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Edited Transcript of LAT.PA earnings conference call or presentation 4-Sep-19 8:30am GMT

Half Year 2019 Latecoere SA Earnings Call

Toulouse Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Latecoere SA earnings conference call or presentation Wednesday, September 4, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Pierre Gadonneix

Latécoère S.A. - Chairman of the Board

* Sébastien Thierry Rouge

Latécoère S.A. - Group CFO

* Yannick Assouad

Latécoère S.A. - CEO & Director

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Conference Call Participants

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* Agnès Blazy

CM-CIC Market Solutions, Research Division - Aerospace and Defense Analyst

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Presentation

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Pierre Gadonneix, Latécoère S.A. - Chairman of the Board [1]

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Good morning, ladies and gentlemen. Thank you for being with us. My name is Pierre Gadonneix, and I am the Chairman of the Board of Directors at Latécoère. It is my pleasure to welcome you to the presentation of Latécoère's financial results for the first half of 2019.

Latécoère achieved significant successes in the first half of 2019, and we are gaining significant traction. With regard to our Interconnection Systems division, the division is reaching new dimensions in the wake of the recent business gains during the past 2 years. And with regards to the Aerostructures division, our streamlined operation, our innovation, and the production ramp-up of our new facilities have provided the division with robust and competitive positions. CapEx investments will nonetheless continue with the second half of 2019, and we can confirm today that our transformation 2020 plan will be completed as expected. With new capacities and increased competitiveness, Latécoère will be in the best position possible to benefit for the next cycle of new programs expected between 2020 and 2025.

The first half of this year, 2019 was also marked by a change of our reference shareholder. And on June 27, we co-opted 3 representatives from Searchlight Capital Partners as new financial partners of Latécoère's strategy for the future.

On July 1, the Board of Directors acknowledged the intention of Searchlight Capital Partners to launch and offer for voluntary cash tender on the securities of the company at a price of $3 -- EUR 3.85 per share. On July 17, we appointed Finexsi as independent expert to provide an opinion on the firmness of Searchlight proposed acquisitions terms. Their work is conducted under the supervision of an audit committee begun by the Board of Independent Directors composed of Claire Dreyfus-Cloarec, Nathalie Stubler and myself. Following the issuance of the recent opinion of the Board of Directors, it gives the intention of Searchlight to launch its offer which is currently expected in the last quarter of this year. The proposed offer still remains subject to the authorization of the Ministry of Economy for Foreign Investment Impact.

I'll now leave the floor to Yannick Assouad, Latécoère's CEO.

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Yannick Assouad, Latécoère S.A. - CEO & Director [2]

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Good morning, ladies and gentlemen. Welcome to this conference. 4 numbers to increase or surpass, EUR 372 million revenue, which represent established rate of 16% growth, which we could qualify in other dynamic, I guess, because we said we would grow dynamically. I think this is achieved. It represents 13% organic growth if you exclude the FX, the foreign exchange effect, on [off-sells]. 60% Aerostructures, 40% Interconnection Systems. An EBITDA -- recurrent EBITDA of EUR 28 million growing from first half last year where we recorded a number that we -- was started bigger portion of this option we had last year in our Aerostructure division with one of our supplier (inaudible) and being educated to industrialize with large number of parts, one major problem for us. So this problem all behind us, and we'll speak about it again during the presentation. And 80% of our transformation 2020 targeted savings achieved as of the 30th of June 2019, and of course, we'll come back to that later in the presentation.

Just one more to link with, what is our strategy at Latécoère? Our vision is to become the reference in Aerostructure and Interconnection Systems and to be able to propose design and build innovative equipment that hits the customer needs, that is our ambition. We are a little bit there in Interconnection Systems starting EUR 16 million with the platform that was working mainly more than 80% for Airbus Industries through a mutual customer, very international program platform, which we are very proud. So we are moving through the sector. So clearly, everything we are getting today that reference. And for me, it means that wherever and whenever there is final customer, we are getting it. We are getting the chance to win and to show off competitiveness, most technical competitiveness and cost competitiveness. So that's what it means.

In Aerostructure, where that reference endorsed, really wherever and whenever there is an (inaudible) endorsed we are getting it. We are not going yet on Aerostructure on airplane section, which is the second in our specialties. So we still have some work to do and a problem of size there, that's why, clearly, we need to grow. And we need to reach a critical size that I have targeted EUR 20 billion. And to do that, of course, we needed to grow organically. But we also need to participate to lay the second foundation.

On Interconnect, as I said, we just need to continue to perform in what we are doing well, in redesigning and producing competitively, electrical wiring interconnection system, but we don't want to do that on this or other industry. We want to do that for all OEM and all the Tier 1, be it an engine manufacturer, cabin manufacturer or Tier 1 system manufacturer or an airplane maker. So that's really what we are doing. While at the same time, investing and continue to invest in technology, mainly looking at optical transmission of data. So that's really we are doing, and the Paris Air Show was a big success from that standpoint, which showed the LiFi system. And I have a slide dedicated to that, but that's really what we will continue to do in Interconnection Systems because it proved to be working.

A bit of news on, continue to grow our customer base, whether it would be H1. I'm going to stop by Interconnection. EUR 46 million new business win for the first half. 25% of our revenue on new activities in customer which we had just recently, ongoing discussion with major American customer, airplane maker. And one new contract, and we have a slide to illustrate it with Airbus Helicopters H160, which is a new helicopter of airbus helicopter.

On the Aerostructure side, 2 new business jets door contracts, one of which we can disclose, which is the baggage door of the Falcon 6X. Among those 3 new contracts, we have 1 new North American customer. On a program we cannot name because it's not disclosed yet to the market, but it's a new customer for us -- a customer we didn't have previously, for which we never worked previously. And we have a significant pipe on both build-to-print and design-and-build commercial portfolio.

