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 Arnovich.
Mr. Arnovich, you may now proceed.
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 2019 and answers to questions, contain forward looking statements. These forward looking statements our expectations as of today, November 13, 2018, in accordance with the 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 and A available on our corporate website and in our filings with the Canadian Securities Administrator on SEDAR and the U. S. Securities and Exchange Commission on EDGAR. On the call with me this afternoon are Marc Paolone, CAE's President and Chief Executive Officer and Sonia Brancow, our Chief Financial Officer. After remarks from Mark and Sonia, we will take questions from financial analysts and institutional investors.
Following the conclusion of that Q and A period, we'll open the line to calls from members of the media. Let me now turn the call over to Mark.
Thank you, Andrew, and good afternoon to everyone joining us on the call. I'll first discuss some highlights of the quarter and then Sonia will review the detailed financials. I'll come back at the end to talk about our outlook. CAE had a good performance in the 2nd quarter with 20% revenue growth, 15% earnings growth and strong free cash flow. I'm especially pleased with the continued progress we've been making with our training strategy as demonstrated by $1,000,000 in orders in the quarter, giving us a record $8,700,000,000 backlog.
Overall, our performance in the quarter and year to date supports our full year outlook. Looking at Civil, we generated double digit growth during the quarter and we booked orders for $575,000,000 for a record $4,300,000,000 backlog. These include a new 5 year multi crew pilot license cadet training program with AirAsia, exclusive training contracts with CityJet, Oceanair, LOT Polish Airlines and Air Busan and our new long term training contract with Star Speed. In products, we sold 16 full flight simulators in the quarter, which brings us to 34 sales of simulators in the first half of the fiscal year, tracking above our initial outlook. Training center utilization was 72%, which is up 2 percentage points from last year.
In defense, we generated high single digit growth during the quarter and we booked orders for $380,000,000 giving us a record $4,400,000,000 defense backlog. Orders included CAE's new 700 MR series simulator for the Royal New Zealand Air Force's NH90 helicopter. We also won the U. S. Air Force C-1 hundred and thirty eight Air Crew Training Services contract adding to our training systems integration programs and we received orders from the Air Force for additional C-one hundred and thirty J simulators.
Also involving aircrew training services, we renewed a contract for the U. S. Air Force's KC-one hundred and thirty five aerial tanker training devices, which include upgrades to our simulators. The integration of Alpha Omega Change Engineering, or AOC, which we acquired in the quarter, is progressing well, and we're beginning to see benefits from our expanded access to higher level security programs in the United States. And finally, in healthcare, we launched a redesigned fully portable CAE cath lab VR interventional simulator.
And together with the American Society of Anesthesiologists, we launched the Anesthesia SimStat robotic surgery module, the latest in a series of interactive screen based courses approved for maintenance of certification credits. With that, I'll now turn the call over to Sonia, who will provide a detailed look at our financial performance. I'll return at the end of the call to comment on our outlook. Sonia?
Thank you, Mark, and good afternoon, everyone. Consolidated revenue for the Q2 was $743,800,000 and quarterly net income was $60,700,000 or $0.23 per share. This compares to $0.20 in the Q2 last year, excluding the gain of approximately $0.02 per share from the divestiture of the Zhuhai Flight Training Center. Income taxes this quarter were 15 point $2,000,000 representing an effective tax rate of 19% compared to 23% in Q2 last year before the gain on ZFTC. Free cash flow improved in the 2nd quarter, reaching $137,700,000 compared to $63,500,000 last year.
We had a lower investment in non cash working capital and a higher cash from operating activities. As in previous years, we expect a portion of the non cash working capital investment to reverse in the second half. Uses of cash in Q2 included funding capital expenditures for 40 $900,000 mainly for growth and we distributed $25,700,000 in cash dividends. We used another $37,200,000 to repurchase stock under the NCIB program. Our financial position continued to be strong with net debt of $795,100,000 at the end of the quarter and net debt to total capital ratio was 25.8%.
Also return on capital employed increased to 12.8% this quarter compared to 12.6% last quarter, excluding the impacts of fiscal 2018 income tax recovery related to the U. S. Tax reform and net gains on strategic transactions relating to our Asian joint ventures. Now looking at our segmented performance. In Civil, 2nd quarter revenue was up 24% year over year to $393,100,000 and operating income was up 19% to $63,300,000 for a margin of 16.1%, excluding the gain on divestiture of ZFTC last year.
