Safran SA

Safran SA

€209.8
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Paris
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Aerospace & Defense

Safran SA (SAF.PA) Q2 2017 Earnings Call Transcript

Published at 2017-07-28 15:26:32
Executives
Peter Campbell - Investor Relations Philippe Petitcolin - Chief Executive Officer Bernard Delpit - Chief Financial Officer
Analysts
Christian Laughlin - Bernstein Olivier Brochet - Credit Suisse Robert Stallard - Vertical Research Celine Fornaro - UBS
Operator
Ladies and gentlemen, welcome to the Safran Half Year Results 2017 Conference Call. And now I will hand over to Mr. Philippe Petitcolin, CEO, and Bernard Delpit, Group CFO. Mr. Petitcolin, please go ahead.
Peter Campbell
Good morning, everyone. Before Philippe starts I have an introductory message here to read. My name is Peter Campbell and I am Head of investor relations for Safran. Welcome to our conference call to the Safran first half 2017 results. We would be discussion the accounts, the income statement and the presentation that were all distributed this morning and published on our website. We want to draw your attention to the disclaimer page of the presentation that contains important information and the qualified information given in the presentation. In particular, this presentation contains forward-looking information that is subject to risks and uncertainty that is more fully explained on the disclaimer page. Please also note that the purpose of this call is to discuss our results and we will not be repeating older information or providing new information on the proposed transaction with Zodiac during this call. You may always find the latest information regarding the proposed transaction in the dedicated investor section of our website. And so that said, Philippe over to you.
Philippe Petitcolin
Good morning. Good morning everyone. We are very pleased this morning with solid set of results for the first half of 2017. I will go over the highlights of the first six months of the year, then Bernard will go over the numbers and I will conclude with the outlook for the full year before we start with the questions session. Let's start with the financial highlights. Our organic adjusted revenue increase of 2.4% at €8,038 million as expected coming mainly from civil aftermarket to 8.4% aircraft equipment growth driven by new programs, mainly the A350 and the beginning of the A320neo services and growth in our defense market. Our adjusted operating margin at 15.2% of the sales on an amount of €1218 million with a strong improvement in our equipment margin is 1.3 points and defense was 2.6 points. Our Propulsion margin remained very healthy at 18.1% with a CFM LEAP transition in line with our guidance. The free cash flow has risen 65% of our recurring operating income at €666 million. Page 5, commercial successes, the 2017 Paris Airshow was a great success reflecting continuing high demand for our products and CFM leadership. CFM International logged record orders at the 2017 Paris Airshow receiving more than 1000 new orders for LEAP and CFM engines a net addition to long term service agreements. I remind you that Boeing launched the new 737 MAX 10 airplane powered by the LEAP-1B engines. The new model is scheduled to enter commercial service in 2020 and in our opinion the MAX 10 will be a very competitive aircraft on the cost per seat basis. The backlog remained very strong for LEAP and CFM56 engines. CFM56 backlog amounts to 1,814 engines including 389 new orders in H1 providing support of [indiscernible] production ramp down and I believe that this ramp down will really be longer than we were expecting at the beginning and will allow us to produce more CFMs than we were expecting. The LEAP backlog stands at 13,113 engines. LEAP remains the engine of choice of the A320neo with today a market share of around 60%. Going to Page 6, if we look at an update or more specific update on the LEAP program, the production ramp up is proceeding with 147 LEAP sold in H1 2017. Our constant focus on supply chain and our extensive sourcing policy provide us with comfort in our ability to meet customers' requirements. The production ramp has started for the LEAP-1B the first 737 MAX successfully entered into commercial service at Malindo on May 22. To date the LEAP-1B is in operation at three airlines with more than 1400 flight hours accumulated. The engine also received its ETOPS 180 certification from FAA and EASA in June. Regarding the LEAP-1 the production run continues with now 15 airlines operating this engine and over 190,000 flight hours as of today. Regarding the ETOPS 180 LEAP-1A also got granted this certification from both FAA and EASA. Regarding the LEAP-1C for COMAC development continues on track and as you know this first flight of C919 occurred in May of this