Safran's (SAFRF) CEO Philippe Petitcolin on Q2 2016 Results - Earnings Call Transcript

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Safran SA (OTCPK:SAFRF) Q2 2016 Earnings Conference Call July 29, 2016 2:30 AM ET


Philippe Petitcolin - CEO

Bernard Delpit - Group CFO


Christian Laughlin - Bernstein

Olivier Brochet - Credit Suisse

Tristan Sanson - Exane BNP Paribas

Christophe Menard - Kepler Cheuvreux

David Perry - JPMorgan

Harry Breach - Raymond James Euro Equities


Welcome to the Safran First-Half 2016 Results Conference Call. I now hand over to Mr. Philippe Petitcolin, CEO and Mr. Bernard Delpit, Group CFO. Mr. Petitcolin, please go ahead.

Philippe Petitcolin

Good morning, everyone. Bernard and I are pleased to present our set of results for the first half of 2016 which, at least in my opinion, are really good. Starting with the financial highlights, revenues are up 6.3% compared to last year, 6.5% organic, at €8.9 billion. Propulsion, equipment and security contributed to this increase. Recurring operating income is at €1.3 billion, representing an increase of almost 12%, one, two, compared to last year and 14.6% of the sales.

I just want to highlight one single item which is a strong improvement of the aircraft equipment operating margin which I remind you was at 8.2% last year for the first semester and which is heading to 10.7% which is an increase of 2.5 points during the first half of 2016.

The cash flow is very strong at €566 million. We go to the next page and see how we're doing our LEAP program. The progress on the three LEAP programs are doing very well. If we take the LEAP-1A, we have started the beginning of the production and the ramp up. We delivered during the first half of the year 11 engines. And in July we -- Airbus delivered the first airplane A320neo with our engines to the large customer Pegasus Airlines, the Turkish airline. The ramp up of production is on. We're daily monitoring this ramp up.

If we look at now the LEAP-1B, the engine has been certified in May, by both EASA and FAA. There are currently four airplanes in flight tests. They have accumulated as of today, more than 800 hours of flight, so 300 flights. And on the LEAP-1B we're on track for entry into service on time and at performance. On the LEAP-1C we're, as you know, a little bit behind. We're still expecting our customer to do the first flight before year end. And in -- for regarding the propulsion system with the engine and as I said, we're on track.

Go to the next page and look at the main highlights regarding the CFM56 engine. We have produced the 30,000 engine in July. That's the biggest success in the world of commercial engine in all times. And we're, of course, extremely proud of this achievement. We delivered a record 886 CFM engines during first half, 886 and we had never done that until now.

I remind you that during the first semester last year, 2015, we delivered 816, eight, one, six and the year before in 2014 during the first half we delivered 792, seven, nine, two. So, it's a record of production of this CFM56, during the first half of this year.

We keep receiving orders for the CFM56. We received since the beginning of the year 786 orders for CFM56 engine which gives us for this first half of 2016, a market share of 82%. Of course, if we look since the beginning of the production of the CFM we're closer to 57% or 58%. But if we just look and focus on the -- on 2016, we're at 82% market share. And, of course, when I talk about market share I'm talking about Airbus. If we took A320, as you know and Boeing, we're at 100%.

Regarding the LEAP, we have on order in terms of backlog 11,100 engines on order, 11,100 and we have delivered only 11. So, you see, we still have a lot in our plate. The main orders received at Farnborough are coming or were coming from Air Asia for 200 LEAP, Air Europa for 40 LEAP, Asiana for 50 and Tap Portugal for 83 engines.

Next page on the highlights for the other businesses of Safran. We have, I would say, finally finalized the creation of Airbus Safran Launchers. This JV is now fully operational with a staff of 8040 people. We have been selected on the helicopter-engine side by the Koreans to power their two new helicopter programs, the LCH, that means Light Civil Helicopter and the LAS, the Light Armed Helicopter. So, Light Civil and Light Armed Helicopters for the Koreans will be both powered by Safran engine coming from the [indiscernible].

he business for our landing system is doing very well, especially in the carbon brakes. We maintain our worldwide position of more than 50% market share. We can just mention two of the many airlines which have selected our carbon brakes, Hainan for the 787, 39 787 and Azul for 58 A320neo and 5 A350. Our business in electrical and power is also doing well. We have been selected and we won a contract with Embraer to supply all their wiring for their new Legacy business jets 450 and 500.