On the order front, the civil book to sales ratio for the quarter was 1.46 times and for the trailing 12 month period was 1.49 times. In defense, 2nd quarter revenue of $320,300,000 was up 18% over Q2 last year, while operating income was up 2% to $34,100,000 for an operating margin of 10.6%. Excluding the impact of reorganizational and integration costs related to the purchase of AOCE, Defense segment operating income would have been $36,100,000 or 11.3 percent of revenue, which is up 8% compared to the 2nd quarter last year. The defense book to sales ratio was 1.19 times for the quarter and 1.03 times for the last 12 months. And in healthcare, 2nd quarter revenue was up $30,400,000 up from 28 $300,000 in Q2 last year.
Healthcare segment operating income was $1,300,000 in the quarter, down from $2,200,000 in Q2 of last year as a result of higher investment in selling, general and administrative expenses and higher research and development expenses to support recent product launches. To sum up, we had a good performance overall this quarter with solid year over year growth in civil and defense, which would have been even stronger if not for the impact of the 5 week work disruption in our Canadian manufacturing operations this summer. The interruption reduced the number of product deliveries we could achieve in the quarter and also affected our ability to reach milestones on a number of programs. We had already expected revenue recognition to be more back end loaded this year as a result of IFRS 15 implementation, the interruption makes it even more so. We implemented a recovery plan in the second and current third quarter with several measures designed to accelerate production capacity, including establishing a second assembly line for high volume full flight simulators.
The net result with that extra capacity running in parallel. We will reach a substantially higher level of delivery milestones in the Q4 compared to the current Q3. Accordingly, deliveries in Q3 are anticipated to be more closely resemble the levels we saw in the 1st 2 quarters of the year. The overarching positive is that our recovery plan is on target and with these measures our full year outlook for growth is intact. With that, I will ask Mark to discuss the way forward.
Thanks, Sonia. We continue to see good momentum with our training strategy as evidenced by the important developments announced last week, which further strengthen our long term growth investment thesis. We continue to be highly positive of our prospects in civil. In Business Aviation Training, we're well positioned to provide an excellent customer experience with our global reach and industry leading solutions. The announcement that we've agreed to acquire Bombardier Business Aircraft Training further solidifies our position.
The acquisition will expand our ability to address the business aviation training market and give us greater leverage across our training network. It fits right into our core and aligns very well with our strategic objective to grow recurring revenues. It also gives us the ability to leverage our expanded position on Bombardier business jet platforms across the entire CAE global network. The acquisition gives us a bigger position in the largest and fastest growing segment of the business aviation training market, which involves medium and large cabin business jets. It gives us a broad portfolio of customers, an established recurring training business, highly talented people and a moderate fleet of business jet full flight simulators.
We also signed an agreement to extend CAE's authorized training provider status for flight and technician training to 2,038. Taken together, this is a major step forward in the progression of our growth strategy in aviation training and will have a positive impact on our performance. In its full year following the closing of the transaction, which is expected by H2 of calendar 2019, the acquisition is expected to provide CAE high single digit percentage earnings accretion and is also expected to be accretive to free cash flow. We also expect to continue to make we also expect to continue making good progress in commercial aviation training. The announcement last week at the European Airline Training Symposium of a long term training outsourcing agreement with Easyjet is an example of the kinds of opportunities in our pipeline to increase our share of the airline training market and to form new enduring customer partnerships.
Under the $170,000,000 10 year agreement, all of Easyjet's pilots will soon be training at sea in 3 European pilot train locations, including a new state of the art training center at London Gatwick with a dedicated wing for Easyjet. In Civil Products, based on our level of success in the 1st 6 months, we're on track for our best year ever. In defense, we expect to continue winning our fair share of programs, building on our successes as a training systems integrator. We have good momentum with our recent wins of the U. S.
Air Force C-1 hundred and thirty H aircrew training system and the New Zealand NH90 programs. Our acquisition of AOC positions CAE as a training partner to the United States Air Force's Special Operations Command, training aircrews on variants of the C-130J and HH-sixty Pave Hawk Helicopter as well as a platform that is new to CE, the CV22 tiltrotor aircraft. The AOS CE acquisition has also us working with other platforms new to CE providing training for the United States Air Force air crews on the F-fifteen, F-sixteen and F-twenty two fighters. We recently signed a strategic agreement with the government of New Zealand to work together to address its long term defense training needs. And she is excited to be part of the team selected as the preferred bidder for the new Royal Canadian Navy's Canadian Surface Combatant Program.
