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 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 2019 and answers to questions contain forward looking statements. These forward looking statements represent our expectations as of today, May 25, 2018, 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 FEED's annual MD and 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 Pallant, CAE's President and Chief Executive Officer and Sonia Brancou, 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 call to questions from members of the media. For your added convenience, we've posted a presentation on CAE's website to accompany this discussion of our performance outlook. It provides some highlights of the adoption by CAE of the new revenue standard IFRS 15. You can download this document entitled Supplemental Q4 FY 2018 Presentation atwww.ca.com/investors. Let me now turn the call over to Mark.
Thank you, Andrew, and good afternoon to everyone joining us on the call. As usual, I'll first discuss some highlights of the quarter and then the year, and then Sonia will review the detailed financials. I'll come back at the end to comment on our outlook for the new fiscal year. We had strong results in the Q4 and the full year, having delivered on our growth outlook in all of our segments. I'm especially pleased with the increased momentum we've gained from our training strategy as underscored by a record $3,900,000,000 order intake for the year and a record $7,800,000,000 backlog.
We grew earnings per share by 8% over last year and we made good progress on our return targets with return on capital employed growing to above 12%, all in all a very good performance. Looking specifically at Civil, we booked $545,000,000 of orders during the quarter or a 1.2 times book to sales ratio, including long term training services in Europe and the Americas and the sale of 5 more full flight simulators. For the year, Civil booked a record $2,300,000,000 in orders for a 1.44 times book to sales ratio, giving it a record backlog of $4,000,000,000 which is 21% higher than last year. This is a good indication of a considerable momentum we've gained just in the last year towards realizing our vision to be the recognized global training partner of choice. Orders for the year included 50 full flight simulator sales and comprehensive long term training agreements with airlines, including AirAsia, Jazz Aviation, Air Transat and Virgin Atlantic, just to name a few.
As well in Business Aviation, Civil won long term training contracts with customers worldwide, including Elite Avia and Flexjet. Overall for the year, Civil grew segment operating income by 12% and filled its training centers to 76% utilization. Turning to defense, During the quarter, we booked orders for $435,000,000 representing a 1.5 times books to sales ratio. Notable wins included a training systems integration contract for a comprehensive NH NH90 helicopter training solution for the Qatar Air as part of a U. S.
Foreign military sale. Highlighting the recurring nature of our defense business, we were also awarded a contract to extend the provision of King Air 350 simulator service to the Royal Australian Air Force and the U. S. Navy issued additional orders under the MH-sixty R and S tech refresh and procurement of simulators program. For the year, defense orders included a contract extension to continue providing aircrew training services to the UK Ministry of Defense at CEE's medium support helicopter aircrew training facility and a contract to provide the UAE Air Force with a comprehensive training center for its remotely piloted aircraft.
Both contracts highlight CAE's continued success to bid and win as a global training services integrator. Defense orders for the year reached a record $1,400,000,000 and a 1.3 times books to sales ratio and our defense backlog reached a healthy $3,900,000,000 And finally, in healthcare, we returned to growth this year and we accomplished a number of strategic objectives to enable higher growth beyond. We further developed sales and distribution and we launched a series of innovative products. CA Juno, our clinical skills mannequin for nursing was very well received by customers and we also introduced Lucina AR, the world's 1st augmented reality child birth simulator. We made good inroads as a thought leader with the release of Anesthesia SimStat, a screen based simulation approved by the American Board of Anesthesiology for maintenance of certification credits and we formed a new partnership with the American Heart Association for the delivery of lifesaving courses in certain markets.
We also leverage CAE's expertise in augmented reality with innovative training solutions for medical device OEMs, Medtronic and Abiomed. These examples define CAE as the innovation leader in simulation based healthcare training and education. With that, I'll now turn the call over to Sonia, who'll provide a detailed look at our financial performance. I'll return at the end of the call to comment on the outlook. Sonia?
Thank you, Mark, and good afternoon, everyone. Consolidated revenue for the 4th quarter was up 6% to $780,700,000 and quarterly net income was $100,100,000 or $0.37 per share, which is up 19% compared to $0.31 in the Q4 last year before specific items. For the year, consolidated revenue was up 5% to $2,800,000,000 and annual net income was $347,000,000 or $1.29 per share. Excluding the impacts of the income tax recovery related to the U. S.
