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Executives

Jean-Paul Herteman – Chairman and CEO

Ross McInnes – Deputy CEO and CFO

Marc Ventre – Deputy CEO, Operations

Analysts

Christian Laughlin – Sanford C. Bernstein Ltd.

Robert Stallard – Royal Bank of Canada

Tristan Sanson – Exane SA

Antoine Boivin-Champeaux – Natixis SA

Zafar Khan – Société Générale

Christophe Menard – Kepler Capital Markets SA

Safran SA (OTCPK:SAFRY) Q2 2014 Earnings Conference Call July 31, 2014 2:30 AM ET

Operator

Welcome to the Safran First-Half 2014 Results Conference Call. I will now hand over to Mr. Jean-Paul Herteman, Chairman and CEO and Mr. Ross McInnes, Deputy CEO, CFO. Mr. Herteman, please go ahead.

Jean-Paul Herteman

Thank you. Good morning, everybody. Thank you to be there with us once again. Ross and I, as well as Marc, we'll try to be relatively short in the introduction so that we keep – we can keep that time for your question. Knowing that, I've been told, there's another conference call from one colleague of us later on this morning. And maybe, some of you could be interested to attend to the other meeting as well.

Well, a very good first semester. If we go to the figures, growth in revenue around 5%, a strong increase in profitability, operating income, even better than we did expect with growth of operating income by 16.5%, and based on that the confidence we have and the visibility we have of the rest of the year, we are upgrading our guidance relative to operating profit. And we'll come back to that later on.

Net profit, you may see some little drop, but it's just because we have to remember that last year we had an exceptional earning based on the sales of 10% shares we have in Ingenico, was 100 – something like, €130 million, so on the back-to-back comparison it's a growth of net profit about 15% as we are in operating profit.

The cash – free cash flow is slightly less than last year, because higher investments both in R&D and corporate capital expenditures. We'll come back on that later. The net debt is still well contained at €1.8 billion.

Some business highlights, launch activity, we announced, we and Airbus will go 50-50 into single corporate entity and to build a European launch industrial competitive and the best competition from the U.S. And we are well on line on that project. We just announced yesterday we – some nomination of the fact that we'll manage this important joint venture. We finalized the acquisition of electric assets from Eaton. We have been developing some breakthrough technology in many, many areas including defense, optronics for combat, non-combat vehicles of security.

Maybe some of you who travel a lot in the U.S. have noticed there is a new system from TSA which is leaner than the standard one, it's called TSA Pre and we do that across the – across to the TSA. So you will see that, thanks to Safran technology, you may have even that you are able everyday some return on investment.

Most important, of course, is Farnborough Air Show and the really – still very positive trend in civil aviation. Globally air traffic worldwide is still going at around 6% a year. And narrowbodies market is still very strong. You may have noticed there is a few consolidation that if you look into more detail, the majority of consolidation on 320 are nothing but has shifted to A330neos.

And honestly, the market is still very, very strong. You will recall the savings from last Farnborough. We have now more than 7,500 LEAP engines in the backlog. CFM56 classic is still selling well both in terms of volume and pricing, which go to the big, big players like American Airlines and easyJet, that's more than references in this business.

And technically-wise developments of the third LEAP model is doing very, very well with high investment profile to match the schedule and accommodate very, very strong ramp up production that investment today for profit of tomorrow and on the long term as well. We have finalized the partnership into the GE9X power plant for the 777X at a level of 11%. Something interesting technically-wise is that, we do on that engine there what we call the forward fan case, which is a very, very big box and it will be made just with the advanced composite technology we are investing on the LEAP for the fan blades and the fan case as well.

So you see, not only we do not have any technical issues with the implementation on this technology but we do have confidence in that to extend it even to new – to other programs and bigger engine nacelles. We have been selected by Airbus for the nacelle of the A330neo powered by the Rolls-Royce Trent 7000. We have signed an agreement of a JV regarding accessory and transfer gearboxes with our colleagues of Rolls-Royce and as a consequence of that we will do the accessory gearbox Rolls-Royce gear boxes of the Trent 7000 of Rolls-Royce.

In our businesses in civil aerospace are doing – are doing quite well, whatever its carbon brakes or other equipment. The transition CFM to LEAP is doing well with even more LEAP and even more CFM56 that we did anticipate. Of course, cash-wise it's put some pressure in the system that once again it's investment for return and reasonably short-term and strong return.

