Safran SA (OTCPK:SAFRF) Q4 2016 Earnings Conference Call February 24, 2017 2:30 AM ET
Peter Campbell - Investor Relations
Philippe Petitcolin - Chief Executive Officer
Bernard Delpit - Chief Financial Officer
Olivier Brochet - Credit Suisse
Christian Laughlin - Bernstein
Zafar Khan - Societe Generale
Ben Heelan - Bank of America Merrill Lynch
Welcome to the Safran’s Full Year 2016 Results Conference Call. After the presentation there will an opportunity to ask questions. At this I’d like to turn the conference over to your host Philippe Petitcolin, Safran’s CEO and Bernard Delpit, Group CFO and Peter Campbell, Investor Relations. Please go ahead.
Thank you. Good morning. Today’s discussion includes forward looking statements and other information that may be subject to legal restrictions in certain jurisdictions. For further information please refer to the disclaimers that they're in the package you received this morning and in the slides, on the slide that you see on the screen. These disclaimers describe risks that may apply to the forward looking statements and legal restrictions that may apply to the proposed transaction with Zodiac Aerospace.
With that over to you, Philippe.
Thank you, Peter. Good morning everyone. Bernard and I are going to present our 2016 results and our guidance for 2017, an important reminder to compare apple-and-apple between 2015 and 2016. Our security activities are now specified as discontinued operations and are not included in our sales and operational profit figures. And that’s what I'm going to show you. In addition to that that our space business stop be included in our sales figures in H2 2016.
So let’s start with the financial numbers and results of 2017. Safran performance was excellent in 2016 for our targets were met up exceeded, further demonstrating the strengths of the business model, and a strong focus of our team to deliver on these commitments. I also remind you that our 2016 guidance apply to continuing operations and took into account as I just said, equity accounting of ASL as explained in October 2016. If you want more information about all of this we'll be able to give you all the details you need.
If you look more in details and the financial highlights; going further new driven by Aerospace by 3.9% organic to a level of €15.8 billion with continuing momentum in Aerospace services. But looking at recurring operating margin, we achieved a 15.2% a level of €2.4 billion it's a number we are never, never achieved before. And this recurring operating income grew by 5.4% compared to last year driven mainly by strong improvements in the aerospace equipment and defense.
We have also a healthy increase of our net profit by an increase of 21.7%. We are going to propose dividend of €1.52 per share it’s an increase of 10.1% compared to 2015. And our free cash flow was almost €1.1 billion up 17% compared to last year and it's representing 45% of our recurring operating income. Finally our debt was very moderate with a level of €1.4 billion.
So after showing you this financial objective, let’s look at a couple of main highlights of the year for our businesses. And start with the LEAP program. 2016 was a year of great operational achievements as a LEAP with the entering to service of LEAP-1A for Airbus certification of LEAP-1B for Boeing and for LEAP-1C for further Chinese Comac.
LEAP-1A production is ramping up in 2016. We produced 108 engines. We delivered 77 engines supporting all of commercial commitments to our customers. We enter into service of the engine is going very smoothly, customers publically expressed their satisfaction with the LEAP’s performance in support of their operation, and I am really, really proud of that.
Our dividend of January is a LEAP-1A is in service with six airlines and as accumulated more than 36,000 flight hours. In 2017 this year, the production we continue to ramp up to support the rising of the A320neo assembly rates and we enter into service of the Boeing 737 MAX.
Our constant focus on the supply chain readiness and investments we made to prepare the unprecedented comp up providers which come from our ability to meet our customer’s requirements.
At the same time the LEAP development for Boeing and Comac continuous so far of Boeing we are four airplanes flying, we have accumulated more than 2100 hours of flight test and we have logged more than 1600 flights. So far the engine is fully on track to meet the performance specification.
The Chinese LEAP-1C is after certification was awarded the end of December by FA and European Certification Authority. So propulsion system is ready for the first flight which is scheduled to this first semester of 2017.
Finally, we load 1,801 orders and commitments to a new LEAP engines in 2016 bringing the total to 11,563 engines and by the way at the end of January we are over 12,000 engines, we had a very good month of January in terms of booking for new LEAP orders.
If you look at as businesses in propulsion outside of the LEAP, we delivered a record number of CFM56, 1693 engines we have delivered, I remind you that last year we were at 1612, so this year an increase of 5% compared to last year and it is a record ever in terms of production of this CFM.