And with that, we are going to go through the detail number of our results, and I will give it to Sébastien to present that.

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Sébastien Thierry Rouge, Latécoère S.A. - Group CFO [3]

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Thank you. If we start with the revenue figures that we disclosed in July. So a strong growth for both division, 16% growth overall, 13% if we compare the figures with the same exchange rate.

Starting with Aerostructure, we've got high Boeing volumes. There are -- these are really the biggest driver of the growth. And I wanted also to highlight that inside these figures, we have a few millions that are released at the end of the catch-up of the operational issues of last year. So those are boosted a little with the first-half revenue, and should not be considered as a recurring type of activity. I think this points to confirm that we do not expect for the second half of the year, such a big organic growth for Aerostructure. In the second half, we'll actually be lower than last year, so that we average out with a small growth for Aerostructure, but not with the other managing that we have seen so far of 15%.

On Interconnection Systems on the other end, 11% organic growth. We do expect that to continue. This growth is driven mainly by the new businesses, Mitsubishi in particular where we have done a fair amount of work to produce the first physical set of -- to equip an airplane after having done most of the design last year and still continues. But we are then at the beginning of the physical deliveries that took place. And as part of the strong business momentum, we also have a good level of activity of our service after service, online work that are actually still small for the group, the goal year after year.

The way this revenue conflicts by customers, as you can see custom-free notes that for the first time, maybe ever actually, and we have less than 50% sold directly to Airbus. It does not mean that (inaudible) that are finally going into an Airbus platform, but we have actually added direct shipments to airbus commercials less than 50% for the first half of the year. We show, on this pie chart, the strength of Boeing going up and relative stability in Embraer, in particular, also leads to the catch-up effect that was -- I was highlighting. Dassault was relatively strong in the first half as well, and the other and mostly the reflection of all these new customers that we have in Interconnection Systems. And it's not surprising that you see that going up quarter after quarter.

The book-to-bill, so really what we have a firm order as compared to the sales, if we look at that related to last 12 months is going up and higher than 1, also delivered by the good levels of Boeing. While the order book projection, which is not what we have legally earned, but really what corresponds to the firm backlog of the OEM multiplied by IS shipset on these particular planes, we still have overall full years of activity and here, we have still this backlog really driven by the depths of the orders of airbus and Boeing. For Embraer, as you know, as we are mostly placed on the Embraer E1, it has a long-term trend to decrease. That's what we have seen in the -- since the last 2 years.

How does this translate in terms of profitability and here, we are looking at the recurring EBITDA. We've got overall EUR 28 million of EBITDA, 7.6% in terms of margin and a really well-balanced, actuality -- actually profitability between those divisions, which is, and we stop by that first good news for Aerostructure, really a performance that demonstrates that we are out of the woods in terms of operational issues that we've been -- that were very present last year and -- so that we are -- do not suffer any kind of specific negative impact financially from the operations we had.

In terms of mix, we still have, for the first half, high level of Embraer in E1, in particular, more than in the second half, and we remember that it's a program at the end of the space. So on average, more profitable than in our overall portfolio. And we had, we'll detail that in the next slide also, a few millions of good positive commercial settlements on price, on discussions that have contributed. So operating actions that have contributed to the operating income, and that also, we should not consider as being repeated semester after semester.

On the other hand, the profitability of Interconnection Systems is lower than the last year's comparable. We had actually highlighted that 2019 would be difficult in terms of startup cost. It did not regularize in that way. We have really clear trend within the portfolio that the underlying business, the metro activity and recurring is relatively stable in terms of volume, and it is really (inaudible) in terms of performance. On the other hand, we are facing startup cost both in terms -- that we see both in terms of valuable margin following project and implementation cost of production support, quality, logistics, that is higher in the past, going from an airbus to jets door business to other business, which has a very wider footprint, both in terms of customer and in terms of geography is actually proving a big step for interconnection. And we are investing in this manner, investing in the P&L to make sure that we can cope with this growth.

If we want to be a little bit more specific, we are looking at the recurring operating income as compared to last year. On the 6 months, we had a positive -- slightly positive FX impact because of the small strengthening of the dollar. I did highlight some of, I would say, operational positive one-off, mostly in Aerostructure of EUR 3.9 million that we have considered for the first 6 half -- 6 months. We have still, and it will continue. It's less brittle than last year, but it's still visible price impact. So price decrease in our metro platform are continuing. We have -- and that's really the reflection of the increase of sales, also a positive impact of the production rate. So clearly, what comes from normal volume of production, and it's positive, the same industrial performance when we look really, are we able to produce the same product in a better way than last year? The answer is yes. We see that for Aerostructure and also for the traditional project of Interconnection. But this time, that's our operational difficulties are behind us in Aerostructure, but also we have the continuous payer for the transformation program that is bringing EUR 6.3 million item when we compare to last year.

Cost of IS growth, that's the big burden that we have for the first 6 months, dedicated to IS. We have negative gross margin on the very first month of production of some of our new projects, and we have also, what I was mentioning, an increase of fixed cost and overall production ship of cost that we are putting in place to ramp-up the new cabin business, to start the operations and roll the operations in Mexico, in India that this EUR 6.5 million that I was mentioning. Also in terms of pure SG&A of both divisions. Even outside of what is really the new project, we have some really fortunate structure, also to cope with new customer with new geographies. So all in all, our recurring EBIT is higher than last year, but still a little bit penalized by what happened in the Interconnection Systems.

