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CAE reduces military revenue growth forecasts

Aug. 11, 2011, Montreal - Flight training and simulator manufacturer CAE says government efforts to trim military budgets will reduce its revenue growth forecasts this year, but won't hamper its long-term
prospects.


August 11, 2011
Carey Fredericks

The Montreal-based company had forecast that military revenues would grow by 10 per cent this fiscal year. But delays in winning contracts has tempered that enthusiasm.

"Under the worst case scenario we'll do growth, I just can't say right now how much growth that will be this year because I don't control the timing of contracts,'' president and CEO Marc Parent said Wednesday following the company's annual meeting.

CAE Inc. said its first-quarter profits rose to $43.1 million or 17 cents per share, as the stronger commercial aerospace sector offset military weakness.

Profits for the period ended June 30 increased from $37.2 million or 14 cents per share a year earlier. Adjusted for one-time items, it earned 14 cents per share, compared to 17 cents forecast by
analysts.

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Benoit Poirier of Desjardins Capital Markets described it as "a rare miss for CAE on soft military results.''

Revenue increased to $427.9 million from $366.4 million, just slightly above analyst expectations. Military revenues declined to $206.4 million from $256.4 million in the seasonally stronger fourth
quarter and operating margins decreased. Civil segment revenues increased slightly to $210.1 million.

CAE lost $2.6 million on $11.4 million of revenues in its new health-care and mining simulation business.

Parent said full-flight simulator sales are off to a strong start with 11 sales in the quarter. CAE increased its guidance slightly to at least 30 simulator sales for the year.

It also signed three joint venture agreements, including the total outsourcing of training by AirAsia, one of the world's fastest growing airlines.

Parent declined to indicate whether the commercial segment will return to being CAE's largest sector as demand for pilot training and new simulators accelerates and military demand softens.

"My concern is not if we will win (military) contracts, we are well-positioned to win contracts since in many cases we have already been selected,'' Parent told reporters.

"The uncertainty comes in the timing, when will they place the order.''

Defence suppliers have been hurt because delays in approving government budgets have prevented funds from being allocated to award contracts.

Parent said CAE's military platforms for helicopter, transport and other aircraft are in synch with military's desire to maintain battle readiness that should withstand the budget axe.

"Those just happen to be CAE's sweet spot that's what we excel in and are market leaders.''

And as policy makers seek additional savings, they will increasingly turn to its simulator services that can train pilots at a fraction of the cost of flying planes.

"We have to get over the turmoil but longer-term as we get a sustained wave of saving costs I strongly believe in what we do.''

Cameron Doerksen of National Bank Financial said while military margins were lower than forecast in the quarter, they should rebound later in the year.

"Mixed results, but the outlook is still generally positive,'' he wrote in a report.

"The military margins are also somewhat lower than expected. However, the improved outlook for full flight simulator sales is positive. Notwithstanding increasing concern over a potential global
economic slowdown, we still believe that the broader aerospace industry outlook remains generally positive''

He added that CAE's leading industry position, presence in higher growth markets and resilient business model should mitigate any potential impact of another downturn.