year. Going to Page 7, some of the business highlights for the first semester. We delivered 710 CFM56 engines compared to 886 last year as the production down as expected. So helicopter engines we certified with EASA our engines Ardiden 3G which powers the Russian Helicopter’s KA62 and this helicopter made its official maiden flight in May of this year. In equipment we have commercial momentum which continues for carbon brakes is penciling our leadership in this fast growing market, many new contracts with more than 10 major ones have been signed in the H1 2017. Another point I would like to mention to you is our selection for the new European Large Telescope which is going to be built in Chile and where we got awarded all the mirrors, all the lenses for this new telescope and we are very pleased with this new order. We have a small subsidiary called Reosc. We have I believe we are really at the state of the art in the world in terms of expertise to build mirrors of extremely high quality. Page 8, looking at services in aerospace, first one the growth, first point I would like to mention is the growth in our aircraft equipment services is a growth of 7.4% compared to last year. In aircraft equipment the growth is coming mainly from carbon brakes which continued to grow strongly with more than 10% growth in 2017. The nacelles business also are showing high growth rates driven by sales of spare parts, especially for new A320neo customers and our MRO activities for landing gear also contributed to this very good growth. Regarding civil aftermarket in Propulsion the growth for the semester is 8.4% in U.S. dollars compared to H1 2016 is still driven by very good business in the spare parts for CFM56 and GE90. I remind you that last year we said that in Q2 of 2016 we had nice positive manufacturing contribution which makes the comparison with 2016 more difficult this year. So don’t expect this flat year in terms of growth, but when we compare with 2016 where we had this manufacturing contribution it makes the comparisons more difficult. The environment remains extremely favorable. I remind you that at the beginning of the year EASA was talking about growth in the range of 5% of the traffic of the worldwide traffic, at the end of May we are 7.9%. So EASA has revised its forecast and now it is scheduling growth which should be in the range of 7.4%, so it is very good on the overall for our commercial business. Page 9, strategic highlights, this is strategic steps in H1 2017, we finalized property finalized divestment of our security business to focus really on our core aerospace and defence markets. The net proceeds of these divestments amounts to €3.1 billion. We also negotiated with basis of the deal to require Zodiac Aerospace and then we really are very satisfied with the massive shareholder support we secured for the transaction at our June Annual Meeting. Our teams are working on preparing the operation notably to the work flows related to obtaining the necessary regulatory approvals. We will of course keep the market updated as necessary. I will now let Bernard give you more information regarding our numbers and results. Bernard?
Bernard Delpit
Yes, thank you Philip, good morning everybody and I’ll start with Page 12 with the I think that last mentioned of the security business as we closed the two transactions on security as Philippe said proceeds of €3.1 billion and a very positive capital gain of €766 million booked in our P&L in H1. Page 13, even if it sounds to live far away H1 was positively impacted by the strengthening of the dollar. Average spot rate improved from $1.12 last year to $1.08 and I remind you that our guidance for revenues in 2017 was based on a $1.10 assumption for the year. As planned the hedge rate is improving from $1.24 to $1.21 as well. The spot rate as closed is different with the strengthening of the Euro that creates a positive mark-to-market impact in our consolidated debt up €2,754 million and this is what you can see on Page 14. This is the usual bridge that we consolidated P&L and adjusted P&L. Two things are worth mentioning. The restatement of this positive mark-to-market effect in completed data were looking at adjusted data. On the other hand, the capital gain on security which is roughly stated as no hedging or no PPA impact, so you find it in our P&L. Page 15 mentions one-off items below recurring and operating income of €16 million negative. This reflects the first transaction costs for the Zodiac project. We will have further cost in the second half and that being 2018 as well. And I remind you that the financing costs of the proposed transaction are in the financial results. If I move on to Page 16 and page 16 I will make some comments starting from the bottom line. The net profit of €1.6 billion of €3.91 EPS, excluding capital