If we look now at what is happening mostly at the rest of the P&L. So we just spoke about recurring operating income increase. What is important of the nonrecurring items, we do remember that last year, we had the positive impact of the sale of the first Toulouse Périole that was basically offsetting all of the transformation 2020 cost. This year, we have a lower, if we have a figure that is comparable, we have a lower pace of transformation costs. They are still very important with lowering up month-after-month as we planned. We have also, it is also important to note, a few amounts related to all the financial operations that Latécoère is enjoying this year and any chance that also has the nonrecurring items that are part of the EUR 7.9 million. And the big difference as compared to last year is that we did not have this positive offset. You remember that (inaudible) actually being sold next year and not in 2019.

When we look at the operating -- at the financial results, so a slight increase of the net cost of debt really coming from 2 operators. Higher volumes means a little bit higher factoring. We have seen in the report also that the cash consumption was big in the first six months did have an impact there. We have also inside the figure in 2019, the first implementation of IFRS 16, which as you know, translates some of the lease cost into depreciation at one hand and financial interest on the other. The second line contributing to the financial results is mostly made out of the remeasurements at fair value of the edge instruments. We are protecting ourselves against decrease of the dollar so we asked that with the dollar strengthening, the protection goes bigger with either -- as in the line and those are an impact on our financial result, mostly unrealized. In context, even though, we are not in a positive situation and still have a little, some of this in the categories where we do pay taxes in the network so we have EUR 1 million, mostly coming from outside of France network charging the P&L that we roll these elements, we do have actually a net loss for the first 6 months of the year.

If we go now to the second difficult time of the first six months is actually the cash flow generation. We knew 2019 would be difficult. We prepared financially for that. We are actually more than what you anticipated in terms of cash used for the first 6 months of the year, mostly around the working capital. And I will come to that.

So first of all, we still have an increase of inventory, I would say that as we contain in Aerostructures and which is mostly linked with the difference of logistics flow that we have with our customer that we are very fast and are very shocked, actually we can do it from out there towards our supply chain. Some of our colleagues have explained that also in the presentation that a little bit of movement in coming from the demand of our main customers, which has translated into sharp increase, as well as increase of the Aerostructure activity that will result -- that affected actually to reduce and that really decompensated in the second half of the year and that we will see actually that we have built in terms of inventory that will not be sold before the end of the year. We are, in fact, this year the biggest contributor actually again the new business of IS. We had the same trend last year, a growing level of inventory to cope with the new activity. Mitsubishi again, we are -- as I said now is entering the fence of delivering physical product that we have mostly bought in the first half, all what was needed for the year. So an increase of inventory for that and as well for the cabin business where to cope with the ramp-up which is happening, we have kept on increasing the inventory. One thing which is important as well that the change in the customer receivables, we have too many impacts that I wanted to highlight. First, the mixing Aerostructure when you have seen that we have sold most Embraer to Boeing, and actually that's as compared to the rest of the portfolio, it took us to note that have longer payment terms. So we have a mixed effect around EUR 30 million to EUR 50 million, just due to that and that I would say, will unfortunately also reverse itself in the second half, when in particular we'll decrease the Embraer activity.

The second point which is very specific in this figure is actually payment terms of our design and build activity for Mitsubishi. And like the pure engineering activities, all what is physical deliveries is actually paid playing a stock play. So we are actually working in delivering activities that when we looked at our position at the end of June, all this physical activity was noted by Mitsubishi. So we have, since the closing, actually received a fair amount of money, but that -- this element has contributed a loan of EUR 50 million of receivable -- extra receivable, I would say, on top of normal course of business when we look specifically at the balance sheet of June. So that's why for these 2 areas, we are aware that there are actually large variances. There are strong actions both commercially and operationally that have been taken during the first half of the year, and we are confident that we are in the peak in terms of working capital requirement for the full of 2019.

The rest are very more in line with our expectation in terms of the working capital (inaudible). A few tax credits that sometimes (inaudible) will impact of the amortization of the issued revenue. We have recurring and nonrecurring CapEx that are in line. We have more nonrecurring CapEx in the second half of the year than in the first, just timed from alone particular and desire for work to be finished, done and paid. And we have the impact in terms of nonrecurring OpEx, here the costs more or less equal the cash-out. So all in all, we have pushed a little bit the envelope in terms of financing for Latécoère. We have strong receivables, strong balance sheet position that we have now increased in particular our short-term debt or decrease the available cash that is against that. And I wanted to highlight as well in terms of balance sheet that we have EUR 20 million coming from IFRS 16 implementation that were not there last year.

Two more separate data I wanted to give. First the progress financially of the transformation plan. We still have, and we are maintaining the EUR 130 million overall envelope reducing our cost by more than EUR 40 million every year. So we have made a decent progress in the spending social plan is that [in the rounding] we are already mostly through at the end of last year. Although OpEx has gone up by EUR 5 million for the transformation plan in the first half of the year. EUR 6 million increased for the CapEx. We will have most of the remainder actually spent in 2019 in particular, as I said, the pace of CapEx in the ramping up the completion being closed for most enlargement of the year and the second tranche written earlier.

In terms of savings, we have you know that we're following that in a very rigorous manner. We idealize this idea that our (inaudible) needs to go. And that doesn't mean that they are fully in the P&L, but that is really action from our own and has an impact on the P&L. It means, for example, that the first reduction has been achieving our plans for that and the new reduction on here is in place for and operational for a new contract. And here, out of the EUR 40 million minimum that we are targeting, we are 80% at the end of June. So that will keep on delivering cost savings in 2019 and 2020. I would say that the main step that we have for these cost savings will come from the implementation of the two facilities that I was just mentioning.

At the last point I wanted to highlight was actually confirmation of the hedged rate both of 2019 and 2020 and (inaudible) around that. We were actually highlighting that in 2021, we will hedge also around 123, 125 in order for the model to work. I wanted to highlight that because of the structure of our hedging implement, even remain strong, we will have only a partial benefit of that in '21 because of the structure of our hedging implement. And then at the end of '21 and in '22 that we can start hedging in way more favorable terms than what we have right now. I would say that the list of opportunity is improving in our hedging strategy. From there, I think I want to give you back the floor, Yannick.

