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 2018 and answers to questions, contain forward-looking statements. These forward-looking statements represent our expectations as of today, November 10, 2017, 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 and at the U.S. Securities and Exchange Commission.
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'll take questions from financial analysts and institutional investors. Following the conclusion of that Q&A period, we will open the call to questions from members of the media. Let me now turn the call over to Marc.
Thank you, Andrew, and good afternoon to everyone joining us on the call. I'll first discuss some highlights of the quarter, and then Sonya will review the detailed financials. I'll come back at the end to talk about our outlook. Our performance in the second quarter continues to support our outlook for the full year. The results in Civil continued to be strong, and our Defense and Healthcare segments showed positive momentum. Overall, we saw a high level of business activity, with total orders for the quarter reaching CAD 931 million, including CAD 516 million from Defense customers. Looking specifically at Civil, we booked orders for CAD 388 million, including 11 full flight simulators and long-term training contracts with customers including Iberia Airlines, Brussels Airlines, and Endeavor Air. For the quarter, Civil had double-digit % operating income growth, and we filled our training centers to a seasonally typical 70% utilization.
In Defense, growth momentum improved as we continued to ramp up programs from our backlog. New orders included C-130J trainers for the U.S. Air Force and Air National Guard, and a contract to continue providing helicopter aircrew training to the U.K.'s Royal Air Force. Defense also signed an order for more T-44C aircrew training for the U.S. Navy, and received contracts from the U.S. Air Force to continue training for the KC-135 aerial refueling aircraft. With the U.S. Air Force, we signed a contract involving training aircrews on the Predator and Reaper remotely piloted aircraft. Finally, in healthcare, we also saw more momentum with the launch of new products and a ramp-up of our expanded sales force. Customer response to CAE Juno, our latest simulator for nursing, has been positive, with initial sales meeting our expectations. In fact, we began delivering our first Juno units during the quarter.
CAE is the innovation leader in healthcare simulation, and I'm very proud that we've recently been recognized with industry awards, including the prestigious Unity Impact Award for our VimedixAR ultrasound simulator. This is a mixed reality solution that integrates the Microsoft HoloLens. With that, I'll now turn the call over to Sonya, who will provide a detailed look at our financial performance. I'll return at the end of the call to comment on our outlook. Sonya?
Thank you, Marc. Good afternoon, everyone. Consolidated revenue for the second quarter was CAD 646 million, and quarterly net income was CAD 65.2 million, or CAD 0.24 per share. This includes a gain of approximately CAD 0.02 per share from the divestiture of the Zhuhai Flight Training Centre. By comparison, in the second quarter last year, earnings per share before specific items were CAD 0.21. Income taxes this quarter were higher than usual at CAD 24.8 million, representing an effective tax rate of 27%, compared to 16% for the second quarter last year. The higher tax rate was mainly due to the gain on ZFTC and a negative impact from tax audits in Canada this quarter. Excluding the ZFTC impact, the rate would've been 23%. Free cash flow from continuing operations improved in the second quarter, reaching CAD 63.5 million, up from CAD 27.3 million last year.
The increase came from a lower investment in non-cash working capital and an increase in cash provided by continuing operating activity. As in previous years, we expect a partial reversal of non-cash working capital investment in the second half. Uses of cash in Q2 included funding capital expenditures for CAD 24.4 million, and we invested CAD 24.7 million to consolidate training capacity in the market by acquiring a portfolio of existing simulators. In terms of shareholder returns, we distributed CAD 23.2 million in cash dividends, and we used another CAD 19.9 million to buy back stock under the NCIB program. Our financial position continued to be strong, with net debt of CAD 670 million at the end of the quarter for a net debt to total capital ratio of 24.1%. Return on capital employed increased to 11.2% this quarter, compared to 10.7% last quarter. Looking at our segmented performance.
In Civil, second quarter revenue was 2% lower year-over-year to CAD 349 million, mainly because of some FX translation headwinds and timing differences related to the deferral impact of the accounting for standardized simulators. Notwithstanding these elements, operational activity in Civil was strong, as demonstrated by operating income, which was up 16% year-over-year to CAD 62.8 million, for a margin of 18%. These numbers exclude the gain on divestiture of ZFTC. On the order front, the Civil book-to-sales ratio for the quarter was 1.11 times, and for the trailing 12-month period, it was 1.03 times. Civil backlog at the end of the quarter was CAD 3.1 billion. In Defense, second quarter revenue was up 6% over Q2 last year to CAD 268.7 million, and operating income was up 3% to CAD 30 million, for an operating margin of 11.2%.
