Zodiac Aerospace (ZODFF) CEO Olivier Zarrouati on H1 2015/2016 Results Presentation - Call Transcript

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Zodiac Aerospace (ZOODFF) H1 2015/2016 Results Presentation April 20, 2016 1:00 PM ET


Olivier Zarrouati – Chief Executive Officer

Jean-Jacques Jegou – Executive Vice-President Administration & Finance

Jean-Michel Billig – Chief Executive Officer Zodiac Seats

Yannick Assouad – Chief Executive Officer Zodiac Cabin

Benoit Ribadeau-Dumas – Chief Executive Officer Zodiac Aerosystems

Maurice Pinault – Deputy Chief Executive Officer, Strategy & Business Development


Harry Breach – Raymond James

Celine Fornaro – Bank of America


Welcome to this Zodiac Aerospace meeting that will be held in English. So for those of you who want to listen to the French interpretation, you have headsets in the room.

Unidentified Company Representative

We have decided to do this presentation in English after having some difficulties in the past regarding the translation from French to English. So the English portion will be the reference for this conference call as it's, so in the call. As it was for the two previous one, and I remind you that the French remains the reference language for our Annual and Half Year report.

Having said that, welcome to this conference again, and I leave the floor to Olivier Zarrouati, CEO of the Company.

Olivier Zarrouati

It's Olivier Zarrouati and the team. Good morning, everyone and thank you for your attendance to this meeting which is first half earnings meeting. So, we will be -- we have by including the mode of the presentation, so we are -- we will be introducing all the team managing these -- our operations and our Group. And my task would be here to get to the main message. The first main message is our target for this fiscal year 2015-2016, is confirmed versus what we said one month ago in our Sales Conference and two months ago when we initiated the warning that we would not make what we initially planned for the fiscal year.

So it's good to say that as a matter of fact, our forecast is confirmed and our monthly management KPIs are telling us that we can confirm the guidance. Of course, when we are stepping out of a difficult economic situation, confirming the guidance for the full year means that second half will be better than first half, otherwise we will talking about something else than recover plan.

And that will be coming from better sales in two branches; the branch Seat and the branch Aerosystems. Actually, seat was showing an organic negative growth in first half and Aerosystems was also showing an organic negative growth in first half. So, Michel Billig and Benoit Ribadeau-Dumas would be talking about that. We don't intend to stay there. Second half should be -- is said to be much better nothing comparable to first half. This is what we count on to meet our guidance.

So second item being the decrease of the extra cost and better control of overheads. Second important message, our organization is deeply changing. The plans are in place and even more important that the plans, the team is in place. The persons are here, most of them are now seasoned in their current position and they will be standing before you and talking about what they intend to do with their branch for the fiscal year and beyond.

So we are pursuing our transformation and this is -- this had to do with focus plan, which is now running at full speed. So let's talk about the organization. You have already seen that chart which talks about the people. So, we'll be talking before you today, Jean-Michel Billig for the Seats branch, Yannick Assouad for the Cabin, Benoit Ribadeau-Dumas for the Aerosystems and Maurice Pinault for the business development.

And before them, Jean-Jacques Jegou will be talking about the finance. As a matter of fact, since a week now, Jean-Jacques will be retiring at the end of this fiscal year. This was planned actually two years ago, and it was agreed with the team.

Since we were in 2015-2016 in a continuing crisis, Jean-Jacques accepted to do another year with us. But I mean life is life and time is time. Jean-Jacques will be retiring at the end of 2016, and of course the process is going on and you will be informed in due time. So Jean-Jacques will be talking about the numbers, and I would say thank you Jean-Jacques for many things. And I pass the floor to you.

Jean-Jacques Jegou

Thanks Olivier for your nice words. I don't want to comment more on my retirement. It's -- I had very nice time working with Zodiac for now several years and it was a very great, great, great story, I'm sure you know. It will be perhaps again a good story in the future.

So, speaking about our figures, we are speaking about sales. Our sales in H1 are 7% up to last year, compared to last year, up to EUR2.5 billion -- close to EUR2.5 billion with a strong positive impact of our exchange rate compared to last year. So, it's bringing 8.6 point to this increase. There is no impact in fact of the charge in the scope. It's a very low number. And we have slight decreasing our organic with 1.7% decrease.

If we look at our operating income, it's impacted by still by the Aircraft Interior performance. We have Aerosystem agreement and Aerosystem activity is a combination of Aerosafety and Aircraft Systems branches, and both are bringing EUR12 million in the EBITA. Well the Aircraft Interiors is bringing a negative EBITA around [indiscernible].

The impact of currency is strong in our EBITA bringing EUR55 million positive impact and our growth in organic growth -- EBITA organic growth is negative unfortunately for EUR155 million. So at the end our H1 EBITA is disappointing with EUR80 million. So that tells us about this performance where cost still remaining, we have EUR110 million excess cost above what we budgeted, so it's main expansion of our variance compared to our expedition.

We have still an impact of the ramp-up of new programs which we were budgeted but not at the size of this impact. And we have also an impact of the lower EUR0.06 and we expect to continue to just to reach this EUR0.11 in H2.

If we look at the cash flow and balance sheet items, our balance sheet and the cash flow is impacted by this performance. So, our cash flow for the first half is 50% of what it was last year, mainly driven by the working capital increase at the level which is 50% of what we had last year. CapEx is stable. Speaking about working cap, this is mainly in the Cabin branch and mainly inventory, it's linked to the ramp-up of several programs lavatory in A-350, C-Series et cetera.

At the end if we compare to last year at the same time, we have an increase of our net debt which is EUR200 million and which is close to three year EUR350 million more than at year end.

Looking at the detail of this change in net debt, like you know I said it's mainly coming from the working cap and we have also in the same time, we have an increase in our inventory of receivable, we have also an increase of our income tax receivable which is linked to the loss we are suffering in the U.S. and we expect to get some cash refund of that in H2.

Speaking about financing, with this balance sheet impact, we worked with our bankers and we were able to set a new pack of financing, first we had our Club Deal which was negotiated in 2013 with a maturity in March 2020 and we have the right to request an extension of a year. We did it, we got the agreement in March 2014 from our pool of bank, and now we have a maturity in 2021.

We are -- and we will paying that will balance sheet which is still normal balance sheet at the end of February EUR125 million in the negotiation. We have the negotiation to refund this Euro PP and to set new Euro PP EUR230 million with a maturity of seven years, once you know with the majority metric of ongoing figure existing at the end of February was just two years.

One of the use of the Euro PP additional EUR100 million will be to refund the tranche of Schuldschein we have in July which is EUR130 million. And last but not the least, we set and I believe the finance team for EUR250 million, we did it first to be able to make an acquisition if we have the opportunity to do one before the end of this year and to avoid to figure, cost debt ratio at the end of this year.

All in all we have about EUR2 billion of all the financing, so it's more than our need. In addition we have a commercial paper program of EUR1 billion. Today we are using EUR450 million of commercial paper. And as you know we have a debt of loan which is in our Club Deal Schuldschein [indiscernible]. And this governance is adjusted for in the definition and it has to be less than 3 and we expect to be less than 3 at the end of this year without [indiscernible] impact. So, we are confident.