And, finally, in our security business, we had very strong first half of the year with more than 10% business increase, especially coming from the U.S.. And we can just mention the TSA Pre-check program, where we have now enrolled more than 3 million people. I remind you that when you talk about TSA they claim that potentially this number could jump up 25 million.

I will end this first part of the presentation by showing you a few index. The index for aircraft-equipment services grew by almost 15%, 14.9% exactly, in euros, during the first half of the year. The one for propulsion services grew by 9.8% in euro. And, finally, the civil after-market index grew by 8.5% in dollars.

Now I will let Bernard present the financial results more in detail for the first half of the year. Bernard?

Bernard Delpit

Thanks. Good morning, everybody. If you allow me, I will just make two introductory comments. The first one is that the profile of this first semester of our medium term plan is in line with what we showed you in March. Limited decrease in propulsion margin that stays at a very high level. And improvement across the board of all other businesses in terms of profitability and the balance is very positive [indiscernible]. My second comment would say that we have a strong cash generation with a very good control on the working capital, in spite of no new export contracts during the first half of 2016.

Let's start on page 10 with the usual volatility or, I would say, FX landscape. In fact, the title is not really accurate, because we didn't get really much volatility, when we look at our spot or average spot rate compared with last year. The average euro/dollar spot rate is $1.12 which is exactly what we had in 2015. So, very limited impact on our sales revenues.

We have some negative coming from the conversion impact of the GBP which is of the end of this half, but nothing much to comment here. In terms of transaction we have the improvement, already flagged, of the hedge rate from $1.25 to $1.24. It is in our profit, but it has been mitigated by some negative impact, most of that for currency that we don't hedge in South America. And last comment, mark-to-market and mark-to-market is positive because the spot rate at close improved from $1.09 to $1.11. And you know that this positive impact is restated when it comes to adjusted data.

Page 11 on our income statement, I would just highlight here two things. You can see that we have some other non-recurring operating income for €355 million and they are not taken into account on our adjusted data for €368 million. It comes from the capital gain that's recognized on the assets that we contributed to Azul. And this is, again, neutralized in our adjusted data. And the second is the mark-to-market of our portfolio-hedging instrument that I just mentioned. For the rest of that you see that the net income is €862 million.

On page 12, below the recurring operating income, nothing much to comment, just to say that one-off items are related in 2016, as of today, limited to transaction costs for our Azul transaction and our security business strategic review. On page 13, on still below the line, I would say that we have a slight deterioration of our net financial income that amount to €59 million for the first half of 2016, of which cost of debt is €24 million negative. And it comes from the drop in net interest rate on our cash and cash equivalent.

Income tax is €342 million. That means that the average tax rate is 27.6%, down from the 31.3% that we had in 2015. And I expect the average tax rate to remain below 30% at the end of the year. And, again, the EPS is €2.07 to be compared to €2.80 last year. But, you know that last year it took into consideration the disposal of Ingenico sales which was €1 per share. So, excluding this capital gain of last year, it's a 15% improvement.

On page 14, Philippe already mentioned that we have a strong increase in revenue, 6.3%. And there is a 6.5% organic variation that I will comment later. We have a slightly negative currency impact due to the -- mainly to the GBP. And almost no changes in scope, just a little change in the consolidation of our business in [indiscernible].

6.3% improvement, the breakdown is 10% increase for services and 4% for OE. I remind you that in 2015 first half the organic increase was 5%. It's now 6.5%. On page 15, recurring operating income grew almost 12% on organic terms. You see that we have almost no currency impact. This means that the positive impact of the improved hedged rate for the euro/dollar is offset by the currencies in South America and the hedge rate for shifting in dollar. But you have here the impact, the positive impact, of the improved hedge rate.

I would say the tailwinds are coming from aerospace services, contribution of CFM56 OE organic growth in security and productivity gains and cost reductions across the board. When looking at headwinds, we have higher expensed R&D for €12 million, headwinds within our helicopter-turbine business and the negative margin on LEAP deliveries and in-production for something that represents roughly 1.3% of the Group sales.