Business development activity was especially strong in Defense in the second quarter, leading to a Defense book-to-sales ratio of 1.92 times for the quarter and 1.53 times for the last 12 months. Defense backlog at the end of the quarter was CAD 3.6 billion. Finally, in Healthcare, second quarter revenue was CAD 28.3 million, compared to CAD 27.6 million in Q2 last year. Healthcare segment operating income was CAD 2.2 million in the quarter, compared to CAD 2.6 million last year. This represents good progress given our ability to absorb the higher SG&A associated with the expansion of our sales force and the development and launch of our new products, which position us for higher growth. With that, I will ask Marc to discuss the way forward.
Thanks, Sonya. The macro environment remains favorable for CAE, we're on track to deliver on our outlook for the year. We expect to continue winning our fair share of opportunities and to convert them into top and bottom-line growth. In Civil, pilot training demand remains well supported by high rates of commercial passenger traffic and improved aircraft utilization in business aviation. In an environment where airlines are having to find new approaches to meet their pilot staffing requirements, CAE is becoming even more valuable with its comprehensive cadet-to-captain training solutions. On the business development front, we're making good progress to conclude the two new deals in Asia that we announced last quarter. Namely, the new joint venture with Singapore Airlines, which we expect to finalize in the coming months, and the purchase of AirAsia's 50% share of our training joint venture, which should be concluded imminently.
We feel good about CAE's position and prospects, we have a solid opportunities pipeline in Civil from which to grow our share of the large global aviation training market. Our outlook for the year continues to be for Civil to generate low double-digit percentage operating income growth as we earn a greater share of wallet in training and maintain our leadership in simulator sales. In Defense, we've been able to sustain a large pipeline as well. Even though we converted more than a half billion CAD worth of pipeline into orders in Q2, we've already replenished it to over CAD 4 billion of active proposals submitted and pending customer decisions. This is testament to the substantial opportunities we continue to find in an environment of rising defense budgets and a high emphasis on mission readiness.
Momentum is positive for our Defense business, our outlook for mid to high single-digit growth this year remains unchanged. Finally, in Healthcare, we continue to expect to resume growth this year on higher sales from our pipeline and the launch of new products, which will put us on course for long-term double-digit growth. The positive reaction to our new products like CAE Juno and CAE VimedixAR gives credence to our innovation leadership, and we see good opportunity for CAE in this market. The use of simulation for the education and certification of healthcare professionals is being driven by a greater focus on the quality of patient care and a desire for standardized competency-based training. I believe we have the right focus, and I'm confident that the investments that we've been making in products and people in the Healthcare segment will provide long-term value for shareholders.
In summary, we have the benefit of positive tailwinds in each of our three segments: Civil, Defense, and Healthcare. We have significant headroom in large and growing markets that are characterized by a high degree of recurring business. We also have a strong competitive position based on our unique solutions and our global reach. We believe these advantages, together with our deep culture of innovation, give CAE the potential for superior returns over the longer term. Before we open the line to questions, I wanted to really add how very pleased I am that Michael E. Roach has joined the CAE board of directors.
As I'm sure most of you will know, Michael served as President and Chief Executive Officer of CGI from 2006 to 2016, where he led a highly successful growth strategy and enabled the company to become one of the foremost IT and business process services firms in the world. His experience leading a global solutions company such as CGI, with its comprehensive portfolio of services, makes him truly a great addition to CAE's board. With that, I thank you for your attention, we're now ready to answer your questions.
Thank you, Marc. Operator, we'd now be pleased to take questions from analysts and institutional investors.
Thank you. Ladies and gentlemen, if you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a 3-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. If you are using a speakerphone, please lift your handset before entering your request. One moment, please, for the first question. Our first question coming from the line of Kevin Chiang with CIBC. Please proceed with your question.
Hi. Thanks for taking my question. Good afternoon. Maybe just the first one from me on civil margins, a strong first half of the year, a multi-year high. Just wondering how we should be thinking about this trending sequentially into the back half of your fiscal year and maybe any input onto fiscal 2019. When I look back at recent history, it looks like you typically see a one to two point sequential improvement in that civil margin in the back half of the years. Is that something we should expect for this year as well? Would that be a normal sequential trend?
I think I maintain the outlook that we have, which I talked about during the brief. We continue to believe that we will generate low double-digit % operating income growth. I think I would keep it at that. There is variability within that. We do not expect the seasonal trends to change. Activity is high, so I would leave it at that. We have not really got into next year yet, and we will give it some time, but there is good opportunities in front of us.
