Safran SA

PAR:SAF

Earnings Call Transcript 2018-Q1

[Operator]

Welcome to the Safran Q1 2018 Revenue Conference Call. I will now hand over to Mr. Philippe Petitcolin, CEO; and Bernard Delpit, CFO. [indiscernible] Please go ahead.

[Philippe Petitcolin, CEO & Director]

Thank you. Good day, everyone. I don't know if I should say good evening or good morning, so I prefer to say good day to all of you. On today's call, we will discuss our business highlights and revenue for Q1 2018. I remind you that the press release and presentation are available on our website. To sum up the presentation, I would say 3 things. First one, we got a very good start of the year in Q1 and we are confirming the 2018 outlook for revenue and recurring operating income. I remind you that both revenue and recurring operating income, we proposed a few weeks ago when we gave you the guidance for 2018, a range of improvement. We are today, to be honest with you, at the top end of the range for both revenue and recurring operating income. We don't want to change the guidance because it is too early in the year, but we are already at the top of the guidance we gave you for 2018.Second point I wanted to mention is that the action plans to ensure the LEAP contract give us confidence in reaching the delivery targets for 2018.And the third point. For the first time, Zodiac Aerospace activities are consolidated as of March 1, 2018. The integration plan goes forward focused on operational recovery and implementation of synergies.So if you go to Page 4, revenue highlights. In Q1, the revenue grew by 12%, including the 1-month contribution of Zodiac Aerospace, which is truly consolidated since beginning of March. At constant scope, excluding Zodiac Aerospace contribution, revenue increased by 2.3% including, of course, the negative impact of FX. On an organic basis, which is always most important, on an organic basis, Safran recorded a sharp growth of 10.2% driven by positive the momentum in Propulsion, Aircraft Equipment and Defense, demonstrating the strength of our end market.An update on Page 5 on CFM56 and LEAP programs. The transition in production from CFM56 to LEAP made good progress over the quarter. The LEAP contract is on track. We delivered 186 LEAP in Q1 compared to 81 last year. This is consistent with our target of around 1,100 LEAP shipments in 2018. Our constant focus on supply chain and the investments we made provide us with comfort on our ability to meet customers' requirements. At the same time, the CFM56 production is still very high with 312 deliveries in Q1 2018. Around 1,000 CFM56 should be delivered this year, thanks to the sustained customers' demand. On the LEAP-1A, something quite important. So deliveries are for A320neo LEAP engine in China. The Civil Aviation Administration of China issued the Validated Type Certificate, which is called the VTC, for the LEAP-1A engine at the end of March, which was a critical milestone for deliveries of Airbus A320neo LEAP engines in China. The engine is operated now by 19 airlines and has accumulated more than 780,000 flight hours. For the LEAP-1B, Lion Air became the first airline to launch commercial service with Boeing 737 MAX 9, followed by the LEAP-1B engine. The engine is operated by 23 airlines and has accumulated more than 200,000 flight hours.Finally, we logged 827 new orders for LEAP in Q1, bringing the total backlog up to 14,278 LEAP and providing further evidence of the sustaining demand for the product.Some points on the quarter business highlights. We have growth across our civil aftermarket, driven mainly by the CFM56, up 16.4% during the first quarter. Spare parts sales to airline customers grew in the low double digits. We had a sharp seasonal increase in the contribution of service contracts, which should reverse over the course of 2018. We confirm our annual assumption for civil aftermarket to grow in the high single digits based on the continuing momentum in the sales of spare parts, which make up most of the civil aftermarket revenue [indiscernible] and on the contribution of services contract similar to last year. Our helicopter engine business did also quite well with Qatar selecting us for its new fleet of NH90 helicopters. We have continuing momentum -- we mention that in most every quarter, in our carbon brakes business with signing of new [ several ] contracts with a lot of new airline customers.We have announced that we will open a factory to manufacture electrical wiring systems in India and we will start this business in the next 12 months.Finally, we have announced that following the completion of the acquisition of Zodiac Aerospace, we launched at the end of March a share buyback program of EUR 2.3 billion over the next 18 to 24 months.Finally, on Page 7, performance on the integration of Zodiac Aerospace. Zodiac is now a Safran company. For the last 2 months, we have been working in many directions. [ We are framing these ] points that I want to mention to you. We are working on the operational performance. We have to improve our quality and delivery to satisfy our customers, both OEM and airlines. Second point is the implementation of processes and methodologies that we consider as best practices, which is also extremely important. And the third point is we discussed, which are still too high and lower the break-even points for all the businesses of Zodiac.Just the same, in Zodiac, we attended the big airline interiors show in Hamburg, called AIX, beginning of this month and the feedback we got from the airline customers was quite positive. They wait for us. They said they need us, so it was quite encouraging for the future [ economic recovery ] of this business at Zodiac, mainly the business for interior. Now I will lend the floor to Bernard. He's going to come back a little bit more in detail on the financials of this first quarter of 2018.