Tax reform and net gains on strategic transactions involving our Asian joint ventures, net income would have been 297,300,000 dollars or $1.11 per share. This compares to net income last year of $278,400,000 or $1.03 per share before specific items. On this basis, annual EPS was up 8%. We generated $117,300,000 of free cash flow in the quarter and $288,900,000 for the year, which represents an annual cash conversion rate of 97%, excluding the impact of the aforementioned items. This is in line with our annual average conversion target of 100%.
In fiscal 2018, we generated higher earnings, which converted into higher cash provided by continuing operating activities. This was partially offset by investment in non cash working capital in support of our growth and mainly as a result of timing on accounts payable and work in progress. Overall, a good year from a cash flow standpoint and we expect to continue our focus on improving non cash working capital efficiency in the year ahead. Uses of cash involved funding capital expenditures for $57,400,000 in the 4th quarter $173,900,000 for the year, mainly for the deployment of new simulators to our global network in support of customer led growth opportunities. This figure also includes the acquisition of existing simulators from 3rd parties.
In line with the customer driven accretive investment opportunities that we see in fiscal 2019, we expect to deploy about $200,000,000 of CapEx, mainly in support of growing customer training outsourcing. In terms of relative capital intensity, CAE's annual CapEx has continued to decrease as a ratio of total operating cash flow. Our existing asset base generates a high level of recurring cash flow and in addition the simulators we've deployed to our network in support of growth over the last 5 years have typically ramped up within about 24 months to generate accretive incremental returns and free cash flow. In other uses of cash, it included the distribution of $89,900,000 in dividends for the year. In addition, we repurchased and canceled approximately 2,100,000 common shares under the NCIB program during the year for another 44,800,000 dollars In all, between the dividends and share buybacks, CAE returned $134,700,000 to shareholders during fiscal 2018, which represents a 10% increase over last year.
Looking at capital returns, we saw significant increase on return on capital employed to 12.3 percent from 11.2% last year. As well, Sea's financial position became even stronger with net debt of $649,400,000 at the end of March for a net debt to total capital ratio of 21.5%. This is down from $750,700,000 or 26.5 percent of total capital at the end of last year. Income taxes were $13,700,000 this quarter for an effective tax rate of 12%. This compares to 17% in the Q4 last year.
The decrease from last year was mainly due to a change in the mix of income in various jurisdictions, mainly from the recognition of deferred tax assets due to our increased profitability in certain European countries. Excluding the effect of this item, the income tax rate would have been 23% this quarter. For the year, excluding the impact related to the U. S. Tax reform, the recognition of deferred tax assets and net gains on strategic transactions relating to our Asian joint ventures, the effective tax rate would have been 21%.
Now turning to our segmented performance. In Civil, 4th quarter revenue was up 9% year over year to $455,200,000 and operating income was up 14% to $95,700,000 for a margin of 21%. For the year, civil revenue was up 5% to 1.6 $3,000,000,000 and operating income before the net gains on the strategic transactions relating to our Asian joint ventures was up 12% to $306,200,000 for an annual margin of 18.8 percent. In defense, 4th quarter revenue of $290,400,000 was up 3% over Q4 last year, while operating income was up 17 percent to $38,700,000 for an operating margin of 13.3%. For the year, defense revenue was up 5% to $1,090,000,000 and operating income was up 6% to $127,700,000 dollars representing a margin of 11.8 percent.
And in healthcare, 4th quarter revenue was $35,100,000 up from $34,200,000 in Q4 last year. Healthcare segment operating income was $6,700,000 or 19.1 percent of revenue in the quarter compared to $4,100,000 or 12 percent of revenue in Q4 of last year. For the year, healthcare revenue was 115,200,000 dollars up from $110,700,000 and segment operating income was $8,800,000 up from $6,600,000 last year. Before I turn the call back over to Mark, I'll say a few words about the new accounting standard IFRS 15 relating to revenue from contracts with customers, which CE adopted as of April 1, 2018. This standard changes the way that we recognize revenue for certain customer contracts, impacting mainly the timing of revenue recognized for civil simulator products, which are currently accounted for using the percentage of completion method.