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Yannick Assouad, Latécoère S.A. - CEO & Director [4]

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So now in terms of what Sébastien just said in images and text. So as Sébastien said, we are continuing towards our Transformation 2020 plan path. We will be opening officially our (inaudible) action plan achievements next week, so it's completed and operation have started in June '19. So we will open it officially with (inaudible) and I think I should move to the other slide, for [which the client] that we are on track. That's the one in colors. So we finish, on the initial site, the building you see in the picture is roughly 4,000 square meters. We have 17 improvements as we speak, growing up to 300 in 2022. We will be manufacturing 2 types of products, Falcon 2000 harnesses for [product authorization], direct shipment then. And (inaudible) that we will make will be manufacturing most of the volume of the IFE, in-flight entertainment, system installed in Mexico, in India, in addition of what we will be doing in Mexico, mainly 2 things will be done in Mexico, and in the California site, and some other sites where they design and produce their own IFE system. So that's what we learned there.

The same thing will be of faster on it that will go on the site in [2,000] which is our annual [litigation on these]. And then it will go back to our site in France in August. Just to assure you that [product] has started to get out of that plant already.

Continuing with Montredon. So we have done a lot. We are continuing to do a lot in Montredon. (inaudible) have been certified 14001. This is the certification that shows that you are taking care of the environment, that you are recycling most of your waste. That we are. So we have been satisfying the standards. We are continuing to increase the machining capacity in existing building. On one of the two machines that we (inaudible) need in both parts. And that has been introduced, as planned, in the summer. And we are increasing the building, as we said, by 3,000 square meters. A few new plans in that additional space. One is to surface treat all the component that are built in Montredon, with machining and sheet metal work, and to paint those parts as well. Then we deliver on September 6 that is in line with energy (inaudible). And then we will be implementing all the surface treatment equipment that is ready to go. And so we actually starting building to start this production and to ramp it up by beginning of next year. It's, I would say, as planned.

This will conclude, by the way, the equipment of Montredon. By year 2020, we should be completely full in one part of the entire building and all the machines of these building, whether machining, specific equipment of machine parts, sheet metal work and surface treatment of sheet metal work parts, that we have and we are continuing as planned.

Bulgaria, in the other site that we build for Latécoère, we are increasing the size, doubling it basically. We extended 5,000 square meters to reach upward towards 9,000 square meters with the capacity of over 200,000 hours. So here, it's relevant to talk about manual hour because it's dedicated to manual work, where in terms of our machine while we are (inaudible). So we have transferred all the A320 doors structure sub-assembly there from our Czech Republic plant to our Bulgaria plant. We have completed 100% of the rack structure production that we used to be making in the Czech Republic as well, but that is 100% transfer in Bulgaria. So it's a total investment which is not less than what we are moving in Montredon because basically we're building machine total investment for the 9,000 square meters is EUR 15 million. In Montredon we are in the range of [EUR 40 million] for a little less (inaudible). So it's completely different. In Montredon we have lot of new production machinery warehouse in busy area. It's mainly (inaudible).

Transformation 2020 is not only the aerostructure business work. It's also impacting interconnection systems, and there we are also working on automation. We -- this semester was big event. We had a big event, which was the first worldwide implementation of automatic wiring of connectors in the aerospace industry. First ones to implement this machine. So this machine is able to automatically -- we build this one previously already in our labeling machine, cutting, wasn't done automatically, in our label machine, all the plant. But that's where we're the only plant that we're automatized so far in the interconnection system work. From there, we'll go to stripping the wires automatically, initially -- today we are still doing that almost 100% manually in all the plants we operate for in Interconnection System. We are crimping and clearing the wire into the connectors, and we do that for all the non-shielded wire, which we (inaudible) in Interconnection Systems. So that's really the future, it's worldwide and we are very proud of what we have done.

Of course, significant factors, productivity, clearly we are going to make a lot of manual true-up implementation of those type of machines. Of course quality, because we are (inaudible) and we do not have with manual work, and profitability. The machine trade (inaudible) on the wires when everything is manual. So clearly it's a big event for us and we want to the process to really go from [proper fitting] wires through the machines to really mass production, and this is really the impact.

Good business momentum as well. I spoke briefly about it in my introduction, the [wire side opportunity] and got a lot of traction from many new customers. We acquired the small company making many tools in the U.S. We've acquired H160 cockpit wiring contract. Then the contract (inaudible) and we saw a lot of room for partnership to certain technology project with Airbus. We show that you include (inaudible) as you know we ensure that and be assured the mission on the life site to partnership with Air France and Air France and Ubisoft, having [Ubi] in the soft gain (inaudible) should. We are going to do that again during the cabin introduction in LA next week -- coming up next week. During that show, we've been nominated as the finalist of the Crystal Cabin Award of the show. So we are nominated along with three or four other contenders, so we're very confident that we have the best technology (inaudible). It's a little early in the beginning for Latécoère, is not used to compete in this kind of world, but a very exciting moment for the team next year. The first slide with (inaudible) as will be announced in the Paris Air Show, honor Air France A321 that is being modified right now. We are undergoing a seat check and moving (inaudible). The first flight in the afternoon of October and we have really excellent momentum with a lot of customer contracts, whether it's OEM, airlines or [IOT] suppliers. Clearly, this technology has the potential to eliminate the under-seat wiring or the right size consistent of the content of the (inaudible) of the seat.