Okay. Just the last one from me. On healthcare, it sounds like a lot of exciting developments there. I am just wondering, when you look at the investments you have made, both in personnel and in the asset base and product, is there a sense of how much revenue you can generate off of that? Are the investments you have made, is this a CAD 500 million revenue business without any additional investments being made, or is there a sense of how big the pie can be given these investments?
Well, obviously, we haven't gone that far, Kevin, look, I'm excited about the business. I definitely think that this is a double-digit growth business, and we definitely can ramp up the revenue from where we are in the years to come. There's no doubt in my mind. I wouldn't comment about the number you put out there, but we wouldn't be putting the investments we have in product development, R&D, and expanded sales force if we didn't believe that the market is there. We've refocused our strategy this year, as we talked about the tail end of last year, where we're really focusing on the markets that are there today, the existing pool of value. The really existing pool of value in this business is on nursing education.
It's very interesting that there's similar dynamics in this market that we see in the pilot training market where there's a shortage of trained nurses. People across North America specifically are really looking for differentiated solutions to be able to go after that market. Products that we develop, like for example, first and foremost, CAE Juno, are specifically designed to go after that market with a differentiated product where we really haven't been before. Penetrating into that market, which as I mentioned, that's an existing market that exists that's being served today. That in itself fuels our ambitions for the outlook that we've given in the short term and for multi years.
Beyond that, I think that you can see from the margins even that we have in this quarter, as I said before, we still have a, if you like, a headwind of the amount of sales force that we have and the amount of which we've increased, and the amount of R&D that we're spending in this business is not in proportion to the size of the revenue we have today. It's designed to go after the increased revenue. You can well imagine that if we can generate that kind of return with the drag of the SG&A and R&D that we have today, throw a bit more revenue at it, and I think that we'll be quite happy with the SOI performance of this business, that's what we're aiming at.
Thank you for the color.
Thank you.
Thank you. Our next question coming from the line of Fadi Chamoun with BMO Capital Markets. Please proceed with your question.
Thank you. Good afternoon, and thanks for taking my question. First, maybe clarification on the military side. EBIT year-to-date is down 2% and would imply almost 18% or more year-on-year improvement in the back half of the year to sort of put you in this guidance range that you provided. Are you seeing things kind of lift a little bit to the right here, or was kind of all along designed this way? I would suspect at this point you have pretty good visibility into the ramp that you have.
No, Fadi, we do. Look, I did the same math, believe me. You've been following us for a long time, and if you look at our performance specifically, well, CAE as a whole, but more specifically our defense segment, you look at the last three or four years, and I think you will find that H2 second half is always significantly stronger than H1, I don't expect anything different. I expect it to support the outlook that we've said, which gives the numbers that you cited. It's really been driven by the fact that, as I said at the first quarter, there's a number of programs that we've won that it takes us some amount of time to ramp up the revenue for a number of reasons.
One of it is because the first part of the program, you spend a lot of effort on R&D, which you're not booking revenue at the same rate. That's number one. Some of the programs were delayed because we didn't have some of the, if you like, the raw materials to be able to deliver it with parts and data for specifically, which that is now behind us in most part, i.e., supporting our outlook. The fact is as well that some of the orders that we've won this year, although we have a great order intake, some of the orders that will generate revenue in this year came a few months late to our projection. All of this contributes to making the back half a lot higher in terms of SOI contribution.
That's what I expect to happen, and I feel pretty good about that based on, you will have seen, of course, the very high order intake in defense. That, plus the visibility that we have on the execution of programs we have, gives us the confidence to give the outlook.
Great. It's a great color. Thanks. One more, just, on the portfolio simulator you mentioned you acquired. I'm curious to know sort of the rationale for buy versus build and whether this is a commercial portfolio or a mix, and maybe even kind of where are these assets located geographically?
A lot of this, I'll talk about, but let Sonya answer some of it. A lot of this is speed. As you said, there's build versus buy sometimes, and we're always shaping our portfolio of assets and our network. In this case, there was a real opportunistic possibility of purchase of existing capacity in a market where it's pretty hot market for training right now. If we can get our hands on simulators right now at a good value, I can immediately put them to work and ramp them up pretty quick. It's really a consolidation. In actual fact, some of these simulators were already in our training center, so maybe just provide a color on which ones they were, where they were.
Yeah. It's a pretty international buyer in Europe, South America, U.S., and so on. We essentially bought mostly all commercial assets that either already had customers attached to it or that we see client demand and will deploy immediately. It allowed consolidation of operations, existing market capacity, and we see it as a value buy, which is immediately accretive and contributing to our investment criteria for our target return. These type of bolt-on opportunities that we keep an eye out for with accretive returns are things we capitalize on when they're made available.