For R&D, as I mentioned, this is slightly negative for our profitability. It's €12 million, sorry, headwind for EBIT. And it comes from a strong reduction in self-funded cash R&D, less 10% compared with 2015, but also a strong reduction in gross capitalized R&D for €75 million. We said in the press release that we guide now for €100 million EBIT impact, negative EBIT impact, for the full year. Nothing really to mention here. We have made some reclassification between R&D and industrialization cost. But we're very much in line with what we expect. That means less R&D and less capitalized R&D.

Page 17, the breakdown of our operating income by activity, you see that the 14.6% is a 60 bps improvement compared with last year. For propulsion it's 1.6 points less and this very strong improvement for aircraft equipment, 250 basis-point improvement.

Just to mention here about the corporate center that has improved a lot. It was a negative for more than €50 million in H1 2015. It's almost balanced here, thanks to a very strong reduction in our cost. I would say that the lifestyle of the corporate center has dramatically changed since last year. And that represents two-thirds of the reduction of the total negative EBIT of the corporate center.

On page 18 for aerospace propulsion, revenue up €371 million, of which €132 million for OE and €239 million for services. Growth comes from OE sales, up 6.5% on the back of higher CFM deliveries and higher military engine shipments. As Philippe said, the sales in helicopter turbines dropped in the high single digit, despite stabilized volumes. It's a mix impact mostly.

We have a strong improvement in services, up almost 10% in euro, driven by [indiscernible] market up 8.5% in euro [indiscernible] and military services also up 30%. We have lower contribution of our helicopter-turbine support activities due to softer demand from oil and gas customers and the ramping of the H225 plate. EBIT is stable. It mean that headwinds from R&D, €34 million and helicopter turbines' margins plus the start-up costs of LEAP were offset by margins on OE and services.

Page 19 for aircraft equipment. Strong increase in revenues, OE up 1.5% and services up 15%. That means up €128 million. For OE we have increased volumes for A350 for landing gears and wiring shipsets, for 787 with more landing gears' deliveries for A320, more thrust reversers' deliveries for A380, more nacelles, [Technical Difficulty]. On the other hand, lower volumes for A330. EBIT is up 36.2% or €72 million, thanks to increased volumes, the cost benefit of productivity gains and cost reductions and lower expensed R&D. But on these things pricing is still a challenge and has a negative impact on our EBIT. EBIT is well above our target of 2016. I remind you it was 10% [Technical Difficulty] this target.

For defense we have a decline in revenues, 5.2% negative, in organic terms. This is only due to optronics which is down almost 20%. Avionics and electronics are up. The EBIT has improved in spite of this reduction in revenues. It's up €7 million, thanks to lower expensed R&D for €15 million and an increase of our cost-reduction program for almost €10 million.

On the security business, as already said, strong organic growth 10.4%. Current trading is doing great during our strategy review. Everything is going up in terms of revenues; identity and security and detection, as well. EBIT is up almost 20% including negative currency impact already mentioned. We continue to reduce our cost. And we have a higher contribution and higher margins on all our businesses.

And a page on our FX hedging. Our total portfolio is $80.2 billion. The landscape for 2016 and 2017 hasn't changed since we last talked about this hedging program. We have now completed our 2018 hedging program up to $5.7 billion for a total program of almost $8 billion. Nothing really to mention. We keep our target which is to reduce the hedge rate between $1.17 and $1.20 in 2018 and $1.15 and $1.20 for 2019. And we will start working on 2020, starting from now, in terms of future hedging.

I will not comment on page 23. Let's go to page 24 for our free cash-flow generation. It's €566 million compared with less than €100m at the end of June 2015. You see that there is an impact of less provisions compared with last year. Again, the provisions is -- it's negative on FX for almost €300 million, when the net of additions and reversals, but we have less additions than last year so it's positive for the cash flow.

You can see a very strong working-capital management with a slight deterioration since the end of December, thanks also to a lower currency impact compared with last year, where we had a dramatic impact of the euro/dollar exchange. It's not the case this half. Plus a strong impact of all programs that have been put in place to reduce total inventories and other parts of the working capital. In terms of CapEx you can see that for tangible assets its stable. And for intangible assets it's down, thanks to our capitalized R&D reduction and also entry tickets that are lower this half compared with last year.