Olivier Zarrouati

Thank you Jean-Jacques. Now let step into the operational items. First Interiors, Interiors being as you know the compound of Seats and Cabin. So, as we are reporting for the whole Interior, these are the numbers. Plus 7.8% of growth, but with negative 1.1% organic growth coming mostly from Seats. The negative 4.2% Cabin show a positive 1.4% organic.

Obviously Jean-Michel will want to talk about this negative organic on Seats, because this is where the H2 rebound is supposed to come from. EBITA is impacted by large level of excess cost as Jean-Jacques said we are in the range of 100 and actually we are at minus 118.8, change in organic.

On the currency effect something that doesn't happen often is the condition they take is negative, the transaction is positive, so these two effects offering different sides which is in fact the consequence of the fact that our U.S. operations at loss mainly sometime higher, which is our sales plans for the Seats branch. This is unusual and needs to be noticed.

So, Seats, Jean-Michel, it's turn for you to talk about the plan.

Jean-Michel Billig

Thank you, Olivier. Good morning ladies and gentlemen. Seats, I think it's fair to say that we are progressing in our journey to be back to performance in terms of on time and on quality deliveries. As I already stated here in this room, our primary objective is of course to protect the operations of our customers, and this is what we are proactively doing in order to rebuild trust of our key stakeholders.

I think, it's fair to state that the goal is ongoing very well, thanks to both and extra task force efforts and day-to-day hands on operations management and at the same time is progressing well thanks to the progressive implementation of our transformation plan through processes management.

Of course these activities, cost impacting the performance of the branch, and this cost overrun are still at the too high level for two primary reasons, first lack of efficiency and high level of firefighting mode requiring additional resources. And two, we have to further improve our processes in particular in two key areas which is engineering and production.

At this point we are now concentrating our efforts on the few business class programs which are by the way explaining the negative growth Olivier was referring to early on which have hampered our ability to delivery and which we should now get results in the second semester.

Most of the capacity issues related to those business class programs have been addressed so far. We have absorbed our late backlog almost completely. But the supply chain has to be further reinforced. This is still requiring a too high level of resources and needs to be put into, back into a sustainable mode.

Our current need is as well to focus more on improving quality and solving remaining certification issues. I will come back to this in on the particular complex program. And last but not least to maintain the path to deliver our transformation plan.

Coming back to the business class programs, the delays are now due to set of three main difficulties which are currently being resolved. The first one is, as I mentioned the certification issue on one complex program, complex because it's a new platform, complex because of new technologies, complex because of very dynamic shells we have designed.

At this present time as we speak, we were successful in the last development test two weeks ago which allow us to run now the certification test which are running this week, which opens the way to resume deliveries. We are currently discussing with our customers to resume those deliveries in the rest of this fiscal year.

Second difficulty we are facing with the business class programs is a poor industrialization of shells. Difficulty to manufacture, what we have poorly designed? It is fair to say that we have to enter a re-design program of those shells which is ongoing and which will be finalized by this summer.

And I parallel we have strongly reinforced our manufacturing engineering capabilities, in other words to secure that -- the product engineering and manufacturing engineering are working more closely together to make sure that the manufacturing ability or the industrialization of our shells are secured.

Third difficulty, we are currently addressing is our supply chain. We had up to know a manual management of our supply chain at Zodiac Seat Shells, which is one area we need to concentrate our efforts. We are currently implementing new MRP process since this month which would deliver results by June allowing us to rely fully on an ERP by summer 2016.

Next, regarding transformation, after having share with you the progress of our recover plan which would get to an end by this summer. We are in parallel in terms of implementing our transformation plan which is progressing quite positively as well. We have re-engineered our business process and this is ongoing for all key processes which has program management, engineering, supply chain, manufacturing, customer service, of course taking into account some specificities of our Seats business and in particular the change in requirements quite late into the development process just driven by high-level of customization expected by our customers and which we need of course to full fill.

The Phase 1 of our process redesign has been completed earlier this year and is currently being rolled out across all business units in the within the branch. We have as well renewed our management system within Seats which is currently being implemented in this quarter namely to migrate from kind of holding of independent business units to an integrated group managed, to ensure control and standardization, in reinforcing support to business units while its securing the agility as well to develop the business and developing synergies between the BUs and securing the best practices across the branch.

We are working on the mindset change as well. At all levels with new people, we have significantly renewed the management team of the branch, but also and implementing some new management methods. One of them, you may remember, I told you last time that I was implementing some quality awards to stop or to prevent pollution of poor quality across production process. This quality awards are perhaps of the QAQC process, quick response to quality control which means that we have a continuous process to improve the production to improve engineering and so to make our performance more sustainable and robust over time.

This progress is indeed giving us a good confidence that H2 will deliver their forecast sales at this point in time in excess of 20%above H1 performance and will deliver as well the economical performance as we are actively working on overheads realignment and on variance reduction. So as I told you earlier this year, we are on track to get back to performance within the next 18 months.

Last point I want to zoom on is regarding Zodiac Seat Shells. Olivier mentioned that it is one of our weak points, which deserves some specific attention. This business unit is, I must say made of very engaged people, but this has led to -- relied too much on people and not enough on robust processes and this company had time to face the steep ramp up over the past couple of years about 200 shells per months to 600 shells per month. The process is being not robust enough. Of course this has resulted in poor operational and economic performance.

This has led us to run different set of actions. The first one is to as already stated, to rebuild those processes and to revisit organization. We have been through some structural improvements which are highlighted. This might be -- we have to read it in the bottom right corner, this is the detail of the various actions undergoing currently within Zodiac Seat Shells with contemplated solution or the contemplated roadmap for a resolution with a due date for delivery. All those dates are within this fiscal year.

The second point we are working on is on the initial footprint. It is clear that Zodiac Seat Shells became a kind of single point of seller in our overall operations. We have to reconsider as well the overall logistic flow to better serve the two major OEMS for commercial aircraft. This has led us to revisits our industrial strategy, our industrial footprint which is currently being rolled out, which is in essence relying on the several shell supplier throughout the integrators within the Seats branch, which will lead to slight scale down, sometime I have sites scale down to come back to more reasonable size allowing us to accelerate the return to performance.

Thank you for your attention and I hand over to Yannick.

Yannick Assouad

Thank you, Jean-Michel. I'm going speak about on the Cabin branch. And I would start by saying that globally the Cabin branch is not affected everywhere by issue we are seeing. It's an important message. Nevertheless, globally operational performance is impacted and affected by some ramping up program that we have not anticipated early enough. Those program are mainly A350 lav which are manufactured in the U.S. and more recently with the second line we set up in Montreal, Canada to give continuity of [indiscernible] of some business program from Bombardier.

