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CAE Inc. (NYSE:CAE)
Q4 2018 Earnings Conference Call
May 25, 2018, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentleman. 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.

Andrew Arnovitz -- Vice President, Strategy and Investor Relations

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 subjects 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 risk factors and assumptions that may affect future results is today's annual MD&A, available on our corporate website, and in our filings with the Canadian Securities Administrators on SEDAR and the U.S. Securities and Exchange Commission on EDGAR.

On the call with me this afternoon are Marc Parent, CAE's President and Chief Executive Officer, and Sonya Branco, our Chief Financial Officer. After remarks from Marc and Sonya, we will take questions from financial analysts and institutional investors. Following the conclusion of that Q&A period, we'll open the 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 and 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 FY2018 Presentation" at www.cae.com/investors.

Let me now turn the call over to Marc.

Marc Parent -- President and Chief Executive Officer

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 Sonya 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 fourth quarter 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 $3.9 billion order intake for the year and a record $7.8 billion 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 million worth of orders during the quarter for a 1.2 times book-to-sales ratio, including long-term trainings services in Europe and the Americas and the sale of five more full-flight simulators. For the year, civil booked a record $2.3 billion in orders for a 1.44 book-to-sales ratio, giving it a record backlog of $4 billion, which is 21% higher than last year. This is a good indication of the considerable momentum we've gained just in the last year toward 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 Air Asia, 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 Elit'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 million, representing a 1.5 times book-to-sales ratio. Notable wins included a training systems integration contract for a comprehensive NH90 helicopter training solution for the Qatar Emiri Air Force and an S-70B Seahawk helicopter training system for the Brazilian Navy 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-60R/S Tech Refresh and Procurement of Simulators programs.

For the year, defense orders included a contract extension to continue providing air crew training services to the UK Ministry of Defence at CAE's Medium Support Helicopter Air Crew 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 $1.4 billion at a 1.3 times book-to-sales ratio and our defense backlog reached a healthy $3.9 billion.

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. CAE Juno, our clinical skills manikin for nursing, was very well-received by customers and we also introduced LucinaAR, the world's first augmented reality childbirth 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 life-saving AHA courses in certain markets.

We also levered 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 Sonya, who will provide a detailed look at our financial performance. I'll return at the end of the call to comment on the outlook. Sonya?

Sonya Branco -- Vice President, Finance and Chief Financial Officer

Thank you, Marc, and good afternoon, everyone. Consolidated revenue for the fourth quarter was up 6% to $780.7 million and quarterly net income was $100.1 million or $0.37 per share, which is up 19% compared to $0.31 from the fourth quarter last year before specific items. For the year, consolidated revenue was up 5% to $2.8 billion and annual net income was $347 million or $1.29 per share. Excluding the impacts of the income tax recovery related to the U.S. tax reform and net gains from strategic transactions involving our Asian joint ventures, net income would have been $297.3 million or $1.11 per share. This compares to net income last year of $278.4 million or $1.03 per share before specific items. On this basis, annual EPS was up 8%.

We generated $117.3 million of free cash flow in the quarter and $288.9 million for the year, which represents an annual cash conversion rate of 97%, excluding the impacts 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 $57.4 million in the fourth quarter and $173.9 million 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 third parties.

In line with the customer-driven, accretive investment opportunities that we see in fiscal 2019, we expect to deploy about $200 million 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 five years have typically ramped up within about 24 months to deliver accretive incremental returns and free cash flow.

In other uses of cash, it included a distribution of $89.9 million in dividends for the year. In addition, we repurchased and cancelled approximately 2.1 million common shares in the DNCIB program during the year for another $44.8 million. In all, between the dividends and share buybacks, CAE returned $134.7 million 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% from 11.2% last year. As well, CAE's financial position became even stronger, with net debt of $649.4 million at the end of March for a net debt to total capital ratio of 21.5%. This is down from $750.7 million, or 26.5% of total capital, at the end of last year.

Income taxes were $13.7 million this quarter, for an effective tax rate of 12%. This compares to 17% in the fourth quarter 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 companies. 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 related to our Asian joint ventures, the effective tax rate would have been 21%.