Page 25, the usual walk for the net-debt position, starting from the €748 million net debt at the end of December. You have the positive impact of cash flow from operations; limited change in working capital; the usual R&D and CapEx impact; the dividends that we paid after the General Assembly. The impact which is negative, from the €470 million paid in relation to the Airbus Safran Launchers equalizing payments, so that leads to almost €1 billion net debt at the end of H1 2016. Nothing really to mention in terms of debt and liquidity management. You are well aware of the convert that we issued at the beginning of the year.

In terms of balance sheet, on page 27, the only thing I would mention here is the impact of the finalization of Airbus Safran Launchers on different lines of our balance sheet and also the impact of the Morpho Detection deal. We're between now signing and closing, so we have classified Morpho Detection as assets held for sale with impact on goodwill and net debt and assets available for sale. So, nothing really important to mention here. Nothing to mention in terms of customer financial guarantees. It's coming down, by the way.

And I leave the floor to Philippe for the outlook.

Philippe Petitcolin

Thank you, Bernard. Page 30 you have the key assumptions for 2016 regarding, of course, an healthy increase for aerospace in OE deliveries; a civil aftermarket growth, [indiscernible] of our initial target start-up cost for the LEAP production. A reduction, as we said, of the R&D in the range of €100 million. CapEx should -- mentioned already by Bernard. Profitable growth in security business. And, of course, this is extremely important, the continued benefit of productivity improvement including a lot of overhead reductions.

So, with all these assumptions, we confirm our guidance for 2016 which is basically adjusted revenues to increase in the percentage of low single digit and adjusted, recurring, operating income to increase by around 5% with a further increase in margin rate compared to 2015. And a free cash flow which should represent more than 40% of the adjusted, recurring, operating income.

Of course, starting July 1, we will not have in our sales a share of Airbus Safran Launcher. We will use the equity method and, thus, no longer record the revenue. And, in terms of revenue it should be something approximately in the €400 million cost base which will not appear any more in our revenues starting July 1. For me this outlook, this guidance, is a minimum to get for 2016. Our developments are under control. The ramp up of both mature and new programs are on track. The complete Company including, of course, the holding, is working on LEAN and is indeed under strict management control. All our businesses improved their performance, so I am fully confident for the future of our Company.

And that's the end of our formal presentation. We're now, Bernard and I, waiting for any questions if you have some clarifications for Safran. We're waiting for you.

Question-and-Answer Session


[Operator Instructions]. The first question is from Christian Laughlin, Bernstein.

Christian Laughlin

A couple of questions from me regarding civil aftermarket. The first one is what drove the tightening of the growth assumptions for the year? Is it around unit growth, that is, fewer units coming through the shops? Scope? Pricing? Or what sort of balance between the three? And then, secondly, related to that the press release mentioned some -- a non-recurring benefit to the aftermarket growth recognized in Q2. Could you elaborate on that? Thanks.

Bernard Delpit

Basically we're, as we showed you, around a bit over 8% at the end, 8.5%, of the first semester. We mentioned that we have some non-recurring because, if you remember last year, during the second quarter we had 38%. So, we wanted just to show that in this number there was a portion, a small portion, of non-recurring. We don't disclose this number because they are directly related to our customer and we don't want to give that.

Generally speaking, regarding the year, maybe I'm a bit cautious, but when we disclosed our guidance at the beginning of the year we said high-single digit. It's a nice way to say something in English. We don't have to say a number. In French you need to put the number. In English you don't put the number. We said high-single digit.

Today, based on the quality of shipments you are talking about pricing, scope or unit growth. We believe that it's going to be in the range of 5%. As we said for many years, the average increase of [indiscernible] should be in the range of 5%. So we believe, me being on the safe side, that the guidance to be very clear, today we put 7%. At the beginning of the year we said between 7% and 9%. Today we clearly say we take maybe the safe side, but we say 7%. This is what it means.


The next question is from Olivier Brochet, Credit Suisse.

Olivier Brochet

I will have two questions. The first one on M&A. If you could update us on I would say input and output, so where are you in the security business review? And on any opportunities to reinforce aircraft equipment? The second question is on the HQ line. Can we expect the same order of magnitude in H2 and I would say going forward? Thank you.

Philippe Petitcolin

I will, Olivier, will answer the first question and then will let Bernard answer the second one. In terms of M&A you mentioned two items. The first one identity and security. As you know, we previously said that we're going through a strategic review of this business. Why? Because I really think that the future of the development of this business is in the digital market and the digital market is today in terms, not of a tool but in terms of end market, far from what Safran is used to.

