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CAE Inc (NYSE:CAE)
Q3 2020 Earnings Call
Feb 7, 2020, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the CAE Third Quarter Conference Call. Please be advised that this call is being recorded.

I would now like to turn the meeting over to Mr. Andrew Arnovitz. You may now proceed, Mr. Arnovitz.

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 '20 and answers to questions contain forward-looking statements. These forward-looking statements represent our expectations as of today, February 7, 2020, and accordingly are subject to change. Such statements are based on assumptions that may not materialize and are subject to risks and uncertainties.

Actual results may differ materially and listeners are cautioned not to place undue reliance on these forward-looking statements. A description of the risks, factors and assumptions that may affect future results is contained in CAE's annual MD&A available on our corporate website and in our filings with the Canadian Securities Administrators on SEDAR at www.sedar.com and the U.S. Securities and Exchange Commission on EDGAR at www.sec.gov.

On the call with me this afternoon are Marc Parent, CAE's President and Chief Executive Officer; and Sonya Branco, our Chief Financial Officer. After remarks from Marc and Sonya, we will take questions from financial analysts and institutional investors. And following the conclusion of that Q&A period, we'll open the line for questions from members of the media.

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. I'll first discuss some of the highlights of the quarter, and then Sonya will review the detailed financials. I'll come back at the end to talk about our outlook.

CAE had strong growth in the third quarter, with revenue up 13%, segment operating income up 37%, and we secured CAD1.1 billion of orders for a 1.2 times book-to-sales ratio. CAE's total backlog at the end of the quarter was CAD9.4 billion. Our performance continued to be led by Civil, which delivered strong operating income growth, and we continued to have good momentum in the market with our innovative and comprehensive training solutions. Our customers continue to place their trust in CAE as their training partner of choice.

In Defense, we have good operating income growth in the quarter, which supports our view for a stronger second half. Also encouraging is the 1.1 times book-to-sales ratio for the quarter. And in Healthcare, we had double-digit revenue growth and we continued to bring highly innovative solutions to market that make healthcare safer.

Looking more closely at Civil. We booked CAD706 million of orders for training solutions in Q3, including a long-term training -- pilot training agreement with JetSmart Airlines and 17 full-flight simulators for a total of 37 for the first nine months of the year. The Civil backlog at the end of the quarter was a record CAD5.3 billion. To address the growing global demand for new pilots, we launched new Multi-Crew Pilot License programs with easyJet and Volotea and a new cadet pilot training program with Jazz Aviation and Seneca School of Aviation called Jazz Approach.

CAE is working together with our industry partners to create a pipeline of highly qualified aviation professionals to support our customers growing needs for critical personnel. In business aviation, we signed a range of pilot training contracts with business jet operators, including JetSuite, Solairus Aviation and TAG Aviation Holdings. Overall, training center utilization was 70% this quarter on our network of 303 full-flight simulators.

In Defense, we booked orders for CAD367 million, including contracts to provide the German Navy with a comprehensive training solutions for the NH90 Sea Lion helicopter and to upgrade and modify the German Army's NH90 full-mission simulators. These wins underscore CAE's strong position on this helicopter platform. Other notable contracts include the next increment of a multi-year contract with the United States Air Force to provide comprehensive C-130H aircrew training services.

Defense also received orders to continue providing long-term maintenance and support services for Rotorsim, a joint venture between CAE and Leonardo, and a contract for Abrams tank maintenance trainers for the U.S. Army. Defense also launched the CAE TRAX Academy at the recent I/ITSEC conference, the world's largest military training and simulation event. This is an advanced training continuum that delivers faster and more efficient military student pilot training. Customer response has already been highly positive for this new training solution, which brings together our latest innovations in virtual reality and advanced analytics.

In Healthcare, we also continued to innovate by developing custom training solutions for Edwards Lifesciences to enhance physician training. And we delivered a custom cardiovascular simulation to Cardinal Health. Together with the American Society of Anesthesiologists, we launched a new Anesthesia SimSTAT module, which is of course approved for Maintenance of Certification in Anesthesiology credits. As well, Healthcare was awarded an EMS World Innovation Award for CAE AresAR, the Microsoft HoloLens application for our emergency care manikin.

With that, I'll now turn the call over to Sonya, who will provide a detailed look at our financial performance, and I'll return at the end of the call to comment on our outlook. Sonya?

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

Thank you, Marc, and good afternoon, everyone. Consolidated revenue for the third quarter was CAD923.5 million, up 13% compared to CAD816.3 million in the third quarter of last year. And segment operating income before specific items was CAD155.3 million, up 37% from CAD113 million last year. Quarterly net income before specific items was CAD98 million or CAD0.37 per share, which is 28% higher than the CAD0.29 we reported in the third quarter last year.

Net finance expense for the third quarter was CAD36.7 million, up from CAD19.3 million in the third quarter of fiscal 2019. We had higher interest resulting from the issuance of unsecured senior notes since the fourth quarter last year and higher interest on lease liabilities because of the adoption of IFRS 16.

Income taxes this quarter were CAD18.4 million, representing an effective tax rate of 16%, which is up from 15% for the third quarter last year. The higher tax rate was mainly due to the impact of tax audits in Canada last year, partially offset by a change in the mix of income from various jurisdictions.

