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Edited Transcript of LAT.PA earnings conference call or presentation 10-Mar-20 9:30am GMT

Full Year 2019 Latecoere SA Earnings Call

Toulouse Mar 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Latecoere SA earnings conference call or presentation Tuesday, March 10, 2020 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Michel Abaza

Latécoère S.A. - Interim Group CFO

* Pierre Gadonneix

Latécoère S.A. - Independent Chairman of the Board

* Yannick Assouad

Latécoère S.A. - CEO & Director

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to today's Latécoère Full Year 2019 Results Webcast.

(Operator Instructions) I must advise you that this webcast is being recorded today, on Tuesday, the 10th of March 2020.

I would now like to hand the webcast over to your first presenter today, Pierre Gadonneix, the President of Latécoère. Please go ahead, sir.

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Pierre Gadonneix, Latécoère S.A. - Independent Chairman of the Board [2]

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Good morning. I'm Pierre Gadonneix. I'm the Chairman of the Board of Directors at Latécoère, and it's my pleasure to welcome you to the webcasted presentation of Latécoère financial results for the fiscal year 2019.

In order to help curtail transmission of the coronavirus and as a preventative measure, Latécoère has changed the format of its in-person results presentation as we used to do; and prioritizing the health and safety of all our partners, employees and investors. I thank you all for your understanding and for joining us through this webcast presentation.

I would like to highlight 3 main item related to the year 2019. The first, the year 2019 illustrates the positive momentum of the group development of sales. And that's, at the same time, from new contracts and strong volume increase. It's true in our interconnection division -- system and, in some extent, with higher volumes which benefited to the -- through organic growth in the aerostructure division. That the -- first item.

Coming back to the -- to our results. This year was a very important year for the group, as we are now almost -- we have now almost completed the Transformation 2020 plan. And now -- and the third aspect is now we are backed by a strong shareholder who will support the future development of our company. So we are now ready to launch Beyond program, which is a new project designed for further improvement within Latécoère competitiveness -- within Latécoère to improve the competitiveness and to reduce our fixed costs by EUR 20 million in the next 2 years.

We are committed to establishing Latécoère as a major Tier 1 operator in the aircraft industry. We are entering 2020 with confidence. And we have a renewed Board of Directors, which reflect the situation of our new of the -- presence of the new shareholder, major shareholder. And this will leverage the potential of transform group and sustain profitable growth over the long term.

I'll now leave the floor to Yannick Assouad, Latécoère CEO; and Michel Abaza, which will be -- present the financial aspect of our development.

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Yannick Assouad, Latécoère S.A. - CEO & Director [3]

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Good morning, everyone. This is Yannick Assouad, the CEO of Latécoère.

Three slides to start with, if you want to move to Slide 3.

So this slide, you know already. We just updated it with the '19 numbers. So both operational results, [nonsubjective] results and financial results. We produced more doors than ever in '19, 3,800, coming from 3,500 last year. On the contrary, we produced less (inaudible), roughly 350, coming from 375, due mainly to the decrease of the E1 production rate, the Embraer E1 platform production rate. More racks, more harnesses and more cockpit panel than last year under the effects mainly of the growth of A320 and A350. More cameras as well, mainly for Boeing, both for retrofitted activity -- retrofit activity and first months; and a stable satellite harnesses activity. As you know, the satellite activity has not been great in '19. So a stable activity for that.

Is 5,200 employees, a growth of roughly 200 employee worldwide, with funds being stable in that front, established as you know in 13 country. And that didn't change.

If we move to the next slide to go to the financial results.

We've published a revenue for the year already EUR 713 million of revenue, which represents a growth of 8.2%. That's in reported number 7% organic growth, which is a great number. EUR 47.6 million recurring EBITDA, which is a decrease, and we'll explain why. Mainly, it is the cost of performance of our interconnections system activities that we will detail further on in the presentation. On the contrary, 6.2% of recurring EBITDA margin for our Aerostructures business, which is a growth versus last year. You know that last year, you may remember that last year we had operational issues mainly due to the impact of some of our suppliers not delivering us and the fact that we were obligated to in-source those supply, with industrial costs associated to that. That disappeared completely in 2019, so that number is what we expected and is there.

In term of cash flow. Negative cash flow that we published already in September, on the reverse the second semester that shows a great cash flow. There's one major impact there, which is the fact that we have the scheme of brokering the Airbus invoice with one bank with them, which produced positive cash flow, but it's also even out of that we had a positive operational cash flow in H2. We had committed to have that for 2020, but our H2 semester shows already that the trend is good.

A book-to-bill of 1.09x, which shows that we are renewing our order book year after year, and even it shows growth. And then a stable backlog with EUR 2.2 billion. I'll remind you that this is the projected airplane manufacturer backlog based on our ship set per platform that they have in their backlog. That's compared to EUR 2.1 billion last year, so being basically stable.

Moving to the next slide. As Pierre said, we had a major shareholder change during the course of the year. Late in '18, Apollo and Monarch were 2 reference shareholders; expressed the view of exiting, which we organized beginning of the year. On April 2, Searchlight capital partner announced that they were acquiring 26% stake of Apollo and Monarch in Latécoère for EUR 3.85 per share. That happened and was concluded on the 26th of June 2019. On the 28th of June, Searchlight announced their will to buy the rest of the share. So the tender was -- still was organized [in the second half of September] and was concluded on December 20, with Searchlight holding 65.5% of the share. At the same time, most of the employees sold their share to Searchlight. So we remain with 33.6% public holding in Latécoère. And we are still (inaudible) 20th of December and the outcome of the tender offer by Searchlight.

Moving to the operational results of the year, and we are going to start with the highlights of the business for '19.