So we got some interest coming from 12 companies at the beginning -- at the middle of the year, regarding some interest for cooperation or even for purchase of this business and from these 12 interest we got from consortium or from private industrial companies, we selected five of them. Well, now they have to prepare a project. They have to tell us what they would do with this business. And they would commit for a proposal and we're waiting for an answer on these five group of companies by middle of September.

So when we receive these offers, including, again projects -- what they want to do with the business, how they want to develop it and if we believe that their project is better than the one we can develop ourselves, of course we'll go further. And if we would decide to sell the business, we would do that before year end. That's what I have in mind today. It's going to be a commitment.

Of course it depends on what we're going to see, but what I have in mind today is to make a decision before year end regarding the future of the business. Not only for the business itself, but especially for the people who work in this business who have to know, at a point, what we're going to with it. Regarding the second item which is related to aircraft equipment, I have no comment, right, as of today.

Bernard Delpit

I will answer to the headquarters question, Olivier. We have made a lot of efforts to reduce the cost of the headquarters. You've seen some improvement already in the first half and I mention also that in the second half of last year we increased the level of internal invoicing to the different businesses. So what you will see at the end of the year is a mix of those efforts. Corporate center will still be negative at the end of the year, because there are some costs that we keep at that level, but our target is definitely to reduce the negative EBIT of the corporate center at the end of 2016, compared with the end of 2015.

Philippe Petitcolin

The corporate has to do the same effort as our business units in order to improve the overall performance of Safran.

Olivier Brochet

If I may follow up on that one, not necessarily at the level of €5 million multiplied by two?

Bernard Delpit

No, it will be more than that because we don't invoice all cost to the businesses, but again, the efforts to reduce the cost, you will see that in 2016 EBIT of the holding.


The next question is from Tristan Sanson, Exane BNP Paribas.

Tristan Sanson

It's Tristan from Exane and I have three questions. The first one is on provision movements in H1. If I refer to your accounts of H1 2015, you had a €77 million headwind from provisioning freeze in H1 last year. This year you have a net decrease of €144 million. So the net movement is €220 million. Can you explain to me how I should look at this number and how I should -- or [indiscernible] where does it come from? In which division? And what should be the net provision movements that we should expect for the full year? I know it's volatile on quarterly or six months' basis, but should it still be a [indiscernible] for the full year or should it neutralize over time? That's the first question.

The second one, so you had a strong performance from work in store in H1, in your current statement. Can you give us an insight on what is the share of military down payment in that? We know that all the fellow suppliers that are reporting so far have had a strong working capital performance, so that would be helpful. And the third one is on the TP400. Some of your peers announced efforts that they had to do in order to participate in the restoration of the TP400 and A400M program overall. Do you have a similar contribution in your numbers in H1, on your plan in 2016 which could be reflected by either a special CapEx overrun or R&D spending to improve the situation on TP400? Thank you.

Philippe Petitcolin

Bernard is going to answer the first two questions and I will answer the third one.

Bernard Delpit

Okay, in terms of provisions you have to take everything into account, including depreciation. We have taken more depreciation for the LEAP engine in 2016, so don't take provisions only. And by the way, for provision, as I mentioned, the net impact on EBIT of additions net of reversal, again, is net negative of €300 million for 2016. So, as you mentioned, we have taken less new provisions compared with last year. Most of that is in the propulsion business. It comes from various sectors, including warranties given.

We didn't need to do as much as last year. And for the termination provision, as we took some provision for the loop -- for the LEAP, in terms of inventory depreciation we didn't have to take so much in the provisions. I remind you that we have done many things positive [indiscernible] in the last years. We didn't have to do as much this first half. For working capital, military contracts, we have the same kinds of impact as last year. I mean, it does not explain anything in the improvement of cash generation in the first half of 2016. Same amount but no new contracts.

Tristan Sanson


Philippe Petitcolin

Last point, regarding the CT400. As you know, we're part of an EPI consortium made with Rolls-Royce, MTU and ITP. We own about 30% of this consortium. It's true that GRU which is our supplier for the PGB, had some quality problems. They are under way to be solved with a kind of interim fix, with a truncate plug which under production now and a definitive solving solution which is scheduled now for mid-2017.