We had good free cash flow of CAD275.3 million in the quarter compared to CAD155.1 million last year. The increase resulted mainly from a lower investment in non-cash working capital and higher cash provided by operating activities. This is consistent with our expectations for significant reversal of investment in non-cash working capital accounts in the second half of the fiscal year. Uses of cash in Q3 included funding capital expenditures for CAD51.6 million, mainly for growth of our global training network to deliver on the long-term exclusive training contracts in our backlog. We continue to expect total capital expenditures for the year to be about 10% to 15% higher than in the prior year.

Other uses of cash include the distribution of CAD28.3 million in cash dividends and we used another CAD12.6 million to repurchase stock at a weighted average price of CAD32.69 per common share under the NCIB program, for which CAE's Board of Directors just approved this renewal.

Our financial position continued to be solid with a net debt of CAD2.3 billion at the end of the quarter for a net debt to capital ratio of 48.5%. Since we adopted IFRS 16 effective April 1st, 2019, net debt now also includes obligations under lease contracts, which were previously accounted for as operating leases and therefore not included in debt. Excluding this impact, the net debt to capital ratio would have been 44.9% this quarter. We continue to expect to be at the lower end of our target leverage range, which is 35% to 45% on a pre-IFRS basis within the next 18 to 30 months. Return on capital employed before specific items and excluding the impact of IFRS 16 was 11.6% this quarter compared to 11.7% last quarter and last year.

Now looking at our segmented performance. In Civil, we had double-digit organic growth in the third quarter. And in addition, we benefited from the integration of the Bombardier BAT business, which also performed very well. Third quarter revenue was up 22% year-over-year to CAD558.1 million on 12 full-flight simulator deliveries and good demand for our training services with our expanded capacity. Operating income before specific items was up 42% to CAD123.4 million for a margin of 22.1%. On the order front, the Civil book-to-sales ratio for the quarter was 1.27 times and for the trailing 12-month period, it was 1.44 times.

In Defense, third quarter revenue was CAD332.4 million, that's up 1% over Q3 last year, while operating income was up 24% to CAD31.3 million for an operating margin of 9.4%. We incurred some reorganization costs this quarter to adjust our global structure for greater operational and commercial excellence. Before these costs, defense segment operating income for the quarter would have been CAD33.2 million for an operating margin of 10%, which represents a 32% increase compared to the third quarter last year.

Defense benefited from a more favorable program mix in the quarter as well as some conversion of our active bid pipeline to order. The Defense book-to-sales ratio was higher this quarter at 1.11 times and it was 0.88 times for the last 12 months.

Lastly, in Healthcare, we continued to see higher sales momentum with third quarter revenue of CAD33.0 million, up 19% compared to Q3 last year. Segment operating income was stable at CAD0.6 million, reflecting a higher investment in R&D and SG&A to develop and support a larger future business.

With that, I will ask Marc to discuss the way forward.

Marc Parent -- President and Chief Executive Officer

Thanks, Sonya. We continue to have a positive outlook for CAE for the balance of the year and over the long term. In Civil, the industry expects approximately 4% long-term passenger traffic growth. And this assumption continues to underlie our investment thesis. Higher demand for air travel drives an expanding global in-service fleet of aircraft and a significant need to attract and create new pilots to meet industry needs. As a company, we're focused on providing comprehensive solutions for our customers to recruit, develop and maintain these highly critical personnel. CAE has the privilege and responsibility of being the world leader in aviation training, and we have a very good momentum in a large addressable market. And as we look ahead, we expect more opportunities to materialize from the large pipeline of long-term training partnerships. We also continue to expect another good year for full-flight simulator sales and to maintaining our leading share of the market.

For Civil overall, we continue to expect operating income growth closer to 30% for the year on strong demand for our training solutions. Since the start of January, we received orders for seven more full-flight simulators, including six for the Boeing 737 Max. Boeing announced in early January that it would recommend simulator training for the Max, which if confirmed by the aviation authorities, would indeed drive a higher rate of demand. It's our practice to respect the timelines of the OEMs and aviation authorities and not get out ahead of them, especially when it involves aircraft certifications or investigations.

So I'll refrain from speculating on what the training regulations might entail for the Max's reentry in the service, and instead I'll summarize what has been CAE's position so far on the aircraft type. To date, we've sold a total of 56 full-flight simulators to airlines -- Max full-flight simulators to airlines, which represents the vast majority of all sales to airlines of that simulator type. The fact is the majority of airlines that have ordered the Max aircraft are indeed CAE customers. So far, of the 56 simulators ordered, we've delivered 22 as of the end of December. And in addition, we've already deployed three to CAE's own training network, and we're in the process of deploying more.

We mentioned on our last quarterly call that we've begun to build additional inventory of Max simulators in anticipation of pent-up demand. And this continues to be our practice in view of the demand that we expect. I guess the most and central point in all of this is that we have our customers covered as their training partner of choice, and they recognize the support that we bring to their most critical operations. We have the capacity and the capability to respond to our customers' training needs whatever the requirements, and we look forward to a successful and safe reentry to service for the aircraft.

