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Good day, ladies and gentlemen. Welcome to the CAE second 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. Mr. Arnovitz, you may now proceed.
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 '19 and answers to questions, contain forward-looking statements. These forward-looking statements represents our expectations as of today, November 13, 2018, and accordingly, are subject to change. Such statements are based on assumptions that may not materialize and are subject to risks and uncertainties.Actual results may differ materially, and listeners are cautioned not to place undue reliance on these forward-looking statements. A description of the risks, factors and assumptions that may affect future results is contained in CAE's annual MD&A available on our corporate website and in our filings with the Canadian Securities Administrator on SEDAR, and the U.S. Securities 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 line to calls from members of the media.Let me now turn the call over to Marc.
Thank you, Andrew, and good afternoon to everyone joining us on the call. I'll first discuss some highlights in the quarter, and then, Sonya will review the detailed financials. I'll come back at the end to talk about our outlook.CAE had a good performance in the second quarter with 20% revenue growth, 15% earnings growth and strong free cash flow. I'm especially pleased with the continued progress we've been making with our training strategy, as demonstrated by $986 million in orders in the quarter, giving us a record $8.7 billion backlog. Overall, our performance in the quarter and year-to-date supports our full year outlook. Looking at Civil, we generated double-digit growth during the quarter and we booked orders for $575 million, for a record $4.3 billion backlog. These include our new 5-year Multi-Crew Pilot License cadet training program with Air Asia, exclusive training contracts with CityJet, OceanAir, LOT Polish Airlines and Air Busan, and our new long-term training contract with Starspeed.In products, we sold 16 full-flight simulators in the quarter, which brings us to 34 sales of simulators in the first half of the fiscal year, tracking above our initial outlook. Training center utilization was 72%, which is up 2 percentage points from last year. In Defence, we generated high single-digit growth during the quarter and we booked orders for $380 million, giving us a record $4.4 billion Defence backlog. Orders included CAE's new 700MR Series simulator for the Royal New Zealand Air Force's NH90 helicopter. We also won the U.S. Air Force C130H aircrew training services contract, adding to our Training Systems Integration programs, and we received order from the Air Force for additional C-130J simulators.Also involving aircrew training services, we renewed a contract for U.S. Air Force's KC-135 aerial tanker training devices, which include upgrades to our simulators. The integration of Alpha-Omega Change Engineering, or AOCE, which we acquired in the quarter, is progressing well, and we're beginning to see benefits from our expanded access to higher-level security programs in the United States.And finally, in health care, we launched a redesigned, fully portable CAE CathLabVR interventional simulator. And together with the American Society of Anesthesiologists, we launched the Anesthesia SimSTAT - Robotic Surgery module, the latest in a series of interactive screen-based courses approved for maintenance of certification credits.With that, I'll now turn the call over to Sonya, who will provide a detailed look at our financial performance. I'll return at the end of the call to comment on our outlook. Sonya?
Thank you, Marc, and good afternoon, everyone. Consolidated revenue for the second quarter was $743.8 million, and quarterly net income was $60.7 million or $0.23 per share. This compares to $0.20 in the second quarter last year, excluding the gain of approximately $0.02 per share from the divestiture of the Zhuhai Flight Training Centre. Income taxes this quarter were $15.2 million, representing an effective tax rate of 19%, compared to 23% in Q2 last year before the gain on ZFTC. Free cash flow improved in the second quarter, reaching $137.7 million compared to $63.5 million last year. We had a lower investment in noncash working capital and a higher cash from operating activities.As in previous years, we expect the portion of the noncash working capital investment to reverse in the second half. Uses of cash in Q2 included funding capital expenditures for $40.9 million, mainly for growth, and we distributed $25.7 million in cash dividend. We used another $37.2 million to repurchase stock under the NCIB program.Our financial position continued to be strong with net debt of $795.1 million at the end of the quarter. Our net debt to total capital ratio was 25.8%. Also, return on capital employed increased to 12.8% this quarter compared to 12.6% last quarter, excluding the impacts of fiscal 2018 income tax recovery related to the U.S. tax reform and net gains on strategic transactions relating to our Asian joint ventures.Now looking at our segmented performance. In Civil, second quarter revenue was up 24% year-over-year to $393.1 million, and operating income was up 19% to $63.3 million, for a margin of 16.1%, excluding the gain on divestiture of ZFTC last year.On the order front, the Civil book-to-sales ratio for the quarter was 1.46x, and for the trailing 12 months period was 1.49x.In Defence, second quarter revenue of $320.3 million was up 18% over Q2 last year, while operating income was up 2% to $34.1 million, for an operating margin of 10.6%. Excluding the impact of reorganizational and integration costs related to the purchase of AOCE, Defence segment operating income would have been $36.1 million or 11.3% of revenue, which is up 8% compared to the second quarter last year.The Defence book-to-sales ratio was 1.19x for the quarter and 1.03x for the last 12 