We have acquired the (inaudible) on July 9th. We created earlier a (inaudible) among from business as [ATF] it's not a continental chase. It is a recognized US innovator (inaudible) supplier to words the (inaudible) of the business that the fuel you find in [young supplies] of the airplane, but the biggest that you find in business class and first class, very, very nice (inaudible) which is the supplier that also a lot on business jets, OEM because Boeing product next year is making also business jets, and they have the big screen they are putting in business class as well. So typically this is the final product that needs completing in design and (inaudible). So one additional component that goes very well in our cabin-wiring strategy, which is really to provide wiring and equipment for some seeking data in the cabin. So it goes very well with our video system when we are the video monitoring in the cabin environment. You can plan to streamline that for the flying attendants for long term, so that goes very well with our video system, but that goes also very well with what we are giving in service to the [LCD] manufacturers.

On the H160 cockpit control panel wiring systems. So everybody knows now the H160, the new helicopter that is planned to be certified by the end of this year, by the end of '19. So clearly a great win for us. And despite our interconnection systems business being very present at Airbus commercial, we have to fix the (inaudible) we are not very present from the helicopters side of our -- the Airbus, and we want a new H175 cockpit interconnection systems I think was end of '17 or beginning of '18, I don't recall exactly the date when we won that. And now we are on the 160, which in both -- it has both a commercial value and really have a (inaudible) each new version will have 160 in (inaudible) security nicely for us as well.

As I said, we are expecting to do second project we expected last year or beginning of the year when we presented last year on end of year results. We talk about ongoing discussions with business that [Miclo] was one of them who you know that finally (inaudible) project is the replacement of the [SkyDeck]. It's going to make [it slight in] '20 or '21 and beginning of 2022.

And we wanted to talk a little bit about what we're doing in terms of research and technology. And not talking about any platform yet, on business partnership with them. Usually, it's common to talk with the JVC or sometimes on (inaudible) community, but really wanted to highlight that because there is a conjunction of projects that are quite unique, and which we are working jointly with Airbus. First, of course, we have demonstrated that we started to show in Paris Air Show, where the goal is really to design [a next-step function of the airplane]. That is there to be (inaudible) but also to lower larger flux (inaudible) for the turnaround time of the airplane on ground to be faster.

So clearly, that's what we are working with them and we wanted to highlight this joint development with Airbus. Here we have shown a photo that is taken in the Paris Air Show, which is first demonstration of the door, is our engineering team and the other engineering team working on the door. We are also working on a very complex, low cost structure and composite during application, the application -- the light application on the door rather than doing with composite what we call black metal, meaning the concept of design that is very similar to what we do with metals is trying to design in composite a door where the structure of the plane and some of the components we have combined directly in one shot in hanger to plane.

So that's really what we're looking [for out of the plane]. We are looking (inaudible) and again we are doing that jointly with the (inaudible). It's a project called [Alcocour] and we are working another assemblage where we are putting the door that's adjustable but also new [lock] structure and for (inaudible) in the Paris Air Show, we showed a product trial of what could replace (inaudible) which is almost 10x less volume and less weight. So clearly we're working to implement that in the cockpit assembly with them, as well as the structure for the nose that we are looking at. So clearly a conjunction of project that will place Latécoère in good position to at least get the RFP.

The last one that I was talking about at the beginning to become the best ones and get the RFP, and use a different step component of the airplane. One new airplane we will raise, probably some years from now.

One word on our social responsibility. We, like any company, we are looking at that just because some of the legal requirements are looking stronger and more (inaudible), but also I think it is important for the company to take care of its people, to take care of its stakeholders and to take care of the planet and its environment, and how it impacts environment. So we have done a comprehensive analysis of all the stakeholder and their expectation in that arena of social responsibility. Out of that 26 topic that we will divide because we cannot address 26 topics at the same time.

But I believe for category, HR and social environment, performance and innovation, but also rank in terms of importance for the stakeholders and important for us and (inaudible). And we have comprehensive action plan, and the main important one starting with those of course in Q2 to address and improve that. So for example, just to give you a more complete view about it, we decided it's -- we're probably one of the first product ideas, we decided to measure our CO2 ejection to the atmosphere for the company. For the size of Latécoère, this is clearly a difficult task. But we decided to do it and in terms of (inaudible) get that measured by the end of '19, and improve from there. To give you a little bit an example of what -- this is a difficult one, and you know in the previous one we took the action plan, especially the new one and the one in the locals country 14,001, another type of action that is moving that action plan, which are part of our social responsibility. So clearly we are getting momentum on this topic as well.

Outlook on ['19] and then the year after '19. So for '19 we just want to reiterate what we said in March, and what (inaudible) at the beginning of July. We will have a significant organic growth. I still (inaudible) we believe that the same way in H2 compared to H1 for interconnection systems. On the contrary, we don't believe growth will be as dynamic for Aerostructure in H2 than in H1. And remember, in addition, H2 last year was already there in it because we started it especially in the last quarter H2 to capture [all operation] at the beginning of the year. So clearly it is also higher than H1 was for us this semester. So clearly, we don't have the expectation to repeat H2 on the same level as H1 for the restructure.

On the transformation plan. We stated that we're doing -- most of the CapEx will be spent by the end of the year. And therefore, we will have more cash output from the CapEx in H2 than we will had in H1, mainly because we are going to pay off suppliers for the 2 plants we are enlarging as we speak. On the contrary, of course, we are expecting a much less valuation actually of the working capital for H2. So that the transformation plan will continue. All the OpEx will not be spent by year 2020. As I said, we will continue to ramp up, especially surface treatment, and complete some of the transfer in the area beginning of 2020 so the OpEx will not be completely spent at the end of 2020, but again most of it will have the CapEx in the 100% done, or close to 100% done at the end of 2020.