Now turning to our segmented performance. In civil, fourth quarter revenue was up 9% year-over-year to $455.2 million and operating income was up 14% to $95.7 million, for a margin of 21%. For the year, civil revenue was up 5% to $1.63 billion and operating income, before the net gains on the strategic transactions related to our Asian joint ventures, was up 12% to $306.2 million, for an annual margin of 18.8%.

In defense, fourth quarter revenue of $290.4 million was up 3% over Q4 last year, while operating income was up 17% to $38.7 million, for an operating margin of 13.3%. For the year, defense revenue was up 5% to $1.09 billion and operating income was up 6% to $127.7 million, representing a margin of 11.8%.

And in healthcare, fourth quarter revenue was $35.1 million, up from $34.2 million in Q4 last year. Healthcare segment operating income was $6.7 million, or 19.1% of revenue in the quarter, compared to $4.1 million, or 12% of revenue, in Q4 of last year. For the year, healthcare revenue was $115.2 million, up from $110.7 million, and segment operating income was $8.8 million, up from $6.6 million last year.

Before I turn the call back over to Marc, I'll say a few words about the new accounting standard, IFRS 15, relating to revenue from contracts with customers, which we adopted as of April 1, 2018. This standard changes the way that we recognize revenues for certain customer contracts, impacting mainly the timing of revenue recognized for our 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 on profit recognition, which may result in some quarterly volatility, but there will be no change to milestone payments and cash flow from contracts.

The impacts of IFRS 15 on our fiscal 2018 results can be found in Note 2 of our annual consolidated financial statements and in our Supplemental Q4 FY2018 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 Marc to discuss the way forward.

Marc Parent -- President and Chief Executive Officer

Thanks, Sonya. CAE continues to benefit from steady secular tailwinds in each of our three 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 CAE 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 the 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 growth 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 commercialized 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 first 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. CAE 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 big pipeline into orders. We believe CAE is well-positioned to continue growing its share as a training systems integrator inside of a $17 billion market.

Current bids and proposals pending customer decisions is currently as high as ever, at over $4.5 billion. Last year, we continued to demonstrate our ability to bid and win as a top-tier training systems integrator and we're already off to a solid start in fiscal 2019 with the recent win of a five-year, $150 million contract to support U.S. Navy pilot training. We'll providing instructors at five 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 turboprop 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 benefit from 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 CAE's share in relatively large segments like nursing. We maintain a positive view of CAE 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 has the benefit of an increasingly recurring base of business and significant headroom for long-term profitable growth inside markets that are themselves experiencing secular tailwinds. Our strategy in 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, thank you for your attention and we're now ready to answer your questions.

Andrew Arnovitz -- Vice President, Strategy and Investor Relations

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

Questions and Answers:

Operator

Certainly. Thank you. And, ladies and gentlemen, once again, for the analysts, if you'd like to register a question, please press "14" on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered or you'd like to withdraw your registration, press "13". If you're using a speakerphone, please lift your handset before entering your request. Once again, it is "14" to register your question.

And we'll get to our first question on the line, from the line of Fadi Chamoun, BMO Capital Markets. Please go right ahead.

Fadi Chamoun -- BMO Capital Markets -- Analyst

Thank you. Good afternoon. And congratulations on the good results.

Marc Parent -- President and Chief Executive Officer

Thank you.

Fadi Chamoun -- BMO Capital Markets -- Analyst

I wanted to ask first on the civil side, the guidance, is this off of the restated EBIT base of $311 million?

Sonya Branco -- Vice President, Finance and Chief Financial Officer

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 FY2018 numbers.

Fadi Chamoun -- BMO Capital Markets -- Analyst

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 of 5%, operating income growth was 12%, almost twice the conversion we've seen in the prior three 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 20%, 21%? What's the possibility on the operating margin in this segment?

Marc Parent -- President and Chief Executive Officer

Well, a lot of it comes from the utilization. I think, increased utilization, Fadi, that does it. You look at, for example, 82% 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 extra yield provided by throwing more revenue off the same assets at 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. So utilization comes from business aircraft rather than commercial. And even in commercial, there are different parts of the world. So there's a lot of things at play that explains that. Most of them positives here, as you've seen.

And, yeah, for the future, I think we just basically take to 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 when you look at return on capital employed, of course.

