just add that, according to Carmelle, there is no one-timers in this.
Oh, no.
No one-timers, Steve.
No.
Okay. Okay, good. Over the next several years, then, we should continue to see that kind of 100-150 basis points bump over where we were into the low 20s.
Well, you'll get our outlook for next year very soon, but not on this call. Look, I think we're very happy with the performance we have. I think we tend to, as you've seen, we like to guide on operating income growth in the absolute terms. Look, I think that there's no reason to expect our performance to go down.
Okay. I guess related, and probably a similar answer in the longer term, but defense margins. You're calling for modest growth in the year, but you're down, I think, 8% or 10% so far year to date. It implies a strong finish, as I'm sure you're aware. I guess a couple things. One, just in terms of what do you see in the near term that supports that jump in Q4? And then just looking out over the mid to longer term, are we right in thinking about this as kind of a 10%-12% margin business as it has been historically, or is something in the mix changed there?
Well, look, I think, first and foremost, actually, it's pretty the same answer to a certain extent with regards to longer term outlook. Still, it's a growth business, and we're quite confident of that. I'm going to leave some time for Todd Probert as the new head of defense to get his hands around the business. Clearly, we expect that we can do well, and longer term, I fully expect us to beat market growth in defense. We'll precise that as we've done, as we get into the early part of next year, as it relates to next year, for sure. In the short term, yeah, you're absolutely right. It implies a very strong, actually, I'd say, fourth quarter.
We did that last year, and we have the habit of doing that, and it's supported by, you would imagine if we're basically committing to it's because we have a strong forecast that supports that. It's supported by the usual suspects. It's how are we executing the programs that we have in the backlog, and the orders that we had in the quarter. As I said, I was encouraged by the positive book-to-bill that we had in the quarter, especially the strong product orders like I talked about, the NH90 order. That's very important. I would tell you, it does require that we win. There's a few orders that we need to win in the quarter, and that's no different. We always have to win orders in a quarter.
I think some of that variability, and you saw it bring us down slightly, our outlook, in the last quarter for defense, and that was basically on some of the orders that we had were going to be moved out of the year. Look, again, I have confidence in the orders, and because on over 90% of the ones we need, we've already been selected on them. It's not a question of if they're a competed contract. It's one, it's just decide, can we reach the contract? Can we get the customer to sign on before the end of March? That's really where we're at on that one. Those are the elements that make up our outlook for the year.
Okay. Thank you. Just a final point, just on the training centers and customers in China. Any comment at all in terms of what's happening with your operations there right now? Obviously, no crystal balls, but have there been closures or what's the near-term status of some of the facilities right now?
I think we're following what the recommendations mainly of WHO and governments around the world, as you might expect us to do. Obviously, our first priority is the safety of our employees, our customers around the world. In terms of business impacts for us right now, again, I'd just say we're watching this situation closely. We do expect it to resolve itself. We do see this as a short-term issue from our standpoint of what we see. So far, the impact for us has been that we have pulled our personnel out of China. We were, for example, installing a civil simulator in China. That simulator was expected to deliver this year, so it will not at this point. That's one impact.
We had some training customers that have canceled their training because of, in some cases, there were Chinese carriers come to train with us, for example, in Dubai and other centers. We've modeled this, and it's reflected in the outlook that we have for the end of the year. Barring some catastrophic escalation of this, which would have far bigger ramifications than what we're talking about here, we feel good that the effects are contained for us.
Okay. Great color. Thank you.
Thank you for your question, Mr. Arthur. Continuing on, we now have a question from the line of Konark Gupta with Scotiabank. Please proceed.
Thank you. Congrats on a good quarter. Just wanted to follow up on the defense margin and welcome, Todd. Margin has obviously come down below 11% over the past two years, and I know the mix has been more skewed to services lately. Should we not expect the margins to kind of remain below 11% as you continue to grow as a TSI business with more service proportion? Is it not because of structural changes or is it something else?