[Bernard-Pierre Delpit]

Thank you, Philippe. Good morning or good evening, everybody. I'm on Page 9. Just 2 things to mention here. First, of course, these figures are presented in application of IFRS 15 and comparators are established against '17 figures restated for the application of IFRS 15. The restatements of 2017 are provided in appendix for each quarter of '17. Second thing. Zodiac Aerospace is now fully consolidated in Safran's financial statements starting March 1. Safran Q1 2018 revenue therefore included the 1-month contribution from Zodiac Aerospace.I move to Slide 10 on FX. The main point to mention here is great move on dollars in Q1 from $1.06 on average in Q1 last year to $1.23 in Q1 this year. I'll come back on the hedge rate later where nothing has really changed since we spoke in February.I'm on Slide 11. So Q1 2018 is EUR 4,222,000,000 of revenues. It's 12% up, including 10.2% organic variation, a negative impact of currency for EUR 295 million and a positive impact of EUR 363 million in scope including EUR 369 million for Zodiac Aerospace. I turn to Page 12 and will now comment some details by business together with figures from the Slide 20 in appendix. So Propulsion, we have a revenue of EUR 2,286,000,000 in Q1, 12% organic growth. It includes reported OE revenue up 6.9% or 13.6% organically for OE only with higher sales of narrowbody engines supporting this growth. On the other side, military engines, helicopter turbines and high-thrust engines are slightly down. For services in Propulsion, services are up 3% or 11.1% organic. It includes civil aftermarket up 16.4% in U.S. dollars, thanks to a positive momentum in spare parts sales with a low double-digit growth and a sharp seasonal increase in the contribution of service contracts, which is expected, as Philippe said, to reverse over the course of 2018. IFRS 15 makes it a bit more tricky to forecast those services revenues. And in Q4 last year, we had some exceptional items explaining why on a year basis we think that this seasonal impact will reverse. And we expect a flattish situation for services for the full year. But for spare parts, it will continue to be very strong, we expect double digit.Still for services, we have experienced organic growth for helicopter support activities with single-digit growth. And we experienced [indiscernible] inventory services in Q1. For Aircraft Equipment. So revenues for Q1 are EUR 1,263,000,000. It's down 3.1% on a reported basis, but up 6.6% on organic basis. So OE in Aircraft Equipment revenue are up 5% on an organic basis. It included higher delivery for A320, notably for nacelles and higher ship sets were for deliveries for the 787 for wiring and landing gear and higher shipments for A380 due to nonrecurring catch-up effect of -- in Q4 last year and Q1 this year.Services in Equipment are up 10.6% on an organic basis, thanks to higher activity on carbon brakes and increase in sales of spare parts for nacelles. Electronic and Defense has experienced also very strong growth, 12% on organic basis, reaching EUR 298 million revenues this quarter. Defense sales are up 16% organic; avionics sales, up 8% organic for Defense, thanks to higher volumes of guidance and sighting systems and a positive contribution of tactical drone program, Patroller. For Avionics, the 8% organic growth is due to inertial navigation systems, electronics and optics. Just to mention here for Zodiac, it's EUR 369 million sales in March alone. It's down compared to last year due to seasonal impact on [ Aero ] system. And for the other divisions, the same trend as the one that we published yesterday.I move on to Page 13. For FX, no change in our targeted hedge rate for the 2018, 2021. I just want to mention here that we have improved the instruments for 2020 and 2021, moving the KO barrier up from $1.26 to $1.27 for 2020 and from $1.29 to $1.32 for 2021.And now I leave the floor to Philippe for the outlook.