Under the new standard, revenue for these products will instead be recognized upon completion. This change impacts the timing of contract revenue and profit recognition, which may result in some quarterly volatility, but there will be no change to milestone payments and cash flows from contracts. The impacts of IFRS fifteen on our fiscal 2018 results can be found in Note 2 of our annual consolidated financial statement and in our supplemental Q4 FY 2018 presentation. For the fiscal year 2018, the net impact of the new standard was a $0.01 deferral of EPS. With that, I will ask Mark to discuss the way forward.
Thanks, Sonia. CAE continues to benefit from steady secular tailwinds in each of our 3 core markets of civil, defense and healthcare, and we're well positioned for sustainable profitable growth. The macro environment is highly supportive and just as encouraging, if not more so, is the momentum we currently have in the market as a credible training partner for our customers. As we look to the year ahead, we expect CE to exceed the growth rate of our end markets as our large pipeline translates into even more opportunities for market share gains and new customer partnerships. In Civil, the market fundamentals are well supported by continued passenger traffic growth and expanding global in service fleet of aircraft.
So far in 2018, we've seen continued high rates of commercial passenger traffic growth, especially in high growth regions like Asia Pacific, where CAE is highly active as a training partner. The Gulf continues to be well in excess of the long term global average of about 4%. Pilot training demand is fundamentally driven by regulations governing the flight crews who operate the global in service fleet and incrementally by the large number of new pilots who need to be trained over the next decade. I remain highly encouraged by CAE's prospects in this environment. CAE is a pure play training services company that's well defined as an innovation leader with the largest and broadest global training network and the most comprehensive offering of cadet to captain training solutions.
We're harnessing the latest in augmented and virtual reality and the power of digital with new data driven solutions. For example, we commercialize CAE Rise in fiscal 2018 to provide our training customers with a powerful new tool capable of objective pilot assessment and providing much 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 for more long term recurring training partnerships for CAE. Commercial aircraft deliveries drive full flight simulator sales and with major commercial aircraft OEMs still delivering aircraft at high rates, we expect continued good demand for our products and to maintain our leadership position. We sold 50 full flight simulators again last year and we're off to a good start in the 1st couple of months of the new fiscal year with our first ten already sold.
In Business Aviation, we've been doing very well to address the existing market and I'm encouraged by the signs of improvement we continue to see with increasing business jet utilization. CA is well positioned to provide its customers with an excellent experience and to continue gaining market share. For Civil overall, the year ahead looks bright and we expect to continue generating low double digit percentage operating income growth as current momentum for our innovative training solutions translates into market share gains and new customer partnerships in commercial and business aviation training. In defense, the macro environment is also highly supportive with governments around the world placing a high priority on mission readiness and looking for outsourcing alternatives involving industry partners like CAE for the creation and maintenance of critical operations personnel. Here too, we're seeing increased momentum as we continue to convert our large bid pipeline into orders.
We believe CAE is well positioned to continue growing its share as a training systems integrator inside of a $17,000,000,000 market. Current bids and proposals pending customer decisions is currently as high as ever at over $4,500,000,000 Last year, we continued to demonstrate our ability to bid and win as a top tier training systems innovator and we're already off to a solid start in fiscal 2019 with a recent win of a 5 year $150,000,000 contract to support U. S. Navy pilot training. We'll be providing instructors at 5 naval air stations to support primary, intermediate and advanced pilot training for U.
S. Navy, Marine Corps and Coast Guard aviators using a combination of simulators and the T-6B Texan turboprops and the T-45C Goshawk jet aircraft. This is yet another strategic win for us, demonstrating the Navy's recognition of CAE as a world class provider of comprehensive training solutions and services. We expect the positive momentum in defense to translate into mid to high single digit percentage operating income growth in fiscal 2019 as we deliver on contracts in our backlog and continue to win our fair share of orders from a large pipeline. And finally, in healthcare, we expect to resume double digit growth this year with the benefits of our broader market reach and expanded products offering.