So the status on this program is following. We've been running roughly between 2 to 2.5 shipsets per month until January. The Montreal line started producing in the second part of December and since them and since mainly the beginning of the year with the improvement we've made in Cypress, which is [indiscernible] site and this production in Montreal, we've been progressively ramping up to 5 shipsets month in February to a demonstrated 7 in March, ramping up to 8, which is what we need to do until the end of the year with some excess capacity to be able to take care of head aversion for some airline which will put us temporarily at 10 months share between the two site, two-third roughly in Cypress and one-third in Montreal.

So, you see from this little graph that finally we are getting there. It's not been easy given the lack of anticipation, but finally we are getting there. We have other programs that are ramping up, several of which are combined to create also operational performance in another site, sell a region with all the lavatory retrofit program that we have won directly with airlines. We have come up with a product which is a combined galley/Lav of the airplane which allow the airline to put additional rows of seat in narrow body, and that product has had a certain success among the airline and we are ramping up that -- this monument as well with some difficult with the same lack of anticipation.

Also and with a little bit of anticipation this time, we are also steeply ramping up and here actually faster than actually our own plan but also Airbus plan, on the SpaceFlex v2 program which is the same type of monument complex combining a galley and two lav, [indiscernible] after the narrow body and for Airbus it's an option that they are offering on A320 which again has been selected by quite number of airline and more than actually both Airbus and ourself anticipated. So, we are on steep ramp, that's the plan and I'm trying to keep up. And right now, although difficult, it is keeping up at the required pace. Next please.

So those program has have not only affect our operational performance, but put the branch profitability under pressure, because they have started program, they have a lower profitability and this include the A350 lav, as I said the Spaceflex, but also I didn't speak much yet about the CSeries. The CSeries ramp-up is not as steep as the Airbus program, but due to late modification on that program, we are also in a difficult start with less profitability than expected, and more essentially less than what we enjoyed before with the program that are completely phased out like the full interior of the Embraer platform, which as you know because we've communicated on that already

We've created a JV with Embraer which is called EZAir to which we have transferred the entire Embraer interior while manufacturing. Or program that are slowing down like the Bombardier regional and business airplanes, both type of airplane are ramping down or slowing down, if we talk to BizJets, it's not a replacement program that is making the BizJets of Bombardier slowing but small, the condition of the market.

We have also some cost overruns that are due to initial in-service issues that we are curing and when you have in-service issue, usually first you have to re-engineer some parts of your products, so that's an additional cost.

And second most of the time, you are asked to replace free of charge, this product or subset don operate properly in-service and that's also an additional cost. We have had also some re-work non-quality and really that's more in regards to -- to be included in the start-up cost. Such are expedited build chase which are at higher price and of course penalty, because we are late due to poor operational performance.

We have also some indirect resourcing inefficiency, meaning we have more people to do things that normally would be required. Mainly that's concentrated in our former C&D and Heath Tecna sites. Why is that? Because we are trying to move them from very manual processes to more industrial processes. We've implementation the modern ERP Enterprise Resource Planning package last year and all the processes and rigor that go with the implementation of an ERP and that require training for sure. But also pursuance change to put the rigor at that those type of system requires people and right now we are not there yet and operating still with too many people versus what we should require with such a system.

The improvement with certainly come from learning how to manufacture those new program whether we talk about lav or full interior like the CCVs. Also we redesign -- partial redesign and here I'm seeing a specific thinking about the A350 to improve manufacturability and decrease the re-work that today are required to meet the quality criteria that Airbus and Airbus customer requires, and also working on the purchasing cost.

Can you go to next, yeah, please? The Cabin will also and is also undergoing a broad industrial restructuring that will of course take much longer time. I started by reorganizing the branch and adding new resources mainly in the field of production and preparation to produce meaning manufacturing engineering and industrialization. We are coming from site that we have very good at workmanship, but doing things very manually versus site that I want to turn to industry, and that require different skillset for people.

So this is ongoing with the establishment of more robust processes which is really part of the focus plan and we need to accompany that with a lot of training, the use of different IS system that are more comprehensive in their scope that touches all the support function of the companies and therefore somewhat again of cultural change.

More particularly, we are going to restructure our site again mainly in the U.S. We are coming further, many, many small site in the Washington State area and California that I want to merge in more, in bigger site, more in the field sites, so I'm going to reduce the number of site and optimized industrial footprint.

And also continuing what has been started which is moving to facility in more -- in cost competitive country when applicable, meaning when automatization won't be possible in our current site.

And globally given the breath of that industrial restructuring, my expectation is that we will be fully back to operational performance in roughly 18 months, but by the beginning of the -- our fiscal year 2018, I think everything will be clean and working properly.

Can you got to next? I think Cabin has despite, it's given difficult year, I think it has a bright future, because of the opportunity that the market is offering us in retrofit. I think I said that again, we've been not so good at executing and manufacturing what we have to make. Nonetheless we are started with excellent product, and products that the airlines want, because the airline are looking for several ways of optimizing their operation.

They of course want to optimize their real estate in their airplane to increase their revenues, so they want to be put more seats and a lot of our monument and the combined function, combined utilities that we've created are really helping them to do that. They want also other ways of revenues like beds, like bar, and again this rely on monument that Zodiac Cabin is able to offer.

They also want to ease their baggage build and also it's a will of us as passenger to take care of our own luggage, not to waste time looking for and waiting for luggage, and that is a allowed by bigger bins in the airplanes. We have the perfect products for that and clearly we are having a lot of success with that product in the market.

The alignment to improve the pax environment as well, the cabin ambience, we are also doing that. You see Delta A320 cabin on the top right of the screen, and we can also offer modern IFE that is simple, reliable that can evolve with technology and connect to your onboard, and we are showing that. I was very glad weeks ago when Air France announced that they pick our IFE on their A330 retrofit. It's a big testimony for me that this product now is at the level of the best -- of this field in the world. So that's what I wanted to share on Cabin.

And I will hand it over to Benoit, who is going to speak about system.

Benoit Ribadeau-Dumas

Thank you Yannick. Good morning everyone. So regarding our Systems, we are posting an EUR970 million sales and profitability which is close to 16% EBITA. Our sales are currently going this semester, but this is thanks to favorable ForEx impact, so they are actually decreasing organically both for AeroSafety and Aircraft Systems. And the two branches have been impacted this semester by sales to depressed helicopter markets and more generally a dynamic BizJets and regional jets activities and concerning more specifically our safety, slowdown of our activity in alerting system and to a low extent parachute and protection systems.

In terms of EBITA, we also benefited from positive ForEx impact, but this offset the reduced margins on both branches because there as well the margins are slightly decreasing and the reasons for this unfavorable evolution which of course we plan to invest are the following. I already mentioned the depressed Helicopter and BizJet activities.

We continue to have high development cost. We passed significant milestones this semester, but some programs are breaching to the right, and of course this impacts us when we can't charge the customer for that

We have programs also which are not yet at their maximum rate, so we are not yet on the favorable part of the learning curve and we don't benefit yet from the volume effect, even though we remain confident that it will come.

And lastly, last year first semester was favorably impacted by initial provisioning and in comparison, we had this semester softer after-sales. So this is -- all of that is weighting on our profitability for this semester in H1.