[Philippe Petitcolin, CEO & Director]

Regarding the outlook, the assumptions we showed you 2 months ago regarding 2018 are unchanged, I'm not going to come back on them. And just go to Page 16 for the continuation of what I said in the beginning of this presentation. Based on what we have done during the first quarter, we confirm that the adjusted revenue should grow on an organic basis at the top end of the previously indicated range of 2% to 4%. I remind you that at an estimated average spot rate of $1.23 to the euro, the adjusted revenue is expected to grow slightly. The adjusted recurring operating income to grow comfortably to the other end of the previously indicated range, which was 7% to 10% at a hedge rate of USD 1.18 to the euro and the free cash flow should remain above 50% of the adjusted recurring operating income. This is for the formal presentation of Bernard and I. We are now at your disposal if you have any questions to ask us.

[Operator]

[Operator Instructions] We have a question from Ben Heelan, Bank of America Merrill Lynch.

[Benjamin Michael Heelan, Analyst]

Going through the Zodiac results yesterday, one of the key takeaways was that while operation in Zodiac is stabilizing. Now the seat business is clearly still being impacted on the revenue line. Could you maybe talk a little bit about how you're getting involved on a customer and sales perspective to recover the market share midterm? And then, I guess, one for Bernard. On the Zodiac statement yesterday, you said that Zodiac hedging had been incorporated within Safran's own hedging program. So I guess going forward, should we assume that the open exposure, the transaction exposure for Zodiac is going to be hedged at a similar rate to Safran?

[Philippe Petitcolin, CEO & Director]

Well, I will try to answer the first question. Yes, you're right. The business for the seats for the first half of the year 2017, 2018 of Zodiac is down by a bit more than 20% organic. It's something which was known. We knew that the fact that we had this very poor performance over the last couple of years had pushed customers to let them go. And in addition to that, I remind you that they were not authorized to do any business with Boeing for a while. So the 2 together for the seat business made this reduction. Again, it's not a scoop. I'm expecting such a reduction and that's the reason I said a bit earlier that in addition to reduce the cost and lower the break-even point, because with less sales, we have to lower even more than break-even point, we have to recover the confidence of the customers. And it's just by delivering on time good quality products that the customers will come back. It's not something, which is impossible. Again, we were quite happy with the exhibition at Hamburg because most of the customers who came to see us, who were discussing about seats said, "Don't worry. If you perform, we'll be back. We need you, the supply. You have been a very good supplier. We want you to come back to an acceptable level of performance and then we'll come back and give you more orders." So on the medium-long term, it's not a problem as long as we are innovative and we have good products at a cost that customers will pay. But on short term, yes, it's a big drop in terms of production and in terms of sales and we have to adapt ourselves as soon as possible.

[Bernard-Pierre Delpit]

Ben, I will answer the question on hedging. I think you get it right. Zodiac started the year with their own hedging instrument at one time and they have booked the necessary hedging into the summer. And after the summer, we will use our own hedging instruments, that means [ 1 18 ].

[Operator]

The next question comes from Christian Laughlin, Bernstein.

[Christian A. Laughlin, Analyst]

I have 2 questions, the first one was on the aftermarket. I was wondering if you could just add a little bit more detail on the impact of the unusual phasing from the services contract to the Q1 growth of 16.4%, i.e., roughly what you would have looked at if service contract contribution was normal? And then the second question is on the LEAP engine. Deliveries look like they're on track, as you said, and according to plan. Could you talk a little bit about how unit costs are progressing relative to the financial plan on that program?

[Bernard-Pierre Delpit]

Christian, I'll start with -- Bernard. I will start with the aftermarket and especially services, that represents roughly 20% of our civil aftermarket. And as you said, we've been quite surprised by the high growth of services for Q1. So we looked at it and Q1 last year for services was not so good. And we booked also some exceptionals for services in Q4 last year. That's why we think the high growth of Q1 won't be the situation that we will find for the remaining quarters. That's why we think it will be flat. And also, you must bear in mind that based on IFRS 15, it's now a cost-of-cost method to recognize revenues, so it's a little tricky to forecast that. There may be some volatility, but taking a flat assumption for services for the rest of the year -- at the end of the year, I'm sorry, I think, is a fair assumption.

[Christian A. Laughlin, Analyst]

Okay, great. And on LEAP unit costs?

[Bernard-Pierre Delpit]

Well, on LEAP unit costs, it goes according to the plan. Nothing specific to mention. I think we are completely in line with the guidance. Of course, it will be easier to cut costs at the beginning of the program and it's becoming more challenging. But again, we have no reason to derail from our guidance. We will continue to cut costs and it goes according to the plan.