Fadi Chamoun -- BMO Capital Markets -- Analyst

Okay. Just one quick one on the CapEx. 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?

Marc Parent -- President and Chief Executive Officer

Well, I mean, our priorities don't change, which is growth is always No. 1. And your answer to do I see more opportunities is yes. And accretive opportunities. And we look at them specifically on that and I think our results on the return on capital employed growth proves that we're focusing on that in an accretive nature. And, yes, we see more opportunities out there. I think I've seen a lot before but I'm seeing more of an appetite for airlines, specifically, to want to turnover 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. Right? We can't predict exactly when we might close them but, 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 there's never any guarantees, but you've seen our pattern on distribution, on cash returns to our shareholders now with the dividends and the buybacks that we've done. I don't see any reason to expect that we would change that materially but we'll see. We'll see. Depending on how successful we are on deploying that cash, 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.

Sonya Branco -- Vice President, Finance and Chief Financial Officer

And just if may add, Fadi, so like Marc 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 flow, 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 returns to shareholders. And, as Marc mentioned, pretty good track record there with seven years of dividend increase and some NCIB in the year and $135 million of cash returned to the shareholders this year, which is a 10% increase year-over-year.

Fadi Chamoun -- BMO Capital Markets -- Analyst

Okay. Thank you.

Operator

Thank you very much. We'll get to our next question on the line. It's from the line of Kevin Chiang with CIBC. Please go right ahead with your question.

Kevin Chiang -- CIBC -- Analyst

Hi. Thanks for taking my question and congrats on a good quarter there and a good end to the year. Maybe just a follow-on on Fadi's question there around where margins can go. You spoke about the opportunity to improve yields, shifting from dry hours to wet hours. What's your utilization at 82%? Are you able 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?

Marc Parent -- President and Chief Executive Officer

Well, I think it does. I mean, 82% is high. Can it get higher? I guess, theoretically, yes. Because 100% -- we define 100% depending on the market, like 6,000 hours 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 reasonably 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 you were saying just in your question, the mix of customers. For example, business aviation. In the past, if we go back, business aviation 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 the financial crisis of 2008. So if we see business aircraft coming back in any material way, then that could have a quite significant benefit to not necessarily margin -- margin growth, yes, but operating income growth.

Kevin Chiang -- CIBC -- Analyst

That's helpful. And maybe just a quick one from me on healthcare. I noted in some of your disclosure you talked about a lower R&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 12 to 18 months?

Marc Parent -- President and Chief Executive Officer

Well, 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 the largest pool of value today, that's being served today, like, for example, nursing. So we've launched new products, CAE Juno specifically. The market receptivity to that product has been very good. Your question about R&D, no, we haven't our foot off the pedal. We continue to invest both there and in SG&A, mainly sales force marketing, to continue to grow the business. But with top-line growth, bottom line growth will come because, as I've said in the past, the margin of the products that we have is very good, I would say. So we have room to do both top and bottom and that's our expectation.

Sonya Branco -- Vice President, Finance and Chief Financial Officer

And to add to that. So the R&D expense did go down a little bit this year, but really it's a reflection of the cycle we were in in some of our product development. So you'll note that the capitalized R&D was higher because we were in development mode because we did launch quite a few products this year. So that R&D expense did go down but what I would argue is that it got replaced with added investment in our product launch expenses, marketing, and also on the SG&A in our sales force to launch these new products.

Kevin Chiang -- CIBC -- Analyst

That's very helpful. Thank you for the color.

Operator

Thank you very much. We'll get to our next question on the line. It's from the line of Cameron Doerksen with National Bank Financial. Please go right ahead.

Cameron Doerksen -- National Bank Financial -- Analyst

Yeah, thanks. Good afternoon. Just to follow up on Kevin's question on 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 million, because obviously revenue is going to continue to track higher and I want to get a sense of where the margins can do.

Sonya Branco -- Vice President, Finance and Chief Financial Officer

Yeah. So there was a benefit in the quarter from a kind of one-time lower royalty expense. So there was a bit of a benefit in the quarter but over the year, as I had just mentioned, we did invest a lot of one-time costs in SG&A and product launches. So over the year the benefit is basically neutralized. So the way that I would look at it is over the annual year, the growth in revenue and the growth in SOI, as 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&A. but as we grow volume, we should see that dropping to the bottom line and to the SOI.