What to say more, of course, yes, services. Services in commercial engine market is growing as expected. But on the half of the year, it's 9.4% growth. You may argue that it's only 6.5% growth in Q2, but please do remember that we got last year quite unusual growth in Q2 2013, that's compared to 2012 was 24% something. So if you sum up 24% and 6% it's around 30%, the average on two years is 15% on that's typically more and more – more representative of the global trend than quarter-to-quarter on the yearly based comparison, because we still do have some significant volatility into the system. The basic trend is still the same. I mean strong growth on GE90, a strong growth on second generation CFM56 and a strong decline in engine CFM56. The good news being that all along the time the share of first generation CFM56 into the global service business is less and less. It now accounts for just a little bit – something a little bit above 20% and it will be down 20% pretty soon.

So we still are totally confident with our guidance for a growth in services of commercial engines and specifics for this year. Ross, you have the floor for detailed figures.

Ross McInnes

Thank you. I'll kick off on page 10, to remind you that we adopted IFRS for this year, our accounts are therefore restated, we gave detail in April. This is just to remind you of the impact on a half yearly basis. It deprives us of about €160 million of revenue, little impact in operating income and increases our debt, reduces our net cash by about €150 million.

Page 11 reminds you of the foreign exchange volatility. The average spot rate $1.37. As you'll see that in the impact on the turnover, but none on profitability given our hedge, with the exception of translation, i.e. conversion, in particularly in security where our business is native dollar in both costs and revenue. The transaction effect was positive, because our hedge rates continued to improve from $1.29 to $1.26 and, of course, the mark-to-market of our dollar position is hugely favorable. It's currently close to €1 billion, but that will be spread over a number of years as it goes to the P&L.

Page 12 is the usual spread from consolidated data to the adjusted data. As usual, the main differences are business combination amortization and our treatment for currency hedging. Page 13, the overall picture and I'll talk about revenue and recurring operating income in a second, but as Jean-Paul mentioned it's reached – our recurring operating income has reached a record margin of 13.6%, virtually no one-off items, some M&A expense and some minor restructuring in our security business to make that more efficient.

The page 14, gives you the full view of the income statement. Our profit from operations we shall discuss. Net financial expense, €11 million negative, our average debt increased to €1.4 billion, the result of the impact of the acquisitions of GEPS and of Eaton. Cost of debt came down and the non-cash items were not significant in the first-half of this year compared to last year. Payroll taxes last year was that we had a relatively low task rate for reasons linked to combinations of former loss making businesses in Sagem Communications the year before.

The impact of that in cash was in 2013. This year we are paying more tax in both cash terms and in P&L terms. And as Jean-Paul mentioned, last year we had the gain on the disposal of the Ingenico shares of €131 million, of course we don't have this year. Nevertheless, net profit is fairly close to last year's, notwithstanding the absence of the one-time gain.

Slide 15 on revenue on revenue and that can also be read with pages 38 and 39 in the back of the book. On the revenue you'll notice the negative currency impact, that's the dollar and some of the exotic currencies, which in terms of turnover deprives us of about €150 million or €160 million of turnover. But a lot of that was recouped through the hedging and all of it when it comes to operating income.

You should notice the impact of acquisitions, €55 million, that's in particular on the extra three months of RRTM and you'll see on the next slide that that is an extremely profitable acquisition. In terms of the make-up of our turnover, which increased by 5% organically, well it's driven by the volumes which you see on page 39, both growth in CFM engines, up 3%, our high thrust engines growing and also a doubling of the 787 landing gear set. You'll see the same phenomena in the cabin and the cabling and that's one of the things which is driving the increase in profitability of our equipment business, more of that in a second.

In terms of the services revenue split, you'll see the services overall are growing by 7% in euros and OE by 4% in euros, and that contributes significantly to our profitability, which is mentioned on page 10 – page 16, I beg your pardon. You'll see that I've mentioned the margin going to a record 13.6%, a positive currency impact. That's the impact of the hedging improvement, notwithstanding some of the negative conversion impact.

The significant contribution in acquisitions €14 million in operating profit on €55 million extra turnover. You'll see the very strong margins on the RRTM business. Overall acquisitions were positive, foreign exchange was positive. The P&L impact we'll see later, R&D was, we spent – or we put about €50 million of R&D extra through the P&L in the first half.