So demand remains August and we load an additional 876 engines in 2016 of the CFM56. So we recorded another success with India buying 36 aircraft, which is extremely good for our engines. In helicopter turbines we made excellent coverage in development of new program especially for the Arrano of new airbus H160 helicopter and for the Ardiden engine for India and Chinese customers.
Finally, Cessna selected the Silvercrest for its Citation Hemisphere a new jet, this is the second application for our engine. Looking at aircraft equipment, we delivered on our commitments to support rate increase on all our customers program. We executed flawlessly on rising production rates on A350 and A320 programs. The main highlight is really the successful ramp-up of our nacelles business, because you provide a full nacelle on the A320neo for the LEAP-1A application.
Carbon brakes were did extremely well also we have now a next installed base of more than 8200 aircraft using our carbons brakes, we have a market share which is higher than 60% worldwide for all these aircrafts which have more than 100 seats passengers.
In the sense, we are extremely proud and very happy about the order intake regarding in 2016, this is the first time for many years where we are book to build which is bigger than one - higher than one, we booked for about often most €1.8 billion of sales in our defense business, which is good for the future and especially for 2017 where we should see an increase of our sales in 2017 on our defense business. I'm not going to give you all the details about the orders we received in the 2016, we can mention the Patroller tactical grown or the new modular precision guiding admissions that the French government ordered from us.
Services, in services, we have continuing momentum within Aerospace services. In Aircraft Equipment services we grew our business by 10.5% in Europe last year. In propulsion services we grew our business by 7.3% driven mainly by service to market and strong services for military engines.
And if we look at the civil aftermarket index that we follow every quarter, it's up 6.9% in 2016, I remind you that the last call we said, we would be around 7%, I think we have achieved this 7% increase in 2016. As you can see very, very happy with the level of this civil aftermarket in Q4 where we have a 12.5% increase year-on-year during the Q4 I remind you that Q3 that not so good with a drop of 1.6%.
Research & Technology, we are executing what we said, we would do, it is a self-funded R&D declined by more than €100 million in 2016. Research & Technology remains a key focus, it’s truly my priority number one for driving my internal strategy, it more and more money in Research & Technology, we increased in 2016 to €465 million and we set to increase in the coming years to repair and the next generation program. In 2017, we expect the self-finance Research & Development to continue to drop in the order of €100 million driven by lower capitalized R&D. And in 2017 again as a result of the falling capitalization and arising amortization the impact of R&D on EBITD will rise by €60 million to €100 million.
Just a short comment before, let’s floor to Bernard on our strategic milestones. We are on track with everything we told you, we would do. The transaction in security is staring with our detection business in on track with fleshiness. And we are also on track for the sale of our identity and security business to Advent International, we expect most transactions to be closed in H1 2017.
Regarding Airbus Safran Launchers it is in force since July 1 as we said it would be. In just a short comment and as a contemplated acquisition of Zodiac Aerospace status update, as of today we are really working with the employee representatives work counsel procedures initiated both at Safran and Zodiac Aerospace regarding the binding agreements we are in finalization subject to completion of the Safran and Zodiac Aerospace works counsel’s procedures and regarding antitrust and also regulatory approvals we are in the preparation works again waiting for the works counsel procedures to be completed.
No I leave the floor to Bernard and I will come back for the guidance and our financial ambition 2020. Thank you.
Thank you, Philippe. Just a word start, every strong set of results and I will switch to Page 17. Just to remind you that we have two big changes in the scope of our business. The first one is that we have applied IFRS 5 for our security business. So that means that the contribution to 2016 is only on net income and that’s €117 million in 2016 that was €99 million in 2015.
The second one is our space activities, and here it’s under IFRS 11, so we equity account ASL in our 2016 the second half, and Safran’s share of net income of the joint venture is included in our Propulsion EBIT, and we had €87 million recurring operating income coming from both our owned space activities in the first half, and equity accounting of ASL in the second half.
Page 18, as you know we prepared adjusted income statement alongside our consolidated financial statements. The consolidated profit is €1.9 billion and that profit on adjusted data is €1.8 billion. For 2016 the adjustments reflects mainly negative mark-to-market of FX derivatives for €186 million. And the capital gains for €367 million on the - with the finalization of ASL and that included in our PPA and business combination statements taken.