Cameron Doerksen -- National Bank Financial -- Analyst

Okay. Just a quick question on defense. I mean, obviously there's a terrific pipeline of opportunities there for you. I'm just wondering if you can just maybe talk about any potential sort of larger, longer term training 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?

Marc Parent -- President and Chief Executive Officer

We have a number that will come out over the next few months. When I saw the next few months, a year and a half approximately. That are specific coming up, I can think of, and I have to look in detail here, but I think the KC-135 contract is coming up over the next couple of years. Also the training that we do for the unmanned air vehicles, the Predator and the Reaper, that's up for rebid, I think, in the next year. The next few months, I believe. I'm just consulting my notes as we go here. But actually I'm just told that KC-135 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 as the incumbent on those programs 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, I'll just pick one, the C-17 in the United States is coming up. And we, as I said, we have about $4.5 billion of active bids that have been submitted and we're waiting for decisions on those. If you take all of that, it's basically the nucleus of the outlook that we have for defense this year.

Cameron Doerksen -- National Bank Financial -- Analyst

Okay. That's great information. Thanks very much.

Operator

Thank you very much. We'll get to our next question on the line. It's from the line of Turan Quettawala with Scotiabank. Please go right ahead.

Turan Quettawala -- Scotiabank -- Analyst

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, Sonya, to divvy those up between the segments?

Sonya Branco -- Vice President, Finance and Chief Financial Officer

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 from our network to a customer. And we regularly meet customer needs, either through new simulators, 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.

Turan Quettawala -- Scotiabank -- Analyst

That's helpful. Thank you. No, I understand that. I was just trying to figure out the segment numbers there. That's helpful. Thank you. And I guess maybe just one more question for me here in terms of, as you look at the outlook here, and we look at all of the segments, things seem to be doing really well on all the segments for the most part. Marc, is there something that you're worried about in terms of a risk? What do you think could go wrong here potentially?

Marc Parent -- President and Chief Executive Officer

Well, I mean, obviously if I'm giving you the outlook for a public company, I'm pretty confident in the outlook obviously. But there's always risks. There is. And the risks are the usual ones of competition. And, for example, I was just talking on the previous question with Cameron on the defense bids. I mean, yeah, we have active bids but although we have a very large backlog, it is still a not insignificant portion of the SOI that we'll have to generate this year that's got to come from the wins we will win this year. So clearly we have to win them. But having said that, talking out of both sides of my mouth, we feel like we have backup plans to make sure we do. So that's part of the risk, I would say.

Otherwise there's competition in civil as well. A lot of players 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.

Turan Quettawala -- Scotiabank -- Analyst

That's really helpful. Thank you very much. Congratulations.

Marc Parent -- President and Chief Executive Officer

Thank you.

Operator

And we'll proceed to our next question on the line. It's from the line of Benoit Poirier with Desjardins Capital Markets. Please go right ahead.

Benoit Poirier -- Desjardins Capital Markets -- Analyst

Good afternoon and congrats for the good quarter. Just to come back on the bidding proposal. I mean, it's been up from $4 billion to $4.5 billion. Could you talk a little bit about the mix inside? I just want to get a better understanding of the mix between equipment and services. I know the 11.8% EBIT margin you achieved in fiscal '18.

Marc Parent -- President and Chief Executive Officer

I don't have the exact -- and actually the number, we said $4.5 billion, but it's more like $4.7 billion within the bidding business there, in terms of the bids we have out there. Look, I can't really tell you offhand with precision right now. But I may be able to get back to you on the -- and, in fact, I really don't know if we ever put that out, the split between products and services. Do we?

Andrew Arnovitz -- Vice President, Strategy and Investor Relations

Yeah. I think, Benoit, you should assume that it's gonna profile pretty much like the other TSI deals that we have brought in as examples, where there is usually a long-tail services component. And it's one of the reasons why our guidance, our outlook continues to be based on operating income dollar growth as opposed to margins specifically because, depending on how these programs flow through, product service mix will be as much or more of a determinant of margin percentage as 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.