Next slide, the communication of the group has been centered this past month on the [indiscernible] for reasons which are easy to understand, but Olivier asked me to spend at least two slides with you on our Aerosystems activity which account for roughly 40% of the group turnover.

So the new activity was created on September 1, 2015, actually when I joined the group. It is the merger of the former AeroSafety branch and Aircraft Systems branch. The turnover last fiscal year was EUR1.95 billion, the EBITA hike was close to 16% maybe even more than the other branches. Aerosystems; activity is characterized by a very large variety of activities and business models.

I mean we have a niche positioning on more than 30 lines of products going from wiper for commercial aircrafts to electrical systems and this is following a strong internal and external growth. This activity has had great successes in ramping up towards systems, so we have now strong Tier 1 position on systems like Evacuation systems, Floats & Rafts, Electricity, Oxygen, Water & Waste, Fuel Management, where we enjoy leadership position again in a Tier 1 position.

And this means large shipsets on the majority of the [indiscernible] platforms. But still even if part of our goal is now tied to the success of these platforms, we continue to enjoy the relatively balanced customer base. You can see it in the pie chart. I mean a bit more than the third of our activity is through commercial aircraft which you certainly expect. But a fourth is helicopter, regional and BizJets, and another third is from the Parachutes space, arresting systems and others.

We are most of the time vertically integrated and this is a key driver for our profitability even if it means of course that we need to constantly adapt our engineering and our manufacturing skews.

And last and it is another driver for profitability, we have a significant after sales content with dedicated organization called Zodiac Services, headed by Christophe Bernadini, who sits here on the first row and which we will discuss further in my next slide.

Overall the good news is that Aerosystems activity enjoys a relatively good level of operational maturity. We have challenges of course, not everything is by tender and easy, but in general our customers are satisfied with us, because we try to deliver innovative product at a competitive price on time and on quality.

Next slide, in the current global context of Zodiac, our priorities are quiet simple. The first one is to further reinforce the activity. And when I say reinforce, I mean organize, standardize and control. Again we are clearly not in the same situation than Seats and Cabins. We are not facing the same levels of difficulties. But for sure, nevertheless we have lessons to learn from what happens to Seats and Cabin, if only because we share with them the same DNA of our internal and external goals.

So at the beginning of the year, I put in place a new organization for the activity. It is not only following the borders of the company that we acquired in the past, Aerazur became Aerosafety, and Intertechnique became Aerotechnics. It's been to on four divisions with [indiscernible] management and we also put in place new transact functions, operations, bill changing, HR, customer focus. The goal is clearly to keep the same activity and on top of know your spirit that made the success of Zodiac was deploying common ores and processes and a better portfolio of, although more but they are quite diverse and that we have 50, five sites in my activity.

The second priority is to protect and grow our market share. We will continue our selective ramp-up towards systems to achieve large shipsets, bigger plane, and here I would like to give you one or two examples, because they are the best illustration of this stagey. If you take the A350, take all the system, I mean it's hopefully 20 times bigger that we had on the narrow body, on the narrow body, 20 times bigger than the shipsets we enjoyed on the A320, A330. Same, if you take Boeing, water and waste systems, in the past we used to sell only toilets, now we are selling the whole water and waste systems, and it's the same multiplier for the goal.

Second, we will continue internal and external growth. I mean it has been a recipe for success in our old system in the past. Internally, I mean the group is really able to invest in the long-term for the future systems. One example, I'd like to quote is the fact that we have just been selected on the 777X for the fuel measurement system. It's a great success that we had and it's thanks to investments that was launched more than five years ago on the new technology that helped us to win this year.

With regards to external growth, I mean the past experiences have been also successes for Aerosystems and if only we could mention the last acquisition Enviro which this year is bringing relative results for the activity. And last but not least, we will continue to leverage our after-sales organization, Zodiac Services. This dedicated organization is by nature close to the customer.

In our case Zodiac Services has had very good feedback from our customers, Airlines and OEM manufacturer, and we have seen a very good progression in customer ranking and in particular, our [indiscernible] has been dramatic. So this kind of organization brings new businesses, new opportunities, so we will continue to expand its scope to deliver additional goals.

The third priority is to defend our added value with part of not demanding customers because of course the customers are more demanding which is perfectly normal. So we need to protect our margin and to protect our margin, we need to deliver more than value.

First, we will continue to focus on innovation. One thing I like to highlight is the fact that in the past five years, when our engineering team was well occupied with a lot of program under development, I mean still we decided to continue to go errand key budget, [indiscernible] technology budget which is the money that we spend beyond the programs I mean to prepare for the future. We chose that we do not sacrifice the long-term over the short term. We will also continue to focus on our base and I like to mention two sets of figures here, close to 30% of our direct label sits in cross-competitive countries, must be in Tunisia and Mexico and we plan to continue to expand there to continue to transfer programs there when they have reached the operational maturity and direct opportunities account for 60% to 70% percent of our cost of good sales and we have no centralized, the purchasing from [indiscernible] assisted activity level, so it's 70% of EUR2 billion gives us lever to option more from our suppliers.

And lastly we will show and improved personal focus. I think we realized that our customers do not accept any more to see as many Zodiacs as we are building it. So we need consistent operations and consistent performance together with recent the top right level, we are deferring a net growth of [indiscernible] managers to reinforce the voice of the customer.

But I like to finished as mentioned by Olivier with, I mean my top priority for the remainder of the year as mentioned by Olivier is in solution for [indiscernible] expected this year. All of the activities must be second so much better than the first one and that is the case as well for Aerosystem. So, we are the negative organic goals this quarter for the results that I mentioned, the headwinds, the [indiscernible] headwinds that are we are facing. Despite these headwinds we are targeting a second semester that is higher than the first and close [indiscernible] to last year too in terms of sales. Thank you.

Maurice Pinault

Thank you Benoit. I would say quick words about our environment. So new commercial airplanes A350 we talked about it on the regions side, sales overall are slightly down, but many new programs are showing it that will replace them, so it's still a good market. And the third market in which we operate business jets and helicopters is certainly under pressure and slightly down for the foreseeable future. Our aftermarket itself is going up.

So as a business model overall, Aerosystems as Benoit pointed out is based on the stable and predictable business mostly SFE, so we have excellent visibility on the future. On the Aircraft interiors, the Seats is mostly BFE business which means that we have short-cycle between order taking and delivery, so it's easy to replace product by a new range of product. On Cabin, we have a mixed business model between BFE and SFE and what Yannick pointed out is that we're suffering on SFE programs, but we have a lot of time to do a cost rundown on this program that will eventually become profitable after a few years.

So this is a general breakdown between BFE and SFE. We're relatively balanced between the two, which we believe is a good feature.

Next, in the latest commercial developments we had very successful show in Hamburg which is the most important interior show in the world and we got an award for innovation. More people than last year, very crowded, booths were very happy with the show and with the successes that we've had. One of most visible ones was the announcement of Air France that we were doing their retrofit for A330 for both seats and IFE and this was certainly a nice announcement, but there were many other orders taken during the show.

So brand of Zodiac Aerospace is strong and we are considering moving from several brands to one single brand in the future and possible depreciating the other brand that we're not choosing anymore.