Okay, great. Just one last clarification. You mentioned working capital should reverse in the back half. You're expecting it to fully reverse or kind of you have some investment you're making in-
Yeah. As I mentioned in my remarks, we would expect a partial reversal. Invested and I think good traction, especially on the collections. We continue to see high deposits on contracts and good inventory management. A good performance on non-cash working cap, and I expect that to continue and expect a partial reversal for the year.
Okay. Thank you.
Yeah.
Thank you. Our next question coming from the line of Konark Gupta with Scotiabank. Please proceed with your questions.
Yes, thank you. Good afternoon. Thank you for taking my question. I guess maybe, Sonya, if I could ask you about the deferral of revenue in Civil that had, I guess, due to the accounting changes and the way you're accounting for the simulators right now. Does it come back in the second half year, or is that going to be more of 2018?
Yeah. There was a couple of things that were headwinds against on the Civil revenues this quarter. One of them was FX, a bit of a headwind in the quarter with the appreciation of the Canadian dollar against most currencies. In our case, USD and the British pound were more significant. For the company as a whole, it had an impact on CAD 11 million on revenue, and CAD 2 million on net income. So that's the first point. It was also impacted by deferral of the accounting for standardized simulators. Now, that impact on revenue was a little bit more than CAD 20 million for this quarter. You'll see that this will continue to, I guess, abate as the ramp-up of the deliveries of these standardized simulators increase.
It's already lower than what we saw last quarter, and I would expect most of this to reverse in the latter half, next 15 months.
Great.
Just to clarify, on the FX side, it's mostly on the translation exposure, not working capital.
Yes. Thank you. That's perfect. Thank you very much. I guess just if I look at the utilization, that seems to have flattened out a little bit here, on a year-over-year basis, if I look at Q1 as well as Q2. Is there room for that to rise a little bit more, or was this purchase that you made of some of these new sims, did that have an impact on it? If you could give some more color on that'll be helpful. Thank you.
Well, as you've heard me say before, utilization is not a perfect metric. Can it move up? Yeah, absolutely. The fact is Practical capacity is 100%. We have a number of training operations that are operating above that at the moment. On an aggregate of 270-something simulators, 70% for a low quarter is not a bad number. I think to your point, it's flat to last year's number. It doesn't tell the whole story, and you see it showing up in the bottom line. We're showing more recurring revenue in Q2, which is driving more yield per simulator and the mix across the various geographies affects that number. It's just not a perfect metric for looking at it quarter-to-quarter, to be very honest with you.
No, I understand that. Sure. Okay. Thank you very much. That's helpful. There is more recurring revenue , I guess. Was there any gains apart from ZFTC in that number there?
Well, there was a contribution from a sale on a simulator to a customer that was included in or accounted for as other gain. You'll see that in the notes to the financial statements. It's been accounted for as a gain, I guess, from accounting perspective, because it came out of our network. We see this as really normal course business of selling the simulators to a client. Whether it's a customized or a really advanced build coming out of inventory or from our network, it really depends on the situation. In this case, what was best suited was something that came out of the network, speed was important, we sold it out of our network, would've been a very normal course sale had it not been coming from our network.
From the accounting perspective, you count that as other gain rather than inventory and revenue. I would consider that a normal course sale.
Okay, got it. Thank you very much. Is it possible to give me the numbers, Sonya?
A little over CAD 4 million, I believe.
Okay. Thank you very much.
Thank you. Our next question coming from the line of Benoit Poirier with Desjardins Capital Markets. Please proceed with your question.
Good afternoon. My first question is related to the agreement that you signed with the Singapore Airlines and AirAsia. I just want to make sure that we have a good view of the most important numbers. I was wondering if you could provide more details about the cash outflow that will be impacted in Q3, and also maybe a look about how many simulators we should expect to be joined in your fleet, and if it will totally replace the profitability lost by the JV that you just divested. Thanks.
Sonya.
In terms of the capital for these two deals, on the AirAsia side, when we signed the transaction, we made public the price, which is about $90 million USD. That's cash outflow when we sign the transaction. On the Singapore side, the capital contribution for each partner is about $20 million-$25 million USD, but that's going to be in kind and not cash. In terms of the contribution for our additional share of AirAsia, well, like we said last time, it's going to be immediately accretive, and on a run rate perspective, on an annual run rate perspective, yes, we would expect it to offset the loss contribution from the ZFTC.
Okay. Perfect. You were talking about your other bolt-on opportunity that you foresee in other countries. I'm just wondering about if you could give some color, Sonya, about the size of those opportunities, whether it's similar to AirAsia, Singapore, or maybe even a larger scale.