While too soon to quantify, both avenues present potentially sizable opportunities for Sea over the longer term. Overall, we're continuing to pursue a large defense market with over $4,900,000,000 of proposals in the hands of customers pending decisions. And finally, in healthcare, our new products like CAE Juno and CAE Ares are being well received by customers, giving us greater access to some of the larger value pools in the existing market. We expect to see the healthcare business ramp up to a more meaningful scale, and I continue to be optimistic about its potential as CA's innovative training solutions become more broadly adopted. In summary, we have good momentum in all of our markets and we
are on
track to deliver on our growth outlook. With that, I'll thank you for your attention and we're now ready to answer your questions.
Thanks, Mark. Operator, we'd now like to open the lines to take questions from members of the financial community, financial analysts and institutional investors. Thank
Our first question coming from the line of Kevin Chiang with CIBC. Please proceed with your question.
Hi, good afternoon. Thanks for taking my question here. Maybe just a clarification question in regards to the acquisition of the Business Aircraft Training division from Bombardier. You've noted that it'll add about 100 to 150 basis points to your margin within Civil. Just wondering how that how I should think about that flowing through seasonally within the divisions.
When I look back over the past 4 or 5 quarters, your margins run between, let's say, 16% to 21%. Is it should I think of it just lifting everything by the 100 to 100 and 50 basis points? Or does it have a greater seasonal impact in your low quarters because there's more wet training involved and the top end kind of sticks around 'twenty one. Just trying to get a sense of how this works through the year for you?
Okay, Andrew. Hi, Kevin. It's Andrew. Let me see how I can help you with that. I think the way I would look at it is that our reference is always on an annual basis.
So when we're looking at what Civil achieves on a yearly basis, figure on about 100 to 150 basis points lift from the acquisition. Look, we've seen with our experience in Business Aviation that our Q4 tends to be a big quarter for Business Aviation. So, not sure it's important enough to establish as a seasonal trend, but that's probably something that I would take into consideration.
Okay. That's helpful. And then just in terms of the back half of the year, you noticed some integration costs with AOCE. Are there additional, I guess, integration cost drags to consider in the back half? Or are you basically through most of that now?
No. So we're integration is progressing well. And working through kind of all the synergies. We do expect some remaining integration costs in the back half, about $1,000,000 to $2,000,000
Okay. That's helpful. And just lastly for me, just turning to healthcare, you're bouncing around $30,000,000 in revenue pretty consistently here. And I know you're very positive on the long term outlook. But do you have a sense of when this revenue hits an inflection point that drives to a much improved margin profile?
Or is this a situation where you're holding steady and eventually the market will come to you and you get that big revenue lift that you're expecting. Just trying to get a sense of do you have a sense of when revenue gets better or is this more of a longer term trend outlook?
Well, I think that the our expectations are, as you might expect, are reflected in the outlook that we've given. So I do expect a lift. I think what we're seeing, look, is that we have a bit of an inflection in that we've that was occurred been occurring in our business where we've been shifting our strategy over the past year towards what we call the larger value pool in this business, which is nursing training. So we've basically focused our R and D on coming out with new products that were specifically destined to enter this market. And those are CA Jumino and CA ARRIS.
And those products are what we're seeing we see those products being well adopted by the market. We are increasing the sales of those. There are lower cost points, but it's a different market, less complexity, but ideal for that market. We see those progressing, but at the same time, what we see is in our existing market, which was high fidelity, bit more of a flat situation. So what we see is us overcoming the if you like the time, but we just may not overcome it, just the time it takes to penetrate that market.
It's really going after penetrating share in that market. We are confident the market exists. Products are resonating and I think that again it will come up in what we expect is the revenue will follow the expectations we have in our outlook. I won't go further down the road on that one in additional years except that I continue to be confident that this is a growth story that will achieve meaning scale scale for CAE. So yes, I'm still confident based on what I'm seeing.
But admittedly, to your point, the numbers don't reflect that at the moment.
That's it for me. Thank you for taking my questions.