As well, we have a development pipeline of innovative solutions, which will continue to launch during the year to increase CE share in relatively large segments like nursing. We maintain a positive view of CE Healthcare's long term potential as the use of simulation expands for education and training. And we remain confident that healthcare will become a more significant part of CAE's overall business. In summary, CAE is the benefit of an increasingly recurring base of business and significant headroom for long term profitable growth inside markets that are themselves experiencing secular tailwind. Our strategy and training is working well and we have the momentum to continue growing at a superior rate to our end markets.
We take great confidence in the strength of our position as an innovation leader and increasingly the recognition of CAE by customers as the global training partner of choice. With that, I thank you for your attention and we're now ready to answer your questions.
Thank you, Mark. Operator, we would now be pleased to take questions from analysts and institutional investors.
Certainly, thank you. And we'll get to our first question on the line from the line of Fadi Chamounth, BMO Capital Markets. Please go ahead.
Thank you. Good afternoon. Good afternoon. And congratulations on the good results. Thank you.
I wanted to ask first on the civil side, the guidance, is this off of the base of restated EBIT base of
$311,000,000 Yes. So the guidance is based on the normalized, which excludes the transactions during the year and restated for IFRS 15. So all of the guidance that we've provided is on an apples to apples basis, so on the restated FY 2018 numbers.
Okay. And so I mean this year you've had a pretty decent conversion from revenue to operating income in Civil. I think revenue growth 5%, operating income growth was 12%, almost twice the conversion we've seen in the prior 3 years. Was there something specific helping this year? And secondly related to that, what can this segment do in operating margin ultimately as you continue to benefit from the strong cycle?
Can we see a 20%, 21% like what's the possibility on the operating margin in this segment? A lot
of it comes from utilization. I think increased utilization, Paddy, that does it. You look at, for example, 82 percent back in this latest quarter. That obviously has an effect as we throw more revenue at quasi fixed cost assets. The other thing that comes into play, which holds promise for margins in the future is the yield, the extra yield provided by throwing more revenue off the same assets, not only utilization, but by us doing wet training.
And that's a goal we've had and we've been successful this year. And finally, mix. Mix is a big issue because we have a number of components in the business depending on if the utilization comes from business aircraft or rather than commercial and even commercial there's different parts of the world. And so there's a lot of things that play and that explains that, most of them positive this year as you've seen. And yes, I think for the future, I think we just basically take it our outlook in terms of the income growth.
That's really what we should focus on. Not that margin is not important, we're quite happy with those margins. But I think we really hang our hat on SOI percentage growth itself because we have a better view on that one with any precision and really that's really what comes into play on when you look at return on capital employed of course. Okay.
Just one quick one on the CapEx. I mean, you've generated more cash flow in the last couple of years than what the market opportunities to reinvest have been and your balance sheet is pretty strong at this point. Are you seeing more opportunities to grow or to invest for growth? Or is there kind of an opportunity here to look at distribution a little bit differently in the next year?
Well, I mean, our priorities don't change, which is always like growth is number 2 is number 1. And your answer to it, you see more opportunities, yes. And accretive opportunities. I mean, we and we look at them specifically on that. And I think our results on the return on capital employee growth proves that we're focusing on that in the accretive nature.
And yes, we see more opportunities out there. I see I think I've seen all that before, but I'm seeing more of an appetite for airlines specifically to want to turn over more of their training to us specifically. And I don't see that abating. So I think there will be opportunities for us. But sometimes they're episodic like we can't predict exactly when we might close them.
But on a large on a macro base, I think there's opportunities for us to do that. And of course, still maintain the kind of distribution that although we never did guarantees, but you've seen our pattern on distribution, on cash returns to shareholders, now with the dividend and the buybacks that we've done. I don't see any reason to expect that we will change that materially, but we'll see. We'll see. If we're depending on how successful we are on deploying that cash.
We have we'll hold our power to dry and take it when we get to that point. But coming back to it, there are opportunities in market for us to deploy that capital accretively.
And just if I as I add, Patty, so like Frank said, we continue to see good market opportunities. And the assets that we have deployed so far in the last few years that are market led have ramped up quite quickly to generate accretive returns, support growth and just add to the recurring cash flow generation. So to the extent we continue to see that we'll continue to do so to invest. And we often look at the CapEx as an absolute number, absolute value, but the company has grown. And if we look at it from a capital intensity perspective, the CapEx as a proportion of operating cash flows, the intensity actually is decreasing, right?