Next, so it was pointed out already, but one thing which is particular about Zodiac is that we are present in every single new platform. Many of those are not yet in production, but we are on every new Airbus and Boeing platform on the COMAC and Irkut planes that will grow in importance in the future with possible wide-body launch between the Chinese and Russians.

Regional we are on all programs and again, that are not in production yet for many new programs on which we're doing everything in the interiors and systems as well. Business jet again we're on all new programs including the Global 7000/8000 of Bombardier which is not yet in production.

So helicopters, so we are present just about everywhere. So, it's very wide presence that gives us balance both in interiors and systems.

Thank you very much. And with that I will leave the conclusion to Olivier.

Olivier Zarrouati

With all these items, we need to show and outlook. So, the three items need to be underlined. One, on sales there is a vast dissymmetry between H1 and H2, Aerosystems and Seats talked about that and we are clearly expecting another very strong second half fiscal year. This has started as soon as month of March. And it is -- this was in a way -- this was anticipated.

Second, on trend on the Seat side, the transformation is now happening at full speed and yielding it first [indiscernible]. We are seeing the products getting out of the doors and not only now we are focusing more on the -- in depth of the delays, we used the one year ago to be talking about weeks of delays in the production of Seats now. And one hour is already one how too much, but date is much better than weeks and this is happening.

On Cabin side, we are in a transformation which is an industrial transformation but also a transformation as a portfolio of the programs. The old CRGs and the E1 at Embraer are being replaced by C-Series by 350, by 320 and by many other programs, actually the brunch is mounted on each and every new program as Maurice mentioned. It so happens that all these programs are at the top of their learning curve at the same moment, because all these programs are coming forward placement at the same time. So this is coming with additional work for the people in backgrounds and that was not anticipated at the same level as what we are having now.

So, when we saw that two months ago that we wouldn’t be able to make our guidance as planned for the beginning of the fiscal year, we posted that to the market, which was not a good moment, but we did it, and now we are only confirming that what we said two months ago and one months ago, confirming one months ago is actually happening. This is based on last month and on February and March experience.

So, we are confirming as said one months ago that the operational, the return to operational performance at seat and cabin is happening in the next 18 months. The customers Maurice said are still there, I believe that this decision that we made to protect our customers and to keep them as harmless as possible from our difficulties was the right decision – it has some economic performances for our operations, but at the end of the day we believe that this was our duty to protect them whatever happened and the decision made by Air France last week for maintaining our products on the A330s and adding to that selection our IC product is really a tribute to that decision.

As Maurice said, it’s not the only order intake that we are throwing, but unfortunately the tradition that business is – the customers want to make their reveals themselves as they don’t expect us to talk about the order intake on their behalf. So we need to leave to them to make the announcements, but sometimes Air France they are ready to big announcements, so this is the one we are talking about, but which is not the only one obviously.

Okay, so the model is still there. The transformation is happening as we speak and we confirm our guidance. The financials hedgings, hedgings have been put in place. The numbers are on the screen.

Thank you for your attention. We are ready for questions.

Question-and-Answer Session


A - Jean-Jacques Jegou

So we are now going to take questions in the room or in the conference call and we’ll answer some questions which can be asked in a written way, which I would repeat as through the webcast. First question in my left.

Unidentified Analyst

Hello. I have four questions please, the first one is on the full year guidance, we saw a big step up in the second half to give us more confidence around your ability to achieve this in the second half, could you may be share with us qualitative color on the run rate of the extra cost, I mean how this have developed in Q2 months-by-months and so far in April. This is the first question.

The second question is on the Slide 17, you are implementing a new ERP at your seats division this summer. I mean have you included any buffer in your guidance for the second half and what about your inventories, did you increase them ahead of this?

The third question is again on seats, given that your costs have not stabilized yet, how do you set the pricing when you have a new seat contains? And my last question is, there was yesterday, FAA announced that you need to replace about 10,500 seats – original seats in the U.S., if you can give more color around this, yesterday, and also the cost that’s used at the airline?

Olivier Zarrouati

Okay. The first, probably I will leave the three lot questions to Jean-Michel and we will share the answer to the first question with Jean-Jacques. You have to see that on the guidance of 2016 most of the improvement is coming from the top line, between H1 and H2. This is providing like more than two third of the result is coming from the top line. On the bottom line, obviously we are counting on the decrease of the overall spend, but we have decided to be prudent on that side of the projection, maybe Jean-Jacques you want to talk about that.

Jean-Jacques Jegou

Just maybe, we are expecting to spend more or less penalties in H2, this is our expectation. And also to have less quality issues that we have in the first half, so this is – obviously improvement in the H2.

Jean-Michel Billig

Okay. On your question to ERP, our team production of our – rather been, and correct me if I got it wrong, has been usually increasing the inventory which indeed we will do. We first started by cleaning inventory, improving the inventory accuracy which is now in the excess – largely in the excess of 90%, which is giving us as a good visibility of what is effectively in our inventory. And second, could this in product – MFP process, this is giving us the ability to more, if not have a different, all the parts within the lead time of our suppliers, which use not to be the case by going through manual ordering process. So these are the two aspects related to the supply chain, which will contribute together with MFP process. To give us confidence in the smooth flow of parts before delivering to the customer, this is on your question.

On the FAA question, to be quite frank this is not coming by surprise, it is I would say close to business as usual, you know there is no compromising on safety. And as start of this attitude, which is continues attitude for decades at Zodiac, we are working extremely closely and continuously with the authorities, be it FAA or [indiscernible]. And at start of this working together, several months ago, FAA came to the idea and it is I insist not related to any accident, nor any incidents, nor any negative test results, but FAA came to the idea we should consider a potential risk in the design of one of our seats. We didn’t argue that long, we went through a joint solution, we have already certified the solution and as it is the case for any safety related matter, the FAA is now going – not to issue an [indiscernible] they are going to issue a rule for proposal making, which is actually called for comments of the products that we’re wanting today. The industry will have about 45 days to comment this notice for proposal we’re making, and then there will be an directive for which the industry will have not 60 days as I read somewhere, but 60 months to correct the solution across the fleet.

As far as Zodiac is concerned, as I said the solution, we have already solution, we have already certified the solution and it is already provisioned in our financial. So I’d say it is business as usual, and by the way as far as we are concerned, this should not be 10,000 seats, it should be in the order of magnitude of 6,000 seats.

Jean-Jacques Jegou

One thing that needs to be told about that is that – it’s important to understand. When the product is certified in commercial aviation, the regulatory, the authority has always the opportunity to put the certification in question and that can happen one year, two years, 10 years after, depending on the view they get order products and that can come from the evolution of their thoughts on how the products can be certified. So this is an ongoing process that happens very regularly and they work with us. It doesn’t come as a recall of products. They work results and they tell us, oh you know what, maybe I reviewed the video of that cluster that you’re providing in the certification of operation, and I feel like maybe there is a neck of the dummy is having more pain than we thought, could you consider that and we do. We don’t recall the seats, rebuild or performed online followings and it’s a very simple operation, and we negotiate with them as the operation get simple, but if they have a concern, they want us to change something of the product, so we negotiate it can take months. And when we are in agreement with the fact that we have a way forward, we obviously probably take the reserve in our financials that has been done already. At that point in time we enter into the reveal of the same, because at a point of time we need to inform the airlines that they will need to consider being the improvement of the product, and they have to forecast the operation for that. So in a nutshell that happens, we are talking about 6,000 seats backs, it doesn’t happen often, but it happens regularly, and which just working together with regulatory and being part of that business, and I said before its publishing already.