gain it is €842 million profit or €2.05 EPS up from €1.94 last year it is up 4.3%. Current tax rate was 26%, I would say in line with what we expect for the year. Cost of debt limited to €28 million and sharing profit from joint venture €92 million up from €19 million last year notably due to the launch of business. Page 17 on revenues, scope impact is negative for €300 million that is due to the space activities and now equity accounted in our P&L. Currency impact is positive €161 million due to the Euro-dollar evaluation. On the other hand GDP had a negative impact on currency and revenues. It clears an organic growth of 2.4% of which 0.9% up for Propulsion, 4.2% up for equipment and 5.8% up for defense. Page 18 on operating income fully in line with the early guidance, close to 216 first half, benefiting from tailwinds from currency and impacted by the transition in Propulsion not completely offset by positive contribution from civil aftermarket and improvement of profitability in equipment and defense. Page 19 a limited part of the organic decrease of EBIT is due to R&D. Cash R&D decreased by €34 million. As expected capitalization decreased as well and amortization rose leading to a higher expense R&D of €6 million. Cash R&D most of the decrease came from LEAP. Decline in capitalized R&D also came from lower capitalized R&D spending on LEAP. We have an increase in amortization due to LEAP. I will remind you that the amortization of LEAP-1A started in May 2016 and the amortization of LEAP-1B started this year in March. So that drives the impact on recurring operating income after tax credit to €6 million negative. Page 20 a brief overview of revenue and profit by division. Group margin stands at 15.2% in this first half compared to 15.4% in the first half of 2016. Propulsion margin is impacted as expected by the CFM56 LEAP transition and we had strong improvements, I would say very strong improvements in both equipment and defense. As we will not come back to it I will just mention that the corporate center is neutral on H1 profit. I will remind you that it was very negative in 2015, €85 million. It was also negative in 2016 for €25 million and we expect 2017 to be in line with 2016 with some charges not offset by fees in the second half. Now let’s dive into the different businesses, Page 21 for aerospace propulsion, revenues of €4,691 million down 3.4% but up 0.9% on organic basis. Recurring operating income €849 million is down 10%. Return on sales up 18.1%. Organic revenue growth was mainly driven by continuing momentum in services and positive contribution of military OE, as expected the transition weighs on profitability, operating margin at 80.1% is fully consistent with the plan. The revenue side, by the way there it is on Page 38 of this presentation OE sales are down. As expected Civil OE declined notably driven by lower deliveries of CFM56 engines, 710 units were delivered in this semester, 176 fewer than in H1, 2016. High thrust engine modules deliveries are also notably down with G90. LEAP deliveries grew by with 147 engines in the first month compared with only 11 in the year ago period. Helicopter turbines OE is also down on soft volumes and mix, but military OE increased thanks to Rafael engine up three units at 12 engines delivered in the first half and TP400 also up nine units, 49 engines. Growth in services propulsion is up 7.5% or 5.2 on an organic basis driven by civil aftermarket up 8.4%. Military services slightly increased up 3% where we have lower contribution of helicopter turbine support activities due to softer demand from oil and gas customers and the branding of part of the H225 fleet until last week. The debit side €849 million down 10%. We have a positive contribution of services, positive contribution of military, positive contribution of hedge rate and positive contribution of space with Safran’s 50% share of net income of the Ariane Group joint venture. On the negative side with the negative impact of CFM56 translation in line with annual assumptions, lower contribution of helicopter turbines and higher expense R&D which is a headwind of €19 million in this first half. And as you will ask, I mention here the negative €165 million coming from the transition between CFM56 and LEAP balanced between decreasing OE margin of CFM56 due to volumes. And the contribution of LEAP with negative margins with more than raised less negative, but still negative unit cost margin and lower depreciation. Page 22 on Aircraft Equipment, revenues €2,715 million up 6.8% or 4.2% up on organic basis. €327 million of recurring operating income, 12% return on sales up from 10.7% last year. Revenue was up both on OE 6.5% and services 7.4%. On the OE side the increase is explained by higher volumes of A350 shipments, lending gears, wiring, accessory gear boxes up