Provisions were on the increase, which is normal as we grow the business and in our usual prudent way make provisions for all sorts of technical guarantees and services we might have to render in the future. And therefore, the increase in profitability raised as much as 16%, was done despite significant addition to this. It shows the underlying strength in earnings. EBIT was up – EBITDA was up over 20%.

I'll spend some time on R&D, which is page 17. The overall – our self-funded R&D 9.8% before the impact of the R&D research tax credit, that's re-leveraging a bit, after the tax credit €636 million was spent on R&D. The major rocks – the major parts of that were on the fundamental R&T approximately €200 million, that's the €400 million annual basic spend on R&T, none of which is ever capitalized. The other two big items of expenditure as you would expect the LEAP, a couple of hundred million, doubling versus last year as the program picks up steam and Silvercrest is reported stable at €100 million of spending of R&D.

Our capitalization increased by €65 million. That's the last time that's going to happen as in the full year you will see capitalization come down on the prior period as we had planned. We will cease to capitalize Silvercrest development as of April 1, 2014. We capitalized half of it this year according to our standard and hence you'll see the P&L impact of R&D up – the P&L impact up €49 million.

If we look to the full year we have initially planned approximately €1,300 million in R&D self-funded. But our outlook is today somewhere between €1,350 million and €1,400 million, a slight increase therefore versus what was planned. The 20115 outlook should get us back down to €1,300 million. Now the reason for that – the increase in R&D this year is slight increase on Silvercrest, the anticipation of some spending on the GE90 as our selection was confirmed. And also on the LEAP, where we're accelerating both the development spending and the CapEx in order to be ready for faster production.

In the last few months, the backlog of LEAP has increased very substantially and the rhythm at which we shall have to produce them, as you'll see from one of the earlier slides is also increasing substantially. So both the CapEx and the R&D have to prime up for that. We're in a situation where our CFM56 is living longer and the LEAP is selling faster. The combination of the two requires us for very virtuous reasons to increase the development expense to-date. It will be reduced in 2016 and 2017 as we're largely anticipating rather than decreasing.

If we look at Slide 18, the results by activity, you will see the improvements in the margins, in particular in the equipment business which is now 9.5%, it was 8 – below 9% this time last year, propulsion posted 20%, stability in security and in defense. There are details on the subsequent pages, but in the interest of time I propose to answers questions later rather than go into detail, and move to foreign exchange hedging, which is at page 53, where you'll see that we have pursued our policy of hedging three years out. The difference is that exposure is now increased to €6.2 billion to €6.5 billion, which is good news in terms of the growth of our business. We are solidly hedged for 2015 at 1.25, of course this year will be – 2014 will be 1.26.

We have continued our strategy for 2017 and you will recall that for 2017, $4.8 billion was achieved, mainly through optional products with knockout thresholds. Those thresholds are at 1.40, 1.40, 1.44 and 1.46, so limited periods in 2014 and a bit in 2015. Today – looking at it today with a swap at 1.34, those knockout barriers look fairly distant given the timescale.

As I said, most of them will expire this year, which means that we feel that we're on very good track to secure close to €5 billion and something in the region of 1.26, 1.27 for the next three to four years, which given where we stand today looks extremely secure. That will drive page 24, some continued improvement in the impact on operating income from our foreign exchange hedging.

Free cash flow on 25, here you will see the adjusted net profit, depreciation, amortization and provisions increased, provisions were higher. Once again, our prudence dictate that we make various provisions as volumes increase. Change in working capital, there was some increase in working capital to cope with rising production rates throughout our businesses. We talked about the CapEx increase, which are necessary for both the propulsion business and the equipment business and in particular to cope with CFM selling longer and LEAP selling faster. We've talked about intangible assets in the R&D part.

Page 26 gives the overall view of our debt position, which has started at €1.2 billion, still very moderate €1.8 billion, as you'll see – you'll have seen the impact of the items we've talked about previously, the dividend, obviously the increased dividend payout and its impact in June. And acquisitions, the biggest chunk of that €340 million was the Eaton disbursement and some capital increases in non-consolidated subsidiaries, in particular in the composite businesses both in Rochester in (inaudible) in eastern France.