Olivier Zarrouati

Thank you. Next question offline.

Unidentified Analyst

Thank you. If possible, I was hoping I’ve got four page questions as well. The first one is on the focus planning cost, could you give us an idea of what’s the cost this year in terms of the recurring cost timing, and what will be the intimate that will get probably additional recurring costs for your focus plan.

My second question is about guidance, end of last calendar year, you gave us guidance over 2 years, you did not repeat [indiscernible] last time. So when do you think you will be able to provide us with 2016, 2017 guidance.

My third question is regarding your comments on aircraft interiors back to operation deferments in 2016, 2017, what it would mean exactly because in the past I think this division the mid-teens EBIT margin [indiscernible] and do you think that you can reach probably not in the short-term, but medium term in this type of profitability. And the last question is on [indiscernible].

Olivier Zarrouati

The first question, we told already that it would be less for this year to be less than EUR20 million for the year, that’s embedded into the overhead section and we come from that order of magnitude. We have to say that it’s – that number is not coming from a financial reporting statement because some costs are clearly allocated to the focus plan like consultants or things like that, when the manager, our new manager is taking part in this time – over time. On the program visit half time, sit one-third time it’s a little bit less easy to access. But we are based on what we have before that would come from that order of magnitude.

Going forward, I think that, yeah, focus is coming with additional reporting, additional discipline processes, which obviously is more burden for everyone. On the other side, I would like to say that if we wouldn’t do that, we’re not supposed to yield results in the operation. So, the cost side is more easy to access than the return side. What would be coming from focus in the fact that the operations are getting more profitable, that will always stay a question mark. So 2017 is less easy for me to answer you.

I think that the booking place, the plan is probably costing more than maintaining the plan than the cost of maintenance of the plan going forward, but that will be more easy to state when they have the budget of 2016, 2017.

Guidance, yeah, I understand that it would be good to have a guidance for 2016, 2017, so we are now in April and the next – the last opportunity for us to give the guidance for 2016, 2017 is in October when we report on the fiscal year 2015, 2016 and probably – we will probably have to give you some indication before that. It’s also true that two months after having had to restate our guidance for this current fiscal year, we need also to be prudent on that. So I'm extremely careful about what others are going to say about this. So will it happen when we report on Q3 or on the sales of next 2015 and 2016, I still don’t know, but I understand that you need to know more than usual about that. On the interiors profitability this segment is more subscribed to be low-teens – to the double-digits than to the mid-teens, but I will – to Yannick to answer your sub question.

Yannick Assouad

For cabin steady statistically interior, we are still accessing where we’ll up being, as I said in my presentation, we have new program that are – that would be the bulk of revenue going forward. So [indiscernible] less profitable that the full yields that we had in Bombardier and Embraer. Nevertheless within this restructuring that I will be conducting in next two years, because that’s the amount of time you will take, one to optimize our footprint taking into account that some will be the reason towards your cost, some manufacturing processes will be automized in our current U.S. facility, but also European facilities, Czech Republic and Germany. I still have difficulty to give you a precise number and being able to tell you it will be above 15% which is what you are expecting or close to 15%, I don’t know that for sure, but right now what we are doing is really optimizing what we have, so that we can really reach a much better possibilities and what we have today.

Olivier Zarrouati

I see antenna this will be a double voice because Benoit is making the antenna, and Yannick is making the IT system, and when it comes to sell the package, actually we don’t sell antenna, we sell a package, which is a connectivity package. So the frontrunner is for sale and Benoit is making the development of the antenna. So Yannick, maybe you take the first answer and Benoit will complete.

Yannick Assouad

Yes. Just to be little precise, right now we have a connectivity, onboard connectivity offer that is based on global express, which uses an antenna that we are buying, just to correct you on that we are on Airbus platform, all Airbus platform from A320 to A380 going to A350 with that, either way is some of you were at Hamburg Aircraft Interior, on our IFE boots we had that antenna under boot, so it’s something that is really [indiscernible] and has been a very selected by one big customers. In the time to come indeed, we are planning at making our own antenna and this is where I will perhaps, the mic Benoit to say where is that development.

Benoit Ribadeau-Dumas

Okay. So we are not in a field organization, but in business unit of my organization called data system. We are building what we plan to be – I mean offer to our colleagues from IFE to two years from now is the target that we have, having being place, I’m trying to hurry and this is a good example of whatever is mentioning on guarantee effort because this is a program that we have been developing on some familiar, and we [indiscernible] that we have been helped that much there by DGAC, I mean it’s a initiative that we’ll launch on our own to develop this new antenna for the connectivity of the cabin and to support our colleague formalities.


We’ll take our next question from Celine Fornaro from Bank of America. Please go ahead.

Celine Fornaro

Yes. Hi. Good morning everyone. Thank you for taking my questions. I would have three questions if I may. The first one would be, if you could give us a little bit of color on the R&D, you know now that you’ve broken down the grouping to two main divisions. So the R&D level that you’ve got within each of the Aerosystems and the Interior businesses, because we’ve got your full year average number, which is roughly 6% of sales. And also when I look at the H1 number, I’ve got a decline in the intangibles, CapEx by $10 million, so just a little bit of color on that and how we think about that for the full year. My second question would be on the cash profile and how we should think about that for the second half because you are clearly assuming a profitability, a strong recovery in the second half, nearly going back to a normalized year even though your FX is more than offset by the charges. So just thinking on how we should think about the working capital elements for the second half. And I’ll leave my last point after these questions, please.

Olivier Zarrouati

Two first questions are probably for Jean-Jacques.

Jean-Jacques Jegou

I don’t have as a split between the two activities, but they can say it’s what is our percentage of R&D and mix, when I say net it means after what is invoice to our customer, what is capitalized. We are more than 6% of our sales, which is as you know, it’s a best. We are between 5% and 6% and more than – above the 6%.

Speaking about capitalization, we have this H1, we have less capitalizations in the last year because we are at the end of the A350 program, [indiscernible], so we have about EUR80 million, the capitalization development amortization, we have only element. On the H2, we should have around the same a legal capitalization, so what we know it should be less than versus a prior year.

About free cash flow, we expect the free cash flow for H2 around EUR250 million between the EUR230 million to EUR250 million. We are expecting a CapEx stable, so it should be in the range of EUR80 to EUR90 million. And the main driver, [indiscernible]. We expect a bit trend of are receivable because obviously the troubles we have in H1, we can then put the pressure to get some money, now we tend to do it, so we expect – and it’s mainly for cabinet – I'm sorry, it’s always question on Cabinet, but also we expect to stabilize may be to decrease a little bit inventory.