for A330 shipment for lending gears, reverses up for A320 ship sets for NATO and up for the A320 family landing gears. On the other side lower volumes of A380, but we have and we are anticipating this decline in the rates. Services grew across the board, carbon brakes, landing gears MRO and nacelles spare parts. And EBIT it's up 20% thanks to increased volumes, productivity gains and hedge rate. On defense Page 23, I think that its rebound was well flagged last year with strong order in takes indication. Revenue defense are up at €624 million up 6.8% or 5.8% on organic basis. Recurring operating income €40 million that's return on size of 6.4%, €80 million improvement compared to last year $22 million. Revenue for defense business are up 20% of that again is down 5%. The growth in defense is driven by guidance kits and the start of the portfolio [indiscernible] and electronic equipment as well. Organics is down due to lower volumes of flight control systems [indiscernible] for helicopters. EBIT is up €18 million, increased contribution of guidance kits and optronics, cost reduction and also lower expense R&D of €4 million. Now Page 24, in today’s context I think it’s worth reading all and every detail on this slide, 2017 is fully hedged at 1.21 whatever happens to the spot rate. Same thing for 2018. For 2019, 2.8 billion all ready hedged and our existing instruments we raised this figure to $8 billion below target rate of 1.18 as drawn as the spot remains below 1.25 to the end of this year 2017. In other words, the target range is almost entirely secured and the spot level in the coming months will determine whether we will end up at the top or at the bottom of our target range. For 2020, I would say the same as 2019 with the exception that the part of the portfolio is still to be hedged and as long as spot remains below 1.25 until the end of 2018, we should be landing within the given range. I hope that this is clear. We are fully consistent with our well known hedging policy to cover three to four years ahead and not allowing us to unhedged even if some instruments disappear because they are not up. I move onto Page 25 on cash generation, cash flow operating activities before changing working capital is stable at $1.310 billion, good control of working capital, higher inventories due to the LEAP ramp up that's led to receivables produce prepayments for export contracts in LEAP payment terms. So improved cash generation to 55% of EBIT comes from decreasing R&D and intangible CapEx. Page 26 shows the unusual net cash of €1.5 billion, free cash flow almost entirely financed dividends and buyback. Proceeds of the sale of security explains the situation and as you know we work hard to make it temporary as we will finance mainly in cash on acquisition budget. Page 27 gives more detail on our gross and net debt. As a consequence, we have limited the size of the bridge loan ranging to one of the projected acquisition as we also took advantage of market conditions to pre-finance bulk of our financing requirements of the coming months. Nothing to mention on Page 28, assets available for sale were transformed into cash and nothing to mention as well on the front of customer financial [ph], so I leave the floor to Philippe for the outlook.
Philippe Petitcolin
Thank you. Thank you, Bernard. Regarding the outlook, I will just confirm the outlook we gave you at the beginning of the year. We expect our sales and revenue to grow in the range of 2% to 3% excluding the effect of equity accounting of ArianeGroup. This revenue growth is expected to be in the low to mid single digits. The adjusted recurring operating income will be close to the level of 2016 and finally our free cash flow will represent more than 45% of our adjusted recurring operating income, we just and strongly confirm our guidance for 2017. Thank you very much for having listened to both of us. Bernard and I are now available for any questions you may have.
Operator
Thank you. [Operator Instructions] The first question is from Christian Laughlin of Bernstein. Please go ahead.
Christian Laughlin
Thank you and good morning gentlemen. Two questions from me please, one on the LEAP and one on the civil aftermarket. So, on the LEAP I was wondering if there are any specific areas in the supply chain where bottlenecks are emerging either relating to parts arriving on time or parts arriving with substandard quality issues? And also if you could sort of touch on headlines we saw yesterday about the LEAP-1A high pressure turbine disc? And then secondly around the civil aftermarket, so performance has generally been strong and above guidance for H1 this year, just kind of looking ahead into Q3, do you expect a sequential slowdown relative to Q2 this year similar to what you saw in 2016 and 2015 or are there different dynamics at play?