Well, like we said in the past, when we look at M&A, we're looking for programs and contracts, and major client outsourcings. That's one of the reasons that we keep some powder dry in the financial flexibility should there be some large outsourcing opportunities that require a bit more capital, we're ready to do so. In the meantime, obviously, if there's some opportunistic deals out there like this portfolio acquisition that makes sense from an operational and return perspective, we'll capitalize on those.
Okay. Am I right to say that you want to keep some flexibility as you would foresee something in the next, let's say, 12 months? Do you see any other cash deployment opportunities eventually given the strength of your balance sheet right now?
Well, what I would say is we're very much aligned with our capital allocation priorities, really continue to invest in growth, that's mainly organic. If there are non-organic opportunities, we'll look at them and whether they're outsourcings and so on. We continue to work a very strong pipeline of opportunities, we don't necessarily have, I think plans for anything large and imminently, no.
Okay, perfect. Thank you very much.
Thank you. Our next question coming from the line of Cameron Doerksen with National Bank Financial. Please proceed with your question.
Thanks. Good afternoon. I guess a question on defense. You talked about the pipeline of new bid opportunities or new submitted bids that's now over CAD 4 billion, which I think is up, as you mentioned, quite significantly, even though you've won a bunch of new business in there. Can you maybe just talk a bit about the sort of mix within that CAD 4 billion plus of bids? Is it still sort of skewed more towards training? Maybe geographically, if you could comment on where you're seeing the opportunities.
Well, I don't have offhand, if you're looking at all the opportunities, what proportion is services versus product. I think you might expect that what we're seeing today is what will continue. We are playing to our strength, which is total solutions, and involving training and products, including supplying pilots and the full training gamut. That's a differentiator, offering us very much what the governments around the world are looking for these days. I do think the opportunity is across the globe. We've seen it with increased defense spending in the U.S. with a, as I said in my notes, very strong focus on readiness. There are shortages of pilots across the services. On the existing programs that we have, we see very high levels of activity towards pilot training, specifically.
In Europe, we're seeing increased spending as a result of people ramping up their spending, both to more closely meet their NATO requirements and to basically bolster their defenses against imminent threats. I said it before, resurgent China, new threats that people are looking at in Southeast Asia, and continued insurgent activity like we see in the Middle East. It's coming from across the world. As we said before, we like to have the perfect storm in defense spending right now. We see opportunities everywhere. It's not confined to one specific geography.
Okay. Good. Maybe the second question here, just maybe get your thoughts on the announcement by Bombardier and Airbus about Airbus being involved in the CSeries program. I guess from CAE's perspective, you've been a partner with Bombardier on the CSeries, and obviously Airbus has its own, I guess, forays into training as well. I'm just wondering how you see the longer-term future on that program playing out.
Well, I think you've heard me say before, I think the CSeries is a great aircraft, and it will be successful in the market with the deal that Bombardier has done with Airbus. I think that secures the future of the aircraft, and I think it will prosper, and I think as you said, we've already sold a number of simulators to airlines that have bought the CSeries already, and we have a venture to provide the training for the CSeries aircraft for those customers that will basically go to a service training. We're well-positioned, and I think the airplane will do well, and I think our fortunes will go along with it.
Okay. Very good. Thanks very much.
Thank you.
Thank you. Our next question coming from the line of Ronald Epstein with Bank of America Merrill Lynch. Please proceed with your question.
Yeah, good afternoon, guys.
Good afternoon.
Hi, Ron.
Hi.
Changing gears a little bit to business jets. What have you guys seen in terms of business jet training? Is it picking up? Has it slowed down? Is it holding steady? If you can give us any color on that.
I think it ebbs and flows. Overall, it's in line with utilization very much because training, we sell courses. As you know, it's a regulated market. If airplanes are flying, pilots have got to train. We've been able to actually increase share in the business aviation market. So we've done well that way in a flat market before. I am seeing some increased levels of activity driven by utilization. I wouldn't say they're very large numbers, but I definitely am seeing an increased level of activity. I think you see that in the numbers on aircraft utilization, business aircraft utilization, both in Europe and in North America.
Okay, great. That's all. Thank you.
Thanks, Ron.
Thank you. Our next question coming from the line of Tim James with TD Securities. Please proceed with your question.
Thanks. Good afternoon. Just wondering, Marc, if you could discuss the factors that cause CAE, or CAE thinks about going forward to enter JVs for training purposes with new partners versus going after a market independently or on its own.