Thank you. Our next question coming from the line of Fadi Chamoun with BMO Capital Markets. Please proceed with your question.
Thank you. First, just congratulation on this deal for business, Chad. I thought it was pretty good.
Thank you.
But I wanted to ask that in the recent quarters, we've seen kind of a slew of announcement in Civil Aviation. Has something changed kind of in the marketplace that have unlocked these opportunities? Or is this just this is the fruit of a lot of work that got into it to get you this one? I'm just trying to understand if there's kind of an underlying trend here where airlines have become a little bit more open to these kind of outsourcing deals to these kind of negotiations with you? Or is this just kind of a fluke that happened kind of all these deals happening in the last few quarters at the same time?
No, it's definitely not a fluke, Patti. I think I was in a couple of quarters at least on the call, I said that I used to say going back 2, 3 years that when I look at the market that we had the credibility to be able to identify and secure 1 or deals like this in any given year. And that was about the market that we could see. But in the recent quarters, we definitely see more appetite for that. And it's really because airlines are really concentrating on what their core business is, which is to efficiently fly passengers.
And we've offered them a very credible alternative, because that's all we do. If you think about it, what we do in our Fisher Airlines is look, it will take care of basically the pilot training part of your operation. We're very credible at it. We have the capability. We have the scale.
And because we train, I think our recent numbers are training more than 180,000 pilots a year. We've been able to develop an expertise in that and to do that very efficiently with the and throwing the initiatives that we had we announced over this past summer by digital innovation being able to provide unique insights to our customers on their flight crews. And flight obtaining pilots these days able to secure that capability and manage it effectively becomes that much more important when pilot shortages are getting to be the norm around the world. So and that particular dynamic is a conversation starter at many airlines just by itself. So it's not a fluke and I continue to see a good pipeline of those opportunities in the future.
Okay. And I guess I wanted to ask as far like the pipeline go, is it kind of getting stronger compared to say a year ago, 2 years ago? And I saw you kind of raised your CapEx to handle some of that volume coming at you. With this acquisition, does this kind of constrain your ability to go after some larger outsourcing deals because the CapEx need may be significant?
I think that the latter question I would say, look, I think as you hopefully see in our results is that the CapEx we are deploying is highly accretive very soon to our numbers and we look at them on that basis. I think, Sonya, I know I would call you with pride, but definitely the even including the acquisition that we just announced and the CapEx that we've increased for this year, I don't think that puts a constraint on us being able to go after definitely increased outsourcing and opportunities. And don't forget that Business Aircraft in itself generates a high degree of cash flow, it's all wet. So as we've said, that is highly accretive pretty fast. Sonia, do you want to add anything?
Yes. Just to maybe add on to that.
So the pro form a leverage that we've kind of guided to excluding expected to be at 42% net debt to total cap, which is comfortable within our target range for leverage. And we expect to generate some good free cash flow out of this business jet operations in addition to our own underlying cash flow, which allows for deleveraging to the lower end of that range in 24 to 6 months. So between the cash flow generation, the strong balance sheet it continues to provide good flexibility for us to capitalize on opportunities as they come along.
Okay. Thank you.
Thank you. Our next question coming from the line of Jean Francois Lavoie with Desjardins Capital Markets. Please proceed with your question.
Yes. Thank you very much and good afternoon everyone.
Good afternoon.
I just wanted to take a ask a question about the contract with Easyjet. You mentioned that Easyjet will take a portion of your capacity at the new facility in London, Gatwick. I was wondering how much excess capacity would you have to deploy toward new trainings contract with new customers?
You mean in Gatwick specifically or?
Yes, please.
I don't know the number off hand, but we are basically sizing a new facility there. So we already had a facility at Gatwick and we always size our opportunities to be, I would say, we basically walk a tight rope between having enough capacity to be able to serve the market that's there. At the same time, we want to utilize the assets that are by a very high level. So I think the short answer is, we basically size our capabilities, building, number of similarities to the market. It's a very, very large market in Europe specifically.
We have a number of training centers in Europe. So I think we would have capacity. I can't tell you exactly how much. And frankly, I would hope it's not too much right now, because I think we'd have assets that wouldn't be fully utilized. But I think we're market led.