And so, the investment in growth continues to be our first priority. Of course, we always balance it with a view on the return to shareholders. And as Mark mentioned, pretty good track record there with 7 years of dividend increase and some NCIB in the year and CAD135 1,000,000 of cash returned to the shareholders year, which is a 10% increase year over year.
Okay. Thank you.
Thank you very much. We'll get to our next question on the line from the line of Kevin Chiang with CIBC. Please go ahead with your question.
Hi. Thanks for taking my question and congrats on a good quarter there and a good end to the year. Maybe just following on Fady's question there around where margins can go. You spoke about the opportunity to improve yields shifting from dry hours to wet hours. With your utilization at 82%, are you finding it are you able to accelerate that shift, I guess, to improve that yield given your utilization is so high now?
Or are you able to push it? Or is it more fluid and it kind of comes and goes depending on what the customer chooses from your service offering?
Well, I think it does. I mean 82% is high. Can you get higher? I guess theoretically, yes, because 100%, we define 100% depending on the market, like $6,000 in commercial aircraft, for example, 4,500 hours on business aircraft a year. But I can tell you and I've said this in the past that some of our training centers are operating significantly above 100%.
So is it possible? Yes. But of course our training centers are recently distributed all over the world. And we've had a pretty good market. So it really depends on how the market continues to go across the world.
That really is part of the answer on utilization. And more than that, as well as, as you were saying, just in your question, the mix of customers like for example, business aviation, in the past, if we go back, I mean business aviation is a bit is a little bit better than we've seen in the past, recent past anyway. But it's still nowhere near the level it was prior to financial crisis of 2,008. So if you see business aircraft coming back in any material way, then that could have a quite significant benefit to not necessarily margin growth, margin growth, yes, but operating income growth.
That's helpful. And maybe just a quick one for me on Healthcare. I noted in some of your disclosure, you talked about a lower R and D is helping boost operating income. Should I read that as a sign that you've hit maybe a maturity level within your product profile there and maybe conversely a sign that fiscal 2019 we should start seeing maybe a more significant improvement in profitability within healthcare. Is that something we can look forward to over the next kind of 12 to 18 months?
We're focusing on growth. In Healthcare, that hasn't changed. We believe the potential for the market is significantly larger than the business we have today, the market opportunity. And a lot of it has to do with gaining share in the markets that really hold a large pool of value today that's being served today like for example nursing. So we've launched new products, CA Juno specifically and that's the market receptivity to that product has been very good.
To your question about R and D, no, we haven't taken our foot off the pedal. We continue to invest both there and in SG and A, mainly sales force marketing expenses to continue to grow the business. But with top line growth, bottom line growth will come because as I said in the past, the margin of the products we have is very good, I would say. So we have room to do both top and bottom, and that's our expectation.
And to add to that, so the R and D expense did go down a little bit this year, but really it's a reflection of the cycle we were in some of our product development. So you'll note that the capitalized R and D is higher because we were in development mode, because we did launch quite a few products this year. So that R and D expense did go down, but what I would argue is it got replaced with added investment in our product launch, expenses, marketing and also on the SG and A in our sales force and to launch these new products.
That's very helpful. Thank you for the color.
Thank you very much. We'll get to our next question on the line from the line of Cameron Doerksen with National Bank Financial. Please go ahead.
Yes, thanks. Good afternoon. Just to follow-up on Kevin's question on the healthcare. I think one of the things you cited also in the margin in Q4 was a remeasurement of royalty obligation. I'm just wondering if you can describe what that impact was?
And I guess what I'm trying to get a sense of is what's kind of a more normalized margin for healthcare at this type of revenue level at $35,000,000 because obviously revenue is going to continue to track higher and want to get a sense of where the margins can go?
Yes. So there was a benefit in the quarter from kind of one time lower royalty expense. So there was a bit of a benefit in the quarter. But over the year, and as I just mentioned, we did invest a lot of one time costs in SG and A and product launches. So, over the year, the benefit is basically neutralized.
So the way that I will look at it is over the annual year, the growth in revenue and the growth in SOI is a little bit more indicative. But of course, this is a business that has pretty good gross margin. And so we are continuing to invest in products and launches and SG and A. But as we grow volume, we should see that dropping to the bottom line and to the SOI.