months. And in Healthcare, second quarter revenue was $30.4 million, up from $28.3 million in Q2 last year. Healthcare segment operating income was $1.3 million in the quarter, down from $2.2 million in Q2 of last year, as a result of higher investment in selling, general and administrative expenses, and higher research and development expenses to support recent product launches.To sum up, we had a good performance overall this quarter, with solid year-over-year growth in Civil and Defence, which would have been even stronger if not for the impact of the 5-week work disruption in our Canadian manufacturing operation this summer.The interruption reduced the number of product deliveries we could achieve in the quarter and also affected our ability to reach milestones on a number of programs. We had already expected revenue recognition to be more back-end loaded this year as a result of IFRS 15 implementation, the interruption makes it even more so. We implemented a recovery plan in the second and current third quarter, with several measures designed to accelerate production capacity, including establishing a second assembly line for high-volume full flight simulators. The net result with that extra capacity running in parallel, we will reach a substantially higher level of delivery milestones in the fourth quarter compared to the current third quarter. Accordingly, deliveries in Q3 are anticipated to be more closely resemble the levels we saw in the first 2 quarters of the year. The overarching positive is that our recovery plan is on target, and with these measures, our full year outlook for growth is intact.With that, I would ask Marc to discuss the way forward.
Thanks, Sonya. We continue to see good momentum with our training strategy, as evidenced by the important developments announced last week, which further strengthen our long-term growth investment thesis.We continue to be highly positive of our prospects in Civil. In business aviation training, we're well-positioned to provide an excellent customer experience with our global reach and industry-leading solutions. The announcement that we've agreed to acquire Bombardier Business Aircraft Training further solidifies our position. The acquisition will expand our ability to address the business aviation training market and give us greater leverage across our training network.It fits right into our core and aligns very well with our strategic objective to grow recurring revenues. It also gives us the ability to leverage our expanded position on Bombardier business jet platforms across the entire CAE global network.The acquisition gives us a bigger position in the largest and fastest-growing segment of the business aviation training market, which involves medium and large cabin business jets. It gives us a broad portfolio of customers and establish recurring training business, highly talented people and a modern fleet of business jet full flight simulators.We also signed an agreement to extend CAE's authorized training provider status for flight and technician training to 2038. Taken together, this is a major step forward in the progression of our growth strategy in aviation training, and will have a positive impact on our performance.In its full year following the closing of the transaction, which is expected by H2 of calendar 2019, the acquisition is expected to provide CAE high single-digit percentage earnings accretion and is also expected to be accretive to free cash flow.We also expect to continue making good progress in commercial aviation training. The announcement last week at the European Airline Training Symposium of a long-term training outsourcing agreement with easyJet is an example of the kinds of opportunities in our pipeline to increase our share of the airline training market and to form new, enduring customer partnerships.Under the $170 million 10-year agreement, all of easyJet's pilots will soon be training at CAE in 3 European pilot training locations, including a new state-of-the-art training center at London Gatwick, with a dedicated wing for easyJet.In Civil products, based on our level of success in the first 6 months, we're on track for our best year ever. In Defence, we expect to continue winning our fair share of programs, building on our successes as a training systems integrator. We have good momentum with our recent wins of the U.S. Air Force C130H aircrew training system and the New Zealand NH90 programs. Our acquisition of AOCE positions CAE as a training partner to the United States Air Force's Special Operations Command, training aircrews on variants of the C-130J and HH-60 Pave Hawk helicopter as well as a platform that's new to CAE, the CV-22 tiltrotor aircraft.The AOCE acquisition has also us working with other platforms new to CAE, providing training for United States Air Force aircrews on the F-15, F-16 and F-22 fighters.We recently signed a strategic agreement with the government of New Zealand to work together to address its long-term defense training needs, and CAE is excited to be part of the team selected as the preferred bidder for the new Royal Canadian Navy's Canadian Surface Combatant program. While too soon to quantify, both avenues present potentially sizable opportunities for CAE over the longer term. Overall, we're continuing to pursue a large defense market, with over $4.9 billion of proposals in the hands of customers' pending decisions. And finally, in Healthcare, our new products like CAE Juno and CAE Ares are being well-received by customers, giving us greater access to some of the larger value pools in the existing market. We expect to see the health care business ramp up to more meaningful scale, and I continue to be optimistic about its potential as CAE's innovative training solutions become more broadly adapted.In summary, we have good momentum in all of our markets, and we are on track to deliver on our growth outlook.With that, I thank you for your attention. And we're now ready to answer your questions.