Well, I think the factors are totally customer driven. It really goes along with our vision. Our vision is to be the training partner of choice for our customers. We will enter into conversations with existing customers or prospective customers in a view of becoming their trusted partner. I'll give you an example. I think one that's case in point I've used in the past, look at AirAsia. AirAsia started business 15 years ago. We sold them their first sim on their first aircraft, a used one, and a couple of years later, about 2006, we sold them two used simulators, and we entered into a dialogue with them. Again, it's all based on dialogue, is to say, "Hey, we have an expertise at architecting training centers," because we do a lot.
We have an expertise in being able to run training centers in terms of efficient scheduling, effective maintaining of the simulators themselves. Could we do that for you as a contracted service? We did. A few years later, back in about 2011, we said, "Hey." They were growing. They needed more simulators. That's a capital outlay for them. We say, "Hey, can we help you with there? Can we partner together in a joint venture where we will contribute the existing simulators?" That forms a natural joint venture. We're contributing new simulators. They don't have any capital outlay, and they participate by being able, for us, through our global sales force, to now sell the excess capacity on those sims.
They get a benefit of lower cost, they get a benefit of the fact that now their training costs become variable, and they get the benefit of when they don't use the training, we sell that excess capacity, the joint venture does, on an open market. As well, their pilots now become customers, so there's an intangible aspect of that. As we've seen it in AirAsia, specifically, we have the situation we had with AirAsia, where the CEO says, "Hey, now you're running it very effectively for me.
Why don't we just get into an agreement where I'll give you 20 years guaranteed training for the airline and all its subsidiaries in exchange for a 20-year contract, and I can basically capitalize that value that's been accumulated in the joint venture for ourselves?" That's one example, but if we could have gone straight to the end, would we have done it? Sure. Absolutely. It really depends of the dialogue. We focus with the airline, how can we best participate? Depending on the airline, we'll have different solutions. I don't know if that answers your question, but that's really what we go through.
Yeah. No, that's helpful. I'm just thinking about in contrast with the divestiture of the 49% interest. Obviously, a different market dynamic. I'm just wondering if you can elaborate on sort of the differences there versus what you've experienced with AirAsia and what's unique to those two markets.
Well, I think we talked about it at the last call. I mean, the big difference on that one is, first of all, that joint venture was the first one that CAE did before we were ever into training. Long before we were into training, the first one. We do things differently now. The big one was that it was all dry training. We don't do wet training in that, at least for the joint venture partner. Basically, our interests were no longer aligned. That's where we had a natural point at which we could reevaluate our relationship, and we did in a win-win manner, and we're going to continue to be able to serve the third-party market through the simulators at that training center.
As I said, look, through that relationship, we could not compete on training anywhere in the China market, and China is a very big market. Obviously, we want to be able to serve the market. I think that's all of the reasons we went that way. I certainly would not say that that particular contract is indicative of the market. I think it's a unique situation, and what I see in front of us, with a number of opportunities, is that I think there's more opportunities for us to continue to take share in outsourced training.
Okay. Yeah, that's very helpful. Thank you. Just one quick question. I'm just wondering about the CAD 150 million in capital expenditure plans for fiscal 2018. Is that a good kind of assumption, Sonya, to carry going forward for a number of years as now a normalized run rate? I realize if new opportunities come up, it could move the dial on that number. Is that a good baseline number to think about?
Well, that's a range of CAD 150 million for this year, and I think that's the right view for this year. We continue to reassess, and it's really led by market-led opportunities that are out there to deploy accretive capital and support the growth, right? We're not necessarily giving guidance going forward, and I know that we often look at the CapEx from an absolute value number, but if we approach it from a capital intensity perspective, CapEx, it continues to decrease whether as a proportion of revenue or cash from ops. I would start to look at it, I think, from that perspective. To your question on the outer years, I think it'll be market-led, and we'll give guidance in the next year.
Okay. Thank you.
I think we're pretty happy with the accretiveness of the capital that we deployed in recent years, and that is the big decision that we take on with regards to any deployment of CapEx.
Operator, I think we'll have time for perhaps one more question from the investment community, if there is one more.
Perfect. Thank you.
We'll open it up to members of the media.
Thank you. Our last question from the financial analyst is coming from the line of Chris Murray with AltaCorp Capital. Please proceed with your question.
Thanks. Marc, I'm just kind of curious your thoughts around some of the issues we seem to be seeing with some of the airlines in the civil space with, we're starting to see some schedule disruptions. We're starting to see wage demands, things like that moving higher. We've been going back and forth for a few years talking about a pilot shortage. Some commentators have also suggested it's more of a compensation issue. I guess what I'm trying to understand, especially with your folks in your training centers, how are you seeing Sort of the first wave of pilots. I'm thinking like ab initio training and things like that. Are you seeing changes in demand which is drawing more pilots into the pilot community, or is it still staying fairly static?