On Page 19, not much to say on FX effects. The landscape is a very similar to 2015, so we’ll go directly to Page 20. Just to mention that below adjusted recurring operating income limited non-recurring items €18 million negative coming from transaction and integration charges.
On Page 21, P&L , our revenues are €15.7 billion. Share in profit from joint ventures now include ASL and it’s a total of €99 million including ASL. Requiring operating income is €2,404 million that’s a return on size of 15.2%.
The net financial income is negative for €144 million in 2016 , it includes net cost of debt up €51 million. The income tax charge is a €498 million that means the apparent tax rate is below, its 22.2%, its reflect lower corporate tax rate in France and delivered continued future reductions for the corporate tax and it creates a profit for deferred tax liabilities of €150 million. So that brings the profit of €1.8 billion or €4.3 per share.
On Page 22, some color on our revenues. As I was said previously €15,781 million, up 1.6% on an organic basis is up 3.9% or €603 million. Currency impact is slightly positive €48 million and it includes a negative contribution from the GBP and the change in scope is negative for €406 million as I said previously €410 million are coming from our space activities and the rest is because of the consolidation of the business in nacelles area.
On Page 23, the bridge for adjusted recurring operating income €2,404 million up 5.4%, it’s 4% organic growth or €92 million power to contribution of currency for €33 million mainly reflect $0.1 improvement in the dollar hedged rate and limited impact of scope it’s minus €2 million.
Page 24, some color on our R&D, total R&D is €1.7 billion down €201 million, self-funded cash R&D is down €117 million to €1,106 million. Gross capitalized R&D €343 million at down €136 million that’s why creates a headwind of €45 million in 2016 compared to 2015.
Page 25, breakdown of our revenues and recurring operating income, I will date detail in the following pages propulsion, equipment and defense, just word hit to say that the holding it’s called the corporate center has improved the negative recurring operating income is €25 million. I remind you that it was €82 million in 2016 that reflects strong cost control measures, lower provisions taken that the central level at the end of 2016 and limited increase in corporate fees charge to subsidiaries and the increased as the total sales of those subsidiaries.
Page 26, Aerospace Propulsion, revenues at €9.3 billion, 0.8% up or 4.9% up on organic basis, recurring operating income €1,786 million that return on sales of 19%, it’s down 0.7 point compared with 2016.
Civil OE sales are up 4.9%, services up 7.3%, it includes 6.9% increase in civil aftermarket in U.S. returns. Helicopter revenues down 6%, and for recurring operating income we have a positive impact of services of course, higher contribution of CFM56, negative margin and depreciations on LEAP deliveries, higher expensed R&D that’s a headwind of €65 million on aerospace propulsion recurring operating income and positive effect of hedged rate.
To just to say that the negative contribution for LEAP is €215 million compared with 2015 and it includes depreciation of inventories and WIP and it only reflects LEAP, nothing on CFM56 at 2016 compared with 2015.
On Page 27, equipment, total revenues €5,145 million, that’s 4.1% up or 3.5% up on organic basis. Recurring operating income of €567 million, that’s 11% of revenues compared with 9.4% in 2015, so that an increase of 160 basis points.
OE for equipment grew by 1.4%, services up of 10.5%, the improvement in recurring operating income comes from higher volumes in OE and services. Cost reduction improved hedged rate and the expensed R&D was a headwind of €8 million in 2016 compared with 2015.
For defense, Page 28, total revenues of €1,238 million, that’s down 2.2% on organic basis. Recurring operating income improved to €76 million that means return on sales up 6.1% up 100 basis points. Our revenues is down both from Optronics and Avionics respectively down 5.4% and down 1.6%, and the electronics is up 5.6%, the improvement of the recurring operating income from cost control measures and higher capitalized R&D in 2016.
Page 29, some color on our FX hedging, same strategies and policy as previously now 2017 is fully hedged with the target hedged rate at 1.21. 2018 is also fully hedged at 1.18 and for the following years, we give a range improved versus our disclosures at the end of Q3 and now the targeted hedged rate is between $1.15 and $1.18 for 2019 and $1.13 and $1.18 for 2020.
And that leads to the improvement or let’s say, that tailwind in for EBIT that we show on Page 30. Our free cash flow, when excluding non-cash charges from the net profit cash from operating activities is €2,651 million, change in working capital is negative for €168 million.