[Operator Instructions] Our first question coming from the line of Kevin Chiang with CIBC.
Maybe just a clarification question in regards to the acquisition of the Business Aircraft Training division from Bombardier. You've noted that it will add about 100 to 150 basis points to your margin within Civil. I'm just wondering how that -- how I should think about that flowing through seasonally within the divisions? When I look back over the past 4, 5 quarters, your margins run between, let's say, 16% to 21%. Is it -- should I think of it just lifting everything by 100 to 150 basis points? Or does it have a greater seasonal impact in your low quarters because there's more wet training involved, and the top end kind of sticks around 21%? Just trying to get a sense of how this works through the year for you?
Okay. Andrew?
Hi, Kevin, it's Andrew. Let me see how I can help you with that. I think, the way I would look at it is that our reference is always on an annual basis. So when we're looking at what Civil achieves on a yearly basis, figure on about 100 to 150 basis points lift from the acquisition. Look, we've seen with our experience in business aviation that our fourth quarter tends to be a big quarter for business aviation. So I'm not sure it's important enough to establish as a seasonal trend, but that's probably something that I would take into consideration.
Okay. That's helpful. And then, just in terms of the back half of the year, you noted some integration cost with AOCE. Are there additional, I guess, integration cost drags to consider in the back half? Or are you basically through most of that now?
No. So we're -- integration is progressing well and working through kind of all the synergies. We do expect some remainder integration cost in the back half, about $1 million to $2 million.
Okay. That's helpful. And just lastly for me. Just turning to health care, you're bouncing around $30 million in revenue pretty consistently here, and I know you're very positive on the long-term outlook, but do you have a sense of when this revenue hits an inflection point that drives to a much improved margin profile? Or is this a situation where you're holding steady and, eventually, the market will come to you and you get that big revenue lift that you're expecting? Just trying to get a sense of, do you have a sense of when revenue gets better? Or is this more of a longer-term trend outlook?
Well, I think, our expectations are, as you might expect, reflected in the outlook that we've given. So I do expect a lift. I think what we're seeing is that we have a bit of an inflection in -- that we -- which occurred -- been occurring in our business, where we've been shifting our strategy over the past year towards what we call the larger value pool in this business, which is nursing training. So we basically focused our R&D coming out with new products that were specifically destined to enter this market, and those are CAE Juno and CAE Ares. And those products are -- we see those products being well-adopted by the market, we're increasing the sales of those. There are lower part cost point, different markets, less complexity, but ideal for that market. We see those progressing, but at the same time, what we see is in our existing market, the -- which was high fidelity, a bit more of a flat situation. So always see us overcoming the -- if you like, the time flow which just met me now it was coming, just the time it takes to penetrate that market, it's really going after penetrating share in that market. We're confident the market exists, products are resonating. And I think that, again, it will come up in -- what we expect is the revenue will follow the expectations we have in our outlook. I won't go further down the road on that 1 additional year, except that I continue to be confident that this is a growth story, at which many scale for CAE. So yes, I'm still confident based on what I'm seeing. But admittedly, to your point, numbers don't reflect that at the moment.
Our next question coming from the line Fadi Chamoun with BMO Capital Markets.