Now turning to Defense, we continue to expect a stronger second half, which is a view supported by a healthy book-to-sales ratio in the quarter and a robust pipeline. We continue to expect modest growth for the year, taking into account our year-to-date performance and our current expectations for reaching milestones on programs in backlog. We also expect to conclude several more contracts in the current fourth quarter. And as always, we don't control the timing of government decision making, but I take confidence in knowing that we've already been down selected for the most of them. Our long-term prospects in the large addressable defense market remain positive. And I'm encouraged by approximately CAD3.8 billion of defense proposals that we've written that are currently in the hands of customers' pending decisions.

Finally, Todd Probert officially became our new Group President, Defense and Security on January 27th. As with his predecessor, Todd is based in Washington, DC, where he is very well connected within the U.S. defense establishment and has a clear view of the military future, operational and mission preparedness requirements. He is a proven business leader and he brings an excellent defense industry profile to CAE. He has the passion for artificial intelligence, machine learning and new development models, and his interest, competencies and background are very well aligned with our emphasis on digital innovation. I'm very pleased to welcome a leader of his caliber to our executive team, and I expect he will bring significant value to our Company and customers.

And lastly, in Healthcare, I'm encouraged by the response CAE is getting from the market. We expect to continue building on our current sales momentum with our highly innovative solutions. The increased imperative on patient safety was in full evidence at the International Meeting on Simulation in Healthcare, which took place last month in San Diego. The event, which is the world's largest conference dedicated to healthcare simulation learning research and scholarship was an excellent showcase for CAE Healthcare and our latest solutions. We continue to expect double-digit percentage growth in Healthcare this year.

In summary, our overall outlook for CAE this fiscal year is unchanged. We benefit from a strong position and secular tailwinds in each of our core markets, and we look forward to superior top and bottom line growth in the years ahead.

With that, I thank you for your attention, and we're now ready to answer your questions.

Questions and Answers:

Operator

Thank you, sir. [Operator Instructions] Our first question comes from the line of Steve Arthur with RBC Capital Markets. Please go ahead, sir.

Steve Arthur -- RBC Capital Markets -- Analyst

Great. Thank you very much. Just a question first on the Civil margins. They look very strong in the quarter at around 22%. And if I remember correctly, that's about as high as we've seen them. Were there any one-time items in there that were supporting that? Or is this more a case of Civil margins moving meaningfully higher with the evolving business mix?

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

Thanks, Steve. With the acquisition, we guided that there would be margin accretion of 100 basis points to 150 basis points. And we see this coming through. Margin is also a reflection of the mix of training and the product business. So combined with training margins, but also it does reflect a good program mix in the quarter. So, that's really kind of what's driving some of those margins.

Marc Parent -- President and Chief Executive Officer

And I'd just add that according to someone, there is no one-timers. No one-timers, Steve.

Steve Arthur -- RBC Capital Markets -- Analyst

Okay, good. So then over the next several years, then we should continue to see that kind of 100 basis points, 150 basis point bump over to where you [Phonetic] were into the low-20s?

Marc Parent -- President and Chief Executive Officer

You'll get our outlook for next year very soon, but not at this call. Look, I think we're very happy with the performance we have. I think we tend to -- as you've seen, we'd like to guide on operating income growth in the absolute terms, but look, I think that there is no reason to expect our performance to go down.

Steve Arthur -- RBC Capital Markets -- Analyst

Okay. And I guess related and probably a similar answer in the longer-term, but Defense margins, you're calling for modest growth in the year, but you're down I think 8% or 10% so far. Year-to-date implies a strong finish as I'm sure you're aware. So, I guess a couple of things. One, just in terms of what do you see in the near-term that supports jump in Q4? And then, just looking out over the mid- to longer-term, are we right in thinking about this is kind of a 10% to 12% margin business as it has been historically, or is something in the mix change there?

Marc Parent -- President and Chief Executive Officer

Well, I think first and foremost, yes, same -- actually, you're pretty right, the same answer to a certain extent with regards to the longer-term outlook, still a growth business and we're confident of that. I'm going to leave some time for Todd Probert as the new Head of Defense to get his hands around the business, but clearly we expect that we continue to do well and longer term, I fully expect us to beat market growth in Defense, but we will precise that as we've done -- as we get into the early part of next year as it relates to next year for sure. In the short-term, yes, you're absolutely right. It implies a strong -- very strong fourth quarter, but we did that last year and we have the habit of doing that. And it's supported by -- you would imagine if we're basically committing to it, it's because we have a strong forecast that supports that. But that's -- it's supported by the usual suspects. It's how we're executing the programs that we have in the backlog as the orders that we had in the quarter. As I said, I was encouraged by the positive book-to-bill that we had in the quarter, especially from the strong product orders like I talked about the NH90 order. That's very important. But I would tell you, it does require that we win. There is a few orders that we need to win in the quarter, and that's no different. We only have to win orders in the quarter. So, I think some of that variability and you saw bring us down slightly our outlook in the last quarter for defense. And that was basically on with some of the orders that we had, we're going to be moving out of the year. But look, again, I have confidence in the orders and because over 90% of the ones we need, we've already been selected on it. So, it's not a question of the -- their competed contract. It's one, it's just decide, can we reach to a contract, can we get the customer to sign on before the end of March. That's really what we're at on that one. Those are the elements that make up the -- our outlook for the year.