Starting with our Transformation 2020 program. So that was starting, as you know, on -- in '17. I think we decided in '16, started in '17 and reorganized in '17. In 2019 -- I'm going to focus on the main events that happened in the course of that Transformation 2020 plan. As you know, we're extending our new site in France. We also opened a new site in India, in Belagavi, Karnataka in India. We extended our new Bulgaria site in Plovdiv. We concluded all the transfers that needed to happen on Interconnection Systems side, mainly transferring the A320 cockpit control panel from France to Morocco. And then we are completing the construction of the -- our new head office in Toulouse, to move there by the end of 2020.

So if you move to the next slide. Those numbers, [honestly or at least] for the overall numbers, still a program that is going to cost the company by c. EUR 130 million. That's split in EUR 31 million spent mostly -- it was spent mostly by end of '18 already, EUR 30 million spent in the social plan of Latécoère in France during '17 and '18. Then the rest of the cost split between CapEx and OpEx. OpEx include all the move costs from one sites to the other but also the startup costs in the new site. Basically that's finished. We still have a little bit of cost that [we are further incurring and moreover] in the first summer of 2020 to finish the surface treatment and painting lines that we have implemented in '19. The CapEx, as you see, are not fully spent yet. Mainly they have been committed because all the equipment lies in our facility. It's mainly a payment issue that has happened actually already in 2020.

The overall cost gains, cost reduction that we are targeting for the plans of EUR 40 million is reached and will be reached. You have the split that didn't change, by the way, a good 1/3 on purchasing; then a little more than 1/4 on improving our manufacturing costs; the rest being split between indirect cost decrease, whether it's costs that we purchase or costs that we incur internally.

If you move to the next slide. So this is a view of Montredon, the [large] machine that were introduced in 2019. And what happened mainly in 2019 is the resourcing of close to 900 part numbers that were done elsewhere, mainly suppliers, that are not done in this plant, not at full rate yet, and not at the final [cost]. We still have [further costs] in Montredon, but that's what we are in to make, with roughly 300,000 parts that we will make in Toulouse-Montredon. So that's the addition of 900 new part numbers that were reinstalled, plus what we move on our old site, legacy site in Toulouse. We've added 3,000 square meters to implement surface treatment and painting activity in '19. We are right now qualifying those lines with all our airplane manufacturers.

We've also achieved the ISO 14001, which is the environmental standard that we are aiming at for all our plants but we got it very early on in November, in during the course of the summer. And we are ramping up all of that during the course of 2020 to reach 300,000 parts by full year 2021. In '19, we incurred roughly EUR 8 million of additional CapEx in that site. And we are in the course of internalizing 95% of the surface treatment that was previously done externally.

Moving to the next slide, which is, I believe, the Indian site that we opened in September. We actually started the activity there in June of '19. It's the size of roughly 4,500 square meter; right now employing 70 employees, going up to 300 in the course of the next 2 years, mainly when we will have moved the main harness, the Falcon 2000 to that site, knowing that we are doing today [200] harness through the same airplane. And when Thales activity will be fully ramped up, what we are doing there are the harnesses of the IFE, in-flight entertainment, system of Thales that Thales deliver both through the airplane OEM but also direct to the airlines on several platform, whether Boeing or Airbus platform.

Going through the next slide, which is our Bulgarian site that we extended a little more than 2,500 meter, which is the building which is taller that you see in the back end of the picture on the slide. We are completing, as we speak, the A320 structure sub-assembly. That's done basically today. And right now, what we are doing in the new building is transferring the sub-assembly of the A350 nose fuselage there, knowing that the final assembly of that nose will still be done in [June]. We've completed the rack -- all the rack transfer as well in '19 there. [And not approved], the completion of the transfer of the activity of Interconnection Systems. If you remember, we closed one site in France. We moved a lot of activity in Mexico as well as started to move in '18 to Morocco, in particular the cockpit and interconnection systems that we completed during the course of '19. 90% of that activity is done there. 10% will remain in France, in Labège, close to Toulouse, but we will be making the bulk of it there.

And last but not least, the completion of the move of our [exporters and wide color] from our 2 divisions from Labège to our site in (inaudible). So this building is almost completed now. And we should be moving in the second semester, towards the end of the year, the last quarter of 2020, in this new building people from our legacy site in Toulouse. And people from Labège, the engineering team of both divisions, the sales team and programs team, will be moved together in this building, as well as the corporate team that are staying but still will be moved in that building as well.

Next, coming to our growth structure. We did continue our push for more organic growth, with one major win which we are very proud which is the first EWIS electrical wiring and interconnection system contract with Boeing on 777X. We were producing [general] already for Boeing in interconnection system, but we were not adding any contract on interconnection and harnesses, which is a great achievement and was a goal in itself. We also extended our 787 door contract to 2029, coming from 2024. And as you know, at the end of this year, on the 31st of December, we announced that we signed with Bombardier the acquisition of their EWIS business located in Mexico.

So going into detail to these. And Boeing 777X win will deliver the first harnesses in the course of 2020. And what I wanted to comment mainly on this slide is the introduction for the first time at prototype level the automatic connection of connectors using a machine we developed during the course of '19 that we are using currently to connect domestically the connector of the ATR rack, moving very soon to [850] racks (inaudible). But here we will use it on the connector of those harnesses at prototype phase, so we will industrialize the product directly with the domestic interconnection of connector. And the nice thing, which is a great thing about this machine, is that we are the first to introduced automatic connection of connector in the aerospace industry. It does exist in the automotive industry. It does not yet exist in the aerospace industry. And the reason it's more difficult than in automotive is that we are using much more developed and much dense connector compared to the automotive world, which renders the fine-tuning of this machine quite complicated. So [it's across the year], but we are there and it's a great achievement of the 2019 year.