First, just congratulation on this deal for business jets, I thought it was pretty good. But I wanted to ask, in the recent quarters, we've seen kind of a slew of announcement in civil aviation. Has something changed kind of in the marketplace that has unlocked these opportunities? Or is it just this is the fruit of a lot of work that got into it to get to this point? I'm just trying to understand the kind of underlying trend here, where airlines have become a little bit more open to these kind of outsourcing deals to these kind of negotiations with you? Or is this just kind of a fluke that happened, kind of all these deals happening in the last few quarters at the same time?
No, it's definitely not a fluke, Fadi. I think I was in a couple of quarters, at least on a call, I said that -- I used to say, going back 2, 3 years, that when I look at the market, we had the credibility to be able to identify and secure 1 or 2 deals like this in any given year, and that was about the market that we could see. But in recent quarters, we definitely see more appetite for that, and it's really because airlines are really concentrating on what their core business is, which is to efficiently fly passengers. And we've offered them a very credible alternative because that's all we do. If you think about it, what we do, and airlines is look, it will take care of basically the pilot training part of your operation. We're very credible at it, we have the capability, we have the scale. And because we train, I think, our recent numbers are training more than 180,000 pilots a year, we've been able to develop an expertise in that and to do that very efficiently with the -- ensuring the initiatives that we had that we announced over this past summer about digital innovation, being able to provide unique insights to our customers on their flight crews. And flight -- obtaining pilots these days, able to secure that capability and manage effectively becomes that much more important when pilot [ shortage ] are getting to be the norm around the world. So -- and that particularly dynamic is a conversation starter at many airlines just by itself. So it's not a fluke, and I continue to see a good pipeline with those opportunities in the future.
Okay. And I guess I wanted to ask, as far like the pipeline go, is it kind of getting stronger compared to, say, a year ago, 2 years ago? And so you're going to raise your CapEx to handle almost that volume coming at you? With this acquisition, does this kind of constrain your ability to go after some larger outsourcing deals because the CapEx need may be significant?
I think that -- well, the latter question, I would say, look, I think that as you hopefully see in our results, is that the CapEx we're deploying is highly accretive, very soon, to our numbers, and we look at them on that basis. I think, Sonya, I know I would call you, but definitely, even including the acquisition that we've just announced and the CapEx that we've increased for this year, I don't think that puts a constrain on us being able to go after, definitely increase outsourcing and opportunities. Don't forget that business aircraft in itself generates a high degree of cash flow, it's all wet. So as we've said, this is highly accretive pretty fast. Sonya, do you want to add anything?
Yes, just maybe to add on to that. So the pro forma leverage that we've kind of guided to at closing is expected to be at 42% net debt to total cap, which is comfortable within our target range for leverage. And we expect to generate some good free cash flow out of the business jet operations, in addition to our own underlying cash flow, which allows for deleveraging to the lower end of that range in 24 to 6 months. So between the cash flow generation, the strong balance sheet, it continues to provide good flexibility for us to capitalize on opportunities as they come along.
Our next question coming from the line of Jean-Francois Lavoie with Desjardins Capital Markets.
I just wanted to take -- ask a question about the contract with easyJet. You mentioned that easyJet will take a portion of your capacity at the new facility in London Gatwick. I was wondering how much excess capacity were you after that product or new trainings contract with new customers?
Do you mean in Gatwick specifically or?
Yes. Please.
Well, I don't know the number offhand, but we're basically sizing a new facility there. So we already have a facility at Gatwick, and we always size our opportunities to be, say -- we basically walk a tight rope between having enough capacity to be able to serve the market that's there. At the same time, we want to utilize the assets at a very high level. So I think the short answer is, we basically size our capabilities, buildings, number of simulators to the market. There's a very large market in Europe specifically. We have a number of training centers in Europe. So I think we would have capacity. I can't tell you exactly how much. And frankly, I would hope it's not too much right now because [ currently ] we'd have access that wouldn't be fully utilized. But I think we're market-led. So with the -- with whatever market that's out there, you can expect that CAE will size itself to be able to handle it. And we could do it pretty fast because our turnaround, we usually size our buildings and the land that's associated with them to have capacity for growth. And the way we architect our centers, because we have a lot of centers out there around the world, we architect them in a fashion that is pretty simple for us to add existing simulator base by having exactly like a plug-and-play approach to the extra. If you like to add an extra, we'll have the building and we managed to secure the land beforehand.