Steve Arthur -- RBC Capital Markets -- Analyst

Okay. Thank you. And just -- final point just on the training centers and customers in China. Any comment at all in terms of what's happening with your operations there right now? Obviously no crystal balls, but have there been closures or what's the near-term status of some of the facilities right now?

Marc Parent -- President and Chief Executive Officer

Yeah. I think we're following what the recommendations mainly of WHO and governments around the world, as you might expect us to do. Obviously, our first priority is on -- is the safety of our employees and our customers around the world. In terms of business impact for us, right now, again, as you say, we're watching with this situation closely, and we do expect to resolve itself. We do see this as a short-term issue from our standpoint of what we see. But so far, the impact for us has been that we have pulled our personnel out of China, though we were, for example, installing a simulator -- Civil simulator in China. So, that simulator was expected to deliver this year, not at this point. So, that's the one impact. We had some training customers that have canceled their training because of -- in some cases, there were Chinese carriers come to train with us for example in Dubai and other centers. So, those are the kind of impacts we have, but we've modeled this, and it's reflected in the outlook that we have for the end of the year. So, barring some catastrophic escalation of this, which we have far bigger ramifications to what we're talking about here, we feel good that the effects are contained for us.

Steve Arthur -- RBC Capital Markets -- Analyst

Okay. Great color. Thank you.

Operator

Thank you for your question, Mr. Arthur. Continuing on, we now have a question from the line of Konark Gupta with Scotiabank. Please proceed.

Konark Gupta -- Scotiabank -- Analyst

Thank you, and congrats on a good quarter. Just wanted to follow up on the Defense margin and welcome Todd. So, margin has obviously come down below 11% over the past two years. And I know the mix has been more skewed to services lately, but should we not expect the margins to kind of remain below 11% as you continue to grow as a TSI business with more service proportion? I mean, is it not because of the structural changes, or is it something else?

Marc Parent -- President and Chief Executive Officer

Well, look, I don't want to get out too much in front of that. We still have our backlog that reflects the outlook that we have today for the business in terms of margin performance. I think it really depends on -- you got to remember that ours is a very international business. So, yes, on a typical basis, services tend to run lower and that we said before. Now it doesn't necessarily have to be the case around the world as you can imagine that if we're putting capital into -- at work, we will be looking for a higher margin than that, but it's really going to be -- I think it's going to be based on where the revenue comes from for various jurisdictions around the world, and very, very importantly, it's going to be the products and service mix, as you said, services tend to be lower, but I have quite confident that we can continue to build our products business with the portfolio we have. So, look, more to come, but I wouldn't come to the conclusion that the margin initiatives to dip structurally.

Konark Gupta -- Scotiabank -- Analyst

Okay. That's a great color, Marc. Thanks. And then on the Max, so -- thanks for updating on orders and backlog. That's very useful. Can you talk about your plans for Max simulator production rate and outlook? How do you foresee this backlog translating into production? And are you seeing any interest in upgrade of existing 737 NG simulators as opposed to new orders?

Marc Parent -- President and Chief Executive Officer

Well, I think it's too early to tell with regards to upgrade. I think in some cases, it will really depend on the airlines. Typically upgrading a simulator is quite -- can be quite involved and sometimes you're better off to just buy a brand new simulator. In majority cases, that's what we see in our business even though, like for example, replacing an old 320 with a new 320, our old 737 versus new one that people tend to buy new ones. So, that's been the history. We will see for the Max. If there is a demand for it, we will certainly be there. We have a very big aftermarket business. And so, we would do that as well. That would be part of that. There has been a step-up in demand. As you saw that testimony by six Max orders since January and big exploration as a result of the news that Boeing was recommending Max simulator training.

But look, I think that you asked for production rate, I'm not going to get out there and tell you what the production rate is. But I can tell you that we have increased it, but we have the capacity to increase it even more. We're still at a rate that we're below in terms of production rate below what we were when we recovered from the strike last year and we still have lots of capacity. So, we're following this closely, but we have a bunch of -- I'm not going to say how many of sims as we talked about last time as what we call white tail ready to go, and there is interest out there. So, look, I don't want to get out more in front of that because it's really going to be dependent on what the regulator decides and the regulator hasn't come out yet. So, I think we're holding our fire, but we'll be prepared.

Konark Gupta -- Scotiabank -- Analyst

Okay, that's great. And lastly, Sonya, if I can ask you. So on the leverage ratio, you still said that is 18 to 30 months of normalization to happen here, but if you see any good opportunity out there, perhaps because of the recent consolidation in the industry and if somebody wants to divest an asset or something. Would you pursue that at current leverage ratio or would you still wait for it to normalize? Thanks.