So on track, as we explained in March. We will have the recurring operating margin. We want to stress that as part of cost on interconnection side will continue because we may not yet utilize all the project that we won in '18, and we are continuing to gain project in H1 ['16] is typically a new project for us. And we will continue to work on new projects, particularly the (inaudible) -- I said that we are in ongoing discussions with American Aircraft Union, with those discussions will come to a good outcome before the end of the year, and again that's additional project for Interconnection Systems. Nonetheless, we expect the margin on both sides, and we always said in the beginning, we have a negative operating cash flow. H1 was below our expectation because of the work we got, especially in the area of the receivable from the customer. Our expectation is to turn around that situation in H2, but on the contrary, the CapEx transformation. CapEx will be more important in H2 than H1.

So the year to come. We wanted to give you perspective going forward. I was for sure a renewal slightly in the next 2 years due to platform mix, and clearly the business will remain and will continue to win that all. I'm not expecting some of the big volume levels, we know in fact that are mature, mainly to [Australia] (inaudible) and the new one, Poland, mainly those are the platform that will not drop and on the contrary for some of them, will continue (inaudible) on those platforms and moving that (inaudible) service side.

Our progress towards more competitive production systems, we are pretty sure should compensate, we are open to profit price pressures, and we have just committed to that we will have for '20 and '21. New business contracts will continue interconnection (inaudible) that are going on again new customers. I'm hoping something positive come out of those discussion and it will be (inaudible) largely in the interconnection systems is considered to be started by in [2020] given what we see as to potential operational margin. Operational margin will improve from 2021 onward because previous, the discussion we are having we don't see the content we will continue to win business, but it won't be as big, merely a discussion right now in the past year. And we will start positive operating cash flow from 2020 [but in term of actual year] that I want to point out. In 2020, there is one event that is important for us, which will be the new result quarter for the second part of earlier in that (inaudible) constructing in the section that we sold in June '18. Given IFRS 16 we consider that as an investment. So if I exclude that investment, I will be in positive cash flow. So I included that big IFRS 16 impact because of this (inaudible), we will continue to be negative in 2020. But operationally, we will be positive outside IFRS 16 effect and we get big effect in ['20]. But (inaudible) it's clearly on track and teed up and we will in 2020 on the -- all this to this new building.

So that's what we wanted to give you a perspective.

One word here that the next (inaudible) is in production about the searchlights, cash tenders are here on the shares of Latécoère. Wanted to give you a more precise on where we are in the process. So in terms of regulatory approval that for the absolutely (inaudible). We have obtained, or they have obtained, already the site for U.S. investment approval and the German antitrust complimentary approval from the 26% we acquired in June making the entire equity of Latécoère. And one thing that is not clear that is important is the French ministry approval for the investment on strategic assets. This French strategic asset. So this is ongoing. We will be [summoned, we run] what is [constitutionally] by law, which is the information and consultation process of the [approval] of business for Latécoère and we got a positive outcome of this process at end of July. All the signing should be done by the end of September, as Pierre said, after receiving the German (inaudible) of the next few year, the financial expert that the board selected in beginning of July and following this report, the board will vote itself, give an opinion to the market and to minority shareholders to bring their share to the officer and learn their expert opinion. The closing of this, the (inaudible) if successful by year-end and we will go from there.

So that's all what we wanted to say on the first semester results. Thank you very much. And now I think we will open it for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Agnès Blazy, CM-CIC Market Solutions, Research Division - Aerospace and Defense Analyst [2]

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Agnès Blazy, CM-CIC Market solutions. I have a question about the cash tender offer, simply. Just to be sure to understand correctly, I don't remember what can be the situation, is the independent expert saying the price is not [fundamental]? So could you explain again what it can align the shareholder can launch the offer or not, legally?

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

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So legally, what is the expert opinion over the Board opinion following the expert opinion because the expert is there...

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Sébastien Thierry Rouge, Latécoère S.A. - Group CFO [4]

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And advice for Board.

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

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But we believe the Board opinion, the searchlight, can decide to launch itself to it. It may not have the support of the Board and the recommendation of the Board to the line of shareholders to bring their shares to be offered, but nonetheless, they can launch the offer, they can sign the offer.

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Unidentified Analyst, [6]

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So the first question is on the profitability of the interconnection systems. Just wanted you to (inaudible) the launch of the new program were in line with your expectation or maybe whether there were any surprises, I don't know, anything that goes wrong with the launch of the new program. And the second question was about the article you were talking about, you were talking about an acquisition you are actually working on in the United States. So maybe do you have any comment on that? And maybe the size of -- yes, any comment.

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

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So first question, we expect the stock will be (inaudible) because we even said and wrote that there will be startup cost for the new project we are working on. So we knew that was not the usual type of new business that we used to enjoy. Nonetheless, the real truth, there were more than the online expectation to be completely transparent. We have factored in that beyond June, and now we're realizing that I'm trying to push normalization that was very front centric, to normalization where I'm pushing the ball very wisely. We've kept the news on this and this, different new adjustments, and that takes time to adapt to it and there was probably even more (inaudible) on the fact that we (inaudible) moved that past minor so yes, we have what we realize we are coming from. We are coming from EUR 250 million business that was Airbus and that was (inaudible) multi-platform and very international customer that are far from (inaudible) negotiate a contract into and or California. So clearly, we are working very far away from our base and take some (inaudible) to do it well, to do it in timely manner, and we certainly have to negate from that. I have no doubt that our new structure will adapt. We have the correct management to be able to do it. We have to do one of the changes in normalization (inaudible). But I have no question that to increase the interconnection system branch will become as mature as the (inaudible) structure need to be able to work, which is far away from our base. So interconnection systems, particularly (inaudible) seems to be doing that and it takes a bit of time, a bit of additional SG&A, as we said, and startup cost on real product that are not designed. We are in production on that product.