The balance sheet, page 28, the two major lines the increase in tangible and intangible assets, which is the impact of the increased capitalized R&D and the increase in operating working capital which is very close to what we saw on the earlier phase. Customer financial guarantees have not changed. Back to you, Jean-Paul.

Jean-Paul Herteman

Thank you, Ross, and I'll very quickly just go to the full year outlook. No change regarding revenue, still expect that to increase in the mid single-digits. So regarding recurring operating income that we now expect to increase by something approaching the mid-teens as compared to the previously low double-digit. And as well in free cash flow that we now believe to be achievable at the level of 35% of just recurring operating income as compared to previously close to 40%, keeping in mind that the denominator, I mean the recurring operating income will be somewhat higher.

And that we also have to take into account updated assumption for slightly higher – increased self-funded R&D and tangible CapEx, and keeping in mind as well that we still do have some uncertainty regarding the amount of advance payments and the rhythm of payments by big state customers for the second-half of the year. Now, that's all for our introduction.

I hope we have been clear, but we have now a reasonable period of time for addressing your questions. Please go into the questions now.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from Christian Laughlin from Bernstein. Please go ahead.

Christian Laughlin – Sanford C. Bernstein Ltd.

Hi, good morning, everyone. This is a question from Bernstein. Just one question please on capital allocation, and really just over say more of a medium or longer-term view over the next three to five years. In the set of conditions where your cash inflow exceeds what is needed for organic investment, as well as what you need for a cushion if you will to support production transition to LEAP and production launch of other new engines and new equipment, how do you think about prioritizing where that excess cash goes, is it more towards say dividend or another channel like buybacks in terms of returning that excess cash, or something else?

Jean-Paul Herteman

Okay. That's a good question. Well, nothing is excluded, knowing that, I mean at management level, we do have our – I mean, 200% focus on executing the transition to LEAP and all that type of things which we do have a very strong view of investment projects programs in helicopter engines as well and security. So that – how to say that, Ross? We keep our mind open but obviously we are more in a mood to focus ourselves in executing and delivering the big investment which is something that happens in the history of an aerospace Tier 1 like us every 30 years or so.

I mean we'll keep a few months or few time to make up our mind for more medium to long-term perspective in terms of devising the capital allocation. Ross, do you want to add any color on that?

Ross McInnes

I'd remind you that in terms of R&D, this year is probably the peak, personally the peak, so will be coming down by €100 million or €150 million next year. That still leaves quite a bit to do. The development is not over. And in terms of dividends, you should remember this, and we've been fairly regularly increasing the dividend substantially and in a sense our dividend spend is approximately €400 million to €500 million at a time when free cash flow is in the €600 million to €700 million range.

And the Board has done that for the – with the opinion that it's right that we should distribute significantly, despite the fact that our cash flow is burdened by extraordinarily promising investment opportunity, but that also should be borne in mind that we're distributing fairly significantly and have done on an increased basis now fairly constantly.

Christian Laughlin – Sanford C. Bernstein Ltd.

Okay. Thank you.

Operator

Thank you. We have a next question from Robert Stallard from Royal Bank of Canada. Please go ahead.

Robert Stallard – Royal Bank of Canada

Thanks very much. Good morning.

Jean-Paul Herteman

Good morning.

Robert Stallard – Royal Bank of Canada

First question on the aerospace aftermarket, you reiterated your guidance for the year. That seems to suggest you've got a lot to do in the second half, particularly with a tough comp in the third quarter. I was wondering if you could explain how you're going to get to this number.

Jean-Paul Herteman

Well, once again the trend on the sales path is very well in line with our predictions and so consistent with the full year prediction. The trend on G90 on the second gen CFM56 is really, really strong. The decline on the third gen CFM56 is stronger than was expected in the second quarter of 2013 was exceptionally high regarding CFM56 third gen. And we knew that for sure, we don't have quite the same type of mix in the second-half of the year. So while not really – Marc, maybe you can comment, so on, but we are very, very confident about the aftermarket trends for this year and we – of course, we see the next years, even for this year we are pretty confident.

Marc Ventre

Marc speaking. I will just reconfirm that the trend on the second generation CFM56 is now there. I mean, the gross in aftermarket in this range of engines is above 20% as expected. So, once again, don't be troubled by the engines combined in – Q2 2013 was up something like 24%...

Jean-Paul Herteman

24%.

Marc Ventre

…compared to the previous year. So now if you compare to that, it's now more that you have only 9%.