So if the whatever market is out there, you can expect that she will size itself to be able to handle it. And we can do it pretty fast because our turnaround we usually size our billings and the land that's associated with them to have capacity for growth. And the way we architect our centers, because as you imagine, we have a lot of centers out there around the world. We architect them in a existing similar base by having if you like a plug and play approach to the extra, if you like, adnex that we have to building and we've managed to secure land beforehand.
Okay, great. Thank you very much. And maybe again on that contract, I just wanted to if you could provide the split between the incremental portion of that contract that will be for CAE?
The incremental did you get that one, sorry.
So the incremental growth from that contract, is that your question?
Yes, exactly.
So the contract is a 10 year full outsourcing. We're exclusive to CAE with Easyjet. We are already serving Easyjet, but essentially what it serves is about a 40% increase in growth.
Okay, perfect. Thank you very much.
Thank you. Thanks.
Thank you. Our next question coming from the line of Ronald Epstein with Bank of America Merrill Lynch. Please proceed with your question.
Hi, good afternoon. It's Christine Liwag. Mark and Sonia, you guys have now acquired Lockheed's commercial flight training business and you've acquired these assets from Bombardier. Are there opportunities like this out there where you can acquire more training businesses from the OEMs? And is there
a consolidation
that you could do?
Well, I think what we've said in the past is that we have the this is our business, this is our focus, our vision is to be the trained partner of choice for our customers. So you would expect that if there's opportunities out there and they fit our criteria for the type of business, the type of assets and of course the financial viability of that, we would be open to it. And I can't talk for any OEMs particularly or anybody else who has their business. But certainly we seem to form partnerships with those OEMs and to be and if an acquisition works out, we will certainly be receptive under the provides, as I said, that has to make sense for us financially for how we can serve our customers and grow our business along the lines to achieve the vision that we have.
And as OEMs walk away from these businesses, can you discuss how that's affected the pricing environment?
Well, I don't think that's a factor in the pricing environment. To be very frank, I mean, all of these businesses are still very competitive. So the margins that we would have is the one that we've talked about in our outlook. And I don't think these particular deals in itself would affect one way or another the margin expectations that we would have.
And shifting, I guess, to margins, that's a good segue. Can you discuss what you saw in margins in the quarter? I mean, they were just a little bit weaker than we expected. And then also with such strong growth and your strong book to bill, how do these orders compare with your existing business today? Should we expect these orders to be accretive to margins as they convert to revenue?
Well, I'll take the latter. Definitely, the orders should be accretive to revenue for sure. In terms of the margin profile, I wouldn't read too much about margins in the quarter. To be very frank, don't forget that Q2 is always, particularly in Civil, always the quarter where we have lower absolute numbers and lower margins and because a couple of factors. Number 1, airlines, if you take training, training part of our business, airlines are flying a lot in the summer months.
And when they train, aircraft are full and literally, they're not training, they're flying. So our utilization typically in our training center is low and you see that. At the same time in our products business, that is the time where we usually have and again this year, we have a summer shutdown of our activities and where people take vacations, we have time to refurbish the plan. So we basically are activity in earning revenue and profit out of our full flight simulator business that goes on as well. And in this quarter, you had the additional effect of we have a 5 week work stoppage as a result of a strike in our main facility in Montreal.
So you throw it all in, you see the margins that you have, but it all point to the fact that the absolute number, I think civil is up 19% overall in earnings in this quarter. I think that we are quite happy with the number itself. They look in defense, I think you have to consider maybe a less maybe Sonia to add additional color, but you have to really take into account that we acquired AOCE. There's a couple of 1,000,000 of acquisition costs in there that are in the quarter. But Sunny, you want to add any color?
Yes. I guess just
to complement that, overall, I wouldn't read anything too meaningful into the margin, strong year over year growth on the operating income and holding on the outlook for each of the segments. But just to complement what Mark was saying on the defense side, you did see a bit well, the impact of the integration costs. And also as the AOCE acquisition kind of ramps up, it although it's positive and contributed in the quarter, did have a bit of margin dilution in the quarter.
And again, just to finish off on all of that and just to finish off maybe, none of this is highly unexpected and was kind of factored in when we came up with our reiterated our outlook this quarter. And again, basically numbers we give you which reiterating our full year outlook for all of the businesses.
Our next question coming from the line of Cameron Doerksen with National Bank Financial. Please proceed with your question.