[Philippe Petitcolin, CEO & Director]

Yes, we are really in line. Of course, you have pluses and minuses. Everything is not exactly as we said 2 years (sic) [ 2 months ] ago. But all together, when you think the pluses and the minuses, we are in line with what we want to get and with the guidance we showed you 2 months ago when we gave you the guidance on 2018. So we are quite confident on the costs and the fact that we will achieve the cost reduction that we did on this [ quarter ].

[Operator]

The next question comes from Olivier Brochet, Crédit Suisse.

[Olivier Brochet, Research Analyst]

I have 2 or 3 quick questions. The first one on the LEAP-1A and LEAP-1B. Can you update us on the CMC coating issue? How is the solution progressing on this thing? The second question is could you share with us a bit of granularity on how will you capture from LEAP small delays? Where are the bottlenecks or the dimensioning factors there? Is this the supply chain? Or is it Safran? Where is it coming from? And the last one is a quick check that I wanted to do. The Zodiac contribution you said is going to be 5 to 10 -- or increase EPS by 5% to 10% in 2018. Is that including the implementation costs? Or how much of the 2015 million (sic) [ EUR 215 million ] are included in this number?

[Philippe Petitcolin, CEO & Director]

Okay, Olivier. I will try to answer the first 2 questions and I will let Bernard answer the last one. Regarding the CMC coating, of course, as you know, it is something, which is in the package of our partner. It's not a directly a Safran issue. It's a CFM issue, but it's not a Safran issue. From what I know, we did find an acceptable solution for the durability of this part. And from what I understand, they're implementing this improved solution and we are back to normal in terms of performance we are expecting on this part. So nothing we knew compared to what we discussed 2 months ago except that, from what I see, our partner has a solution to really improve the durability of this part. On the granularity and delays, don't say small delays because for customers they are not small. Today, I would say that we are around 6 weeks behind the schedule we committed to customers. It's difficult because I don't think we are really late. We are not increasing the production at the speed we committed for. But in terms of production, we are not on something stabilized. We are late. We are going, going, going week after week, but not at the speed we committed. And when you look at the quality of engines we deliver both to Airbus and Boeing, we are behind schedule. We had accepted with both of them. Most of these are coming from parts. It's not a question of final assembly. It's not a question of system. It's really a question of adding parts, which are behind schedule and the origin of most of these delays are coming from raw materials, basically the forging and the casting -- the big casting are a little bit behind schedule and with the old supply chain we suffer from this delay. We have plans, of course, to come back on the schedule we committed for and I wish our action plan gets us back on schedule for both customers in Q3.

[Bernard-Pierre Delpit]

[indiscernible] Olivier, I will answer the last question. You get it right. I mean, this 5% to 10% increase in EPS coming from Zodiac takes everything into account. Everything that falls in the net income of Zodiac, so including the implementation costs for the synergies.

[Olivier Brochet, Research Analyst]

And we agreed they are EUR 215 million in that number as you communicated when you...

[Bernard-Pierre Delpit]

Yes, but over 5 years. I mean, the total implementation cost of EUR 215 million is not for 2018, of course, right. It will be spread over several years. So the part of that, that would fall in 2018, of course, is taken into account. But we will say that the EPS accretion coming from Zodiac, the 5% to 10%, the 2018 part will be taken into account.

[Operator]

The next question comes from Andrew Humphrey, Morgan Stanley.

[Andrew Edward Humphrey, Vice President]

Just a couple, if I may. One is on production rates on narrowbody and LEAP again. I'm sure you've seen as we've seen the headlines today and over the last few weeks about potential production increases from one of your major customers there. I wonder how prepared are you for potential further increases in 2019 over and above what's already planned this year, how that can affect your investment plans? And the second question is on -- just on the MRO mix again. You talked about the seasonal reversal and the type of [indiscernible] through the year on the services side. The implication there, for me, seemed to be that you'd [indiscernible] seeing stronger growth in spares through the rest of the year, maybe double digit, so I just wanted to ask could that be positive for margins over the rest of the year relative to what you've indicated?