Ross McInnes

Q2 2013 was very high because of particularly the (inaudible) Q3 2013, that was part of allocation was high as well, but because Q2 of 2012 was pretty low, so above all, earlier we may be wrong, but we do look very confident.

Marc Ventre

Yes, we are confident achieving what we said for the year – for the full year.

Robert Stallard – Royal Bank of Canada

Okay. And then second question, Ross, you mentioned that R&D is expected to peak this year and decline next year. Is CapEx expected to follow a similar pattern?

Ross McInnes

Yes, with a slight lag, but by and large yes.

Jean-Paul Herteman

Yes.

Robert Stallard – Royal Bank of Canada

Okay. Thanks very much.

Operator

Our next question is from Tristan Sanson from Exane. Please go ahead.

Tristan Sanson – Exane SA

Good morning, everyone. So it's Tristan from Exane. Two, three questions if I may. The first one is on provision, so indeed the headwinds you have to face in each one, and looking at the notes of your accounts, I'm surprised by the €132 million increase in services to be rendered – probably rendered, you have to face, and actually performance is quite impressive, I must say.

The few questions I have are first, are these provisions mainly in propulsion or should we consider that there is also some important provision movement in equipment or in other development? And what is the kind of visibility that you have on it? I understand that it's more or less proportionate to the execution of your backlog, with a bit of lead time. So does it mean that you know exactly what will be the phasing of this provision over the next 20, 24 months, or is there some volatility in this?

Second question is on your dividend performance versus the 2015 outlook. Asking you that question of sort of full year numbers, you were okay to say that propulsion and equipment were probably trading ahead of the 2015 target and defense and security were trading behind and at Group level you were on track for that on defense. Is that still the case or do you see a slight difference in the mix?

And the third one is a detail on the defense performance and the R&D spending in defense in H1. So you have a big step-up in R&D spending in that division. Is that a trend, a general trend of reinvestment in the division or is it a question of phasing of program in a specific situation to this year or to this half of the year? Thank you.

Jean-Paul Herteman

Thank you, provisions.

Ross McInnes

I'll do the provisions, and I'll just remind you that what was said for 2015 is we're heading for the mid-teens and we're clearly on track for that. So on the provisions, as you see from the notes to our account, as OE increases and as we take orders, we are extremely conservative in how we account for risk. So yes, you can expect provisions for services to be performed to continue to increase.

Offsetting that, we have a reduction in loss-making contracts. And therefore the provisions which we make for those are coming down and we're consuming the ones we had put aside for things like the A400M and on the SaM146. Our production costs on the SaM146 engines have come down very significantly, and that enables us, as we deliver the engines and as we take down the level of provisions overall, and so that's an extremely healthy symptom.

But you can count on us to continue to be extremely conservative in the way we cut for future liabilities. You see that on the cash because of the EBITDA impact. On the outlook for 2015, heading for the mid-teens seems very much on track and on defense?

Jean-Paul Herteman

Defense R&D you probably have noticed that from the very long – we are running this business with a level of sales, so some with R&D higher than the average of the market. To be fully exhaustive, remember that we have gathered all our direct assets inside Sagem. So that when we say defense, it covers all our units or part of it, the majority of it being a civil business.

So that's a little bit concerning, but okay we cannot slice our organization and business in tiny things. On the increase where you see in a sense some of the R&D this year adding to some type of dual use or single use of avionics, the level we have this year, and it is not to be considerable as well as a normative level. But nevertheless we'll continue to manage our – sorry for my voice, I think (inaudible), but sorry for my voice. We continue to manage defense focused on technological initiatives, avionics, (indiscernible) some high level of technology innovation that we will not stay at the level we are today for very long.

Tristan Sanson – Exane SA

Great. If I may just ask a complement, when I talked about the 2015 outlook, I referred to the dividend outlook you gave during your capital market day 2013 [Multiple Speakers] direction for division. So not being precise, but just for the evolution of the mix, proportion still seems to be ahead of plan, equipment on track, and defense and security were a bit behind. You seem okay with that view?

Jean-Paul Herteman

Not that bad, if you look at the first-half figures for defense, they do resist well in the context which is not easy. On security doing also well, keeping in mind that the Smart Chip business is a vast business and that we do have some significant currency translation, in fact, on the security, because we do some significant business in security in the U.S., of course, in Brazil, in Chile, and in India, and we do some significant translation effects of the overall trend, I mean the basic trend security is healthier than that you can see just that we can figure.