CapEx for tangible assets is stable at €704 million. And we have decrease for the CapEx in intangible assets and it reflects mainly lower capitalized R&D. So €1,91 million of free cash represents 45% of recurring operating income and when you include the €66 million of free cash coming from our security activities, it means that it’s a cash conversion ratio of 65% to net income.
Page 32, net debt nothing to add to what Philippe already said, €1.4 billion a net debt, it includes €750 million for the balancing payments for an Airbus Safran Launchers.
Page 33, nothing to mention. In terms of the balance sheet Page 34 maybe two or three comments. The investments in joint venture have increased of course due the finalization of Airbus Safran Launchers. We have now everything for security on the one item assets available for sale €2.4 billion. And we have lower provisions notably due to the closing of Airbus Safran Launchers, the provisions for Launchers have been reclassified as assets available for sale and excluding this impact provisions in balance sheet are there on €75 million, with €613 million new provisions net reversal, €709 million uses of provisions in 2022, scope and other effects.
Nothing to comment on Page 35, Page 36, a very short update for the preparation for IFRS 15. We confirm what we said during the Capital Market Day limited impact, I think we have a very good understanding of all our contracts in the main areas that will be affected. We have some reclassification in the P& L. We will use the comparative 2017 results methodology it will have an impact on the opening balance sheet on equity at the 1, January 2017. We're making good progress and we are very glad to see that other players in our industry are showing the same use as we have already expressed at the beginning of the year.
That’s it from me, Philippe. I’ll leave you the floor.
Thank you, thank you Bernard. I’ll let’s shoot it our 2017 and what is our outlook for 2017. First Page 38, the key assumptions for 2017. Of course, we are in this aerospace commercial business and we see an increase in the deliveries to our customers. So increase in aerospace OE deliveries. We take the assumptions that the civil aftermarket growth will be at the same level as in 2016.
Regarding the transition which is a question you ask very often, what is the cost of the transition from CFM56 to LEAP? First we have to lower volumes of CFM56 engines and we have negative margin on the LEAP deliveries and the depreciation of inventory and WIP related to this future deliveries. So the impact on our propulsion adjusted recurring operating income will be in the range of €300 to €350 million for the year 2017.
Regarding R&D, we expect as I just said a bit earlier reduction of the sales funded R&D in the order of €100 million with less spending on the big program such as the A320neo for equipments or the LEAP program.
The next point in our key assumption is the falling capitalization, rising amortization of capitalized R&D, the impact of all this in our recurring operating income is in the range of €50 million to €100 million. We have a sustained level of tangible CapEx including expansions new production capacity tooling this should be in the range of €850 million all of this is to support the production, transitioning and ramp-up.
And finally, which is also extremely important for me, is our continued benefits from productivity improvements especially in our IR specific plan and recent businesses. With all of this, what is the outlook for 2017, I’m not coming back on the security and EBITDA financial you know all about it now.
So the outlook for 2017 on the full year basis is an increase of our adjusted revenue an increase in the range of 2% to 3% at an estimated average rate of $110 for euro excluding the effect of the equity accounting of ASL as from July 1, 2016 the revenue growth is expected to be in the low to mid-single digits.
The adjusting recurring operating income will be close should even say very close in value to the 2016 level. And the free cash flow should represent more than 45% of our adjusted recurring operating income.
Based on the slide that you had all the exchanges and security and space business we sort with Bernard he was good to update our financial ambition we presented to you during the Capital Market Day in London in March last year.
So if you go to the next page, Page 41 we have put this 2020 condition by moving back what would have been the results of 2015 without our security business. I remind you that 2015 is a recurring operating margin was 14%, but based on the portfolio of our products as of today, it would have been 14.7%.
And we confirm what we said during the Capital Market Day of March, we confirmed that look previously indicated trend of our annual group adjusted recurring operating margin is consistent with this level of margin over the transition period. Please confirm that during this transition period is the recurring operating margin will be consistent with the level obtained in 2015 based on this new portfolio of products which would have been 14.7%.
Regarding the ambition we set up in 2020, I remind you that what we said in March, we said the revenue target of €21 billion we set recurring operating margin trending above 15% in 2020 and free cash flow conversion of 50%. Based on the new assumptions the trend and the ambition, the ambition for 2020 adjusted and the sales will be or would be in excess of €19 billion, adjusted recurring operating margin trending towards 16% and not 15% and so the average free cash flow we maintain our ambition of delivering more than 50% of cash flow the adjusted recurring operating income.