Okay. Great. And maybe again on that contract, I just wanted to -- if you could provide the split between the incremental portion of that contract that will be for CAE?
The incremental -- did you get that one, Sonya?
So the incremental growth from that contract, is that your question?
Yes. Exactly.
So the contract is a 10-year full outsourcing with exclusive to CAE with easyJet. We are already serving easyJet, but essentially, what it serves is about a 40% increase in growth.
Our next question coming from the line of Ronald Epstein with Bank of America Merrill Lynch.
It's Kristine Liwag. Marc and Sonya, you guys have now acquired Lockheed's commercial flight training business, and you've acquired these assets from Bombardier, are there opportunities like this out there where you can acquire more training businesses from the OEMs? And is there a consolidation that you could do?
Well, I think, what we said in the past is that we have the -- this is our business, this is our focus. Our vision is to be the training partner of choice for our customers. So you would expect that if there's opportunities out there and they fit our criteria for the type of business, the type of assets and, of course, the financial liability of that, we would be open to it. And I can't talk for any OEMs particularly or anybody else who have their business, but certainly, we seek to form partnerships with those OEMs, and to be -- and if an acquisition works out, we would certainly be receptive on their -- provided with what I said, that has to make sense for us financially, for how we can serve our customers and grow our business along the lines to achieve the vision that we have.
And as OEMs walk away from these businesses, can you discuss how that's affected the pricing environment?
Well, I don't think that's a factor in the pricing environment, to be very frank. I mean, all of these businesses are still very competitive. So the margins that we would have is the one that we talked about in our outlook, and I don't think these particular deals in itself would affect one way or another to margin expectations that we would have.
And shifting, I guess, to margins. It's a good segue. Can you discuss what you saw in margins in the quarter? I mean, they were just a little bit weaker than what we expected. And then, also, with such strong growth and your strong book-to-bill, how do these orders compare with your existing business today? Should we expect these orders to be accretive to margins as they convert to revenue?
Well, I think, the latter. Definitely, the orders should be accretive to revenue, for sure. In terms of the margin profile, I wouldn't read too much about margins in the quarter, to be very frank. Don't forget that Q2 is always -- particularly at Civil, always the quarter where we have lower absolute numbers and lower margins. And because -- a couple of factors, number one, airlines, if you take the training part of our business, airlines are flying a lot in the summer months. And when they train, the aircraft are full, and literally, they're not training, they're flying. So our utilization, typically, in our training centers is low and you see that. At the same time, in our products business, that is the time where we usually have -- and again this year, we have a summer shutdown of our activities and where people take vacations, we have time to refurbish the plants. So we basically -- our activity in earning revenue and profit out of our full-flight simulator business, that goes on as well. And then, this quarter, you had the additional effects of we have a 5-week work stoppage as a result of a strike in our main facility in Montreal. So you sort that all in, and you see the margins that you have, but it all points to the fact of the absolute number, I would say, Civil is up by 19% overall in earnings in this quarter. I think that we're quite happy with the number itself. If you look at Defence, I think you have to consider -- maybe I'll ask maybe Sonya to add additional color, but you have to really take into account that we acquired AOCE. There's a couple of million of acquisition costs in there that are in the quarter. But Sonya, do you want to add any color?
Yes. And I guess, just to complement that, overall, I wouldn't read anything too meaningful into the margin. Strong year-over-year growth on the operating income and holding on the outlook for each of the segments. But just to complement what Marc was saying on the Defence side, you did see a bit, well, the impacts of the integration cost. And also, as the AOCE acquisition kind of ramps up, it -- although it's positive and contributed in the quarter, that has a bit of margin dilution in the quarter.
And again, just to finish up maybe, none of this is highly unexpected and was kind of factored in when we came up with our -- reiterated our outlook this quarter. And again, basically the numbers we give you, which reiterating our full year outlook for all of the businesses.
Our next question coming from the line of Cameron Doerksen with National Bank Financial.