Yes, thanks. Good afternoon. Sonya, I just wondered if you could maybe just sort of walk through, I guess, particularly in Civil, the how the quarters kind of look at ease. You mentioned, obviously, it's going to be a back end loaded year. But I think you gave some color around sort of individually Q3 and into Q4.
So maybe just if you just sort of reiterate what you said there and what we sort of should expect in Q3 and Q4. It sort of sounded to me like we'd have a much stronger Q4, maybe Q3 kind of more typical from what you did last year.
Yes. So we had to invest in, as I mentioned in my remarks, in Q2 and continue to create additional parallel assembly line. And this will increase our production capacity to make up for the work stoppage. So we do expect to increase the delivery milestones in the second half, a bit in Q3, but that one as I mentioned should look a bit like Q1 and Q2. And the majority of the remaining delivery is probably in Q4.
So I would expect there to be more deliveries in Q4. And when comparing to previous year, you'll note on the IFRS adjusted profile that Q3 was actually the strongest quarter last year because it had kind of peak deliveries. And so we expect that to be a little bit different this quarter and the peak deliveries in Q4.
Okay. Okay. That's helpful. Just on the full flight simulator market, I mean, like you said, you're on pace to have basically a record year for new orders for full flight simulators. Can you just talk about what you're seeing out there as far as kind of market share?
Is this something where you think you've gained some share against some of the other manufacturing OEMs for full place emitters? Or is it just that the pie is much bigger this year versus last year or previous years?
I think it's the pie really. Okay. But we're still maintaining our leadership in market sales, market share. I think 70% that's probably about right. And so, again, I don't know if you heard, but just to me it's the size of the pie, lots of activity this year.
Okay, excellent. That's all for me. Thanks.
Thank you.
Thank you. Our next question coming from the line of Tim James with TD Securities. Please proceed with your question.
Thank you. Good afternoon. Looking ahead to fiscal 2020, I'm just wondering if you can talk about any potential headwinds that there might be to margin expansion in both the Civil segment and the Defense segment, whether it's contract mix, competitive changes, anything like that? I'm just trying to make sure I'm sort of taking into account or thinking about anything that might moderate any margin expansion that we could see next year?
Well, we haven't given any guidance that far out. So I'm not going to give some here right now, Tim. But based on the backlog that we have and the dynamics that we see in our markets and in all the segments, to me what we see is strong tailwinds everywhere. So I'm not expecting something untoward. I mean, I can't predict the future and future admittedly is not that far away, but based on the future I see is good.
Okay, great. No, that's helpful. That's kind of the way I was thinking about it. I just wanted to make sure I wasn't missing something that might be a bit of a headwind. But okay, that's helpful.
Can you tell us approximately what percentage of current civil revenue is comes from Business Aviation before taking into account obviously the future Bombardier bizapp training acquisition?
Okay. Before the acquisition, how much?
Tim, it's Andrew. We haven't really broken it out that way. But training makes up good 2 thirds of our civil business and business aviation is probably about 40% of that. So, it gives you some sense of order of magnitude.
Okay. That's helpful. And then my last question, just looking at the AOC acquisition, could you tell us how much of the backlog or how much backlog was acquired with that transaction?
So about we acquired about CAD 500,000,000 worth of backlog there. Now that doesn't flow through any order intake. It's adjusted into the funded and unfunded backlog, but not necessarily added on as order intake in the book to bill metric.
Okay, great. Thanks very much, Sonia. That's everything.
Thank you. Thank
you. Thank you. Our next question coming from the line of Chris Murray with AltaCorp Capital. Please proceed with your question.
Thanks, folks. Good afternoon. My first question, just going back to Civil and looking at the deliveries, just I'm trying to understand,
I mean, you had a
fairly significant step down in the quarter. And I guess, if anything, I was a little surprised that the revenue actually held in better than I thought. I guess the way to think about it or how should we think about the proportion of simulators that are being recognized on a completed contract versus still on some sort of percentage of completion? I guess what I'm trying to do is figure out what the magnitude of the step jump is going to look like when we get to the back half of the year?
So the revenue growth, first of all, is driven by not only the product business, but the training business. So good growth on both sides. Now it might be a little bit counterintuitive given the lower deliveries because they are the major drivers of revenue on the product side and the majority of the simulators are, call it, accounted for at delivery. Now despite the lower number of deliveries, the mix of simulators had an impact. So we had a higher proportion of simulators that included DP and E, which is data parts and equipment.