This is what we wanted to tell you is that the end of our presentation. Now we are waiting for any questions you may have. Thank you very much.
[Operator Instructions] We have a question from Olivier Brochet with Credit Suisse. Please go ahead.
Yes, good morning gentleman. We'll go for three questions if I may please. The first one on LEAP and I would like to understand what the critical milestones that could be for what you need to flag to investors to assess how you're doing on this program in 2017, so that they can have an idea of whether you’re on track or not?
The second question would be on the TP400 and the A400M, Airbus indicates but the aim at keeping the A400M financial exposure and tremendous added that EPI would have to be contributing highly to the circuiting, is it something that as potentially an impact on you. What can you tell us on that? And finally, what could you tell us or so in terms of shareholder support that you receive for the Zodiac deal either during the road show that you’ve done after the announcement or on more recently? Thank you.
Thank you, Olivier, for these three questions. First one related to LEAP and what are the main milestone of this year, yeah I will be send you customer-by-customer, if you start with Airbus and we have already started to produce, and you know it. For me is a key milestone will be to maintain as a production ramp up we started. In order to meet the requirements of Airbus we asked to produce around six engines per week until September. And September, we have a further increase that we are almost flat until September in terms of production of engines. And to me it’s a milestone, as a key milestone is ready to meet this production and not miss as of September big increase we will have to face based on our commitments vis-à-vis.
So far as I said you know the engines it is very reliable, the customers are very happy with it. And I hope it is going to continue. We could not say the same thing from the other engines of these aircraft, but we are extremely pleased with our performance as of today.
With Boeing, the key milestone is ready to entering to service. Boeing will put MAX in service during H1, I hope it’s not going to be in June, I think it’s going to be earlier than that. We are preparing ourselves to be ready when Boeing is ready, as the key is going to be really we are entering into service. So that’s the main milestones for the year. This is a last one for combat will be the first flight. We are expecting days on count the data and information we have that they will start with the low speed running of the airplane in the next two or three weeks, maximum.
If everything goes fine, they will go with the high speed rolling of the aircraft in March, so after that based on - so level of small problems as you may find or no problem, we don’t know for at this point of course. We can expect the first flight is on April and May. So the key will be after that to support the Chinese in whole there is a flight test programs they will have. So again different milestones based on the supply chain on top of this and the development of this service programs.
For the TP400, I hear what you said, that we have the contract PPI has the contract with Airbus. We fulfill this contract as you know, we had some problems at the beginning of 2016, with the TGB with this addiction box, produced by [indiscernible] which add some quality problems, we fixed with an in time fix, this problem we are in the development of the final fix. We have delivered I think 84 engines in 2016. We will expect our contract, but we will expect only our contact with our customer.
Regarding the road show, we had with Avana after the announcement of our potential merger with Zodiac, my personal feeling is just personal feeling, I think it went very well, our shareholders and investors understood why we were proposing this deal, and personally I think that we got a very positive feedback from all of them. Of course, you have to go to the explanation. Why we do that. We do that to create value for our shareholders. We do that to create value for our customers. And we do that to make our company better and stronger for the next coming years. So globally, my personal feeling is that it was high positive.
Okay. Thank you.
Next question is from Christian Laughlin from Bernstein. Please go ahead.
Thank you and good morning, gentlemen. Two questions from me please. Firstly, starting with your aftermarket guidance for 2017, I was wondering for LEAP, if you could just elaborate a little bit on some of the assumptions that underpin that 7% growth level with respect to unit volume gross to the shops, pricing and scope of work.
And then secondly, on the LEAP program. If you could just discuss a bit what you lessons learned over the past year in ramping up LEAPs that is what you know now, you didn’t know year ago and how that influences key areas of focus or risk areas you’re focusing on for 2017?
First question, aftermarket, as you know we have big variations with quarter-by-quarter. If you look at the first two quarters of 2016, we were in the range of plus 8% then we had a drop of almost 2%, 1.6% I think. In the third quarter and being back to 12% during the last quarter, if we took the assumptions that the quality of sub visit would increase in the range of 5% in 2017 compared to 2016 and with more and more engines coming from the first - second sub visit. So the other result, we have this indicator at plus 7%.