We have a contract and as of today we see no need to take any kind of provision -- of specific provision -- related to this situation. We're in line. We provide our product and as of today no specific need on our side.


The next question is from Christophe Menard, Kepler Cheuvreux.

Christophe Menard

I have two questions and the first one was on the propulsion aftermarket, not the civil aftermarket, so including helicopters and military. Where do you see that level at the end of the year? Because H1 was very strong. Given the weakness in helicopters and the strength in military are we in for something similar, 9% to 10%?

And the second question was also linked a little bit to free cash flow. Given the very strong free cash flow performance you had in H1, 65% cash conversion, if I'm right, you're still at 40% for the full year and I thought there were some military prepayment integrated in your full year guidance, so do you feel that that guidance on free cash is too conservative, given your performance in H1 or should we expect any outflow in H2?

Philippe Petitcolin

Christophe I will let Bernard answer the second one, but for the first one, as you mentioned, you know there are different elements and in the propulsion service percentage of 9.8% which has been achieved during H1, you mentioned helicopter, but these also military. So helicopter is down. But is down since beginning of the year and it has been increased, this reduction, since April and the fact that the H225 helicopter are not allowed to fly any more, we -- as you know, the French have allowed their Super Puma NH to fly both civil and military, so the reduction is not total in terms of services. Is it going to continue? I don't know.

It's impossible for me to give you any kind of update because there's nothing wrong with the engine. It's just -- it's a machine which is under scrutiny by the various authorities of certification. Regarding military programs, we're doing extremely well. The military machines which use our propulsion system, our engines, are flying a lot, both in France and with our export customers, so we expect the trend for military propulsion to continue. The [indiscernible] has been already reduced. It's going to be further reduced. I don't know. It's really too early to tell. And again, as we're not directly involved in this situation I cannot give you a date when this machine would fly again. So I don't expect a huge change -- if any -- if any -- in the trend we have seen during the first half of the year. I would even think that it will continue on the same track.

Bernard Delpit

On free cash flow, many things to say here. First one is that we have taken actions to improve cash generation month after month and not only in June and December, as is sometimes the case. And it works and we're happy with that and we will continue. As you mentioned and we write that in our guidance, the level of cash generation at the end of the year is subject to uncertainty, because of the rhythm of payments of the client. So we have this uncertainty this year, but we will do everything possible to stick to our guidance of a 40% conversion between EBIT and cash generation at the end of the year, even if we don't have all the prepayments that we expected when we give the initial guidance.


The next question is from David Perry of JPMorgan.

David Perry

Just two questions please. The first one, I think an earlier questioner asked about the one-off item in the aftermarket but I'm not sure if you answered. If you did, I apologize. Just explaining what that was. And then, secondly, I've just got a little bit confused about what the impact of the JV in space launchers will be on your earnings in 2016 and 2017 in particular, because it seems to have been a bigger impact than expected for Airbus, so I wondered if that was also the case for Safran. Thank you.

Philippe Petitcolin

David I will try to answer the first one, but very quickly. There's not a lot to say. We said at the beginning of the year that the guidance for this index of aftersales services was in the range of 7% to 9%. We said high single-digit. Today we say we may be a bit cautious. We adjusted to 7%. That's the only thing I can tell you. It's based on what we see and the fact that the quality of show visits should be in the range of 5%. So I have nothing else to add. It's a very good number. We're pleased with this number and we're going to try to beat it, but as we said, in terms of guidance, again, you know that we try to meet -- every time we give you a guidance, to exceed the guidance. That's what we're going to try to do again.

David Perry

Yes. Sorry, maybe just a language thing. I was talking about the non-recurring contribution in Q2 that you referred to in your release. Just wondered what that was.

Philippe Petitcolin

Well, we just wanted to mention that in the 8.3% or 8.5% of the second quarter there was a little bit of non-recurring, because last year the increase was 38% during the second quarter. We just wanted to give you a little bit more data regarding the 8% above the 38% of last year. It was just to compare apple and apple and we wanted to be totally fair with what we had inside of the number. That's it.

David Perry

And on the space JV, please?