There's no doubt. We'll preface it by saying we're the largest organization in ab initio pilot training in the world, we have a pretty good view on it, some pretty large schools that we operate. Personally, I'm having a lot of conversations with airlines with regards to pilots. There's absolutely no doubt. I'm always worried about calling a shortage. It's not for me to call it a shortage.
One thing we can say, though, is, I don't know if you've seen it, but we issued our first yearly pilot demand forecast this summer, and what our numbers show, and it's based on a pretty deep analysis of the situation from our unique perspective of training the majority of airlines around the world or supplying them simulators or supplying them pilots, either through our ab initio business or our Parc Aviation business, where we actually supply trained captains to airlines. Our numbers show that for the next 10 years, the industry is going to need 255,000 first officers just to meet the training demand. There's no doubt that things have to ramp up. What we're seeing is we're seeing demand for ab initio cadets from airlines. We haven't seen it before.
We're definitely seeing that the feeder airlines are scrambling to be able to meet their pilot demands because a lot of them are being driven by increased flying at the main lines. There's no doubt there's a higher level of activity. I think there are moves across in the industry to attract more people into the pilot profession because it's a good profession, and it will be for years to come.
Are you seeing a higher number of applicants at the front end? Is this sort of going to be a push or a pull in terms of the demand into the network?
I would say, I'm not sure that I could tell you that we've seen a more bottoms-up demand coming from more youngsters wanting to get into pilots profession so far, at least that I've seen. Definitely, when airlines come out with specific programs, they're attracting a huge amount of applicants. We designed a program for JetBlue, Gateway Select program. Look, I forget the exact numbers, but they opened up just a few slots. I've got to get Andrew to give me the exact numbers, but they had a demand that way outweighed the number of slots they have, and they think that's more to come. I think what we're going to see is through a combination of the industry, the airlines themselves, we're going to see people putting innovative schemes that will attract people to the profession.
Okay, that's helpful. Just one last question for me. Thinking about NCIB and capital returns. You're fairly active in the quarter. Should we be thinking that path will probably continue? Any early thoughts around anything around the dividend at this point?
Go ahead.
Yeah. Well, maybe I'll let Sonya talk about it. Look, we've never been explicit about any very explicit policies on dividends. You've seen our behavior, wouldn't expect our behavior to change. You see how we are in terms of payout ratio, in terms of yield, we're pretty much in the industry. We've raised it seven times in the last seven years, I think we've been pretty consistent on what we're doing. Again, I like consistency. In terms of the NCIB, I think the same would apply. Again, what we've said is we put it in place, we use it at the moment, and we've got authority with the board to basically use it to neutralize options being exercised. That's what we're doing. Look, I can't say anything in the future, but that's our current policy. If you want to add anything, Sonya.
No, absolutely. The goal right now with the NCIB is really to offset dilution from options and the dividend reinvestment plan. Really, as part of our capital allocation, we look at returns to shareholders, we balance that with continued investment in growth and maintaining a healthy balance sheet. Really, it's a balance, like Marc said, steady as she goes. Yeah.
All right. Thank you.
Thank you.
Operator, it looks like we have about 10 minutes remaining. I'll ask that you please open the line now to members of the media.
Thank you. Ladies and gentlemen, as a reminder, to register for a question, please press the one followed by the four. One moment, please. Our first question coming from the line, Julien Arsenault with La Presse Canadienne. Please proceed with your question.
Moins faire qu'Airbus pour occuper une place plus grande là-dedans ou au contraire, vous pourriez en profiter ?
Je ne pense pas que c'est un enjeu en ce moment. Ce n'est pas un enjeu qu'on voit venir. On a une entente avec Bombardier sur le C Series, aussi qu'on vend les simulateurs aux compagnies aériennes. Tous les simulateurs qui ont été vendus jusqu'à date ont été vendus par nous. Dans l'entraînement, on a une coentreprise avec Lufthansa, qui est le client de lancement de l'avion, pour faire l'entraînement des pilotes pour les compagnies aériennes qui n'achètent pas les simulateurs, mais qui font leur entraînement dans des centres comme le nôtre. On a déployé des simulateurs dans notre coentreprise. Personnellement, mon hypothèse, c'est que ça va continuer. On n'a aucune contre-indication et je ne m'attendrais pas à en avoir.