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

Even at this level, we're in a very comfortable balance sheet position and capacity. So, on the heels of the cash generation of the acquisition and the other investments that we've made, we have a profiling that can take us to more deleveraging, both on the organic business and the capex that we're deploying. All of this generates good free cash flow. And so, it deleverages, but if there are opportunities, we, of course, always look at various opportunities whether they're organic outsourcings whether they're JVs or even inorganic, we continue to look at those or even any items that may come up on the M&A space. So, the balance sheet is flexible and has capacity, and we can -- I think comfortably with our cash flow generation balance, some deleveraging and continue to invest in growth.

Konark Gupta -- Scotiabank -- Analyst

Okay. That's it for me. Thank you so much.

Operator

And thank you for your questions, sir. Next question comes from the line of Kevin Chiang with CIBC. Please proceed.

Kevin Chiang -- CIBC -- Analyst

Hi. Good afternoon, and thanks for taking my questions here. Maybe first one from me. If I could ask it in a little bit of a different way, you had a 70% [Phonetic] utilization in Civil, margins up at 22% and I appreciate the mix and some of your recent acquisitions have aided in the improvement in your profitability. But if I think of that utilization rate getting back to say the mid-to-high 70% we saw maybe a year or so ago, is a way to think of the upside to Civil operating income as you get that better utilization through your training centers?

Marc Parent -- President and Chief Executive Officer

Well, again, we're not going to get ahead of it because we're not giving our outlook for six years here. And I think you correctly said there is a lot involved in the mix. So I think, look, we take -- we obviously take comfort as you probably do inherent in your question about that we're able to generate this level of margin at 70% utilization. Yeah, for sure. A lot of the sims -- the reason that we're at 70% is because we're moving a lot of simulators around. And if you think about -- we've added that -- we've gone in the last three quarters from 266 simulators to 303 over the last three quarters. So, while we're moving sims or while we're bringing sims that are not fully ramped up in terms of revenue potential, but at the same time, we have had short-term headwinds in Europe. The 737 Max has caused some disruption in the overall 737 market to have some market consolidation. Remember, airlines like, such as Thomas Cook, right now. So, look, is there room to grow earnings? Yes, sure, there is room to our earnings. How that reflects is absolute margin itself? [Phonetic] It will depend on the mix because all -- not all businesses are of the same -- aren't the same in terms of margin percentage itself, but I think we'll probably continue to focus on absolute income growth of the measure that we will drive through.

Kevin Chiang -- CIBC -- Analyst

I appreciate that. That's good color there. And then, I know Todd over at -- as a new Group President in Defense. It's a recent hire, but is there something like to accomplish longer term within Defense that you're currently not capturing in terms of opportunities, in terms of growth, or should we think of that long-term strategy essentially being the status quo even with the change at the top of that division?

Marc Parent -- President and Chief Executive Officer

Well, look, I think that, really what -- if I would to say anything of our defenses, you've seen the success that we've had in civil. And there's a lot of -- there is a lot of things that we can bring from our business model in civil. They are imminently applicable in the defense market. So, I think first and foremost, you'll see us applying some of those technologies, some of those lessons learned of this business model more and more into defense market. Todd comes from a very strong business leader, he comes from a very strong position and strong background in terms of the U.S. defense department specifically, but with international experience as well.

So when -- as I said before, when I was looking for a replacement for Gene Colabatistto in this market, we're looking for somebody that could -- knew his way around, if you look, knew his way around the Pentagon, knew his way around the defense market in the United and internationally and has basically a good view of areas of the US DoD that we don't necessary -- where we haven't been focused on. And I think those doors opened. So, I think first and foremost is concentrating our strategy, leveraging our core competencies, core capabilities, including the digital innovation that we will apply at civil, applying them to defense and Todd comes with strong capabilities in that regard. And then, we will see, but too early, we're not seeing any change in strategy here. But definitely, I think we've reached strong expertise to the fold that I feel confident we will, as I said, be very good for CAE and our customers.

Kevin Chiang -- CIBC -- Analyst

That's a good color. And maybe just last one from me. Sonya, just to clarify, as I think about working capital maybe in the fiscal fourth quarter here, and maybe even the fiscal first quarter, so the next couple of quarters, you mentioned ramping up I think some of the inventory around the Max simulators. Should I think of the working capital, I guess, seasonality that we typically see maybe Q4, Q1 being a little bit different because of that inventory build or maybe it's an immaterial impact in how your working capital flows over the next three to six months?

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

It will have an impact, but I don't see it reversing the overall cash profile, which usually is a first half investment and then reversal or partial reversal in the second half, and good performance in Q3 and reversing CAD180 million [Phonetic] in the quarter and back to what we mentioned last quarter, we expect it to continue on that non-cash working capital efficiency to drive a significant reversal around 75% of that first half investments. And that's with some continued investment in the inventory. Now, some of it turns even quicker in the quarter in Q1. There may be some variation there. I don't suspect it will change the overall cash flow filing between the first and second half, but we are driving to further reversal in Q4.

Kevin Chiang -- CIBC -- Analyst

Thanks for the clarification. That's all from me. Thank you very much.

Operator

And thank you so much sir for your question. Our next question comes from the line of Cameron Doerksen with National Bank Financial. Please proceed with your question.