Celine Fornaro

Yeah, sorry. Just maybe on the R&D first, may be you want to comment as well. If I look at other people in the cabin and the interior area, the R&D is significantly higher than a 6% of revenues is actually sometimes close to a 10%. So I don’t know if you could provide a little bit of color on why Zodiac should have such a lower R&D because I think the interior division has a got big less than the equipment one.

And my last point would actually be on the back of your comment, you made all the orders at the very end, you don’t want to disclose for sensitive information. I do totally understand this, but I do think that given the current situation it would be very helpful to have some sort of an indication on your intakes overall without naming anybody because I do think it’s supporting one airline is fine for us, but it’s really difficult to judge the breadth of –as you say the brands and the business momentum when we don’t really have visibility on that number?

Jean-Jacques Jegou

We are sending values organization, so it’s not the course and your expenses. It really depends on what you want to show, but from what you understand of communication some of the deals maybe the one you are talking about, it’s good to show a very big number and you involve in that number everything including R&D, the one that’s found in customer et cetera, et cetera, here we are talking about financial reporting, which is an exception.

Benoit Ribadeau-Dumas

So on order taking, you know everybody would expect us to have gone through a very difficult time because of the production issues, in fact it’s not being that bad even if we marginally lost a couple of points, but now essentially we are back on track or mostly back on track on deliveries, so the situation has greatly improved with the OEMs and we are now in a position to reboot our order taking and we’re already very – we have already a good order backlog for next year. So, overall it’s more optimistic than pessimistic I would say, so we don’t disclose numbers on order taking.

Jean-Jacques Jegou

Maybe the one thing we could say because you won’t KPIs above that, when we originated the business planning, we know that – you know that we have to do, if it were only to check the – in our accounting process we had to do that. The latest issue with the business management showing – is not showing a decrease, so that is something that you can bag as a strong indication.

Celine Fornaro

Thank you for this and I appreciate the color on R&D, you know it’s up to you, we just see cash R&D and P&L R&D, then happy to compare apples-to-apples even there is some discrepancy.


Next question we have from Reuters.

Unidentified Analyst

[Indiscernible] from Reuters. Two questions, just on the A350 on the lavatories, we’ve noticed more aircraft introduced, could you just tell us how many shipments are currently delayed? And if you could kindly clarify that target of eight, when do you expect that to be met and then I have another question?

Jean-Jacques Jegou

Are you talking, you probably are willing to talk loud, so I will hand it to Yannick.

Yannick Assouad

For your last question, we are heading at eight as early as April. We have difficulty to reach a not anymore because of our capacity. We are able to produce eight connection more, but we have tightened the screening and one thing, we it’s not – we Zodiac, it’s both Airbus and Zodiac because of the testaments of the A350 has very high quality expectation. Above and beyond what had been initially agreed between Airbus and their supplier, Zodiac and that’s really the point, which is really slowing us down right now under quality and the quality aspect of the lab.

Unidentified Analyst

How many ships that’s currently delayed?

Yannick Assouad

We have [indiscernible] today, which is – versus initial dates of Airbus, so right now I couldn’t tell you how many ships are delayed versus that dates, but clearly it’s a number, which is significant. Nevertheless, right now we are now tracking our time versus the actual need of Airbus, and right now there is no airplane that is missing a lav inside.

Unidentified Analyst

And Mr. Zarrouati, if I could ask you, you have delivered a lot of promises in the past followed by average number of profit warnings for a single CEO. Would you accept now that your personal credibility is on the line, and are you prepared to say that if the company doesn’t need these latest second half targets that you would review your position.

Olivier Zarrouati

Okay, I will first answer the question on numbers, on number of warnings because I think it’s a question that needs an answer. We have stepped into crisis, and we don’t like it, but this crisis has been deeper than we expected and longer than we expected. And we have always talked before the market of what we saw, and yeah, we talk before the market seven times per year. We have four quarters, two half’s and one general meeting, so that makes seven per – seven times per year.

And it’s true that these crisis has been lasting more than one year. So you can claim each and any of our presentation before the market as an additional set of bad news. I do believe that and have been – having been inside that crisis, I do believe that it’s not possible to see in one time at first glance, the whole situation. And I really am I wondering still now – till now I’m wondering how it would be possible to pass from such a crisis into one single announcement. I don’t believe it’s possible at least. Under the regulation that deal [indiscernible] is given to us, which says that what you see as soon as you see it.

Now I tend to believe that our plan is a right one. Obviously I feel like the management of that group is able to leave above that plan, this is happening. The rest of your answer is belonging to the both.

Unidentified Analyst

This is [indiscernible] good morning. I have one question or one topic in fact. Just to get a sense of what’s been supplying the money, basically we took the advertising and the second edition on that one, is there any specific conditions attached to it in terms of governments have to take over of – anything in that type of conditions?

Jean-Jacques Jegou

So like I said at the beginning, we expect to return our – without the effect, there is no specific condition, there is no right to explain and it’s just well to finance our group. Again, with the target to be able to make external goals if we can without affecting our debt to EBITDA ratio.

Unidentified Analyst

And do bank subscribe to that?

Jean-Jacques Jegou

I do not want to answer this question now because I have to talk to other to make sure you agree with that. I won’t say that. It maybe more, I will give you next time.

Unidentified Analyst

Good morning. [Indiscernible] I have two question please. First one is on sales, you gave a guidance to slight sales growth for this fiscal year, which you mentioned, and it seems you can split with your indication for strong volume driving the improvement. So could you please quantify the level of growth you now expect for the full year in terms of sales? Second question is, I am bit confused by what you mean proceeds with the return to nominal operating performance, a return to positive current operating income, just wanted to check on that. Thanks.

Olivier Zarrouati

Guidance on the gross, we gave the guidance that year 2015-2016 would be a gross and we maintain that. That by the way implies the comment that I made previously that the volume of H2 would be a bit stronger than H1, and this is where profit is going to come from, so there is no change in those two comments. On the fixed return to performance.

Jean-Jacques Jegou

The way to understand the 18 months is simply that – time between order intake and fixed delivery is in the range of, depending of course 18 to 24 months, and by the time we implement our new processes, the new way of managing programs, we are currently implementing them as we speak on the new launch programs, and the full earning of expected performance will be in the 18 months’ timeframe. But of course the low hanging fruits based on the implementation of the transformation attached as we speak during H2 of this fiscal year.

Olivier Zarrouati

We had one question by email from Andre, Bloomberg. [Indiscernible] awaiting certification for your business, can you give us any estimate of when this should be return and when the deliveries can begin. Thank you, Andre.

Jean-Jacques Jegou

So obviously we are not going to comment over the name some of the customers, so we will not answer the first side of your question. I only will leave it to Jean-Michel to give a comment on the program where we had difficulties.