Going to the next, doors, an extension to 2029 that represent roughly 5,600 doors based on the rate that have been communicated with Boeing. And you know that this rate is going to decrease. Boeing announced it. "We are coming on a 2019 year, then we'll speak about it (inaudible) and talk about the results and what produced the results of '19." Because this 14 ship sets of doors per month in '19, that rate is going to decrease coming to 2020 and further, 2021, to reach roughly a rate of 10 per month by 2021, as announced by Boeing.

Next, our acquisition of the EWIS business at Querétaro, which -- a USD 50 million acquisition for Latécoère. If you move to the next slide: The reason it's important for us it's -- is because it's the continuation of the diversification of the platform. You may remember that, last year, we showed a graph that showed that our Interconnection Systems activities was relying almost completely, back in '16, on Airbus and Dassault. We clearly had an objective to diversify (inaudible) for that activity to derisk it on what it was then. We were marching with that diversification already with Mitsubishi, with -- and Bombardier contract, direct contract, but also engine manufacturer contract and coming (inaudible) contract. Now we are moving to new platforms with 100% of the corporate jet platform of Bombardier on the smaller one, the Learjet 75, to the biggest one which is the Global 7500, but also we will be producing the main harnesses of 2 commercial platforms, regional platforms, the Dash 8, the Q400. That is now owned, as you know, by Longview. Well, not only both the platforms to our rest, remaining backlog of Bombardier but, in addition, in the Dubai Airshow announced 2 very important news: one, addition of customer; and second, the fact that we are going to re-engine the airplane, which may give the platform longer longevity that we need to support. And we will be also equipping the CRJ. We know from fact that the CRJ will end because, as you know, it's been acquired by Mitsubishi and that will not extend the life of the airplanes and rather replace it by the M100 they announced at the Paris Air Show, the SpaceJet. So with our content on the CRJ and the fact that we are [putting] also the MRJ90, which is the contract that we won back in '17, clearly we are in a good position to continue working with Mitsubishi on the M100, although it's not a contract we've won already.

Just a little bit more practical info on the site we are acquiring. It's a large site with 10,000 meters square located in Querétaro, North Mexico, which produce almost 2 million of direct labor and into the product. Bombardier has the concept of main harnesses which all the connection go through, which are very complicated harnesses compared to other airplane manufacturer. So there's a lot of [scale] in that facility. And it's bigger than our own facility in Hermosillo, which is more north of Mexico than Querétaro. So this is what we'll be acquiring. When this acquisition will be closed: We are completely dependent on the Mexican authorities to close that deal. And our expectation is that we should be able to close by the end of H1. Nonetheless, it's not really depending on us. You'll see at the end that in the outlook we are giving [new] for 2020 we did not include that activity, which is roughly an $80 million with yearly revenue activity that we will integrate sometime in the year, probably in H2, but we'll go from there.

One word on the rate of airplane that produced our '19 revenue, if you move to the next slide.

So we -- as you know, we've grown 7% organically. Both divisions grew. And so A320 doors decreased in '18 and '19. And it's not because the A320 rate decreased but because in '18 actually Airbus had issues with one of the supplier. As you know, on this contract, we are producing only 50% of the content -- I shouldn't say "the content" but the rate. And we produce all the door but only 50% of them. They had issue last year with one of their other supplier, and actually we did more than 50% the rate in '18. On the contrary, as you can see, comparing it with the second line which is our interconnection system content on A320 where we are almost single source, we produced roughly 50% of the rate of doors in '19 compared to what we did interconnection. And you see that on A320 we grew in term of interconnection system because the rate of A320 went up. As you know, the rate of it will see -- will continue to go up between '18 and '19. You know that, between '19 and '20, it will stabilize. So this is the end of the ramp-up of the A350.

The E1 door grew. And here, on the contrary, it's not because the E1 rate grew that we grew. It's because we were late out of '18. You may remember that we had a lot of supplier issue last year, and that impacted mainly the E1 Embraer rate, [E2] platforms. So we were late when it came end of '18. That explains the very good H1 volumes that we had on E1 for the door, and that's why [globally] this year is greater for the doors. On the contrary, on the fuselage, we have always been on time. Clearly, [the basic regions] is more representative of the actual rate of production of that airplane. On the contrary, the E2 is growing [at a mile]. And of course, in our (inaudible) going from 6 to 28 in -- for us between '18 and '19.

[So I mean, the rest], we already spoke about it, great rates in '19, as you can see, growing from 143 ship sets of doors that we recorded in '18 to 167 in '19. We know that in '20 that rate is going to decrease due to the progressive decrease from 14 a months to 10 a months in 2021 that was announced already by Boeing.

More probably specific, 7X and 8X grew between '18 and '19. And it's going to decrease back probably to '18 number or lower in 2020, but we benefited on that on both our division in '19.

Globally, still good business momentum. So we move to the next slide. So that's produced the share of revenue between our different customers. And you see global increase of revenue from '18, EUR 660 million, to '19, EUR 713 million. Airbus is decreasing in term of relative weight. Boeing, on the contrary, is increasing. Embraer is also increasing due to the catch-up effect and to the E2 increase. And what is remarkable is that, other, it moves to increasing. And that's the new contract that we've won on interconnection systems. On the -- for a global book-to-bill, as I said, of 1.09x. So (inaudible) in term of [other book, you have 9% more than] we have. What it means -- that's what this number means.

In term of projected backlog. So we are projecting the backlog of the main airplane manufacturer we are working with, with our content per platform to compute that projected backlog. It's globally stable EUR 2.2 billion, was EUR 2.1 billion. And what has changed is the Airbus share that grew further because Airbus has a very [performed] and robust backlog of A320, contrary to the backlog of Boeing, but also on Airbus on wide body which is much less big. And that's -- and you'll see that in the Boeing share that is decreasing because they are eating up some of the 787 backlog clearly with the production of [14 a round] they've had in '19. Embraer, roughly stable between '18 and '19; and so is Dassault. And the rest is increasing. So that's basically what I wanted to comment of the business activity.