Philippe Petitcolin
Good morning, Christian. First question LEAP and generally speaking supply chain performance, we are doing fine. We again, as I said one quarter ago, it’s a challenge every day. But I do not ask today any specific issue with one specific area of the supply chain which could be forging or machining or no matter [indiscernible] supply, I believe that all our supply chain is performing the best it can. We knew in the beginning that risk position [indiscernible] was a challenge, it is a challenge. But as of today, I do not have any specific issue with one specific area of the supply chain. We are very pleased and really I want to thank them because they do a great, great job to support us and to support our customers. Regarding the more specific issue you mentioned on the disc of the high pressure turbine, it is true the quality of stake, we continue our investigation regarding this recent scale. We are working on this manufacturing issue. But don’t forget that we are double-sourced policy which in any case will minimize any potential impact. It is under control. It is totally under control. I do not expect any impact for others or very minor, minor impact if any. But at this stage, I do not expect any impact. And we are talking really about something which is not significant. We are talking about something which is not significant and I remind you that we continue to produce LEAP-1A for Airbus at Reosc [ph] base. We need to accommodate their increasing request for more engines which I believe is a clear indication of our customers confidence in Safran. So there will be absolutely no impact if it’s the base of your question on [indiscernible] related to this minor problem. The last question is first to civil aftermarket, do not forget that in Q2 last year, we said we are non-recurring impact on this number of the second quarter. If I was ticking out this non-recurring impact of Q2 last year, I believe that the number of 8.4% would be a double-digit number. So regarding Q3, the indications we have today regarding the sub-digits because again we look at the sub-digits which determine the trend, the sub-digits increase is in the range of plus 5% compared to last year and we do not see any negative impact of a slowdown of this growth of sub-digits. So we are quite confident for Q3 and for Q4 for the rest of the year regarding our level of business in step up and in all.
Bernard Delpit
If I may just add a comment, you remember that Q3 was not so good last year, so comps are easier for Q3, but Q4 was very strong. So let’s say that in general we expect the second half to be more in line with our guidance, so we stick to a yearly guidance.
Christian Laughlin
Okay, great. Thank you very much.
Operator
Thank you. The next question is from Olivier Brochet of Credit Suisse. Please go ahead.
Olivier Brochet
Yes, good morning Philippe and Bernard. We will go for two plus one questions if I may, the first one on Silvercrest, can you please update us on the progress on this program? I don’t think you’ve mentioned it anywhere in the press release or presentation and when do you think you can find an agreement with so on compensation discussions? The second question would be on hedging, what effectively happens if the rate moves above 1.25 let’s for instance imagine that, do you lose a lot of the hedging or is it just the future hedging that goes? And in particular how should we think of 2021 versus 2020 for hedging? And last very small one, can you give us an order of magnitude of the LEAP deliveries in H1 that were done under flight per hour contracts? Please.
Philippe Petitcolin
Okay. I will try to answer your first question really and will let Bernard answer the last ones, one plus one, as you said yes two plus one. Silvercrest update, we are in this, I didn’t mention anything because there is no any specific highlight. We are in this development of the engine as you have seen that's so as done the first flight of the Falcon 5X with Silvercrest engine in July. According to the data we have, everything was okay. We are still expecting as we said last time we discussed about this subject, a certification of the engine for the first half of 2018 and entering into service in 2020. I don’t have any specific information to pass to you on this program. Regarding the compensation, as we said also we do not comment any specific discussion we have with our customers on this kind of subject, but we said that in our opinion we have the provision, any kind of money could be due related to this program based on the development of the Silvercrest.