Oh yes, you asked if (inaudible) we have searchlight, and saying that they are looking at acquisitions in U.S. I think the strategy on (inaudible) structure was to grow organically, but also to look at external growth. And also (inaudible) that I had, you need to look at it, one was the justification of the portfolio of customers. We are looking from a customer (inaudible) ongoing, we don't have (inaudible) we have very little involved here, and we don't have yet this set here, so clearly more platform, more diversification in our portfolio, and it's customer we don't have in the U.S. and clearly we need to acquire the customer buying the company rather than buying a company that is likely to be more (inaudible) So clearly, it is one of the earlier, which we are looking at potential target. The other criteria is the [composite] content and seeing that supply. Also, we will be [recommended] on the technical, but they're also talking about it in the article. So content improvement is also one of the criteria with which I am (inaudible). In terms of the company content, and in years to come in our own structures. And then the third particular, in the structure, clearly we need (inaudible) and at least certain size, so that's what we are looking at and we can see that searchlight because we're talking about this almost every day now. That clearly, the article, said that. So that gives you now to trust us in this. That's it.

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Unidentified Analyst, [8]

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I have 3 or 4 questions, please. The first one is a follow-up on the Interconnection section -- division, sorry. Could you give us a bit more color on the learning curve of the new cabin program beyond the part of cost? Is there a difference compared to the former [interco]? Second one on services, you mentioned at the beginning of the year of the presentation the growing business in services destination, so could we have an order of magnitude of this part of the business and maybe a target of let's say of earliest horizon and the increased growth of the cabin business? And then on the Boeing exposure, so it's about 18% of the backlog. No doubt that the way we tried to obtain the cost of the next crisis in, one, are you obviously confident regarding the terms of your contract, especially in terms of operating able to change one way or the other the content of this contract?

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Sébastien Thierry Rouge, Latécoère S.A. - Group CFO [9]

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(inaudible) We have got 2 types of costs. First of all, we have the diverse cost related to the startup production. I would say yes, that is the difference between cabin or really whatever what is sure is that the operational efficiency in that. That's the first thing. The second, if we look at the specific of cabin, we are in 2 different model. We are mastering more the content of what we've done and also for that sometimes customer with product will in the first weeks and months of production we are actually dropping premium price and not from day 1 fully on production. So that's maybe a little bit different than what we are doing in this. We will in general be more supported by this type of customer because the driver that's of that we do somewhat compensate, because there is no engineering, there is no structure for design et cetera, but that creates a little different around that.

The second thing that we have and that is part of the cost, so we call it SG&A of the (inaudible), but we actually are putting this new businesses mostly in places where we are not today, on areas of our factory where we are not. And in order to do this particular (inaudible), we have created different small businesses inside because using our (inaudible) what we're doing this (inaudible). And that's something that we have implemented that was necessary to start our new manufacturing model that will be controlled both into Mexico and into new year. And the second time we do that actually, we will be able to start that already from our learning there, can do this project tomorrow. That was not the case in 2019 for the cabin business in particular which is another which we are going forward for (inaudible) last year. The experience and the real figure that we are showing right now that clearly next year is one where would be now our target (inaudible) to do this than anticipated. And there is -- so that's mostly what we can you comment on this yet, which is the first big step which are moving across into the new year.

So reason I wanted to highlight because that is something we don't speak about a lot. And interconnection that's mostly keeps you installation so we do prepare the production of OEM for the most part, so we work for there but we work also for manufacturer. It's a few million euros of revenue that we are right now that has been growing also, but if you look year-on-year, so it's not I would say annual on the full P&L contribution, but that's growth and is profitable. I would say also it's on the contrary type of business that requires the know-how that we have and that we can repeat it in (inaudible) our (inaudible) configuration management is enabled to contain the environment of to a customer into something that we do particularly in our plant or that we help them doing in the plant and that's what we are doing. In terms of target, I will maybe ask Yannick because she is [reviewing] the target to the organization to develop [aftersales] in general.

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Yannick Assouad, Latécoère S.A. - CEO & Director [10]

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It's been a fight to take on this market, and we know we have a strong market, the same on our system, (inaudible) connection, reduction, most of your EBITDA. You don't have the structure, you don't have interconnection, nonetheless we can do things to accompany your customer. One is the airline, because one is the contract in keeping it for airline, but we are doing a lot of the (inaudible) for that airline. The airline that is keeps all redeeming the work checks here every time. In the Interconnection Systems world, doing work, the competitor's version of the airplane that's typically the type of thing we can do the (inaudible) we are doing the full modification on the airplane, especially at the beginning of the production phase where you make modification because of certified versions eventually producing initially so that's part of what we are doing and we want to. In terms of percentage, I do believe we could reach 10% of new. Right now I gave a target of 5% to new Interconnection Systems, but I really think it can go lower beyond that.

Boeing contract. I'm going to take this one. We have a firm contract until 2024 on Boeing. So clearly the 737 MAX crisis will not have an impact on that. Nonetheless, of course we negotiate the continuation of this contract. I don't believe Boeing can go its way out, depending on the good term of its negotiations, it's opened up opportunities as well on that. We know that very well. So we expect a tough negotiation like we have with all the premium manufacturer, especially company like Boeing, because they have a wide portfolio of potential business and we don't want to destroy the relationship, of course. And that expecting it is starting the negotiation with Boeing. And I want to add a comment, Boeing is a lot right now of our business. We certainly don't want to be destructive in any way, and it helps in discussion clearly. So we have the contract, we're starting the discussions. I don't have any sign that there is going to be any uncomfortable discussion.

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Unidentified Company Representative, [11]

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And we will now open up to questions from the conference call. Michelle?

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Operator [12]

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(Operator Instructions) We have no questions at the moment.