Well, look, I don't want to get out too much in front of that. We still have a backlog that reflects the outlook that we have today for the business in terms of margin performance. I think it really depends on, you got to remember that ours is a very international business. Yes, on a typical basis, services tend to run lower, as we've said before. Now, it doesn't necessarily have to be the case around the world, as you can imagine, that if we're putting capital at work, we'll be looking for a higher margin than that.
I think it's going to be based on where the revenue comes from various jurisdictions around the world, and very importantly, it's going to be the product to service mix. As you said, services tend to be lower. I am quite confident that we can continue to build our products business with the portfolio that we have. Look more to come. I wouldn't come to the conclusion that the margin necessarily has to dip structurally.
Okay. That's great color, Marc. Thanks. On the MAX. Thanks for updating on orders and backlog. That's pretty useful. Can you talk about your plans for MAX simulator production rate and outlook? How do you foresee this backlog translating into production? Are you seeing any interest in upgrade of existing 737 NG simulators as opposed to new orders?
Well, look, I think it's too early to tell with regards to upgrades. I think in some cases, it will really depend on the airline. Typically, upgrading a simulator can be quite involved, and sometimes you're better off to just buy a brand-new simulator. In the majority of cases, that's what we see in our business. Even like, for example, replacing an old 320 with a new 320 or old 737 versus a new one, that people tend to buy new ones. That's been the history. We'll see for the MAX. If there's a demand for it, we will certainly be there. We have a very big aftermarket business, we would do that as well. That would be part of that.
There has been a step-up in demand as you saw that testimony by six MAX orders since January and big exploration as a result of the news that Boeing was recommending a MAX simulator training. Look, I think that you asked for production rate. I'm not going to get out there and tell you what the production rate is, but I can tell you we have increased it, but we have the capacity to increase it even more. We're still at a rate that we're below in terms of production rate, below what we were when we recovered from the strike last year, and we still have lots of capacity.
We're following this closely, but we have a bunch of, I've got to see how many, of sims as we talked about last time as what we call whitetail, ready to go, and there's interest out there. Look, I don't want to get out more in front of that because it's really going to be dependent on what the regulator decides, and the regulator hasn't come out yet. I think we're holding our fire, but we'll be prepared.
Okay, that's great. Lastly, Sonya, if I can ask you. On the leverage ratio, you still said there is 18 to 30 months of normalization to happen here. If you see any good opportunity out there, perhaps because of recent consolidation in the industry, and if somebody wants to divest an asset or something, would you pursue that at current leverage ratio, or would you still wait for it to normalize? Thanks.
Even at this level, we're in a very comfortable balance sheet position and capacity. On the heels of the cash generation of the acquisition and the other investments that we've made, we have a profiling that can take us to more deleveraging. Both on the organic business and the CapEx that we're deploying, all of this generates good free cash flow, it deleverages. If there are opportunities, we of course, always look at various opportunities, whether they're organic outsourcings, whether they're JVs or even inorganic. We continue to look at those or even any items that may come up on the M&A space. The balance sheet is flexible and has capacity. We can, I think, comfortably with our cash flow generation, balance some deleveraging and continue to invest in growth.
Okay. That's it for me. Thank you so much.
Thank you for your question, sir. Next question comes from the line of Kevin Chiang with CIBC. Please proceed.
Hi. Good afternoon. Thanks for taking my questions here. Maybe first one from me, if I could ask it a little bit of a different way. You had a 70% utilization in Civil, margins up at 22%. I appreciate that mix and some of your recent acquisitions have aided in the improvement in your profitability. If I think of that utilization rate getting back to, say, the mid to high 70% we saw maybe a year or so ago, is there a way to think of the upside to Civil operating income as you get that better utilization through your training centers?