[Philippe Petitcolin, CEO & Director]

Thank you. I will answer the first question and let Bernard answer the second one. Regarding the production on parts, we clearly said 2 months ago that we are not going to negotiate or to commit for additional quantity of engines until we are totally reassured that our total supply chain will be strong enough to sustain such an additional quantity. So if you remember, we negotiated with our 2 main customers. It was more than a year ago the quantities of engines we would deliver until 2020. And since that time, we have not negotiated anything and we are not ready and we are not going to negotiate anything. We want to stick to what we said 12 or 18 months ago and we are going to let our supply chain perform, and based on this performance, we will tell our customers beginning of 2019 if, yes, we can increase again the quantity of engines we supply to them, or if not, we cannot commit because we don't believe that our supply chain will be in position to accept this additional increase. It's not a question of being arrogant with our customers, not at all. We want to be serious. We want to be good partners and reliable partners. And we think that at the level we are today, it would be crazy to accept additional quantities when I just told you that we are 6 weeks late. So by the end of 2018, we will be, both with Boeing and Airbus, at the production rate, which should be not far from what we need in the full 2019. And I remind you that in 2019, we should deliver around 1,800 LEAP between the 2 of them. And when you are at 1,800, we commit for 2,000 or even more than 2,000, in my opinion, it's something that we could decide and take the risk -- take the risk today. It's too high and we'll not be serious. On the -- but again, we would love to do that.

[Bernard-Pierre Delpit]

On the MRO side, I might just reiterate what I said in terms of mix. What we can say -- see is that the spare parts of the civil aftermarket, which represent the vast majority of our civil aftermarket growing double digit [indiscernible]. For the service which represent a minority of revenues of the civil aftermarket, you shouldn't take Q1 run rate for the rest of the year. That's all. Because of IFRS 15 implementation, forecasting will be tricky and because of also, as I mentioned, we had some exceptional revenues in Q4 last year and we have not identified that such things for the rest of the year. That's why we prefer to be on the safe side. And I say that, on a yearly basis, looking at that as flat is what we're going to do. Now the impact on profitability is too soon to tell, but the reversal of the service growth shouldn't have any impact on our profitability. That's my assumption.

[Operator]

The next question comes from Celine Fornaro, UBS.

[Celine Fornaro]

My first question would be just if we think about for the LEAP delay, so at the moment you're running at 6 weeks' delay and so you're planning to recover that in Q3, but your previous statement where you were hoping to get this back by June. And at the moment, the situation has kind of worsened compared to where you were in early March. So what is the issue? Is it just this [ casting ]? Or is it also introducing along the lines some of these CMC solutions? Or what is the next big milestone that we should think of given that you are planning to make your own deliveries for the year? And my second question would be on the CFM56. So the step-down in Q1 has been very limited. So how should we think of the step-down of that program to get to the 1,000 this year against the 1,300 last year?

[Philippe Petitcolin, CEO & Director]

Celine, regarding the LEAP delay, you're right. We said the end of June. And for what is of the responsibility of Safran, before the end of June, I think we'll be back on schedule. So we had from supply chain a problem with some forging, as I said a bit earlier. But now that we received the raw material, we have cycle to the machine all this raw material and we are now getting to a point where the parts come to where they should be and we can assemble the [indiscernible] and our [indiscernible] Should be back, I believe, on schedule by June. So if you are an engine supplier of CFM back in Q3 means that our partner is a little bit late. It has nothing to do with the CMC. But on their side, they got also some shortages of raw material. And again, they're in the cycles to recover and we should get the claw, we call that the claw of the engines on higher quantity starting at the end of the second quarter, which means that at the time you've finished completing your engines and you deliver them, it will be sometime in Q3. So we both are now in a situation where we don't have shortages anymore of raw material. We are just in the cycle. The cycles are a bit different and that's the reason we tell you today Q3, we are very confident with this recovery in Q3 for the reason I just mentioned. CFM56, we produced last year 1,450 and we are going to produce 1,000 this year, which is perfectly in line or even higher than what we had anticipated a few years ago. And I don't expect any major issue with this reduction, which is totally under control. I didn't really understand your question, Celine. Maybe I'm...

[Celine Fornaro]

I'm sorry. It's still that in Q1, the numbers haven't come down that meaningfully. So should we [indiscernible]

[Philippe Petitcolin, CEO & Director]

No, but it is ascending on the LEAP. If you look at the LEAP, if we have to deliver more -- around 1,100 and we produce only 186 means that we have to deliver more. We are in the swing. And since -- for 2 years or 3 years, we keep telling you that the big year is 2018 because that's where we have the bigger swing between CFM going down and LEAP going up.