Going to a word on innovation. We wanted to describe what we are doing because the spend that we complete to innovation is getting to be a sizable number for Latécoère, 2% of sales, roughly EUR 15 million, less than EUR 15 million but almost EUR 15 million. And we are really having one objective, which is to support our 2 divisions for future growth and win new business. We are also pursuing differentiation of the product offer, but also we are increasing our goodwill through the patents we are filing and where the LiFi -- we have the LiFi in '19. And I want to summarize what we've done in '19 on LiFi, please, the next slide.

So this shows, this slide shows a breakdown of our activity on innovation. In blue, you have the project we are working on the Aerostructures side. In orange, the one that's of 100% dedicated to Interconnection Systems. And the one that's bicolor are really project on which we have the 2 division working.

So we have mainly 2 focus for Aerostructures: developing new generation of components and equipment mainly dedicated to those with the project which is called ASGARD, which is a project we are running by [offsets], which is subsidized by [2018 trends], in which we are developing new opening and closing systems for doors which we are going to apply to the front door [or nose]. For those who've seen these doors in the Paris Air Show -- the door we've developed, so far, comes under [the strategical] part of the airplane. The front door is not developed [in full], and we have to adapt the system to be able to open and close the door on the nose of the airplane. And this is done in the project called [DINA], which is a project to which Latécoère participates alongside other supplier of Airbus and Airbus themselves. We are also participating to introduce our new [LiFi] set that we have developed in the [CORAIL] project into that nose with, in addition, optical interconnection in the cockpit side of this nose.

More on the rear side of the airplane, you see 4 projects mainly dedicated to cabin, with a focus on lifestyle and shift on optical interconnection more generally but also on the development of dedicated power network for the cabin. And last but not least, we've been connected with a U.K. agency to develop the interconnection system of the new wing that is subsidized by the U.K. government.

Going to the next slide. This summarized into numbers. And you can see we've increased in sizable amount the money we invested. The dark blue is our own investment that we self fund. In light blue, you have the subsidy that we've gotten already coming mainly from 3 directions: the region, the Occitanie region; the French State, through the DGAC. And Europe as well is part of that funding. In darker orange, you see the fund which are already being negotiating as we speak. And then the light blue is that what we will need to achieve in the years to come, but firstly, if I speak numbers, we are investing in -- you can see, roughly in line with EUR 10 million on the Aerostructures side and close to EUR 6 million on the interconnection side.

What is important is what we get out of it. We are coming from years where we were almost inexistent in term of patent filing. You see what we've achieved in '17; and in '19, 25 patents roughly evenly split between aerostructure and Interconnection Systems. So that's clearly things we are protecting to -- we are signing to protect future business for Latécoère. We have a goal of at least 1 patent from EUR 12 million spent. You see, spending EUR 15 million mostly, we are doing more than that. And that's a great performance that we intend to continue in the years to come to prepare the future growth of Latécoère.

One word on the LiFi to complete that thought, that section of the presentation. So you are aware of most of what we did in '19 because we've communicated quite openly on what we are doing in the LiFi. So first step was our demonstration at the Paris Air Show, alongside with Air France and Ubisoft, demonstrating the power of the transmission playing a Ubisoft game which is very demanding in term of bandwidth. Then we flew on -- that same technology on October 30 [and with] Air France [significantly], which installed that system on -- in Air France A6121 (sic) [[AF6114]. That flew on October 30 between Paris and Toulouse and back with a competition with 10 finalists of games that Ubisoft organize every year. And it was a great event that demonstrated again the capacity of transmission in flight.

And then finally, to prepare the industrialization phase, we announced towards the end of the year 2 major agreement that we signed, 1 with Signify more on the [collab] side, Signify being the -- in former Philips company that makes diodes in particular and which are working in the bandwidth that we are using in our LiFi systems. And we've also signed an agreement with Huneed technology, which is a -- what you call an [SMS], meaning it's an electronic supplier in South Korea. So we are actively preparing the developed product, which is the aim of 2020. We have also an objective to sign the first contract with a customer, which [all year we are talking], contract, although the crisis that we are having right now with the corona (inaudible) may slow that job (inaudible) probably in 2020. Then we won't shy of investing in newer products in '20, as we were in '19, but we'll go from there where we are today.

One word on our CSR initiatives, focusing mainly on the environmental context of CSR. We've done a lot in '17 in CSR in Latécoère, if you move to the next slide, especially trying to reduce our environmental footprint. We are doing that, first, with an active certification of all our sites along the 14001 standard. In '19, we've certified 4 Interconnection Systems sites and 4 aerostructure sites. And in 2020 and '21 and '22, we are planning more our newer sites to be certified so that we are done by 2022.

We are also having a lot of internal initiatives like the green week, where each of the sites had their own initiatives to reduce their footprint. So it went from cleaning our compound that we own, for example, (inaudible). We cleaned up the river that goes through our site in Bulgaria, just to give you an example. And -- but also and the last point I wanted to insist on because I think, the size of the company, we are among the first to be able to compute our carbon footprint. And that will be covering scope 1, for sure; scope 2, (inaudible), yes. So we will justify our computation that we did in '19 by the Bureau Veritas (inaudible), and we'll go from there.

What this with that -- what this does for us, it help us identify the major positives of carbon dioxide emissions and have a better impact coming -- where it comes from having action on good practice of emissions.