Bernard Delpit
Okay. I will talk Olivier with you the last question about the proposition of high power deliveries. We said that the very vast majority of the LEAP that we deliver today are under such contracts, but they, I couldn’t tell if it’s 90% or 100%, but the very vast majority of the new LEAP generation is under contract. I will remind you that our assumption is that today we have more high power [ph] contract but on average on the LEAP and it will have some more years. It will be between 60% and 65% high power contract. But that's the beginning of the program, more or less. Now on hedging, so let’s be clear. As long as spot is below 1.25 the instruments in place will allow us to secure additional hedging volumes within the target FX rate range even, that means 1.15, 1.18 or 29 in 2020. For 2017 and 2018 even if spot goes above 1.25 no impact of the target hedge rate, 1.21 in 2017 and 1.18 in 2018. If spot moves above 1.25 our target for 2019 and 2020 might be at risk as potentially the instruments that could have knocked out would only be replaced by instruments with higher spot prices than the target given. In other words when spot is above 1.25 issuing instruments that is tied below 1.18 which is tough for our target range is becoming more challenging. Obviously the manner and the speed the spot reaches if it reaches 1.25 is key, another [indiscernible] happy movement does not have the same effect on our portfolio and getting there after several months. We have a policy of participating such moves in order to restructure in advance our hedging instruments in order to mitigate the impact of these trends. So again I want to rate and I led that for 2017 and 2018 wherever the spot rate goes our hedged rate of 1.21 in 2017 and 1.18 next year are secured and if spot rate goes beyond 1.25 then we could have some impact in 2019 and 2020, but we don’t anticipate major impact as we have approximately €17 billion of the portfolio and that will be blended with positive, with favorable hedge rate that we have taken in the last two years.
Olivier Brochet
Thank you Bernard, what happens in 2021? Is there at least impact, at least effects actively are you already taking some hedges that you are not showing in your presentations?
Bernard Delpit
We will start 2021 in the second half , so too soon to tell, but we are starting 2021, This is our well known policy, three to four years in advance. So, you could expect us to finish the hedging of 2020 this year and to start 2021 as well. Now over the target hedge, we'll see later. I mean into this context it would be I think pretty on my side to give you indication, but I don’t expect until major change.
Olivier Brochet
Okay, thank you.
Operator
The next question is from Robert Stallard of Vertical Research. Please go ahead.
Robert Stallard
Thanks so much. Good morning.
Philippe Petitcolin
Good morning Robert.
Robert Stallard
First I thought, I would start with Bernard. I just want to check this, did you say that the units margin on the LEAP on the OEM side is coming in better than your anticipated?
Bernard Delpit
No, I think in line with our anticipation and guidance, LEAP margin are still negative you know that we anticipate breakeven in 2019 of beginning of 2020. The cost reduction is in line with our guidance but it's still a negative margin.
Robert Stallard
All right. Okay, good I’ll check that. And then the second thing I wanted to ask her was that she on the CFM56 and the GE90. As these two programs wind down and the 56 is taken longer than expected, but is there an opportunity for you to release inventory in relation to these programs?
Philippe Petitcolin
I don’t say exactly what you mean in terms of releasing inventories.
Robert Stallard
You know, do you any sort of buffer inventory in relation to these engine types that you may be able to burn down as a programs that these engine types come to the end of their lives?
Philippe Petitcolin
Well, don’t forget with revenues that come in terms of hard exchange at end of furnish, and the end of production at end of service they will remain in service, in operation with the alliance for 25 years. So we will need parks and modules so in our opinions we are not ready at the pace where we are talking about building last bastion of inventory for this program. We’re growing to talk about that in 20 years not before. So again we are extremely pleased with this prediction deferral so, again we are extremely pleased with the, with this production of CFM56 as I said bit earlier in my presentation, I believe that the slowdown is going to be better or lower or call it as you like, than what we had anticipated because they are more on more demand and for this engine and it is extremely good for us today and for us tomorrow with the service business it is going to bring. GE90 is doing also extremely well and again we don’t talk any problem of inventory, short term or medium term related to these, to these two programs.
Robert Stallard
Okay, and then just a final one from me, Bernard you reiterated the aftermarket guidance for the full year, but I think Philippe you had said that RMP GE today will coming in ahead of expectations I also raised that full cost of the year, is there a potential forum aftermarket doing better then what you’d anticipated given the strong traffic growth.
Bernard Delpit
Yes.
Robert Stallard
Okay, thank you very much.
Philippe Petitcolin
But Robert you knew the answer?