[Operator]

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

[Tristan Marie Raphael Yvan Sanson]

I have a few questions. The first one is on the evolution of the oil price and the impact on the airline spending environment. If you look at the past 3 months, the increase in the barrel from $50 to $75 per barrel, obviously that has not impacted in any way you so far. But I wanted to get your feeling about how airlines are considering that headwind? And are they considering [ expecting ] maintenance of engines to save on fuel? Or are they also looking at optimizing their discretionary spending and cutting costs? Do you see a risk eventually for the cabin business, if we could have your view on that. The second question is a bit technical, sorry for that, it's also about the contribution of Zodiac Aerospace to your EPS this year because you are providing a guidance on EPS, but you're providing -- you're implementing a share buyback at the same time. So [indiscernible] pretty sure how to look at this better, could you possibly provide a guidance based on net income, rather than EPS, that would be useful. I don't know what your assumption for completion are of the share buyback which you have to do -- will continue in 2019. And the third question, I would be interested to get your view on your ambition for the [ S class ] program on propulsion system, for the program announced this morning by [indiscernible] for future fighter aircraft, combat aircraft UAV.

[Philippe Petitcolin, CEO & Director]

Okay, Tristan, I will let Bernard answer the second question. I will try to answer the first and the last one. With the increase of price of oil, as of today, it had no impact on the way our customers airlines react to both in terms of new deliveries or in terms of maintenance for their existing fleet. We saw absolutely no change in the attitude of our customers. Of course, the phenomenon you just mentioned is only a few months old. We don't know if it is going to last. But as you know, as traffic is up again for the [indiscernible], we are in the 7% range in terms of increase of the traffic. If you look at the IATA data, we are at 7.6% at the end of February 2018 with a load factor of [indiscernible] 80% -- 80.4%. So people are traveling. The trend is the same in India with more than 22%, more than 10% in China. And again, an important factor for us is the way airlines react in front of [indiscernible]. We saw absolutely no change and when you look at our index for after service we just talked about, 16.4% in the first quarter is really a very high number. So no change in the attitude of our customers. Regarding the [ S class ], I think you mean the [ F class ], that's the new name of this new program between the Germans and the French. Of course, we are working on projects. We are also working with our counterpart in Germany in order to come to something acceptable for both countries, especially regarding the engine, which will have to power this new airplane and this new system that the Germans and the French want delivered. So we are actively working on a project to be part of this program, of course. I will let Bernard answer the second question.

[Bernard-Pierre Delpit]

Yes. We said that we would give guidance for Zodiac contribution to Safran in September. So [indiscernible] that I will not anticipate this guidance even on a net income basis. So the idea is to say that EPS accretion, 5% to 10%, will take into account everything including the buyback program that we have already started. But I need to say that we will compare EPS whatever the number of shares is without Zodiac and including Zodiac. So the 5% to 10% increase, frankly, is neutral considering the number of shares.

[Operator]

The next question comes from Harry Breach, Raymond James.

[Harry William Freeman Breach, Aerospace Analyst]

Just 2 questions for me. Firstly, with the -- Bernard, sorry. Sorry to come back on Zodiac. With the numbers for the first half that they reported last night, can you help us to understand maybe 2 things. Firstly, was the operating income figure, the EUR 35 million, was that in line with their business plan for their financial year to the end of August? And the second part of the question was, in the past zodiac give some indication of the abnormal costs they were absorbing, including customer settlement, air freight costs, scrap and rework. Can you give us any feeling for the level of these abnormal costs in the first half for Zodiac? And a completely different question, maybe more for Philippe. Can you give us just maybe a little bit of a feeling with Silvercrest on where we are on the negotiation with Dassault Aviation and any customers? And then in light of Scott Donnelly's comments the other day about the Hemisphere program being basically on hold, can you give us a feeling about how you're thinking about Silvercrest and development costs on that going forward?