So that's what I wanted to say. And with that, I will hand it to Michel Abaza, who is new. As you know, Sebastien Rouge left the group by the end of '19. Michel is replacing Sebastien and with further details on '19 financial results.

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Michel Abaza, Latécoère S.A. - Interim Group CFO [4]

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Thank you, Yannick. Good morning to everyone. So we quickly jump into Slide 29 with the 2019 financial highlights. There were good things and I would say, less good things or bad things in 2019.

The good thing was the revenue, organic growth and the revenue pickup. We talked about it on both branches. So that's basically building the future with new programs and new customers, especially in IS. So this growth was thanks to higher production rates and of course, an FX impact.

The bad news was on the recurring EBITDA. But even there, it's split with a very good performance from Aerostructure in -- under a difficult environment, especially in terms of pricing and a disappointing performance from Interconnection mainly due to the gain of many contracts in the previous months and years, some sort of growth crisis that I will comment on a later slide.

Recurring operating free cash flow was negative EUR 27.3 million. It was impacted by the last half, I would say, or maybe the last half of the T 2020 investment phase, both in OpEx and in CapEx, and that's impacted by EUR 54 million, our recurring operating free cash flow. The good message is that the split between H1 and H2 is interesting because H1 was negative EUR 46 million where H2 was positive EUR 19 million, even though in this EUR 19 million, there was a reverse factoring impact embedded in the accounting.

In terms of net debt, the net debt moved from EUR 47 million in '18 to nearly EUR 116 million in '19. But if we exclude IFRS 16 impact and a reclassification from liability into financial debt of our CIR and CICE and the acquisition or the prepayment of the acquisition of the Bombardier activity, EWIS activity, our net debt apples-to-apples, so comparable to the one posted in 2018, is limited to EUR 56.5 million, and I will comment the details later.

On Page 30, you have a condensed P&L. A few items to point out. The recurring EBITDA was positively impacted by the -- or sorry, negatively impacted by the hedged rate, which was EUR 0.01 lower from '18 to '19 and of course, was impacted, as you can see on the nonrecurring item line, by the T 2020 project or Transformation plan for EUR 21.4 million that, after 2018, a sizable investment made by the company into its transformation, that will deliver all the fruits in 2020 and 2021. So it's mainly concerning to Aerostructures side, Montredon and Bulgaria. We also had in there some [sample] costs, of course, on some program and some transfer costs from one side to another.

Another interesting line is the cost of debt. So the net cost of debt was basically EUR 5.3 million compared to EUR 4.5 million in 2018. In terms of percentage over the gross debt, it's pretty in line 1 year to another. So it reflects a 3.1% interest rate in 2019 compared to 2.7% interest rate in 2018. So cost of debt and debt, very much under control.

Last line, I would like to comment is the line on other financial income and expenses. In there is embedded the FX impact. So as you can see on the right-hand side, there are 2 impacts. The realized one, which was a loss of EUR 3.6 million on the unwinding of some instruments, and there was the major impact especially compared to 2018 where it was a positive posting in the change in the fair value of our hedging portfolio, and that's impacted by EUR 7.6 million in our P&L. So that's what I wanted to comment. In 2018 as well, there was the A380 impact of EUR 16.7 million that allowed us to post a positive financial result in 2018.

Page 31, so the revenue bridge. Not going to spend too much time on this one. So there is the FX impact of EUR 10 million that the average FX rate between '18 and '19, that has improved, I think, by EUR 0.02, if I remember well, from $1.17 to $1.15. It's not the hedge rate impact, obviously. And the organic growth, and Yannick talked about it, especially through the production rate slide, very positive performance from the 2 branches.

In Aerostructure, the development that was sold to the customers had an important impact in revenues. Customer support as well, which delivered a decent margin and helped a lot the improvement in EBITDA performance in Aerostructure, [cadence], as we said, for the B787, and that was partly offset by the A320, both price reduction and volume reductions.

In IS, very positive momentum, especially on A350 and A320. New contracts with THALES IFE, so in-flight entertainment, so a positive momentum. But unfortunately, because of this, I would say, 2 positive momentum drove the results down and 2020 will be -- we'll target to restore the profitability of Interconnection Systems to where it should have been and where it was in 20 -- at the end of 2018.

The next slide, you have the recurring operating income or EBIT bridge. So it's a reflection -- I mean it's just a deduction of what I've said on revenues. So this time, the FX impact is a negative impact because of a lower hedge rate, so by EUR 0.01. In terms of organic growth, as we said, Aerostructure posted a decent performance, and Interconnection suffered from its underperformance, not only internally, but also externally due to supplier [crisis]. I will comment that on the next slide. So we ended with a recurring EBIT of EUR 11.8 million in 2019.

If we have a look, Page 33 on the quick table, that gives a snapshot of the performance of each of the branches. You can see that there was a decent growth, mostly organic, obviously, and recurring operating income that was improved by 0.9% -- in terms of margin by 0.9 points percent in Aerostructure. And then for (inaudible) a reduction in Interconnection System by 7.3 basis points that I will comment.

So let's have a look first on Aerostructure profitability. Not going to comment the revenues. We said enough about it. In terms of recurring operating performance, there was a very good performance from customer support and development, as I said. There were higher volumes that -- notably on the 787, that drove a lot of the performance. And there was offsetting that and we pointed it out is -- was -- some price pressure, especially on Airbus, in Aerostructure division. And obviously, a negative impact coming from the ramp-up of the 2 sites, Montredon and Bulgaria, that should have a limited effect in 2020.

So the recurring EBIT moved from EUR 6.6 million to EUR 10.8 million in 2019. That's a 4.2% increase, and that's, again, a decent margin improvement in a division impacted by the macros and especially the macros of its customers. Interconnection, very good momentum in revenue as I said it, but unfortunately, EUR 20 million compared to 2018 in terms of operating performance.