Benoit Poirier -- Desjardins Capital Markets -- Analyst

I see. Okay. That's interesting. And when we look at civil, you finished the year with 50 orders and you're off to a good start. So any thoughts about what type of numbers we could expect for the full year in fiscal '19, Marc?

Marc Parent -- President and Chief Executive Officer

At this point, I would say, look, precise being my answer, I would say the dynamics haven't changed. It's really the amount -- we expect to continue to win and to be a leader in this market. I would say 60% to 70% market share. We do like to make money when we sell these so that's why we're saying 60% to 70%. But the catalyst here, as you know, is really the production rates at the OEMs. And the production rates at the OEMs are still very high and they're not gonna 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 multi-year purchasing. Like some of the ones we won last year are sims that people are ordering that are gonna cover them for the next three years. So depending on the mix of customers we have, it really depends are they buying for the next couple of years or are they buying for the next ten. So that's what really it will depend on. 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.

Benoit Poirier -- Desjardins Capital Markets -- Analyst

Okay. Okay. Perfect. And, lastly, when we look at the U.S., it seems that there is pretty nice opportunities in 2018, looking at the TX, the MQ-25. Boeing also with the MoM. So I was wondering whether you could talk a little bit on CAE's position on those opportunities and whether it's part of the $4.7 billion proposal out there that you talked about.

Marc Parent -- President and Chief Executive Officer

Well, I don't want to really get into too much detail of what's in that because some of it is confidential. That we don't actually but a bid on in all cases. I would tell you it's very international. It's not only the United States, although the pipeline of opportunities in the United States obviously is very good because the U.S. is the biggest defense market in the world and the budget's just been announced and it's the largest budget they've had. So that's all very good. Another noteworthy thing is, I think, CAE is now able to bid on top secret programs, which we haven't been in the past, as a result of us recently obtaining what's called a 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'll be good for us.

Benoit Poirier -- Desjardins Capital Markets -- Analyst

Okay. And, lastly, in terms of financial leverage, obviously you finished the year on a strong note. The focus obviously is 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 '19? Or any opportunities to, let's say, deploy capital outside the $200 million you're looking to invest in fiscal '19?

Marc Parent -- President and Chief Executive Officer

Well, I'll let Sonya provide a more detailed answer on the leverage but, look, we see growth. The $200 million is based on our assessments of the opportunities 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 can see other things happening. If we get, for example, a big opportunity for outsourcing an airline and that makes sense to us, well, that may increase our CapEx. That's just an example. So with that, I'll maybe turn it over to Sonya. You want to add anything?

Sonya Branco -- Vice President, Finance and Chief Financial Officer

Yeah. I think I'd just add we continually visit 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 other things or we continue to have conversations and a good pipeline of outsourcing. And that we treat kind of like M&As. Right? So that affords us that flexibility, should it be under JV format or otherwise, to deploy some capital to deploy some larger outsourcings.

Benoit Poirier -- Desjardins Capital Markets -- Analyst

Okay. Perfect. That's it for me. Thank you very much and congrats again.

Marc Parent -- President and Chief Executive Officer

Thank you.

Sonya Branco -- Vice President, Finance and Chief Financial Officer

Thank you.

Operator

Thank you very much. And before proceeding, once again, for the financial analysts on the phone, as a reminder to register for a question, it is the "14" on your telephone keypad. We'll get to our next question on the line. It's from the line of Tim James with TD Securities. Please go right ahead.

Tim James -- TD Securities -- Analyst

Thank you. Good afternoon. Just a couple of quick clarifications, maybe from you, Sonya. The $200 million in CapEx planned for fiscal '19, does that include any amounts for capitalized developments costs or is that in addition to that $200 million?

Sonya Branco -- Vice President, Finance and Chief Financial Officer

So the capitalized development costs would be in addition. The CapEx is really mostly deployments of simulators to support client demand and growing outsourcings.

Tim James -- TD Securities -- Analyst

Okay. Thank you. And then returning to an earlier question that you had in regards to the civil operating earnings growth guidance for fiscal '19. You indicated it was based on an adjusted fiscal '18, applying IFRS 15. But when you say adjusted, does that mean -- I mean, there were a number of significant one-time benefits in the operating earnings in civil in fiscal '18. Is that included in the base upon which we should think about that growth rate?