Operator
Thank you. The next question is from Ben Heelan of Bank of America Merrill Lynch
Ben Heelan
Hi, guys. Yes, thank you for taking my question. Just a quick one on CFM56 and as you said the ramp down is going to be longer than improve as you expected. Can we get a gauge in terms of numbers of deliveries that [indiscernible} in terms of deliveries ahead of where you guys previously expected and when you gave the guidance or the capital markets guidance add the 2016 aftermarket data how many CFM56 is should we expect are going to be delivered incremental to that pran. And then I guess another one into the one on equipment. The margins are running well ahead of the kind of 100 bps margin improvement that you guys for the aftermarket states well. I mean if this level of growth sustainable in the second half of the year and is it a key driver in fact, I mean just run through of the committed to run through the key driver is that how should think about that to into 2018? Thank you.
Philippe Petitcolin
Regarding, this is a first question since the beginning of this, decision to move from CFM to LEAP, we add some guidance from our customers regarding the quantity of CFM, at least a quantity of Boeing NG and A320 neo they wanted to build then the and this number as already moved up compared to the original soft guest we built a couple of years ago. Today we are talking about an additional quantity of engines that’s our customers would like us to build, and its bit too early to tell you exactly how many additional engines would have to be, would have to be produced, but you are talking quantity of, of 100s of engines so, on the next three to four years. So that’s very good but again we are in discussions with them and we all in discussion with our supply chain to see what can be done and it is a bit early to tell you we have secured 100, 200, 300 more engines then we are not participating of until now for our customers. But this is broadly what we are in mind and what we are in front of us and again we are extremely pleased with this additional request on from the customers. On your question Ben on equipments I promised that oh I said we would do our best to deliver 1% improvement every year until 2020 in two years less than two years we are already at 3%. So, it is getting more and more difficult but I’m still very optimistic. As there is no way we should not be able to improve or continue to improve the performance of our lending system, of our electrical system, of our nacelle systems. So, it is going to be tough and tougher, but this is life and which is our job to keep pushing and to keep improving our performance. So second alphabet of the year should be in line with what you are seeing joined the first half and I wish and I will do my best with my team to keep improving next year as we said in and committed in our Capital Market Day.
Ben Heelan
Brilliant, thank you.
Operator
The next question is from Celine Fornaro of UBS. Your line is now open.
Celine Fornaro
Yes, thank you. I'm [indiscernible] actually, thanks. Good morning everyone and so, three questions if I may. My first one would be regarding of the free cash flow contribution that you provide for each of the businesses in the first half. I would like to understand how come the free cash flow generation on the equipment division is actually relatively low if there is a seasoning effect and how we should think about that divisional free cash flow generation going forward linking to the comments to have just made Philippe on the operating profit progress? My second question is regarding the JV contribution which was actually slightly higher than I had anticipated and I think most of the 92 million is within the propulsion division, so I was wondering if you could comment on what should be the contribution for the full year and on Airbus [ph] and the other JVs? And my final question would be, if Philippe you could be share your thoughts regarding the potential ramp up of the OEMs or at least potentially one of them beyond the 60 months rate on narrow-bodies what would that mean in terms of CapEx requirement and what horizon we’re talking in terms of pressure on you guys? Thank you.
Bernard Delpit
Celine, good morning, this is Bernard. I will start with the joint venture thing, I would say that the - as I said the vast majority of the improvement from the $19 million last year comes from the contribution of our launch joint venture with Airbus. I expect that the second half will not be as strong as the first half and this space activity are volatile because if you miss one launch then there could be just for one week a big impact on Safran margin. So, there is risk but in any case, I don’t expect the second half to be as strong as the first half. And again most of that comes from the launcher business with Airbus. For the free cash on equipment, we have some seasonal impact that’s true, particularly is the case for our nacelle business. I would say that for the rest, I mean landing systems and wiring is quite linear on the year, so nothing really to mention. I would add looking at divisional cash that for defense it was a negative in the first half, but we expect it to be balanced more before the end of this year.