So let's spend some time commenting on that. There was, I mean, good volumes on A350 that led to good margins. But the message from here is that the legacy contracts, we are still posting a very good margin where the new contracts and the new customers had some ramp-up difficulties that could be split, I would say, half-half into our underperformance in terms of indirect costs that was mainly due to logistics and the implementation of an ERP that is being delayed and across all sites.

So it's a common ERP being implemented across all sites and had disruptions in logistics. And for another half, it was mainly coming from supplier crisis or maybe crisis is a big word, but supplier underperformance in terms of deliveries and quality that led as well to some disorganization in our production.

On Page 36, another focus on our operating cash flow and net debt. So the operating free cash flow was positive EUR 27 million and with recurring CapEx around EUR 23 million. That roughly EUR 23 million, EUR 25 million is roughly the average CapEx needed on a normal year for the company to keep on investing in these sites and ensuring quality and on-time deliveries to our customers.

Nonrecurring had it hard obviously on cash and debt, represented 57 million -- sorry, 54 million -- EUR 55 million down. In there is as well -- there's not only the T 2020 Transformation plan, but there's also in there the prepayment of $25 million that we made at the end of last year to Bombardier for the acquisition of their activity, so the EWIS activity, representing (inaudible) EUR 22.3 million. Then after, I mean, obviously, the cost of debt we paid and the rest is normal items that impact that.

So as I said in my introduction comment, if you want to compare net debt 2018 -- 2019 to net debt 2018, we really have to remove the last 2 bits of this slide, which are the lease impact, so it's mainly IFRS 16 and the reclassification of the CIR and CICE that were recorded previously in liabilities and not under financial liabilities; and the Bombardier acquisition, which we prepaid but did not deliver yet in the EBITDA. We'll start to deliver in the EBITDA when we incorporate it sometime mid-year -- or I mean the turn of the summer, if everything goes well in terms of getting the authorization from the Mexican authorities. So that's what we can say on net debt.

I wanted to focus and need to follow up on what Yannick developed in our path on Page 37. It's the sizable effort the company is making, the company our size is making in terms of R&D and R&T. It represents EUR 24 million, so it's really 3.4% of our total revenues. And as you can see, it's evenly balanced between the 2 branches, which means that the 2 branches for us are key, and we do not want to sacrifice one for the development of another one. Of course, we try to finance that, I mean, on our self resources, but we also try to get some grants from the public administration in Europe, France or locally, and we managed to increase that from '18 to '19.

R&D and R&T had a P&L impact. If we include the amortized R&D in our P&L, has an overall impact of EUR 30 million in 2019, which is higher than 2018. It represents 4% of our total revenues. And we believe we're going to keep on investing in R&D and R&T in the future because that's what will place the company in a good spot when new programs will come in the future years.

Net debt, quick snapshot. I'm not going to comment again on the figures. What I want to comment on is the bottom left-hand side, is that our net debt is representing less than 60% of our shareholders' equity, so it's good. So it means that the company has a solid balance sheet and a strong balance sheet, and it represents less than 2.5x the recurring EBITDA. And again, this 2.5x includes the prepayment of the Bombardier $25 million price. If we exclude that, because as I said, we did not yet record the EBITDA leading to this $25 million payment in terms of net debt over EBITDA, it only comes below 2x, which is a very good level for our company.

In terms of gross debt prepayment schedule, it's evenly balanced, less than 1 year, it's mainly the factoring lines that are in there, obviously, because there are short-term financing, so we consider them as below 1 year. Between 1 and 5 years, it's mainly a bank loan, the EIB loan that we have for EUR 55 million and leases, most of them financial leases.

Last important focus, especially in the markets we're seeing over the last few days. As you know, the company is exposed to the dollar, roughly EUR 400 million per year, a little bit more, as nearly 60% of our revenues are not naturally hedged by our cost. We have a low guidance of $1.24 for 2020 and 2021, but we decided to take the opportunities offered by the market in the past few weeks when the euro was low and the dollar high, around $1.08, $1.09, $1.10 to increase the length of our hedging and start hedging 2021 and finish it in 2021 and nearly finished 2022.

That allowed us to revise our guidance, hedging guidance by some EUR 0.03 to EUR 0.05, depending on the year we're talking about. Keep in mind that a EUR 0.01 improvement represents nearly EUR 3 million in EBIT for the company so it has a sizable impact. At the end -- I mean early March, our portfolio was around EUR 1 billion in total.

I'll give the floor back to Yannick to comment on the -- on our outlook.

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Yannick Assouad, Latécoère S.A. - CEO & Director [5]

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So we're moving to the next slide. So the outlook, first of all, does not take into account, I think I said it already, the acquisition of Bombardier because we are really not mastering the date of closure. That is mainly dependent on the Mexican authority. It does not take into account either any impact on airplane rates, of the current coronavirus crisis. And to be more precise, right now, we are speaking (inaudible) very recently to our customers, airplane makers. And up to now, we are not announced any impact so far. I'm not saying depending on the length of this crisis that there will be any. But at least, so far, we are not impacted by the coronavirus. I'm not announcing any impact.

So given the rate of production and mainly A320 increase and E1 -- E2, sorry, E2 increase, on the contrary, pressure on rate and decrease of rates of the widebody, and that will impact both division, Boeing and Airbus. But clearly, Interconnection is more impacted on this side by Airbus and Aerostructure more by Boeing. We have also a question on pipes on Airbus program. So given all these aspects, we are planning a revenue like-for-like, meaning at constant exchange rate, to decline by roughly 5%. Let's give a little more color to that.