Jean-Michel Billig

As I mentioned during my presentation, we were particularly focusing on one complex program in business class due to a new aircraft platform, due to new technologies implemented on this program. The good news is that we have completed those developments successfully. We are running the certification tests this week as we speak, I can even share with you the first certification test happened yesterday successfully. So this is allowing us to clear the sky and resume the deliveries to the particular customers, which we are currently negotiating. So I believe that by the end of this calendar year, we will be – it will be – anything in our memories, the difficulties we have been facing, which were quite significant.

Jean-Jacques Jegou

The comment I would like to add is that this is not just another program, with just another certification difficulties, this is a next generation of our business class seats. And you would have probably heard about this, here is a program which is still one of the best sellers of that market, this is actually the program named Blessed by Air Force. Obviously like any other product, this product needed next generation, which is going one step forward, which is more reasonable, with more luxury, more immunities and more space, more – a bit more of everything. And this is the next generation that is currently finalizing certification. So this is not just another program.

Harry Breach

I’m Harry Breach from Raymond James. I’m no expert on hybrids, but can you help me understand the cost of finance, the annual cost of finance for the hybrid instruments. And one for Jean-Michel, I think the seat backlog in the past, I think in the March, Olivier mentioned it was still around the 300 seat level, is it still at that level and when do you expect to get it to effectively to zero. And the final one maybe for Olivier or the wider team, one aspect of worries following the seat delay and the lav issues over the last 18 months has been not as a shell, but potential loss of lines of offerability, have you been removed from lines of offerability by any of the OEMs. Thanks you.

Jean-Jacques Jegou

Because this tool is around what we will have to bear for [indiscernible] on seven years maturity. So this is truth of the first two years, after that there is an increase, but two years of convenience in the market around 3%. Number of seats, Jean-Michel?

Jean-Michel Billig

As you said we have, we were successful in driving down our late backlog to the order of magnitude you have been referring to, which allow us now to concentrate more on first securing the aircraft schedule, not impacting the aircraft schedule, and second, in order to do so, to reduce the dips of the delay, which is in our view much more important than anything else in order to protect the operations of our customers. And this is today our priority. Having then satisfied our last business class programs for this year, then to resume the reduction of the late backlog, which should come to an end because there is always surprise, but I would say allowing us to get back to a normal business by the end of fiscal end year.

Harry Breach

What is the depth of backlog?

Jean-Michel Billig

Depth of backlog means that one year ago we had an average delay in our deliveries, which were accounted in monsoons and today we are counting in less than weeks, to the measurement using days.

Olivier Zarrouati

On offerability, first you must be seeing this by products. We’ve been pre-offerable non-stop at Airbus and are getting those. On seats and also our products, there has been some issues in 2015, but I would say largely reserved today and it’s both Airbus, so we never tell you, you are fully offerable no matter what, so we tell you, you’re offerable for this product and that program and this conditions, we set timeframe, let I would say that most of the issues have gone away.

Harry Breach

No significant change in your lines to offerability?

Olivier Zarrouati

As I said previously things look relatively better from a business point of view looking forward.

Jean-Jacques Jegou

This mostly depends on the desire of the end customer of the airline and we believe that we’re making sense to protect them.

Unidentified Analyst

Are you able today to share business on the KPIs from the – to show the improvement trend in terms of on time performance in terms of supply for instance? And you mentioned the slide with the [indiscernible] because we have seen some announcement during the [indiscernible] transition on this kind of fleet, so what is your view today.

Jean-Jacques Jegou

So, Maurice will take the second question and will give some time to Jean-Michel to things around the KPIs he wants to reveal.

Maurice Pinault

So on the shift to SFE Airbus, Boeing is now doing it. We believe it’s a small slice of the market and it’s a small slice. After that – no one knows about the future, but for instance both Airbus and Boeing seems to get away from SFE model for their cabins and wide body, so we will have to see if the SFE business model survives long-term.

Jean-Jacques Jegou

If I want to add a comment – I will make that comment. This is a very old discussion between – around the commercial aviation seat industry to make it simple, obviously to make everyone’s life much more simple. If you could purchase a seat in the catalogue as part of your plane as we do in the car industry, and this model has been contemplated over a decade by everyone to see if it makes sense or not. The specific situation of the aviation industry is that the lifecycle of the seat and the lifecycle of the airplane almost incomparable.

Plane is going to fly 30 years and the seat will need to be changed after 7, 8, maybe 10 years, and the seat will be changed several times, in the lifecycle of the airplane. Therefore, we are in a difficult – different situation than the car industry. In the car industry no one wants to change the seat during the life of the car that just never happens. In airplanes it happens all the time. So – and the second thing you need to consider is that seats is not only a technical need of the product, it’s also a fashion product. What we sell is a fashion product. And we sell the ability to the airline to keep their cabin up-to-date trending.

And the last thing the airlines want is to be able to retrofit all their planes with a better trending cabin, which is the only that the passenger receives than the new products that they get from the line. And make seats completely SFE, like fuel pumps for example, would mean that over the 30 years of the life of the airplane, you sit all the time on the same seat that just will not happen. That will not happen. So it has to be a specific model to be invented. And on top of that we have to have the self-considering, which is that when the airframer has an older book of like eight year, nine years, ten years that only means that the airplanes have been already sold, and the airline have the right of the contract to choose their seats. So when the airplane manufacturer tells, okay now it’s going to be an SFE seat they have to convince the airline that they have the contract in hand. That’s in their best interest to have the same seat that everyone, which is kind of top sale. So, we believe that this model of SFE product works. For some cabin products like for example the – that has a very high decorate on A320 for a same reason that no one thinks about changing their seats in the life of the airplane – and lav in the life of the airplane. For the seats it’s a little bit of a different, so we were not as [indiscernible] about the SFE model for everybody. And as Maurice said, this has been tested already on wide bodies like catalogue seats for Boeing and Airbus and it is not showing the output that the airframer was expecting. So we don’t feel like this is an area that we will be very much accepting by the market.

Jean-Michel Billig

Depending the level of expectations, behind your question as a matter of fact as you may imagine I have a set of KPIs on my dashboard, which are internal KPIs, allowing me to review weekly is the way we execute both our recovery plan, our confirmation plan, but as well the development of our program. As a matter of fact those internal KPIs they do not really matters for the outside, they are there and they will all need to state that we are progressing and that we are on track in our journey for recovery.

What matters at the end of the day are – for the customers what this is, and what this is, is on time and on quality. So indeed what we share with our customers is our ability to deliver on time, we already mentioned it early on, we are reducing the debts of our delays, preventing any impact on aircraft schedule and we are further continuing in order to get down to zero and we have a very clear roadmap getting this KPIs, 100% on time delivery, as the second KPI is measuring the quality of our the developers. We agree with – at the time of delivery with the number of pick-ups or defects if you will of our deliveries, and here as well there is no compromise, so having here as well, the performance is on to zero defect on each and every delivery.

And we know we are been struggling on this for the last couple of months and few years, so proven [indiscernible] is giving me confidence, we should get back – normal we should have always had before the crisis.

Jean-Jacques Jegou

Thank you, Jean-Michel. I think we are just at the end of this conference call and presentation. Thank you everyone for your participation. The next publication will be June 14, after the closing for our Q3 sales. Thank you everyone.

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