Okay. Just second quick question on, I guess, on defense. I mean, obviously, there's a terrific pipeline of opportunities there for you. I'm just wondering if you can maybe just talk about any potential sort of larger longer term trading contracts that you have currently that might be up for rebid? Is there anything that's at risk in the current revenue stream on defense for this year?
We have a number that will come out over the next few months. When I say next few months, year and a half approximately. There are specific coming up. I can think of and I have to look into detail here, but I think the KC-one hundred and thirty five contract is coming up over the next couple of years, I'm not sure what they also the training that we do for the unmanned air vehicles, the Predator Reaper that's up for rebid in, I think, in the next year, next few months, I believe. The I'm just consulting my notes as we go here.
But actually, I've just called that KC-one hundred and thirty five is not this year. Predator Reaper is this year. So those are the ones I can think of. But having said that, we think we have a pretty good shot at the incumbents on those programs and but it will be competitive. There's no doubt about that because they're good contracts.
But at the same time, there's a lot of contracts that are coming up for bid in other areas, like for example, just pick 1 C17 in the United States that's coming up. And we as I said, we have about $4,500,000,000 of active bids that are been submitted. We're waiting for decisions on those. I think you take all of that basically is the nucleus of the outlook that we have for defense this year.
Okay. That's great information. Thanks very much.
Thank you very much. We'll get to our next question on the line from the line of Taran Ketawala with Scotiabank. Please go ahead.
Good afternoon. Thank you for taking my question and congratulations on a great quarter there. I guess I wanted to just ask firstly on the gains. Is it possible, Sonia, to divvy those up between the segments?
So not much in the quarter. In fact, we had in that other gains and losses, we had a bit of a headwind with FX. The most significant item was essentially a gain on the disposal of an asset in Civil and from our network to a customer and that we regularly meet customers either through u simulators, kind of partial builds, of course custom or from our network. So we consider it part of our normal course operation. It's simply accounted for out of fixed assets rather than inventory.
So that would be the larger item.
That's helpful. Thank you. I understand that. I just try to figure out the segment numbers there. That's helpful.
Thank you. And I guess maybe just one more question from me here in terms of as you look at the outlook here, we look at sort of all the segments, things seem to be really doing really well on all the segments for the most part. Mark, is there something that you're worried about in terms of a risk? What's what do you think could go wrong here potentially?
Well, I mean, obviously, by giving in the outlook for public company, and for example, I was just talking on the previous question, and for example, I just talked on the previous question with Cameron on the defense bids. I mean, yes, we have active bids, but although we have a very large backlog, there's still a non insignificant portion of the SOI that we'll have to generate this year. That got to come from the wins we will win this year. So clearly, we have to win them. But we haven't having said that talking about both sides of my mouth, if you like it, we have backup plans to make sure we do.
So that's part of the risk, I would say on Otherwise, there's competition in civil as well. There's a lot of players who see the same market as we do. So they'll be aggressive and there's price competition. So those are the usual ones. So we expect that we're going to be continuing to be able to win our fair share.
And I think barring any Black Swan events that we can't control, I think it's mainly competition that is the real issue here.
Here. And we'll proceed to our next And we'll proceed to our next question on the line from the line of Benoit Parry with Desjardins Capital Markets. Please go ahead.
Good afternoon and congrats for the good quarter. Just to come back on the bidding proposal, I mean, it's been up from $4,000,000,000 to $4,500,000,000 dollars Could you talk a little bit about the mix inside, just want to get a better understanding the mix between equipment and services. I know the focus is on TSI, but trying to gauge whether we could see some margin expansion from the 11.8 percent EBIT margin you achieved in fiscal 'eighteen?
I don't have the exact and actually the number, of course, closer. I think we said $4,500,000,000 but it's more $4,700,000,000 But I mean, within the spitting distance there in terms of the bids we have out there. Look, I can't really know I can't tell you offhand with precision right now what the maybe we'll get back to you on the but in fact, I don't even know if we ever put that out, but the split between products and service do we yet? Yes.