Interconnection Systems should be in that number, roughly stable, whereas Aerostructure will be the one most impacted mainly due to E1 decrease and 787 decrease during '20 versus '19. We are planning to reverse back the contract performance of Interconnection Systems slowly during the course of 2020. And therefore, we are planning for an improved recurring operating margin but will still be in the low single digit than the -- given the pressure on price that we are enjoying.

On the contrary, we'll have positive operating cash flow mainly due to the end of our CapEx (inaudible) on Transformation 2020. Clearly, it's something that will be much less intensive than in the past 2 years. And as a consequence, between an improved operating margin and less CapEx, we'll have operating free cash flow, positive operating cash flow during the course of 2020. Of course, that's outside completion of payment of the acquisition of the Bombardier EWIS activity that will happen, which we booked during the course of the year.

And I think with that, we'll be ready to go to questions.

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Questions and Answers

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Yannick Assouad, Latécoère S.A. - CEO & Director [1]

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So we see the question here. So we will take them as they come. And I think maybe, Michel, you should start by the first one, which is a question from Fatma.

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Michel Abaza, Latécoère S.A. - Interim Group CFO [2]

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From ODDO.

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Yannick Assouad, Latécoère S.A. - CEO & Director [3]

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From ODDO, Ayachi from ODDO. What is the expected profitability of the Board on the activity?

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Michel Abaza, Latécoère S.A. - Interim Group CFO [4]

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So we've not disclosed the profitability or we say that the annual turnover of this activity is around $80 million. But we believe that the profitability of this branch -- I mean this new branch -- I mean these new activities, should be in line with the rest of Interconnection normalized. So Interconnection normalized, it won't take the 2019 performance obviously, should be around 15%.

There was another question. So at this time, I'll probably hand it over to Yannick. So I'll be reading it, so from ODDO as well. So to get some more details regarding the objective of the new plan called Beyond.

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Yannick Assouad, Latécoère S.A. - CEO & Director [5]

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So it's really the continuation of our Transformation 2020 plan. Our Transformation 2020 plan was mainly [at vesting]. And you've seen it from the breakdown of the cost reduction that we are aiming at. They were really vastly -- it was vastly directed toward direct cost of our [full] demand either for chasing [box] or making box internally. So that was mainly the target of Transformation 2020.

What the Beyond plan is about is to continue that with a nondedicated program that don't have sufficient margin. That's one part of it, that's not the major part of it. What the Beyond plan is, is reduction of our indirect costs. We clearly did not address that in our Transformation 2020 plan.

We see that our indirect structure, which is linked to our organization both strict organization but also organization is flat in size and where you plan your site, is it local [area] site, is it centrally, is it both. So we are right now matching all the functions and the functioning organization in both divisions. And we go from there to try to find the optimum organization to reduce indirect costs.

And we are already addressing all direct costs, whether it's [FES] program, logistics, quality, everything that -- going into direct, indirect costs will be addressed into -- in the Beyond program with a target reduction of -- [local] reduction in costs of EUR 20 million, so roughly half of what we were aiming up for on Transformation 2020 plan. And so that's what we are aiming at.

And so the next question is also from ODDO. What is the impact of the COVID-19 for Latécoère? I think I've already answered this question. I'm going to say so far, so good, but it would be too short of an answer because it really depend on the lens of the (inaudible) prices. You know that we are in the -- every aerospace industry, which is manufacturing of airplane, which is a long-cycle industry and you don't change the direction in a long-cycle industry overnight.

Nonetheless, that price is long. It's not impossible that the rate of production of program changed along the year. I don't have that information yet. And the latest information that are not [ordered], they date back end of last week, are that we should continue on the same rate as we planned, and that information coming both from Boeing and Airbus.

So we see -- the one activity in Latécoère that may be directly impacted is the aftermarket activities. We have spoken and said it was dynamic in '19, especially for the Aerostructures side. That may be directly impacted faster year-on-year because the airline will be very focused on reducing their costs given that the revenue is going to decrease that for sure.

There will be a decreased traffic at least in the next months to come, and it was already published for February with the, I believe, 0.5% decrease globally worldwide. I don't know -- or in essence, globally, it's more than that. So clearly, we'll see where it goes, but that activity, which is small for Latécoère given its activities, which represent 5% to 7 -- to 6% of our global volume, just to gauge you on what we are talking about.

Then we have another question from Yan Derocles, also from ODDO. Could you share with us the split of your turnover exposure between widebody and single-aisle aircraft?

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Michel Abaza, Latécoère S.A. - Interim Group CFO [6]

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I think I've got it, I can answer this question. It's roughly -- I mean widebody is roughly representing 35% of our activity. Single aisle is roughly representing as well 35% of our activity. So the 2 of them should be between 70% and 75%, the rest being the...

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Yannick Assouad, Latécoère S.A. - CEO & Director [7]

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Regional business jets.

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Michel Abaza, Latécoère S.A. - Interim Group CFO [8]

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Yes, the regional business jets and the business jet, right, our regional and business jets.

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Yannick Assouad, Latécoère S.A. - CEO & Director [9]

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So even we split between last year, we could see one (inaudible) each, widebody and single aisle and business jets and what you know -- if you would lose 2 category into 1, so 1/3 wasn't the 1/3.

Then regarding the fiscal year '20 guidance for positive cash flow, could you elaborate a bit more with [a few -- trend] of working cap and exceptional items and CapEx? Can you take that one as well?

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Michel Abaza, Latécoère S.A. - Interim Group CFO [10]

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Yes, I can take that one. So as we said, T 2020 is coming to an end. So the impact of CapEx on that will be very limited, mainly in connection with our Périole site and few leftovers in Montredon, if I remember well.

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Yannick Assouad, Latécoère S.A. - CEO & Director [11]

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But you can gauge that roughly, our CapEx number is going to be divided by 2. That's roughly what is going to happen between '19 and 2020.