Cameron Doerksen -- National Bank Financial -- Analyst

Thanks. Good afternoon. Maybe a question for Sonya. Just on the, I guess, the leverage question that was earlier. I wonder if you could maybe just talk about your ability, if you want to pay down debt earlier than expected. I mean, is there a way that you would potentially accelerate debt retirement here, or are you kind of restricted on what you can do on a yearly basis just on the terms of that debt?

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

So, in terms of the level of financing, we have the private placements that we issued last year and the last tranche in the quarter. We do have also some flexibility with term loans. So, if we wanted to accelerate that, that is an option. We do continue to see very good options for investment. And I'll go back to our capital allocation priorities and first and foremost, continuing to invest in accretive growth organically, and if there is any inorganic approaches to it as well. But to your question, if we -- we do have the flexibility to do so, if we wanted to shift a little bit of the balance.

Cameron Doerksen -- National Bank Financial -- Analyst

Okay. That's fair. Just secondly from me, maybe a question for Marc just on the sort of end markets. So, we have seen a little less activity on business jet flying. I'm just wondering what you're seeing in your business jet training centers. Are you seeing any change in the level of demand? Obviously, you've got the new acquisition that's driving the year-over-year growth. And I'm just wondering on the sort of the legacy business there, do you see any change in the demand for training on business aircraft?

Marc Parent -- President and Chief Executive Officer

Not really. It's very dependent on which platform and what market. But overall, no, I think the -- I would tell you, we don't typically disclose it, but I can tell you that the growth in our printing activity organically is very strong. And big component of that is business aircraft. And when you break down business aircraft, I think a lot of the growth comes from the acquisition that we made. But equally, we have the fact I think we can talk about. Yeah, we -- actually, I was going to look for if we have the breakdown, but we don't have it. But in terms of the organic growth in business aircraft training, it's actually been pretty good. We've been outpacing the market itself overall. There is a number of the flight activity itself, which is a metric, but there's a lot of pilot-changing jobs as well. And that stimulates our training activity, and in the higher-end business jets, a lot of activity. So, overall, we're doing well and the organic growth is pretty good.

Cameron Doerksen -- National Bank Financial -- Analyst

Do you feel like you've gained some market share in that sub-segment?

Marc Parent -- President and Chief Executive Officer

Yeah. We have. And if you look at the contracts that we had just this quarter, we have like three-year -- just in business aircraft alone, three-year training renewal with TAG Aviation Holdings. That's a very big contract in itself with TAG; six years with JetSuite; four years with the Solairus Aviation. So yeah, there is no doubt we've gained share, and we're quite happy with the customers that have moved over to CAE.

Cameron Doerksen -- National Bank Financial -- Analyst

Okay, great. That's all from me. Thanks very much.

Marc Parent -- President and Chief Executive Officer

Thank you. Thank you so much Mr. Doerksen for your question. Up next, we have Fadi Chamoun with BMO Capital Markets. Please go ahead, sir.

Fadi Chamoun -- BMO Capital Markets -- Analyst

Okay. Thank you, and good afternoon. Just one question, if you can clarify the acquisition you made from Bombardier. If there were to be a change in control of those assets, do you have any exposure -- do you have kind of solid long-term commitment under that transaction that you've done with Bombardier?

Marc Parent -- President and Chief Executive Officer

Yeah. We have a 20-year exclusive ATP agreement and exclusivities that would flow over to any potential buyer, Fadi.

Fadi Chamoun -- BMO Capital Markets -- Analyst

Okay. That's great. And on the 56 Max orders that you received or you've sold or received order from, do you know off the top of your head how many airlines that represent?

Marc Parent -- President and Chief Executive Officer

How many in total -- I know it's probably all of them, but I'm not sure how many order -- how many airlines, that we [Phonetic] could probably get to that number later. I don't remember exactly how many airlines it is. But as I said, the high majority of all the airline customers that have bought the Max have bought our simulators.

Fadi Chamoun -- BMO Capital Markets -- Analyst

Okay. Thank you.

Marc Parent -- President and Chief Executive Officer

If I get the number, I'll come back and tell you what it is, we're looking.

Fadi Chamoun -- BMO Capital Markets -- Analyst

Okay.

Operator

Thank you Mr. Chamoun for your question. [Indecipherable] Please go ahead, sir.

Unidentified Participant

Yeah. Good afternoon, and thank you for taking my question. I just wanted to come back on the military side. You mentioned in the past that the business mix would evolve favorably in the second half. I think it remained fairly stable in Q3, but the margin has still increased fairly significantly in the quarter. So, I was more wondering if we should expect a similar performance in Q4, and if the mix will change accordingly.

Marc Parent -- President and Chief Executive Officer

I'll leave it to Sonya a little bit, but I guess it has to -- we're going to beat the outlook that we said we are, which we -- again, as we have confidence in achieving it. I would caution as well, as I usually do and we've said that many times, it's kind of hard to look at the military business on any of the major metrics on a quarterly basis because of the size of the contracts themselves and whether their service or product. This quarter, we had kind of flat revenue, but much higher earnings. Last time, we had the contrary. So, I think it's best to look at it over a number of peers, and maybe 12 months is the best way to look at it, but Sonya you want to...