The beginning of the year is good. The first two months are good, but again it’s not precise science, it’s not scientific. We all know it will have to come and goes with sub visit and the business will come. But to a - say exactly quarter-by-quarter when it’s going to come is almost impossible. We tried to do our best. We have a lot of science behind it. A lot of data and we had at Safran have now complete department for analytics where we have scored Safran analytics where we work on data, and of course, every question this department to help our people, working services in propulsion to have a better or not precise, or no accurate view of a this business, but it’s difficult really to forecast with the position you would like to have and now would like to have.
So we maybe on the crown side, we know more in a couple of months. If this level has to be reevaluated or not, but again we just base our assumption on what has happened in 2016 and we take the assumption or so 5% increase in terms of quantity of sub visits.
Your question, second question is more is more difficult to answer on lesson learnt, I am proud of what people have done, because we are on track, basically we are on track. We are a couple of weeks late on deliveries which have that it’s really in the kind of performance that everybody is expecting at the beginning of such a program. We are delivering good engines, and again the key for me is really the appreciation of the airlines and final customers.
We were - it doesn’t mean that everything is fine and in a piece of cake every day, we are already struggling every day with problems in terms of supply chain you understand it. I said that already, last time we had a discussion around LEAP. Every day is a challenge, every is a challenge, but we have less and less toothpicks on the table. We see that issue to solve, but the fact that we had decided at the beginning two of the double shoot for each top is really in my opinion is a key of success, we see today.
Okay. That’s helpful. Thank you.
Our next question is from Zafar Khan from Societe Generale. Please go ahead.
Thank you very much and good morning everybody. I have two questions, please. No wonder if I have start some in terms of, if I ask the first and then after you talking follow-up the second. The first one is just some clarification on the LEAP, Bernard mentioned the €215 million impact in 2016 and he said it was verses 2015 some a little bit confused. Is that €215 million a bridge from 2015 to 2016 or is that classified as more or less an absolute as you assuring or indicating what will be the case in 2017 €300 million to €350 million. And also just…
If I may just answer now, it’s a bridge. Right, remember the chart that we showed you in the Capital Market Day. We started in 2016 with no impact of the LEAP. So that means it’s the bridge from 2015 to 2016. No impact on from CFM56 margin, just a LEAP, and it takes into consideration, negative margins for the 77 LEAP that was delivered, plus and that was another case in the initial guidance. Depreciation and inventories and the WIP and that’s €215 and again it’s a bridge between 2015 EBIT and 2016 EBIT. Is that clear Zafar?
That is very clear. Thank you. Just struggling to understand again, what is the depreciation on the inventory and work in progress. What does that actually mean? What have you done? Why have you depreciated this?
Because we think that as soon as purchased and be assembled on the engine, it means that considering today cost, we will add negative margins. So we just anticipate for let's say couple of months the negative margins that we would have when delivering the engine, is just a question of timing.
Okay, so I shouldn’t really get too much into, so I’ll really confuse myself. In terms of the maximum dilution from the LEAP, now €300 million €350 million in 2017, is that going to maximum kind of impact and then hopefully it goes towards that zero in a linear fashion, hope 2018 is going to be bigger impact than 2017.
Clarification. First, when Philippe said €300 million and €350 million that time it takes into consideration and the decrease of the CFM56. We have less deliveries of CFM56 in terms of quantities so the €300 million €350 million takes into account the decreased margins coming from less quantity of CFM56 in terms of deliveries. Right, it takes it also into consideration, the negative margins for the LEAP you know that we will much more engines and what we did in 2015. And I consider that in terms of transition from one year 2017 will be the most challenging year. I think it will be less than that in 2018.
That's very helpful. Thank you very much on that. And if I could just move on to the next one which is the offers of Zodiac, merger with Zodiac, and I'm very encouraged to hear that your shareholders by and large supporting this. My own experience speaking to investors is that is really split opinion, I’ve had some very mixed reactions from the various people I've spoken to. And just for the record, we, SG are supportive of the deal. So that's my position.
And I should congratulate your advisors for structuring the deal in such a way that it was possible to do, but it does pose the problem gentleman. The fact that you're doing this in two stages, and you don't go to the shareholders until stage one is complete, does put the shareholders in a little bit of a hostage position. Because let us assume that you get 55% acceptances on the cash tender offer, then I guess you have got control, but then you go to the shareholders and you put a route to them. What do you expect them to do, they can hardly say no, because that just cutting their noses, because if you only got that level of acceptance.