Again, I thought we're not going to get ahead of it, because we're not giving our outlook for six years here. I think you correctly said there's a lot involved in the mix. I think, look, we obviously take comfort, as you probably do in inherent in your question about that we're able to generate this level of margin at 70% utilization for sure. A lot of the sims and the reason that we're at 70% is because we're moving a lot of simulators around. If you think about we've gone in last three quarters from 266 simulators to 303 over the last three quarters. While we're moving sims or while we're bringing in sims, they're not fully ramped up in terms of their revenue potential.
At the same time, we have had short-term headwinds in Europe. There's been the 737 MAX that's caused some disruption in the overall 737 market. We've had some market consolidation. Remember airlines such as Thomas Cook going under. Look, is there room to grow earnings? Yeah, sure there's room to grow earnings. How that reflects its absolute margin themselves, it will depend on the mix, because not all businesses earn the same in terms of margin percentage itself. I think we'll probably continue to focus on absolute income growth as the measure that we'll drive to.
I appreciate that. That's good color there. I know Todd as a new group president in Defense, it's a recent hire, but is there something you'd like to accomplish longer term within Defense that you're currently not capturing in terms of opportunities, in terms of growth, or should we think of that long-term strategy essentially being the status quo even with the change at the top of that division?
Well, look, I think that if I were to say anything about Defense is, you've seen the success that we've had in Civil. There's a lot of things that we can bring from our business model in Civil that are imminently applicable in the Defense market. I think first and foremost, you'll see us applying some of those technologies, some of those lessons learned from those business models more and more into Defense markets. Todd comes from a very strong business leader, comes from a very strong position and strong background in terms of the U.S. Department of Defense specifically, but with international experience as well in his various roles.
As I said before, when I was looking for a replacement for Gene Colabatistto in this market, we were looking for somebody that could knew his way around, if you like, knew his way around the Pentagon, knew his way around the defense market in the United States and internationally, and had basically a good view of areas of the U.S. DOD where we haven't been focused on, and I think those doors open. I think first and foremost, it's concentrating on strategy, leveraging our core competencies, core capabilities, including the digital innovation that we've applied in civil, applying them to defense. Todd comes with strong capabilities in that regard. Then we'll see. Truly, we're not signaling a change in strategy here, but definitely I think we bring strong expertise to the fold that I feel confident will, as I said, be very good for CAE and our customers.
That's good color. Maybe just last one for me. Sonya, just to clarify, as I think about working capital maybe in the fiscal fourth quarter here or, maybe even the fiscal first quarter, so the next couple of quarters, you mentioned ramping up I guess some of the inventory around the MAX simulators. Should I think of the working capital, I guess seasonality that we typically see maybe Q4, Q1 being a little bit different because of that inventory build? Is maybe it's an immaterial impact in how your working capital flows over the next three to six months?
Well, it will have an impact. I don't see it reversing the overall cash profile, which usually is a first half investment and then reversal or partial reversal in the second half. Good performance, I think in Q3 in reversing CAD 180 million in the quarter. Back to what we mentioned last quarter, we expect to continue on that non-cash working capital efficiency, to drive a significant reversal. We saw that around 75% of that first half investment. That's with some continued investment in the inventory. Now, if some of it turns even quicker in the quarter or in Q1, there may be some variation there. I don't suspect it will change the overall cash profiling between the first and second half. We are driving to further reversal in Q4.
Thanks for the clarification. That's all for me. Thank you very much.
Thank you so much, sir, for your question. Our next question comes from the line of Cameron Doerksen with National Bank Financial. Please proceed with your question.
Thanks. Good afternoon. Maybe a question for Sonya, just on the, I guess the leverage question that was earlier. I'm wondering if you can maybe talk about your ability, if you want, to pay down debt earlier than expected. Is there a way that you would potentially accelerate debt retirement here, or are you restricted on what you can do on a yearly basis just on the terms of that debt?