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

Absolutely. It's really because of that variability, always best to look at it over a longer annual basis -- at least annual basis. In the quarter, there was a more favorable program mix drove a higher contribution and contribution of orders signed and started in the quarter. So, that drove some of that margin and while the revenue was relatively stable. I'll also point to the fact that revenue doesn't -- our revenue line doesn't capture the revenue from JVs, which are accounted for as equity pickup and included in the EBIT. And so, some growth that came from those joint ventures is not necessarily reflected on the revenue line.

Unidentified Participant

Okay. That's great color. And if we get back to the Civil segment, I think you mentioned in the MD&A, lower utilization rate in Europe. So, I was wondering if you could talk a little bit more about the utilization there, please?

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

Well, I think Marc spoke to it. And ultimately, we are seeing some -- a bit of headwinds in Europe. There is a little bit from consolidation that we're seeing with certain airlines. Now, we see this more as a short-term, because as they consolidate, they'll generally -- the traffic will generally be picked up with other CAE customers. And we will recuperate at that way. But there is a bit -- we see a bit of headwind in Europe on the utilization there.

Andrew Arnovitz -- Vice President, Strategy and Investor Relations

And just to add and to reiterate what Marc said before, some of that headwind is owing to the Max having been out of service for quite some time now. And so, our 737 simulator training in Europe is directly affected by that as well.

Unidentified Participant

Okay. Thank you for the color. And maybe a last one from me, Sonya. On the capex, I know you don't want to provide guidance for next year, but just directionally, would it be fair to assume some growth in fiscal year '21 as the pipeline for opportunities remain robust in both civil and military?

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

I will come back next quarter with a view on all of the guidance for next year. For this year, we will stick to our guidance, which is slightly higher than last year's 10% to 15% over last year.

Marc Parent -- President and Chief Executive Officer

I think it's important to add though that as a ratio of operating cash flow or of revenue, that number has been declining. So, whatever the quantum, but as a ratio of the size of the business, which continues growing, it has been declining.

Unidentified Participant

Okay. Thank you very much.

Andrew Arnovitz -- Vice President, Strategy and Investor Relations

Operator, I guess that's all the time we have for questions from members of the financial community. We are now want to open the lines to members of the media.

Operator

Absolutely. Thank you. [Operator Instructions] Our first question from the media comes from the line of Allison Lampert with Reuters. Please proceed with your question.

Allison Lampert -- Reuters -- Analyst

Thanks very much. Just two quick questions on the Max. First, you talked about demand for the Max simulator before. Would you say that is the most popular simulator that you're selling right now for to -- during [Phonetic] fiscal year? And secondly, you also mentioned that you would deploy more in your training centers. Where are you looking?

Marc Parent -- President and Chief Executive Officer

I think that -- well, I don't think we've actually developed all the locations happening here. But I think first, wherever the customers are, but...

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

Yeah, and the three that we have deployed is in Toronto and Singapore and in the midst of deploying in Dallas right now. And we're looking at other sites, but those are the ones that are -- that have been deployed.

Allison Lampert -- Reuters -- Analyst

Right now, do you have any idea of where you're looking in terms of the other sites? I was thinking maybe Europe, then I understand that there is not many -- not much -- not many simulators there. So, that might be an interesting location.

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

As Marc said, we are looking at where the customer demand drive us.

Allison Lampert -- Reuters -- Analyst

Fair enough.

Marc Parent -- President and Chief Executive Officer

Yea. It's reasonable to expect that one would go there, yes, at least.

Allison Lampert -- Reuters -- Analyst

Right. And just my other question, would you say, is the Max simulator your most popular, your strongest selling model at the moment?

Marc Parent -- President and Chief Executive Officer

I really haven't looked at the breakout [Phonetic]. But look, I think that certainly in the last -- since the beginning of January, yes, six out of seven. But for the year as a whole, look, I wouldn't expect it, it wouldn't be normal to be because the airplanes have been grounded. So, inevitably, while the airplanes have been grounded, orders have slowed for the 737 Max type. But going forward, with the backlog of aircraft, I mean to me, there is -- I don't want to get in front of regulators, to me, there is no doubt that the aircraft will resume flying and the backlog of 737 Max aircraft is very large. So, we'll be delivering sims for quite a while. And I think the ratio is of simulators aircraft will be the same as other narrow bodies. So, I think that will presage many simulator sales for 737 Max in the future.

Allison Lampert -- Reuters -- Analyst

Thank you.

Operator

Thank you, Ms. Lampert for your question. [Foreign Speech] Please proceed.

Unidentified Participant

Thank you. I have two questions. About the fact that United announced yesterday or two days ago that they would buy a new flight academy. Is it something that is just -- does it make you nervous or not? And second question, could you repeat what you said that the coronavirus add in any effect in your operation?

Marc Parent -- President and Chief Executive Officer

Well, I talked about the coronavirus. I mean, as I mentioned before, the first priority for us is the safety of our employees around the world, safety of our customers. So, we've taken precautions that are very similar to and in line with the recommendations of the Canadian government and WHO in that regard. So, our personnel that were in China have left China. We have -- we had business impacts with regards to one simulator was being installed in China. So, we, of course, put our people moving back to Canada, then that activity has been delayed for the moment. We have some training of Chinese customers that has been postponed for the same reasons. We have put very strict hygiene protocols in all of our centers around the world to get to protect our personnel, our customers. So, that's I guess the answer on coronavirus.