Can you integrate the thing can you get the synergies so the shareholders then forced to say yes we support it? Now, I know there's a difference between kind of the legal requirement, but looking at it from a moral point of view in terms of the letter of the law versus the spirit of the law. Do you not think you should really be asking the shareholders before you launch the cash tender?
I’d say it is a difficult question you’re asking. We respect the law. We do our job. We do what you think it is good for our company. And we respect the law. So we will just go and do it, as it has to be done. I understand your point, but I would not comment this point, because you know what we do is just do what we think again that’s the objective, the objective is not to be a trick, the objective is really to do what is good for our company, good for shareholders, and good for our customers. And again in my only feeling is I want the company to be stronger and for the long term. And delivers more too my shareholders.
Regarding the investors, which was your first question? To be totally honest, when we started the discussion with our investors, when we had our road show, of them and the mix seeding also at the beginning, as I said you know, we convinced I think most of them, I would not say all of them, because I cannot be sure, but most of them that it was a nice way to see the future of our company, and to prepare our company for the next challenges, and at the end of our discussion again my personal feeling that we’re mostly for in favor of this deal. Next question.
Can I just add a supplementary there?
I understand that, but I would think maybe that some of the people want to ask a few question and we have only a few minutes left, so may be let the other people who may want to talk or ask a few questions.
Our next question is from Ben Heelan from Bank of America Merrill Lynch. Please go ahead.
Hi, it’s Ben from Bank of America. Thanks for taking the question. I guess the first question, I have is, have you seen any differential in the average value per shop visit within the civilized market over the past year, and how you think about by moving forward?
And then I guess the second question is on equipment, the margin was up 160 bps in 2016, which I think was you know ahead of the 100 bps improvement that I think a lot of people were expecting to be read anything in 2017 can we continue to see 100 bps improvement over the next few years given you've kind of front loaded quite a lot of that? Thank you.
Thank you, Ben for this question. Regarding this sub visits value, we didn’t see a change, we didn’t see a change in 2016 compared to the previous years. We were already disappointed in 2016 by the quantity of shop visits. We were expecting an increase of 5% we didn’t achieve as I said in Q3 when I presented the reserves and at that time we were in Q3 down in terms of services. No, we didn't see a drop in the value of the shop visits. What you are expecting in 2017 is a record rating for the quantity of shop visit, as I just said to bit earlier and there's a question, we expect and we have taken as a forecast an increase of 5% the quantity of shop visit.
Regarding equipments, maybe you’ve adopted when I told you know about two years ago at least one year ago that we would increase by one point every year for the next four years our profitability in heating equipment and you know we are bit early in terms of trend. But it is not going to decrease what we are forecasting for the next coming years, I mean it's good, we are at 11%. I want and we are doing everything to make sure that our equipment business is going to improve by 1.18 basis points its performance in 2017 and continue in the next coming years.
I remind you that our main competitors and the best of them in the range of 16%, or even better than that for some of them in the U.S., so we still have the margin and we are going to keep pushing, we are working on the cost of course, as the sales which are doing fine, because on the programs and programs which are continued to increase in terms of quantity. And we are of course, so if you look at our presentation. We have our services, which are doing very well, especially but not only in carbon brakes where we have enjoyed more than 60% of the world market and it is a very good business. So yes, we are in advance with 160 points, but we are going to continue to maintain our target of the improving year-after-year by a minimum of 400 points. Last question?
[Indiscernible] Natixis. Please go ahead.
Yes, good morning everybody. Thank you for taking my call. I have actually two questions. In your €300 million to €350 million dilution from CFM/LEAP in 2017, do you have better prices on your engines i.e. better than the launch prices you delivered in 2016?
And my second question is on the depreciation of WIP that you mentioned in your €215 million. How many engines equivalent are stake here on top 77 engines already delivered? Thank you.
Thank you, Anton [ph] for your two questions. The first one, we don’t take into consideration any price improvement in 2017 for the LEAP. We don’t see that. And in terms of depreciation, we will not detail the equivalent of the assembled engines, but it’s part of the next month engines that are depreciated that way.
Thank you all for these questions and thank you for listening to Bernard and I. We wish you a very nice day. Thank you again for attending this conference. Bye, bye.
Thank you. Ladies and gentlemen, this now concludes this web conference call. Thank you all for your participation. You may now disconnect.
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