In terms of the level of financing, we have the private placements that we issued last year and the last tranche in the quarter. We do have also some flexibility with term loans. If we wanted to accelerate that is an option. We do continue to see very good options for investment. I'll go back to our capital allocation priorities and first and foremost, continuing to invest in accretive growth organically, and if there's any inorganic approaches to it as well. To your question, we do have the flexibility to do so, if we wanted to shift a little bit of the balance.
Okay. That's fair. Just secondly from me, maybe a question for Marc, just on the end markets. We have seen a little, I guess, less activity on business jet flying. I'm just wondering what you're seeing in your business jet training centers. Are you seeing any change in the level of demand? Obviously, you've got the new acquisition that's driving the year-over-year growth. I'm just wondering on the legacy business there, do you see any change in the demand for training on business aircraft?
Not really. It's very dependent on which platform and what market. Overall, no, I think I would tell you, we don't separately disclose it, but I could tell you that the growth in our training activity organically is very strong and big component of that is business aircraft and when you break down business aircraft, I think a lot of the growth comes from the acquisition that we made. Equally, we have In fact, I think we can talk about it.
Yeah, well, actually, I was going to look for it, see if we have the breakdown, but we don't have it. In terms of the organic growth in business aircraft training, it's actually been pretty good. We've been outpacing the market itself overall. There's the number of the flight activity itself, which is a metric, but there's a lot of pilots changing jobs as well, and that stimulates our training activity. In the higher end business jets, there's a lot of activity. Overall, we're doing well and the organic growth is pretty good.
Do you feel that you've gained some market share in that sub-segment?
Yeah, we have. If you look at the contracts that we had just this quarter, we had three-year, just in business aircraft alone, three-year training renewal with TAG Aviation Holding. That's a very big contract in itself with TAG. Six years with JetSuite, four years with Solairus Aviation. Yeah, there's no doubt we've gained share, and we're quite happy with the customers that have moved over to CAE.
Okay. Great. That's all for me. Thanks very much.
Thank you.
Thank you so much, Mr. Doerksen for your question. Up next, we have Fadi Chamoun with BMO Capital Markets. Please go ahead, sir.
Okay. Thank you. Good afternoon.
Hi.
Just one question, if you can clarify the acquisition you made from Bombardier? If there were to be a change in control of those assets, do you have any exposure? Do you have solid long-term commitment under that transaction that you've done with Bombardier?
Yeah, we have a 20-year exclusive ATP agreement. Exclusivity is that would flow over to any potential buyer, Fadi.
Okay, that's great. On the 56 MAX orders that you've received or you've sold or received the order from, do you know off top of your head how many airlines that represents?
How many total? I know it's probably all of them, but I'm not sure how many airlines. We could probably get you that number later. I don't remember exactly how many airlines it is, but as I said, the high majority of all the airline customers that have bought the MAX have bought our simulators.
Okay, thank you.
If I get the number, I'll come back and tell you what it is. We're looking.
Okay.
Thank you, Mr. Chamoun, for your question. Please go ahead, sir.
Yeah, good afternoon, and thank you for taking my question. I just wanted to come back on the military side. You mentioned in the past that the business mix would evolve favorably in the second half. I think it remained fairly stable in Q3, but the margin has still increased fairly significantly in the quarter. I was wondering if we should expect a similar performance in Q4, and if the mix will change accordingly.
I'll leave it to Sonya a little bit, but I guess it has to if we're going to beat the outlook that we said we are, which we again, have confidence in achieving it. I would caution as well as I usually do, and we've said many times, it's quite hard to look at the military business on any of the major metrics on a quarterly basis because of the size of the contracts themselves and whether they're service or product. This quarter, we had flat revenue, but much higher earnings. Last time we had the contrary. I think it's best to look at it over a number of periods. Maybe 12 months is the best way to look at it. Sonya, you want to?