With regards to your previous question, on the center for United. No, look, I think it just reflects the fact that what we've been saying is there's a global pilot shortage out there, and it's affecting airlines around the world and airlines are moving to be able to ensure that they have the proper source of highly skilled workforce. So to me, it's just testimony that they need that's out there. Now, as a company -- and I think I've said this before, we never pretended to want to control the full capacity in this market. I mean -- but yeah, we'll look -- I am very proud of the customers that we have in our training centers at the moment. We have very great contracts with on having initial pilots, which are new pilots like this, which you talked at United, with American Airlines, with Southwest Airlines, with JetBlue, just in the United States alone. So, those are cadets being trained from start to getting an airline type rating with CAE. So look -- and in fact we've been leading the market out there in terms of initiatives to increase diversity. We've given scholarships to five deserving women around the world, so they become airline pilots. So, look, United is a very, very good customer of ours. And they're taking action. I can't answer for them, but I think all it does is reflect the need out there for pilots.

Unidentified Participant

Okay. And about China, how many employees do you have over there that stopped working or that you brought back?

Marc Parent -- President and Chief Executive Officer

Well, Canadians, look, I don't remember the exact number, but it's not a huge number, probably less than 50.

Unidentified Participant

Less than 50? And do you have operation...

Marc Parent -- President and Chief Executive Officer

Let me correct that. It's less than 20. What I was talking about more of the 50 that were in country.

Unidentified Participant

Okay. You said -- so, you said less than 20?

Marc Parent -- President and Chief Executive Officer

Less than 20 Canadians returned back to Canada.

Unidentified Participant

Did you return other employees that were from other countries, US or anywhere else?

Marc Parent -- President and Chief Executive Officer

No.

Unidentified Participant

No? And do you have permanent employees that are not Canadian in China?

Marc Parent -- President and Chief Executive Officer

Yes, we do.

Unidentified Participant

Are they still working, or you have to close operations?

Marc Parent -- President and Chief Executive Officer

It depends where we take the same in detail. I mean, we have not shut down operations, but I think most people would be. We don't have a training center over there. So, it's not the plan of exposure. I think we would have people, I'm getting outside my zone. Sonya, do you have anything to add on it?

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

Yeah. So, we have [Indecipherable] Beijing and Shanghai and Hong Kong, and we are following the measures led by the government. So, yeah. A lot of it [Speech Overlap] most of it is work from home that we will be doing at the moment.

Unidentified Participant

Okay. And grossly talking, it would be how many people working from home or in the three cities you've mentioned?

Marc Parent -- President and Chief Executive Officer

Well, probably the majority. I can't tell anything specifically, but it would be a majority of the remaining employees that we have.

Unidentified Participant

But would there be 100 employees, or there would be 20?

Marc Parent -- President and Chief Executive Officer

No. Look, I don't know the exact number, but I -- it's not more than the 50 employees total that we have in China.

Unidentified Participant

Okay. Perfect. I'll let you go. Thank you very much.

Marc Parent -- President and Chief Executive Officer

Thank you. [Indecipherable] continuing on. Our next question comes from the line of Henry Canaday with Aviation Week. Please proceed with your question.

Henry Canaday -- Aviation Week -- Analyst

Yes. Could you talk a little bit about what portion of your full-flight simulators for commercial aircraft have been upgraded for the FAA UPRT, the upset prevention and recovery training requirement?

Marc Parent -- President and Chief Executive Officer

Look, of our civil simulator, I can't tell you the number, but I do believe it to be 100%. And then we get back to, but I think that was the requirements. I'm pretty darn sure that's 100%.

Henry Canaday -- Aviation Week -- Analyst

Is that just for the US or upgrades going on internationally or...

Marc Parent -- President and Chief Executive Officer

I think it would be around the world. And I think we -- I think we should get back to make sure I'm right, but it will follow the regulatory requirements, but we led the industry in terms of driving UPRT training, including this is [Phonetic] used in simulators. So, my belief is we're 100% and -- but we have to maybe get back to an exact number.

Henry Canaday -- Aviation Week -- Analyst

Sure. Thank you very much.

Marc Parent -- President and Chief Executive Officer

Okay. You're welcome.

Operator

Thank you, Mr. Canaday.

Marc Parent -- President and Chief Executive Officer

Sorry, operator. I think that's all the time we have for the call this afternoon. I want to thank all of our participants from the investment community as well as members of the media for having joined us. And I would remind you that a copy of the transcript of today's call can be found at CAE's website. Thank you. [Operator Closing Remarks]

Duration: 55 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

Steve Arthur -- RBC Capital Markets -- Analyst

Konark Gupta -- Scotiabank -- Analyst

Kevin Chiang -- CIBC -- Analyst

Cameron Doerksen -- National Bank Financial -- Analyst

Fadi Chamoun -- BMO Capital Markets -- Analyst

Unidentified Participant

Allison Lampert -- Reuters -- Analyst

Henry Canaday -- Aviation Week -- Analyst

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