Au contraire, je pense que l'entente va être très positive parce que je suis totalement en accord avec les propos de Bombardier selon lesquels ça assure le succès de l'avion pour la pérennité. C'est un très bon avion et je pense qu'on va en vendre beaucoup. S'il en vend beaucoup, ça va être bon pour CAE. Dans le marché, si on prend toutes les compagnies aériennes, c'est-à-dire tous les types d'avions commerciaux, on a typiquement à peu près 70 % du marché dans la vente de simulateurs et on est le plus gros joueur, de loin, dans l'entraînement des pilotes des compagnies aériennes qui font leur entraînement dans des centres comme les nôtres. On a 70 centres aux quatre coins de la planète. Je m'attendrais qu'on va continuer à avoir le même succès en proportion sur le C Series.
Ok, merci. Toujours avec Bombardier, vous êtes un acteur important de l'industrie aérospatiale au Québec, au Canada. Dans le cadre du litige avec Boeing, Boeing fait affaire avec beaucoup de compagnies canadiennes. Est-ce que vous pensez que le climat pourrait inciter Boeing à se refermer un peu sur elle-même ou à se retirer un peu du Canada en raison de la dispute commerciale et moins faire affaire avec d'autres compagnies de l'aérospatiale ? Peut-être un peu voir, à votre avis, s'il pourrait y avoir des dommages collatéraux de cette dispute-là.
Vous me demandez de commenter pour Boeing, je ne serais vraiment pas en mesure de commenter pour eux. Il faudrait vraiment poser la question. Je n'aurais pas une opinion là-dessus de ce point de vue-là.
Peut-être en terminant, je laisserai la place à mes collègues ensuite. Vous avez parlé de coentreprise, de celle avec AirAsia. Est-ce que ça pourrait être un modèle que vous pourriez privilégier dans le futur pour aller chercher davantage de parts de marché dans la formation par rapport à la vente seule ? Je veux juste faire le suivi avec la question d'un analyste à cet effet.
Oui, certainement. Pour moi, c'est une belle conclusion. Si vous écoutez la question, j'ai répondu en anglais, on avait une coentreprise avec eux, 50/50. On a plusieurs de ces coentreprises-là. On en voit d'autres dans le futur. On en a d'autres qui ont différentes proportions, comme exemple avec Iberia, qui est une grosse compagnie aérienne, on a 80%. Est-ce qu'on peut voir d'autres scénarios où on prend 100% ? Absolument. Parce que les compagnies aériennes nous le disent. AirAsia, je le répétais, eux voient la valeur qui a été créée par la business, la coentreprise. Eux autres peuvent capturer cette valeur-là ou la mettre contre la compagnie aérienne. En revanche, nous, on a un contrat d'entraînement qui est notre business pour des années à venir, qui sécurise notre flux de revenus et de profits dans le futur.
Définitivement que je vois d'autres possibilités dans le futur pour ce modèle de business-là.
[Foreign language] Est-ce que ça peut être plus facile d'y aller comme ça que d'y aller indépendamment ? C'est ça que j'essayais de voir, s'il y avait une des deux options qui pourrait être privilégiée davantage. [Foreign language]
[Foreign language] Non. Comme je disais en anglais, on ne regarde pas vraiment ces transactions-là avec ce point de vue-là. Nous, notre point de vue, c'est d'avoir une conversation avec la compagnie aérienne et de vraiment regarder c'est quoi les facteurs qui vont influencer leur prise de décision. S'ils sont assez confiants dans leur flux de commandes d'avions, dans leur flux de pilotes, est-ce qu'ils sont confiants de vouloir complètement faire l'impartition de tout ça ? Nous, on peut le faire. On a un bon capital pour pouvoir le faire. Aucune inquiétude de ce point de vue-là. Souvent, les compagnies aériennes vont vouloir avoir un pourcentage de la business parce qu'ils veulent garder le droit de regard sur la business. On va gagner leur confiance petit à petit. [Foreign language]
[Foreign language] Ce que je vous dirais, c'est que l'ayant fait avec des compagnies dans les dernières années, comme exemple Japan Airlines, où on l'a fait aussi, qu'on a un contrat maintenant avec Singapore Airlines, des grosses compagnies qui démontrent que faire affaire avec CAE pour son entraînement de pilote, c'est une bonne proposition. Je pense qu'on va voir d'autres possibilités pour des compagnies aériennes qui vont décider d'y aller directement avec un contrat d'impartition complet, sans passer par nécessairement une coentreprise. Pour nous, une coentreprise, c'est un bon modèle d'affaires et on gère bien. [Foreign language]
Merci.
Merci.
Merci. Mr Arnovitz, there are no further questions from the media at this time. I will now turn the call back to you.
Thank you operator for your handling of the call today. I want to thank all participants, institutional investors, analysts, and members of the media for joining us for CAE's quarterly conference call. I would like to remind you as well that a transcript of today's call can be found on CAE's website, as well as a 48-hour playback. Thank you very much.
Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day.