Philippe Petitcolin
Celine, your last question on the contracts and targets, that’s been defined by our customers. Yes, we have made the necessary investment to be able to support 60 or even 63 aircraft a month and this is something which has been discussed and decided some time ago. Just for your information we have very, very clearly alumni discussions with some customers who didn’t even think, have not decided anything of course. They think about may be increasing this quantity after 2020 that is for propulsion rate of 60 years we have totally set up in terms of investment to support this need.
Celine Fornaro
Thank you very much.
Operator
Thank you. The next question is from [indiscernible] of Exane.
Unidentified Analyst
Yes, good morning everyone so, it's [indiscernible] from Exane. I have a three question as well. First thank you to go ahead and provided two pages dedicated to FY16 in your accounts. I wonder was there you could give us a bit of details on the where the €0.8 billion of the statement to equity that’s your expecting is coming from just on duration and when do you think you will be able to provide us with pre-existing pro forma secures underlying FY16. This could be extremely useful. The second one is still on the ramp up of engines beyond different – the number of 800 engine circulated lot of – understand it’s a mix of CFM56 and LEAP whether it was for the next two years? Can you give us some collapse this could be more driven by the LEAP or more driven by the CFM56 and can it allow you to go through faster [indiscernible] to breakeven of the LEAP on which you rate sort of 14% 1920 so, if we go faster on the LEAP would you say it is going to be 2019 and not 2020 or for LEAP breakeven. And the third question is on working capital evolution that just plan, working capital in H1 is a bit soft to read because we know all the Rafael suppliers which is the material done payments or will that be €160 million in [indiscernible]. So can you tell us on the propulsion working capital, is the inventory build up under control for Philippe and are you adding extra working capital right now? Therefore future runs up only is yet to come. Thank you and sorry for the long questions.
Bernard Delpit
Yes, it’s a long list of questions. On IFRS 15 I wouldn’t say that the majority of the 0.8 billion comes from the that our [indiscernible] But we will that we will provide more details with the 2017 financial statements as we will guide for 2018 and I guess rest of 2016 and you will have the full disclosure of the opening balance sheet detail so, sorry for that you will have to wait another six months, that related that we are among the first franchise to give you some color on the countrified impact on of a IFRS 15. I would also add that beyond that the impact on the balance sheet we rate the limited impact on our sales and of course no impact on the on free cash. I will answer the question on working capital. As you said this time and very limited impact of to this ramp up on the working capital because as you mentioned prepayments for expect control contract but also from LEAP and are let’s say reducing receivables which helps in terms of working capital. On the other hand we adding increase in inventories that’s what we said mostly in the propulsion business because we manage two different line of product at the same time so, we have an increased in working, in working capital and as planned I would say not differently from what we, we explain in brought term during the Capital Market Day.
Philippe Petitcolin
On your question regarding the ramp up again we didn’t talk about this additional quantity of CFM and LEAP of 800 engine 6 our partner who mentioned that in its communication during, the Airshow has during the – assure as I do not know exactly from which base it was differing this additional quantity of 800 engine is difficult for me to tell you which works but as I said bit earlier in this, in this presentation since the beginning of, of the – we had additional requirements both for LEAP and for CFM coming from our customers and there are additional ones which are under discussions especially for the CFM as I just said little bit early so whole together, yes there is an additional quantity of LEAP and additional quantity of CFMs that you, we’ll have to produce in the next coming years and the and the investments for the LEAP among or will be done and after – secure today. In terms of cost more we produce faster is going to be this regarding [indiscernible] more we produce yes, the faster we will get to level of the production which will bring us to positive margin is it 2019 instead of 2020, it's too early to tell, but I can guarantee you we will do our best to come this positive margin as soon and as fast as possible. Thank you and may be let’s go with the last question if any.
Operator
We currently have no further questions.
Philippe Petitcolin
Great, thank you and for the ones who have not yet taken some vacations has a wonderful vacation than the CU and talk to you soon. Thank you very much.
Operator
Ladies and gentlemen thank you for attendance. This conference has concluded. You may now disconnect.