[Bernard-Pierre Delpit]

Sure. So Harry, I will start with the Zodiac question. The EUR 35 million of recurring operating income I think is a bit weak compared to what the previous management gave as an indication. That said, they also guided for quite strong seasonal impact. So we expect that the rest of the year will be much better for Zodiac. And when I say the rest of the year, I am referring to the calendar year because we won't book anything on Zodiac fiscal year basis now. Regarding the abnormal costs, we have not looked at that this way because it was a KPI from the previous management taking into account different assumptions back to 2014 and '15 and taking also into account some FX situations. So we do -- don't to look at it this way. We look at that on a simple basis. And in H1 for Zodiac, volumes were negative, of course. FX was positive. So the improvement from a pure operational point of view, including some net contribution mix impact due to the good performance of the [indiscernible] system division taking all that into consideration, we have an operational improvement of roughly EUR 90 million, 9-0 because, again, volumes were negative, FX was positive and the improvement was from a net loss in H1 of fiscal year last year to a EUR 35 million positive contribution. So when I look at that, not again taking into account what the previous management called abnormal costs, but from a pure operational improvement, I would say that we are in the range of EUR 90 million improvement, but it takes everything into account. The mix with good performance of [indiscernible] system and other hiccups and abnormal costs that are under what we experienced 1 year ago. Is that clear?

[Harry William Freeman Breach, Aerospace Analyst]

Yes. And maybe Philippe on Silvercrest?

[Philippe Petitcolin, CEO & Director]

Yes. Yes, of course. On the Silvercrest, you have 2 questions. In fact, the one with Dassault, as you know, we have announced the termination of the contract which is, of course, was the second buyback. And we are continuing our discussions on the termination project. I cannot tell you more than that. This is the situation as of today. Regarding the Hemisphere and what Scott Donnelly said last week, he said he's waiting for the engine, which is true. We are in the process of optimizing the development of this engine in order to offer the Hemisphere the best product possible. And as you know, this may include link between a business jet and its engine. And of course, we are working today to find the best fit in order to make the Hemisphere one of the best products on the market. This is what -- I can tell you. This is nothing specific. There's no delay, nothing, except that we are in the [indiscernible] process of development of the engine in order to support the program of Scott.

[Operator]

The next question comes from David Perry, JPMorgan.

[David Howard Perry, Head of European Aerospace and Defense]

I've just got 2 quick questions, please. First of all, your outlook guidance is a little bit more confident in terms of comfortably at the upper end of the previous guidance on unchanged aftermarket guidance. So I just wondered what was possibly driving the more confident view. And then, secondly, I just wanted to check something because the Zodiac acquisition closed a few months later than [indiscernible] last year, I think there's a bit of confusion in the market on what would you define as year 1 and year 2. But based on your comment today of 5% to 10% EPS accretion, it looks like '18 is still very much year 1. So can we assume also that the comment from last May is still valid that the year 2 accretion is high double digits and that's still 2019?

[Bernard-Pierre Delpit]

I will answer the second question, Dave. Well, in May, we said that year 1 would be 12 months after the acquisition of Zodiac, right? So the acquisition was, let's say, 1 month later than what we planned. But nevertheless, we consider that in 2018 the 5% to 10% accretion is our target. For 2019, okay, let's assume it's year 2. But for the moment, I just clarified the question of 2018. We target 5% to 10% EPS accretion, thanks to Zodiac acquisition.

[David Howard Perry, Head of European Aerospace and Defense]

Okay. But in terms of just timing issues, can I still assume high double-digit EPS accretion for '19 -- calendar '19 -- your calendar '19? Or do I have to adjust a little bit for timing here?

[Bernard-Pierre Delpit]

Don't adjust for the moment, David. Take what I said as year 2 as 2019 and make it simple.

[David Howard Perry, Head of European Aerospace and Defense]

All right, that's very helpful. And then just on this year where you might be doing a little better than you thought?

[Philippe Petitcolin, CEO & Director]

That's a tough question, David. Of course, we are doing everything we can in order to do better than what we guided and we have a very good start of the year. As we said -- as I said already at the beginning of the presentation and at the end of the presentation, we are -- when you look at the guidance we gave you 2 months ago, we are really at the top end of this guidance. We try to be maybe a bit conservative. You know us now, you know how we work. We try not to disappoint the market and the people who have confidence in us. This is how we are, but if the trend we are facing today remains the one we see today, yes, we should be able to develop, but it's not a commitment as of today. We talk about the price of oil. We talk about the roundup of [indiscernible], now all the way from unknown, but today, yes, to answer your question, we are conservative. We had a very good start and we hope to do better.

[Operator]

The next question comes from Zafar Khan, Societe Generale, London.