I think, Benoit, you should assume that it's going to profile pretty much like the other TSI deals that we have brought in and as examples, where there is usually a long tail services component. And it's one of the reasons why really our guidance, our outlook continues to be based on operating income, dollar growth, as opposed to margin specifically because depending on how these programs flow through in product service mix will be as much or more of a determinant of margin percentage than anything else. And as we look at our backlog in aggregate in defense, it's probably about a 12% backlog if you could process it all at once, which you can't. And so the variations you see from quarter to quarter are really described mainly by the differences in product service mix.
I see. Okay. That's interesting. And when we look at Civil, you finished the year with 50 orders and you're off a good start. So any thoughts about what type of numbers we could expect for the full year and fiscal 2019, Marc?
At this point, I would say, look, prefacing my answer, I would say the dynamics haven't changed. It's really we expect to continue to win to be leader in this market, like I would say 60%, 70% market share. We do like to make money off we sell these. So that's why I am going saying 60% to 70%. But it's really based the catalyst here, as you know, is really the production rates at the OEMs.
And the production rates at OEMs are still very high. They have they're not going to change materially during this year. So I'd expect in the 40s, that's what I would expect at this juncture. I can't give you a lot more precision on that because a lot of it depends on your multiyear purchasing. Like some of the ones we won last year are things that people are ordering that are
going to cover for the
next 3 years. So depending on the mix of customers we have, it really depends on are they buying for the next couple of years or they're buying for the next 10. So that's what really would depend. So but at the moment, I think last year, we pretty much said that and we'd rather stay on the right side of that answer, if you know what I mean.
Okay, okay. Perfect. And lastly, when we look at the U. S, it seems that there's pretty nice opportunities in 2018, looking at the TX, the MQ-twenty five, Boeing also with the MAM. So I was wondering whether you could talk a little bit how CAE is positioned on those opportunities and whether it's part of the $4,700,000,000 proposal out there that you talked about?
Well, I don't want to really get into the too much detail of what's in that because some of it is confidential that we don't actually say what we've been on in all cases. I would tell you it's very international, it's not only United States, although the pipeline of opportunities in United States obviously is very good because it's the U. S. The biggest defense market in the world and it's the budget's just been announced and it's the largest budget they've had. So that's all very good.
And another noteworthy thing is, I think we'll see now has is now able to bid on top secret programs, which we haven't bid in the past as a result of us recently obtaining, let's call it, proxy, which really allows us to go after, again, top secret programs. So that opens up another part of the market for us that we haven't really been able to access before. So I think that will be good for us.
Okay. And lastly, in terms of the financial leverage, obviously, you finished the year on the strong note. The focus, obviously, it's on growth. You highlighted the CapEx guidance for this year. But when we look at the free cash flow generation also, should we assume that the debt levels will go down much further still in fiscal 2019?
Or any opportunities to, let's say, deploy capital outside the $200,000,000 you're looking to invest in fiscal 'nineteen?
I'll let Sonia provide up more detail and some of the leverage. But look, we see growth. I mean, the $200,000,000 is based on our assessments of the opportunities that we have imminently in front of us right now, either that we've approved, that we've launched or that has a very likelihood of happening. Now over the next few months, I could see other things happening. If we get, for example, a big opportunity for outsourcing an airline And that makes sense to us that, well, that may increase our CapEx, that's just an example.
So with that, I'll maybe turn it over to Fonim, who has anything.
Yes. Just to add, we continually this is our best view of our opportunities. But as they firm up or as additional ones come up, there could be opportunities for additional CapEx whether it's straight up CapEx and outsourcing or we continue to have conversations A, right? So that affords us that flexibility, should it be under JV format or otherwise to deploy some capital to secure some larger outsourcing.
Okay, perfect. That's it for me. Thank you very much and congrats again.
Thank you.
Thank you.
Thank you very much.
We'll
our next question on the line of Tim James with TD Securities. Please go right ahead.
Thank you. Good afternoon. Just a couple of quick clarifications maybe from you, Sonya. The $200,000,000 in CapEx planned for fiscal 2019, does that include any amount for capitalized development costs? Or is that in addition to that $200,000,000
So the capitalized development costs would be in addition. The CapEx is really mostly deployments of simulators to support client demand and growing outsourcing.