Yeah, absolutely. It's really because of that variability, always best to look at it over a longer annual basis, at least an annual basis. In the quarter, there was a more favorable programming, drove a higher contribution, and contribution of orders signed and started in the quarter. That drove some of that margin. While the revenue was relatively stable, I'll also point to the fact that our revenue line doesn't capture the revenue from JVs, which are accounted for as equity pickup and included in the EBIT. Some growth that came from those joint ventures is not necessarily reflected on the revenue line.
Okay. That's great, Color. If we get back to the civil segment, I think you mentioned in the MD&A, lower utilization rate in Europe. I was wondering if you could talk a little bit more about the utilization there, please.
I think Marc spoke to it, and ultimately we are seeing a bit of headwinds in Europe. There's a little bit of some consolidation that we're seeing with certain airlines. We see this more as a short term, because as they consolidate, the traffic will generally be picked up by other CAE customers, and we'll recuperate it that way. We see a bit of headwind in Europe on the utilization there.
Just to add and to reiterate what Marc said before, some of that headwind is owing to the MAX having been out of service for quite some time now. Our 737 simulator training in Europe is directly affected by that as well.
Okay. Thank you for the color. Maybe a last one for me, Sonya. On the CapEx, I know you don't want to provide guidance for next year, but just directionally, would it be fair to assume some growth in fiscal year 2021 as the pipeline of opportunities remain robust in both civil and military?
We'll come back next quarter with a view on all of the guidance for next year. For this year, we'll stick to our guidance, which is slightly higher than last year, 10%-15% over last year.
I think it's important to add, though, that as a ratio of operating cash flow or of revenue, that number has been declining. Whatever the quantum, but as a ratio of the size of the business, which continues growing, it has been declining.
Okay. Thank you. Thank you very much.
Operator, I guess that's all the time we have for questions from members of the financial community. We will now want to open the lines to members of the media.
Absolutely. Thank you. We now welcome the press and media to feel free to press the one followed by the four to register for a question. Thank you. One moment, please. Our first question from the media comes from the line of Allison Lampert with Reuters. Please proceed with your question.
Thanks very much. Just two quick questions on the MAX. First, you talked about demand for the MAX simulator before. Would you say that that is the most popular simulator that you're selling right now for this fiscal year? Secondly, you also mentioned that you would deploy more in your training centers. Where are you looking?
I don't think we've actually divulged all the locations, have we, Sonya? I think it's very first, wherever the customers are.
Yeah, the three that we have deployed is in Toronto and Singapore and in the midst of deploying in Dallas right now. We're looking at other sites, but those are the ones that have been deployed.
Right. No, I was thinking, do you have any idea of where you're looking in terms of the other sites? I was thinking maybe Europe. From what I understand that there's not many simulators there, so that might be an interesting location.
As Marc said, we're looking at where the customer demand drives us.
Yeah.
Fair enough.
Yeah, it's reasonable to expect that one would go there, yeah, at least.
Okay. Right. Just my other question, would you say, is the MAX simulator your most popular or your strongest selling model in the moment?
I really haven't looked at the ratio. Look, I think that, certainly since the beginning of January, yes, six out of seven.
Yes.
For the year as a whole.
This segment.
I wouldn't expect it to. It wouldn't be normal to be, because the airplane's been grounded. Inevitably, while the airplane's been grounded, orders have slowed for the 737 MAX type. Going forward with the backlog of aircraft, to me, I don't want to get in front of regulators, but to me, there's no doubt that the aircraft will resume flying. The backlog of 737 MAX aircraft is very large. We'll be delivering sims for quite a while. I think the ratios of simulators to aircraft will be the same as other narrow bodies. I think that will presage many simulator sales for 737 MAX in the future.
Thank you.
Welcome.
Thank you, Ms. Lampert, for your question.
Thank you. I have two questions. About the fact that United announced yesterday or two days ago that they would buy a new flight academy. Does it make you nervous or not? Second question, could you repeat what you said that the coronavirus had any effect in your operation?