And that's where CAE flows through the value of the OEM data parts and equipment. So higher revenue, but same operating income. And so that had an impact on the margin as well and the revenue growth. So, those were the major drivers. In addition, there's still some development and customized simulators, which are accounted for under POC, but that's the proportion is much less than at delivery.
Okay. That's helpful. And then
just thinking about your production rate then, is it fair to think that with the booking numbers that you're doing, it's really to bring it to a kind of a one to one book to bill or is it that you're just trying to build some extra backlog just to give you some more flexibility?
You mean in terms of the because of the anticipated higher deliveries in the latter half, is that what you're asking the question?
Yes. Well, I guess what I'm trying to think of, Mark, is that you're you've had some pretty strong order intake over the last little while. And if we even look at your trailing quarters, you're certainly trailing behind that one times book to bill, basically because you're not pushing it. I'm just wondering if the changes you've made in the process are intended to speed up your production rate. So we should expect a step up into next year on actually on deliveries that would be maybe dragging down book to bill a little bit, but more on a catch up basis?
I'm not sure where you're coming from, to be honest, I mean, I'll ask Tony on the dropping book to bill because I don't see that. But our new process that we with this fully in place has been for quite a number of quarters how that was started in what we call a Quest program a couple of years ago, which is complete, allows us to be able to deliver to manufacture simulators in less time. So we are we have increased our production rate now. Right now it's going in the last half of the year it's going to be much higher because we're recovering from the strike that we have this summer. So we're accelerating deliveries.
We have actually a parallel line of simulators running for a high volume simulators or separate facility producing simulators. That's why we think we can catch up or we expect that we'll catch up in the second half because we want to make sure that we don't disappoint our customers that expect these simulators. So look, we'll match our delivery rate to the numbers of orders we can expect in the market. We're not production limited. We can get the personnel that we need.
So we're not capacity limited in terms of what we can do. And maybe when I look at the if you look at the number of sales we had, don't forget that they don't all deliver in the next year, some may be delivering over 2, 3 years for example. So I don't know if that helps, but that's what I would say to that question.
Okay, fair enough. And then if I can, just two quick questions around the transaction with Bombardier. First of all, with the increased training mix and just some geographic changes, any thoughts about how this changes your tax profile?
Well, the business jet training is a high margin and high cash generating. And so as we've guided, we expect our earnings accretion in the 1st year and also free cash flow accretion. So it should contribute to the high cash generating of the company.
Yes. I'm just I'm thinking about does it change your tax rates or anything like that with the source of income in the U. S. Or anything like that?
The majority of the well, the operations are here in North America. So we will increase our exposure in North America. But one of the benefits of this acquisition is really expanding through the new platforms and a halo effect across our global network. So, I believe it will change the mix throughout the world. So, right now, it doesn't really change my view on tax.
But as we close, if it changes materially, we'll guide.
Okay. That's fair enough. And then the last question for me is just on the margin agreement or sorry, on the royalty agreement. I'm assuming because you're taking a discount on, I would assume to be kind of recurring payments and you'll just lump sum it and depreciate it over the life of the agreement. What kind of margin impact should we be thinking about in terms of the Civil margin over the once you've got that in place?
So you're right. This was basically future cash flows that we've discounted back and prepaid in exchange for an APP agreement up till 2,038 at an attractive discount rate above our cost of capital. What we'll see is, of course, I guess, capitalization and we'll call it depreciation over time in the P and L. Now the impact of this transaction has been included in our guidance, which is low high digits, single digit earnings in the 1st year in the 1st 12 months after closing.
Okay. So that would be the guidance included the royalty impact as well as the training?
Absolutely. Yes.
Okay. Thanks.
Operator, I think that we'll now want to use the time remaining to open the lines to members of the media. I want to thank all the participants from the investment community for their questions. Operator, if you will, please open the line to members of the media.
Thank you. There are no questions from the media at this time.
Okay. Well, I want to take this opportunity once again to thank all participants on the call today. And to remind you that transcript of the call can be found on CE's website. Thank you very much.
Ladies and gentlemen, that does conclude the conference for today. We thank you for your participation and ask that you please disconnect your lines.