Okay. Thank you. And then returning to an earlier question that you had in regards to the Civil operating earnings growth guidance for fiscal 2019 you indicated was based on an adjusted fiscal 2018 applying IFRS 15. But when you say an adjusted, does that mean I mean, there were a number of significant one time benefits in the operating earnings in Civil in fiscal 2018. Is that included in the base upon which we should think about that growth rate?
No. So there's 2 elements. So restated for the 2018 IFRS impact, but also normalized out. And we've provided that detail in the supplemental presentation. So there's a normalized number that removes the impacts of those transactions during the year.
So the outlook is on the normalized basis.
Okay, great. Thank you. Then, Mark, just you were commenting earlier regarding the opportunity that still exists and kind of where the business aircraft training market is. Could you just generally characterize the utilization of your business jet training sims? And I'm trying to understand if the opportunity for growth and maybe at some point to return to sort of historic levels.
Does that require putting more sims into the network? Or are the existing business jet training simulators in the network underutilized and you can sort of increase the revenue that you get from those assets without investing in additional assets?
Well, I think both. I think there's a level of I think it's very rare, although there are some that are full. There are definitely some, especially from the most recent models. Some older models may not be as full, but they're quite profitable because, for example, they're down the depreciation curve. So but there is definitely opportunity to add more business jet sims for sure.
And that's that I think that we've added some and I think we will continue to add some to cater for the decreased demand that we see out there in business aircraft. And I think that if I look at the utilization of Business Aircraft itself, it doesn't give you the whole story because it I think you have to look at other metrics that are that I think tell us that there's still a lot of growth potential to bring us back to anywhere near we were on in prior to 2,008. Like for example, I think the prior 2,008, I think business jets were operating north of 500 hours a year. And I think now they're operating every but north of like 3, 3:50 hours a year. But I may be precisely wrong on those numbers, but again an idea of the difference.
So if you get to any kind of utilization per aircraft higher, I mean, that will have a pretty significant impact because obviously you need more pilots.
Okay. That's helpful. Thank you. So maybe just a follow on that. And if we think about eventually at some point in time, your business jet training revenue stream or training hours getting back to that pre-two 1008 level, Can you do that with the existing asset base?
Or would there be some incremental investment required to support that historic level, that pre-two thousand and eight level of activity?
No, we'll probably add some. We'll probably add some. We'll still the ones we got. We'll probably add some just because there's more airplanes out there of newer models and will require more SIMs. There's no doubt in my mind.
Okay. Thank you. And then just a final question. Ended the quarter with over $600,000,000 in cash and you kind of touched on the leverage in your capital priorities. I'm just thinking forward over the long term here.
Am I correct in assuming that kind of having that amount of cash on the balance sheet is more than you would ideally like to hold over the long term? Or is that level sort of appropriate do you feel for the business?
To be flippant, I like it, Sonia doesn't. But no, look, our priority is growth. I'll let Sonia has talked about it. So we see opportunities, but we'll be we're focused on accretiveness and we've been successful at that. And the opportunities don't come as you say, they don't come necessarily we don't have the lever the luxury of deciding exactly sometimes when they will happen, when customers want to do it, when they present themselves and whether or not there will be the good opportunity for us to be accretive.
But going back to what I said, we see those opportunities and increasingly, obviously, our priority we used to have a priority, the priority was to deleverage. It is no longer a priority. Do you want to add anything, Sonia?
Yes. Well, we'll always maintain a solid financial position, but I think we're in a we have the financial flexibility to be able to invest thoughtfully and accretive opportunities. And I think we've proved with the investments that we've done that they are successful, they're market led. The market continues to be demand and opportunities and to the extent that they continue they are accretive to earnings, returns and cash flow, I think we have the opportunity to deploy that cash into more capital.
Okay, great. Thank you very much.
Thank you, Tim. Operator, that's all the time we seem to have for analysts and investors. I do want to use the last bit of time we have here for members of the media There are any questions from members of the media.
Certainly. And Mr. Arnabas, we seem to have no questions queued up at this time from the media.
Okay. Well, I want to take this occasion to thank everybody who joined us today on the call and to remind you the transcript of the call will be made available on CAE's website at cae.com. Thank you.
Thank you. And ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation. Please disconnect your lines. Have a good day, everyone.