Well, I talked a bit about coronavirus. As I mentioned before, the first priority for us is the safety of our employees around the world, safety of our customers. We've taken precautions that are very similar to and in line with the recommendations of Canadian government and the WHO in that regard. Our personnel that were in China have left China. We had business impacts with regards to one simulator was being installed in China. Of course, with our people moving back to Canada, that activity has been delayed for the moment. We have some training of Chinese customers that's been postponed for the same reasons. We have put very strict hygiene protocols in all of our centers around the world to protect our personnel and our customers. That's, I guess, the answer on coronavirus.
With regards to your previous question on the center for United. No, look, I think it just reflects the fact that what we've been saying is there's a global pilot shortage out there, and it's affecting airlines around the world. Airlines are moving to be able to ensure that they have the proper source of this highly skilled workforce. To me, it's just testimony that the need that's out there. Now, as a company, and I think I've said this before, we never pretended to want to control the full capacity in this market. Look, I'm very proud of the customers that we have in our training centers at the moment.
We have very great contracts on having initial pilots, which are new pilots like what you're talking, United, with American Airlines, with Southwest Airlines, with JetBlue, just in the United States alone. Those are all cadets being trained from start to getting an airline type rating with CAE. Look, in fact, we've been leading the market out there in terms of initiatives to increase diversity. We've given scholarships to five determined women around the world so they become airline pilots. Look, United is a very good customer of ours, they're taking action. I can't answer for them, I think all it does is reflect the need out there for pilots.
Okay. About China, how many employees do you have over there that stopped working or that you brought back?
Well, Canadians, look, I don't remember the exact number, but it's not a huge number. Probably less than 50.
Less than 50. Do you have operation
Actually, let me correct that. It's less than 20. What I was talking about more is the 50 that were in country.
Okay. You said less than 20?
Yeah, less than 20 Canadians returned back to Canada.
Okay. Did you return other employees that were from other countries, U.S. or anywhere else?
No.
No? Do you have permanent employees that are not Canadian in China?
Yes, we do.
Are they still working or you had to close operations?
It depends where. We take the same look in detail. We have not shut down operations. We don't have a training center over there, so it's not the same as exposure.
Okay.
I'm getting outside myself. Sonya, do you have anything to add on it?
We have folks from Beijing and Shanghai and Hong Kong, and we are following the measures led by the government. Yeah.
A lot of it is work
Okay.
most of it is work from home that we'll be doing in China at the moment.
Okay. Grossly talking, it would be how many people working from home or in the three cities you've mentioned?
Well, probably the majority. I can't tell if any are specific, but it would be the majority of the remaining employees that we have.
Would there be 100 employees or there would be 20 or?
No. Look, I don't know the exact number, but it's not more than 50 employees total that we have in China.
Okay. Perfect. I'll let you go. Thank you very much.
Thank you.
[Non-English content] . Continuing on. Our next question comes from the line of Henry Canaday with Aviation Week. Please proceed with your question.
Yes. Could you talk a little bit about what portion of your full flight simulators for commercial aircraft have been upgraded for the FAA UPRT, the Upset Prevention and Recovery Training requirement?
Look, of our civil simulators, I can't tell you the number, but I do believe it will be 100%, and then we can get back to you. I think that was the requirement. I'm pretty darn sure that's 100%.
Is that just for the U.S. or are upgrades going on internationally or?
Well, I think it would be around the world, and I think we should get back to make sure I'm right. It'll follow the regulatory requirements. We led the industry in terms of driving UPRT training, including its use in simulators. My belief is we're 100%, but we'll have to maybe get back to you on the exact number.
Sure. Thank you very much.
Okay, you're welcome.
Thank you, Mr. Canaday.
Sorry, operator. I think that's all the time we have for the call this afternoon. I want to thank all of our participants from the investment community as well as members of the media for having joined us, and I would remind you that a copy of the transcript of today's call can be found at CAE's website. Thank you.
Thank you. That does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect your lines. Thank you once again. Have a great day, everyone.