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Michel Abaza, Latécoère S.A. - Interim Group CFO [12]

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Okay. So we are not planning anything exception -- no exceptional items here. In terms of working cap, we are working very actively on our working capital and especially on trying to reduce by some 20% our inventories, and that would have an impact in those branches and -- but I would say 2/3 in AS and 1/3 in IS. So that's what we are targeting. So the Beyond plan is not only a reduction of cost, but it's also tackling a little bit our inefficiencies in terms of working cap across the various sites.

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Yannick Assouad, Latécoère S.A. - CEO & Director [13]

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So as you already financed the Bombardier acquisition and it's not [year-over-year] that the current situation is just providing the transition of this acquisition.

So I'm going to give assistance to -- with the items we shared. We think the initial payment when we signed because that was the deal with Bombardier, on our cash. So clearly, we didn't have any specific funding for the first payment. For the second payment that will happen at [closure] there, we are looking into funding to debt, mainly the remaining segment. And here, I leave it to Michel to try to gauge what will be the impact of the current situation in the market.

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Michel Abaza, Latécoère S.A. - Interim Group CFO [14]

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That's right. It's difficult to forecast anything. I mean the -- we paid the prepayment on our own cash. And of course, the idea is to refinance it one way or another with banks on the market. Keep in mind that it's not a large acquisition. So the company is not in desperate need of cash these days. That's not at all the case. And we can afford to pay the remaining -- the remainder balance when it comes to close. So we are not in a rush to go to the market.

Now will it have an impact? I don't know. I mean it's not a liquidity crisis, it's a confidence crisis. For the time being, the metrics of Latécoère have not changed. The company is still on track to deliver its T 2020 plan and its Beyond plan and its growth plans backed by strong shareholders. So we are confident we'll be able to refinance it. The question is, will it be in the next week or will it be in 4 months' time when panic comes down, we'll see that.

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Yannick Assouad, Latécoère S.A. - CEO & Director [15]

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So the next question is for me. What is the (inaudible) between the airplane manufacturer decision to cut its production impact on your (inaudible) rate?

So it's very dependent first on [all key] divisions. The Aerostructure is a much longer cycle than our Interconnection division. So it -- for Interconnection, it is short. We are talking about the average 3 to 2 months, and it's really -- clearly really dependent on them purchasing, if their revenues -- their production impact is rather fast than the Interconnection division.

On the contrary, the bit rate and longer cycles is not immediate clearly. And EBITDA also vary much on the manufacturers because they have different order (inaudible) and it's probably -- I would still have raised the order of magnitude of 3 to 6 months for Aerostructures. So that's really dependent on the product and on the airplane manufacturer.

And then we have -- the last question is, as I see it, from Jean-Francois Delcaire. Any new external (inaudible) complementing this year, a word on further shift in the governance of the combination since the increased ownership by Searchlight?

So I'm going to take what's -- part of the question and (inaudible), if you want to take the last part. But in terms of external growth, maybe a reminder of advanced strategy to explain my answer. The Bulgaria division of the Interconnection System was really opportunistic, growing by M&A on Interconnection Systems will continue to be organic. And we don't want to grow (inaudible) by external growth on Interconnection System.

We feel that there's lots to do organically given where we start with. There are lots to do organically, and it's less expensive to grow organically, although the result of '19 could say otherwise. But we believe it's still less expensive to grow organically on IS even if the competition landscape is only (inaudible) by M&A. Nonetheless, if there are good opportunities, we will look at that.

On the contrary, on Aerostructure, given the number of players in Aerostructures, there is consolidation. You've seen some big acquisition during the course of '19 in that field can -- at least. We speak about Spirit acquiring the Irish and Moroccan side of Bombardier aerostructures. I can speak about it (inaudible). But in honesty, there's really a lot of move in aerostructure because there's so many players and it's very [consolidated]. We should be off the grid.

And we always have had, since I started with Latécoère, that growth spectrum, which was a way to grow against (inaudible) but also to look at consolidation. With the backing of a strong shareholder now, clearly, we will have -- it will be easier to take decision, but also to fund it is necessary to equity increase, contrary to our previous share ownership.

So that's really what we want to do and what we are aiming at. And we have several targets that we are looking at as we speak. That, of course, I cannot disclose as usual. But we are looking at -- through acquisition or merger, by the way. So that's clearly something that is talked about (inaudible) that we are active working on. Do you want to describe the governance?

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Michel Abaza, Latécoère S.A. - Interim Group CFO [16]

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I can say that we have adapted the governance innovation with the -- reflecting the position of control of Searchlight. The first move was to adapt the configuration of the Board. Now there are -- there will be 9 representative of Searchlight. So far, there are 8 -- sorry, there are -- there will be 5 representative of Searchlight. So far, there are 4 in the total number of 9 Board members. And we are adapting. We are in the process of doing that, adapting the structure of the different committees and the internal rule of functioning of these committees. And that process is going on. And we are still looking for a ninth member of the Board. So far, there are only 8 members of the Board.

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Yannick Assouad, Latécoère S.A. - CEO & Director [17]

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And when the effectivity is completed, we expect the (inaudible) be completely (inaudible). We -- Searchlight will find [a woman] representative of that shareholdership. That's what is underway right now to complete the constitution of the Board.

Any other question? We are finished with the question we have in front of us. So I thank you very much all for attending. Thank you very much for your questions. And we look forward to seeing you in further meeting, I'm sure, during the course of the first semester of 2020. Goodbye.

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Michel Abaza, Latécoère S.A. - Interim Group CFO [18]

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Goodbye.

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Operator [19]

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That does conclude our webcast for today. Thank you for participating. You may all disconnect.