Sonya, I just wondered if you could maybe just sort of walk through, I guess, particularly in Civil, how the quarters kind of looked. You mentioned, obviously, it's going to be a back-end loaded year, but I think you gave some color around sort of, individually, Q3 and into Q4. So maybe just if you could just sort of reiterate what you said there, what we sort of should expect in Q3 and Q4? It sort of sounded to me like we'd have a much stronger Q4, maybe Q3, kind of more typical from what you did last year?
Yes. So we had to invest, and as I mentioned in my remarks, in Q2 and Q3 to create additional parallel assembly line, and this will increase our production capacity to make up for the work stoppage. So we do expect to increase the delivery milestones in the second half, a bit in Q3, but that one, as I mentioned, should look a bit like Q1 and Q2 and the majority of the remaining deliveries probably in Q4. So I would expect there to be more deliveries in Q4. And when comparing to previous year, you'll note on the IFRS adjusted profile that Q3 was actually the strongest quarter last year because it had kind of peak deliveries. And so we expect that to be a little bit different this quarter and the peak deliveries in Q4.
Okay. That's helpful. And just on the full-flight simulator market, I mean, like you said, you are on pace to have basically a record year for new orders for full-flight simulators. Can you just talk about what you're seeing out there as far as kind of market share. Is this something where you think you've gained some share against some of the other manufacturing OEMs for full-flight simulators? Or is it just that the pie is much bigger this year versus last year or previous years?
I think it's the pie, really. But we're still maintaining our leadership in market sales -- market share. I think, 70%, that's probably about right. And so -- and I don't share hurdle rates. Just, to me, it's the size of the pie, lots of activity this year.
Our next question coming from the line of Tim James with TD Securities.
Looking ahead to fiscal '20. I'm just wondering if you can talk about any potential headwinds that there might be to margin expansion in both the Civil segment and the Defence segment, whether it's contract mix, competitive changes, anything like that? I'm just trying to make sure I'm sort of taking into account or thinking about anything that might moderate any margin expansion that we could see next year?
Well, we haven't given any guidance that far out, so I'm not going to give some here right now, Tim. But based on the backlog that we have and the dynamics that we see in our markets, in all the segments, to me, what we see is strong tailwinds everywhere. So I'm not expecting something untoward. I mean, I can't predict the future, and future, admittedly, is not that far away, but based on the future I see, it's good.
Okay. Great. That's helpful. That's kind of the way I was thinking about it. I just wanted to make sure I wasn't missing something that might be a bit of a headwind. But okay, that's helpful. Can you tell us approximately what percentage of current Civil revenue comes from Business Aviation, before taking into account, obviously, the future of Bombardier business training acquisition?
Okay. Before the acquisition. How much was?
Tim, it's Andrew. We haven't really broken it out that way. But training makes up good 2/3 of our Civil business. And business aviation is probably about 40% of that, so just some sense, order of magnitude.
Okay. That's helpful. And then, my last question, just looking at the AOCE acquisition. Could you tell us how much of the backlog or how much backlog was acquired with that transaction?
So about -- we acquired about CAD 500 million worth of backlog there. Now that doesn't flow through in the order intake, it's adjusted into the funded and unfunded backlog, but not necessarily added on as order intake in the book-to-bill metric.
Our next question coming from the line of Chris Murray with AltaCorp Capital.
My first question, just going back to Civil and looking at the deliveries, just -- I'm trying to understand, I mean, you had a fairly significant step down in the quarter. And I guess, if anything, I was a little surprised that the revenue actually held in better than I thought. Of the -- I guess, the way to think about it, or how should we think about, the proportion of simulators that are being recognized as a -- on a completed contract versus still on some sort of percentage of completion. I guess what I'm trying to do is figure out what the magnitude of the step jump is going to look like when we get to the back half of the year?
So the revenue growth, first of all, is driven by not only the product business but the training business, so good growth on both side. Now it might be a little bit counterintuitive given the lower deliveries because they are the major drivers of revenue on the product side. And the majority of the simulators are, call it, accounted for delivery. Now despite the lower number of deliveries, the mix of simulators had an impact, so we had a higher proportion of simulators that included DP&E, which is data, parts and equipment, and that's where CAE flows through the value of the OEM, data, parts and equipment, so higher revenue but same operating income. And so that had an impact on the margin as well and the revenue growth. So those were the major drivers. In addition, there's still some development in customized simulators, which are accounted for under POC, but that's -- the proportion is much less than at delivery.