So, yes, you are right, but there is not such a big difference between divisions.

Tristan Sanson – Exane SA

Okay.

Ross McInnes

If I might conclude on that point, we are definitely ahead of track in our progress towards that target, but then Tristan is ahead of track in terms of his questioning. We'll talk about 2015 outlook in a few months' time.

Tristan Sanson – Exane SA

Of course, thank you very much.

Operator

Thank you. Our next question is from Antoine Boivin-Champeaux from Natixis. Please go ahead.

Antoine Boivin-Champeaux – Natixis SA

Yes. Good morning Jean-Paul, Ross and Marc. And so I try to save your voice, Jean-Paul, I will read the questions here. So my first one is on the Russian situation, can you comment a little bit from the risk attached to the current situation both on your sales to Russia and also on your supplies, for example, with titanium, so could you give us the mitigation effect that you may take on that?

My second question is on the (inaudible) commitment to give an additional 2% fuel burn savings to airlines. Are you going to follow the same route and how can you get to these additional savings? Thank you.

Jean-Paul Herteman

Okay. Russia, our Russian sales are worth about, how much, 2% of our total revenue and they are mostly, mostly civil. So the impact on the new sanction would be not that material as for the corporate level. Regarding supply chain we do supply as most of the western aerospace industry, we do supply a significant part of our titanium in Russia, around 30% to 40%.

There is no evidence so far of the tension of the titanium market, which is still under 10% or so over capacity situation. Nevertheless we take appropriate risk mitigation as additional backup of things being there that you can –– you can imagine we've got some things that we closely monitor on a day-to-day basis.

Regarding competition, what to say? We are absolutely well on track to deliver the performance we committed to with LEAP and LEAP is selling quite well, more than 50% market share on the A320neo. So we don't have so far any reason to do something in addition that we are doing today and what we are doing today is a lot in terms of cash expenditure and engineering, and security and industry reports. So we stay with our product policies, so far it works very well and it's a huge investment, so we don't see any need so far to do different things.

Antoine Boivin-Champeaux – Natixis SA

Okay. Thank you.

Operator

Our next question is from (indiscernible) from Bank of America Merrill Lynch. Please go ahead.

Unidentified Analyst

Hi, morning. Just two questions, firstly just wondering if you've seen an increased level of part outs on CFM56 second generation on how you can sort of help capture that business? How is the performance of CFM materials going, and how can you participate in this market?

And then secondly, I'm just wondering if you could break out the performance of security and how see that progressing going forward? Thank you.

Jean-Paul Herteman

Okay. The second explain about on CFM56 program [ph] is going up significantly, Marc, not really?

Marc Ventre

Not really at all. I mean second generation parts are mostly only on the first generation (inaudible) and we don’t see this market picking up on the second generation engines.

Ross McInnes

On security, where you see the overall margin stable of 9%, the situation is very much and the continuity what we saw in last year, I.e., significant pressure on the margins in the cards business (inaudible) business, which are very low. But very healthy margins in detection in the high teens, as was consistent with the last few years and an improving margin in the identity business, where what's occurring is what we had planned for a couple of years ago.

You remember we had the tailing off of contracts in the Mediterranean and Africa. And they're being replaced by contracts in Finland, Holland and in particular in Chile. And in the first two or three years, we have the crossover effect and now where we are drawing the benefit of the increased revenue from those new contracts. We still get more volume in the identity business to get the margin, which is good, to translate back into EBIT amounts which will be to our satisfaction.

Unidentified Analyst

Okay. Can I just have a quick follow-ups on the CFM56 question then? How – is there anything that you can do to prevent the similar thing that happened on the first generation with regard to part outs happening on the second generation?

Ross McInnes

I think what we are trying to do is, you mentioned CFM materials, Marc, is that where we've organized ourselves so that we will be an actor.

Marc Ventre

Yes, we are definitely an actor in these markets. So when it will pick up on the second generation, we'll certainly be part of it.

Jean-Paul Herteman

What didn’t – that means that we will be investing in acquiring second hand spare parts used to do as I said the broker and dealers and optimizing the mix of new parts and part outs, perhaps

Marc Ventre

And perhaps new players.