[Zafar Ayub Khan, Equity Analyst]

I have 2, please, if I may. First one is just on the seats business. H1, down 20% organically and I think it's in line with the 20% drop in Q1. I just want to try and understand this a little bit better. So in that 20%, how would it split roughly between unit volume and price? And the other thing that I'm having real difficulty in understanding is, we've had the ramp-ups in production for both Airbus and Boeing over the last couple of years. There's been talk about production constraints from the supply chain. And with the seats primarily being delivered by 2 big players, who's taking up the slack from Zodiac? Zodiac losing out, we read about the market share; B/E haven't really claimed that they have gained a huge amount of market share. So who has gained at the expense of Zodiac? And secondly, if I'm looking forward a little bit, when the problem started, the big question everybody asked Zodiac management was about penalties and what's going to happen and they gave the indication that they were, in effect, giving fairly heavy discounts to the customers and I just wonder whether those discounted prices have been delivered or whether those will impact the next couple of years. So I'm sorry, it's a long-winded question, but I hope you get the kind of gist of what I'm asking. And then the second one is a very simple one. You talk about earnings enhancements. I'm always very interested in the actual value accretion, and I think you've said in the past that you hope to be value accretive on this acquisition by 2021 -- or 2020, 2021, that sort of time frame. Could you please tell me what kind of WACC assumption you're making to make that statement about value accretion?

[Bernard-Pierre Delpit]

Zafar, I will answer the last question because it's the easiest one. We take 8% of the WACC and the target is to beat the WACC in 2021, true.

[Philippe Petitcolin, CEO & Director]

Zafar, I will try to answer the first question but again, don't forget that we owned the company only for 2 months and we have not gone into a lot of details for each business. So you're right, the seats business has a reduction, an organic reduction of about 20%, 21% during H1, which is, again, something we were expecting. It's not a scoop. We knew that based on the market share over the last -- because they upset it, a lot of customers and the fact that they were not authorized to bid with Boeing for a long period of time, the projections of the sale would reduce over time. The positive point is that every customer we have seen and including the customers who are not buying from Zodiac today tell us we need you. If you come back to something that's acceptable, we'll buy again from you. So that's some positive message we got from customers. In terms of [ highest reduction ], we've seen nothing specific. Basically, it's volume which is the main item, which has reduced the sales. But don't forget that you have a big mix. When you do not supply Boeing 737 coach seats, it doesn't have the same effect that if you don't supply anymore business class or first-class seats to a big airline. So you cannot look at volume in terms of quantity of seats. But basically, the reduction of the sales is coming on the reduction in the volume and again we are talking about the mix between coach, business and first class. Regarding the last part of your question on penalties, including some heavy discount, I have absolutely no information on this point. If you have anything, let me know because I would be interested to know where it's coming from. I don't have anything on this subject.

[Zafar Ayub Khan, Equity Analyst]

I mean, I'll see if I can go through the transcripts and kind of highlight it for you. But the previous management, when they were asked about penalties, was saying, well, we leave something on the table for the airlines to reimburse them by kind of offering much better. So I can't give you much...

[Philippe Petitcolin, CEO & Director]

Yes, it's a kind of negotiation. If you have a quality program, you may drop some percent of the price in order to make your customer more happy or less unhappy about your performance. It's a normal type of thing, but there's nothing really major that we have not seen or which we are not already in the budget, which we have presented to you.

[Zafar Ayub Khan, Equity Analyst]

Okay. But the -- thank you very much for your answer, but I'm still struggling a little bit to understand. Who actually gained the market share from Zodiac?

[Philippe Petitcolin, CEO & Director]

Market share. I mean, you don't have only B/E and Zodiac. Again...

[Zafar Ayub Khan, Equity Analyst]

No, no. I know there's RECARO and there are a few other players, but...

[Philippe Petitcolin, CEO & Director]

You have RECARO, you have AVIC, you have a lot of people who are now in this business. But again, when you look at the seats business, there are a lot of competition in the coach seats. But again, the big guys you see in business and first class are the ones you just mentioned and they are not new ones. So for us, as a key and you know that's where is the profit in terms of business-class seats and the first-class seats, that's where we have to recover the market share we lost, and we do everything we can in order to support our customers in business class and first class just to show that we are a reliable supplier and they can count on us for the future. That's the key for me of the recovery.Thank you so much. Thank you, everybody, for listening to us and attending this session of the results for the first quarter of Safran. Have a good day -- good evening for some of you. Have a good day of work for the others. Thank you very much and talk to you later.

[Operator]

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