Bernard Delpit

Yes, David. I will answer on the space bit. As mentioned in our press release, you should expect, in the second quarter, a negative impact on revenues, for the amount of approximately €400 million. So we will not take any revenues coming from the sub space business in the second year and the €400 million is approximately what we had in the second half of 2015. In terms of recurring operating income, we expect that in the second half of this year we will have approximately the same recurring operating income as last year, right. It will be of course slightly positive in terms of EBIT margins, since we won't have any more revenues, but in terms of total recurring income it will be slightly positive but not much, but you will see an impact on the EBIT margin.

For 2017 will be, I think, improvement in terms of overall earnings and more improvement in terms of EBIT margins, as we will be consolidate also first half revenues and nothing much to add here. It's -- we're a bit early stage of the joint venture business, so -- but we continue to believe that it's very positive for Safran as the EBIT margin of the joint venture will be higher than the EBIT margin of our space activities standalone.


The next question is from Harry Breach of Raymond James.

Harry Breach

I just have three quick questions, firstly, Philippe, can you comment on the supply chain execution on the LEAP program at the moment? Are you happy with it? Particularly with some of the things that you maybe were a little concerned about earlier on this year or last year.

Second question, maybe a little bit more for Bernard, with propulsion, with the change in the recurring operating income margin in the first half 2016 against first half 2015, you mentioned the positive contribution of services, the aftermarket growth, the OE and then you mentioned the negative impact of the LEAP contribution, the helicopter turbines and R&D. You gave us the R&D number of €34 million. Can you give us any feeling of whether the LEAP impact was a significant element in the 1.6-point margin decrease year-on-year? And then the final question, guys, is just about Silvercrest. Are you keeping to schedule with the revised development schedule for Silvercrest? And what's your confidence level on how that's going?

Philippe Petitcolin

So we're going to try to answer in the same order you asked the question. I will ask -- I will try to answer the first. Supply chain of the LEAP. Why, it's a challenge every day. It's a challenge every day, but we knew it since the beginning. We have put a very, very cautious comparison of this number. Now we're in the ramp up and we have small issues, but issues every day, like in any business of this nature and of this scale. So today we're on time.

The product is meeting specification. And we're working in order to achieve the deliveries which are forecasted for 2016 which are around 100 engines and we're already working -- you imagine it -- on the 500 engines we have to deliver next year. So it's working. It's fine. But daily it is a challenge. And we have the right team, both internally and with our supply chain, outside supply chain, to meet these challenges. Nothing else to tell you. We're delivering on time our engines and that's the most important thing. But internally, yes, the supply chain is under some pressure, but we were all expecting it.

Bernard Delpit

Yes, on the LEAP impact, in fact it's more than the 1.6-point decrease in margins. If I can remind you, when -- in March -- we explained how the transition would work, we said that in 2016 the negative impact of LEAP itself on margins, on OE margins, by the way, would represent roughly 1 point of the Group sales. And for 2016 first half it's 1.3, right. So we're a little bit ahead of the total guidance that I gave for the year, but it's not much. We're in line with that. And again, if you compare the LEAP impact to the 1.6 decrease in the EBIT margin, it's more than that. It means that we have more than offset the negative impacts from LEAP by positive impacts from services and OE.

Philippe Petitcolin

The last question related to Silvercrest. If you remember, when we mentioned this program during the third quarter of 2005 -- 2015, sorry -- we said that we would have to go through a three phases recovery. The first one was the understanding of the problem and this has been done and we identified single items which were not at the stack and we identified all the problems, I believe and all of it has been frozen. The design has been frozen end of 2015. So this first phase was during the last part of 2015.

The second item was verification. We understood the problems. We had to verify we had solutions for these problems, so this is now almost completed. And the last phase, we're going to go during the second half of 2016 is validation with the first engine completely completed with all the changes we have incorporated which will run before year end. I think it's in November that this engine is going to run. Flight test, especially on the FTB is going to be conducted in 2017 for a certification of the engine, as we said in 2015 which is now scheduled for the beginning of 2018. There is absolutely no change in the schedule we gave you at that time and today everything is, in my opinion at least, under control.

Philippe Petitcolin

So thank you. Thank you very much for attending this session with Bernard and myself. Again, we're extremely pleased. We have an excellent first half of the year. We're extremely confident for the remaining of the year and we -- I don't know if you are all taking some vacation, but if you have vacation or if you have a time out, have a nice rest during this vacation then we'll talk to you for the third quarter results in a couple of months. Thank you very much attending and have a nice weekend.

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