Jean-Paul Herteman

And we are well prepared to do that, but to do that as opposed to what happened on (inaudible) we so well-positioned thereafter.

Unidentified Analyst

Okay, thanks. And are you the biggest player in the first generation engine part outs?

Ross McInnes

Well, first generation volumes are not – are increasingly less relevant in terms – in that respect. But what we've organized is to be an actor in the second generation as the best, 10 or 15 years down the road is not something which is going to occur in the next few quarters. I think we have time for may be one other question, because I think you have some other interests to pursue later in the day and maybe some of you who go on holiday just out, and to be boarding very good CFM powered engines, say in say in Stansted and Luton.

Jean-Paul Herteman

Immigration process.

Ross McInnes

Early in the immigration processes. So I think one more question so that we're finished–off [ph] with that.

Operator

We have a question from Zafar Khan from Société Générale. Please go ahead

Zafar Khan – Société Générale

That's very kind, thank you very much. Good morning, everybody. Just a couple of clarifications please. On the provisioning, balance sheet shows about €3 billion off for provisions, Ross can you give us some idea of how – what percentage of that would actually be a cash out, because I guess a lot of it is warranties, which hopefully expire without you being put upon? That's the first question, so I just wanted some idea of how much of the €3 billion would be a cash spend.

And just on the GE9X, Marc, one for you, the participation seemed a little bit on the low side. Are you likely to get some more work in the future or is that it?

Jean-Paul Herteman

GE9X, no, the level is well in line with our expectation and technology strategy and also we are pretty comfortable with the level we have, it may be a very well balanced portfolio and that was like towards your business skills [ph].

Marc Ventre

Yes, it’s about 50% of what GE is offering for partnership, so does the cent percentage as we did on the GE90. In France it's at the level that GE is offering to partnership is lower.

Jean-Paul Herteman

On technology-wise, what we do on GE#X is fully consistent with our main line of particular the innovation of an industry and investments. So we are pretty well within what we have today. Regarding provision?

Ross McInnes

The – on the balance sheet you'll see indeed that our total provisions have increased by – from €2.95 billion to nearly €3.1 billion, the – most of it is non-cash. The part where we actually spend cash is where on the – on where provisions where for losses, where we're actually using those provisions. And where we're using those provisions it means that we have costs which are opposite that number, and that's about €20 million or €30 million in the first-half, so that’s maybe €40 million or €50 million a year.

In other words, we're consuming the provisions, but we have the costs. That has no P&L effect, of course, because we're already provisioned and in some cases on guarantees for technical functioning that we would – when we're paying out under those guarantees. And so that would consume cash in the first-half of this year was €58 million under that item. So that you can probably double that. So in an overall provisioning environment, there is probably a €100 million to €150 million a year, which is actually which has actually had the cash affect. All the others are cashless because they're either retirement benefit type provisions or the big chunk is everything we're doing in order to account for possible future spending.

Jean-Paul Herteman

Okay, now for the questions or last one.

Operator

We have another question from Christophe Menard from Kepler. Please go ahead.

Christophe Menard – Kepler Capital Markets SA

Yes, good morning. Thank you for taking the question. I have just one question on propulsion and the exceptional strong performance in H1. Could you detail a bit more the mix on, I mean I understand that helicopter services contributed a lot with essentially RTM and probably also EC225. The question is, is it sustainable and how do you see that mix evolving? And also I understand that the mix in OE engine was also very strong and also contributing to that very high level of margins. So any detail would be great actually.

Ross McInnes

I think you got it right. The propulsion was very good because it's a similar aftermarket, but it's more than that. It's the lower production costs throughout the course earlier on OE. And we mentioned the CFM56 is selling longer and selling more and that has a very good bottom line effect and also a good contribution from the high-thrust engines.

Jean-Paul Herteman

Helicopters-wise the OEM level will be – it is going down for this year and next year making another one and we'll see a ramp up recovery on the – at the longer-term. But the services that you mention remain strong and that's always important to the profitability to remain satisfactory despite the top heavy drop in original equipment in turbines. And that's all what we can say, but you say exceptionally high results that – high results, but we do – we will not say, Marc…

Marc Ventre

I would say understanding rather than exceptional and on that note.

Jean-Paul Herteman

Okay. Thank you, everybody. Have a good day, another session, and good holidays for those of you who take holidays in summer. Goodbye.

Operator

Thank you. Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.

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