Sonya Branco -- Vice President, Finance and Chief Financial Officer

No. So there's two elements. So restated for the 2018 IFRS impacts but also normalized out. And we've provided that detail in the supplemental presentation. So there's the normalized number that removes the impacts of those transactions during the year so that the outlook is on the normalized basis.

Tim James -- TD Securities -- Analyst

Okay, great. Thank you. Then, Marc, 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? 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 kind of increase the revenue that you get from those assets without investing in additional assets?

Marc Parent -- President and Chief Executive Officer

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 definitely are, especially some of 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. But there is definitely opportunity to add more business jet sims, for sure. And that, I think, we've added some and I think we will continue to add some to cater for the increased 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 I think you've got to look at other metrics that I think tell us that there's still a lot of growth potential to bring us back to anywhere near where we were prior to 2008. Like, for example, prior to 2008, I think business jets were operating north of 500 hours a year. And I think now they're operating, on average, north of 300 to 350 hours a year. I may be precisely wrong on those numbers but you get an idea of the difference. So if you get to any kind of utilization for aircraft higher, then that'll have a pretty significant impact because obviously you'll need more pilots.

Tim James -- TD Securities -- Analyst

Okay. That's helpful. Thank you. So maybe just to follow on that then. If we think about, eventually at some point in time, your business jet training revenue stream or training hours getting back to that pre-2008 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-2008 level of activity?

Marc Parent -- President and Chief Executive Officer

No, we'll probably add some. We'll probably add some. We'll fill the ones we've got and probably add some just because there's more airplanes out there and new models and will require more sims. There's no doubt in my mind.

Tim James -- TD Securities -- Analyst

Okay. Thank you. And then just a final question. You ended the quarter with over $600 million 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?

Marc Parent -- President and Chief Executive Officer

To be flippant, I'd say I like it, Sonya doesn't. But, no, look, our priority is growth. I'll let Sonya talk about it. So we see opportunities but 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 luxury of deciding exactly sometimes when they will happen, when customers will want to do it, when they present themselves, and whether or not it'll be a good opportunity for us to be accretive. But going back to what I said, we see those opportunities and increasingly our priority -- we used to have a priority, the priority was to de-lever. It's no longer a priority. Do you want add anything, Sonya?

Sonya Branco -- Vice President, Finance and Chief Financial Officer

Yeah. Well, we'll always maintain a solid financial position but I think we have the financial flexibility to be able to invest thoughtfully in accretive opportunities. And I think we've proved with the investments that we have done that they are successful. They're market-led. The market continues to be a demand in opportunities and, to the extent that they are accretive to earnings, returns, and cash flow, I think we have the opportunity to deploy that cash into more capital.

Tim James -- TD Securities -- Analyst

Okay. Great. Thank you very much.

Marc Parent -- President and Chief Executive Officer

Thank you, Tim.

Andrew Arnovitz -- Vice President, Strategy and Investor Relations

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, if there are any questions from members of the media.

Operator

Certainly. Once again, for the press and media, if you have any questions you'd like to ask, you can do so by pressing "14" on your telephone keypad. Once again, for the press and media, it's "14" to register any questions or comments. And, Mr. Arnovitz, we seem to have no questions queued up at this time from the media.

Andrew Arnovitz -- Vice President, Strategy and Investor Relations

Okay. Well, I want to take this occasion to thank everybody who joined us here 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.

Operator

Thank you. And, ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and you can disconnect your lines. Have a good day, everyone.

Duration: 52 minutes

Call participants:

Andrew Arnovitz -- Vice President, Strategy and Investor Relations

Marc Parent -- President and Chief Executive Officer

Sonya Branco -- Vice President, Finance and Chief Financial Officer

Fadi Chamoun -- BMO Capital Markets -- Analyst

Kevin Chiang -- CIBC -- Analyst

Cameron Doerksen -- National Bank Financial -- Analyst

Turan Quettawala -- Scotiabank -- Analyst

Benoit Poirier -- Desjardins Capital Markets -- Analyst

Tim James -- TD Securities -- Analyst

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