Okay. That's helpful. And then, just thinking about your production rate then, is it fair to think that with the booking numbers that you're doing, it's really to bring it to a kind of a 1:1 book-to-bill? Or is it that you're just trying to build some extra backlog just to give you some more flexibility?
You mean in terms of the -- because of the anticipated higher deliveries in the latter half, is that why you're asking the question?
Yes. Well, I guess, what I'm trying to think of, Marc, is that you're -- I mean, you've had some pretty strong order intake over the last little while. And if we even look at your trailing quarters, you're certainly trailing behind that 1x book-to-bill, basically because you don't push it out. I'm just wondering if the changes you made in the process are intended to speed up your production rates, so we should expect a step up in the next year on actually -- on deliveries that would be maybe dragging down book-to-bill a little bit, but more on a catch up basis?
I'm not sure we're coming from, where it was down [indiscernible] that's 20 on the dropping book-to-bill because I don't see that. But our new process that we -- that's fully in place and has been for quite a number of quarters, that was started in a year, in what we call a [ Quest ] program a couple of years ago, which is complete, allows us to be able to deliver -- to manufacture simulators in less time. So we are -- we have increased our production rate. Now right now, it's in -- the last half of the year, it's going to be much higher because we're recovering from the strike that we have this summer, so we're accelerating deliveries. We have actually a parallel line simulators that are running, our high-volume simulators, our separate facility producing simulators, that's why we think we can catch up, and we expect that we'll catch up in the second half because we want to make sure that we don't disappoint our customers that expect these simulators. So look, we'll match our delivery rate to the numbers of orders we can expect in the market. We're not production-limited, we can get the personnel that we need, so we're not capacity-limited in terms of what we can do. And maybe when I look at the -- if you look at the number of sales we had, don't forget that they don't all deliver in the next year, some may be delivering over 2, 3 years, for example. So I don't know if that helps, but that's what I would say to that question.
Okay. Fair enough. And then, if I can, just 2 quick questions around the transaction with Bombardier. First of all, with the increased training mix and just some geographic changes, any thoughts about how this changes your tax profile?
Well, the business jet training is a high margin and high cash generating, and so as we've guided, we expect our earnings accretion in the first year and also free cash flow accretion. So it should contribute to the high cash generating of the company.
I'm thinking about, does it change your tax rates or anything like that with the source of income in the U.S. or anything like that?
The majority of that -- well, the operations are here in North America, so we will increase our exposure in North America. But one of the benefits of this acquisition is really expanding through the new platforms, and a halo effect across our global network. So I believe I'll change the mix throughout the world. So right now, it doesn't really change my view on tax. But as we close, if it changes materially, we'll guide.
Okay. That's fair enough. And then, the last question for me is just on the margin agreement -- or sorry, on the royalty agreement. I'm assuming because you're taking a discount on, I would assume to be, kind of recurring payments and just lump sum it and depreciate it over the life of the agreement, what kind of margin impact should we be thinking about in terms of the Civil margin over the -- once you've got that in place?
So you're right, this was basically future cash flows that we've discounted back and prepaid in exchange for a 10 -- for an APP agreement up till 2038, at an attractive discount rate of our cost of capital. What we'll see is, of course, I guess, capitalization and we'll call it depreciation over time in the P&L. Now the impact of this transaction has been included in our guidance, which is low -- high digit, single-digit earnings in the first year, in the first 12 months after closing.
Okay. So the guidance included the royalty impact as well as the training impact?
Absolutely. Yes.
Operator, I think that we'll now want to use the time remaining to open the lines to members of the media. I want to thank all the participants from the investment community for their questions. Operator, if you will, please open the line to members of the media.
[Operator Instructions] There are no questions from the media at this time.
Okay. Well, I want to take this opportunity once again to thank all participants on the call today, and to remind you, the transcript of the call can be found on CAE's website. Thank you very much.
Ladies and gentlemen, that does conclude the conference for today. We thank you for your participation and ask that you please disconnect your lines.