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Unidentified Analyst, [13]

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One question from the floor (inaudible). Three questions, if I may. The first one is quite a naive question. Can you remind us if you are expecting any negative consequence from the trade war between the U.S. and all the other countries? And another topic is that any negative consequence coming from the Brexit? But this is quite a naive question from me. And second topic, can you comment a little bit on 2 programs, the first one is Airbus A320 in '21 because I saw articles -- first article this summer expecting a very good momentum on the program, can you remind us the size of the turnover that is made for -- from this program for Latécoère? And for another program, which is the Airbus A380. Can you remind us -- any comment on the end of this program for Latécoère? And finally, one last question on the Latécoère situation. As far as we know, what is the intention of first flight to ask for results close, if conditions are met to carry out such results. And to delist the company.

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Yannick Assouad, Latécoère S.A. - CEO & Director [14]

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So trade war and Brexit. I think the trade war is bad anyhow for the industry and for aerospace industry more specifically. Do we have so far any impact that we feel? The answer is no. We have no financial impact so far. We have a tense situation on procurement on material. We don't have any impact on Latécoère, but we do feel a tense situation. Usually the procurement early on, clearly specification for which drives our acquisition here in Europe or in the U.S. So because there are different types of specification, which slightly below even (inaudible). So clearly, we are seeing a tense situation. But we have no price impact so far on that. We really have some going forward, it's not completely excluded, but it's very difficult to say that had an effect on us so far. What I can say though is if it was a question since we are manufacturing in Mexico, particularly a bit tense in Mexico we have no impact on customs so far, and given the future of the new agreement contract between Canada, Mexico and U.S. we have not had any impact of the previous contract, and we are not seeing any tax coming back to us. There's the question, we had your question.

On the Brexit, we have both suppliers and customers in the UK, but very, very little. We have some suppliers that we are talking about less than EUR 1,000,000 every year. On their supplies to take into account of delaying (inaudible) took us to custom orders, and we've prepared for worst and I must say that especially Airbus were well -- with Airbus and investors, on both of them drove specific process to move the supply chain to account for additional retirement delays, the customer buyer and therefore stock more, very little impact on us because we don't have too much in the U.K. We have one major customer in the U.K., which is Air France. We are on the connections side contract last year. It's not a contract that is not in the article, so it's ramping up. It does not have any effect on us, I must say. So very little impact on that particular, all together, of the Brexit.

A320, A321, we will continue to grow with A321 share being bigger in the next A321 (inaudible) coming up before the end of the year and so yes it's sizing up, and it's we have a substantial program for us, it's both in Interconnection Systems and in the section, we are not communicating the volume of each of the program, but in one line and program by a program second program in our program makes to clearly CD program for us, and it will continue to grow well. There is good momentum, we have no problem, no specific production problem in this side of our business on this program. A318, the final production will be this year for us in U.S. (inaudible) all very will be this year and this year, we took most of the (inaudible) As you know in our facing account, so there were two major components. We took in this year and last year optimization we are now seeing -- we now see that we are not amortized, should I say. And also to took a plus, which was the financial results coming from the interest rate on the advance that we got from the French government that we did not have to (inaudible). So that's what it took in the P&L last year. There, discussion on the closure of the line right now that there are only operational discussions that will have relatively no impact on our financials. We closed the lines and stop the lines and crushed the line, all so we keep some manufacturing capability for aftermarket purposes. (inaudible) are going on with Airbus, but then we have very little to no financial impact on that, knowing that [optimization] that we also took, I should have said that. (inaudible). We're announcing that we have not enough time, but we also took some inventory depreciation impact in the 2018 as well. And so globally, it's very sad but we said, we had to condense and use our planes, so it's very sad to tell you, but that's life as well. If the condition are met, then 90% in June '19 then you knew it went from [95%] to [90%] so you know that. The IFRS 16 up to 90%, the answer is yes, searchlight will apply here and for the (inaudible) 10 remaining percent of the shares.

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Unidentified Company Representative, [15]

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The shares?

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Yannick Assouad, Latécoère S.A. - CEO & Director [16]

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I said that. And it will be [stopped by the official constitution] it will be on [indiscernible intend to clear and therefore, it will be in the company. It truly makes sense for that, clearly it makes sense. I know that it's not nice for the people that are scream loud, but that's the law as well.

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Sébastien Thierry Rouge, Latécoère S.A. - Group CFO [17]

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I think we've got our questions from the call, Michelle?

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Operator [18]

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(Operator Instructions)

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Unidentified Analyst, [19]

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We've got a follow-up question. Could you confirm that the offer will be launched in October?

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Yannick Assouad, Latécoère S.A. - CEO & Director [20]

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On the 2nd of October, yes. So it will be submitted to the (inaudible) and then there will be (inaudible) to decide that everything fine with the offer. So yes, the launch exactly to be in October.

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Unidentified Analyst, [21]

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Can I come back on the inventory question? Because you mentioned that will you have seen more (inaudible) on the OEM side compared to what I believe you are (inaudible) of the supply chain solution, right? And it seems to be, I would say, quite good and to offset this inventory in H2. Don't you believe that some OEM are maybe a bit more cautious on their solution plan compared to [capital fund figure]?

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Yannick Assouad, Latécoère S.A. - CEO & Director [22]

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I'm going to take this one because it's not a financial question. It's very difficult to comment the OEM rate variation (inaudible). Clearly, there has been variation in the production rate summary, and I'm not going to it all in one, the variation. And since our contract allows for some variation, which are a comfort to us does not do -- we are indeed faced with the problem that described some of the (inaudible) variation eventually, which we are very (inaudible) absolutely sure to come out on our supply chain.

I think we're going to close it here. If there is no other question -- no questions from the call. Okay, so thank you very much for being here. Thank you very much for people on the call. And watch what will happen in the last quarter. That's the reason we'll drive if we have a next meeting in March or not. Thank you.

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Sébastien Thierry Rouge, Latécoère S.A. - Group CFO [23]

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Thank you.