Safran Sa Ord

Welcome to the SAFRAN first quarter 2024 revenue. At this time, I would like to turn the conference over to your hosts, Olivier Andries, SAFRAN CEO, and Pascal Bontenis, Group CFO. Mr. Andries, please go ahead.

Good morning, everyone. Thank you for joining us to SAFRAN's first quarter 2024 call. I am here with Pascal. So let's go straight to the key highlights for the quarter. The air traffic good dynamics continues. Narrow body air traffic ended the quarter at 113% of 2019 level. Wide body at 94%. We expect wide body air traffic to fully recover by the end of this year. These good trends support the positive momentum in original equipment and services across all our businesses. We enter 2024 with a soft aircraft production level, with production rates expected to increase going forward. We post today solid revenue growth in Q1 2024 in line with our full year guidance. This performance was mainly driven by services with notably civil aftermarket up by 27.3%, and also by original equipment deliveries in equipment and defense. We closed the acquisition of air liquid, aeronautical oxygen, and nitrogen activities in February. We remain focused on meeting our customer commitments, mitigating short-term challenges on volumes, and are confident in our ability to deliver our 2024 guidance. Turning to slide four, let me give you an overview of Safran's Q1 sales for 2024. Revenue is up 18% at €6.2 billion. We enjoy the double-digit revenue growth in all divisions. Services perform well across the board, and in particular in civil aftermarket, which grew by 27% year-on-year in U.S. dollars and by 12% compared to Q4 2023. This growth was mostly driven by long-term service agreements for both CFM56 and BLEEP and is consistent with our full year guidance at 20% growth. performance was mainly driven by equipment and defense on a low comparison basis. Lead deliveries were flattish year on year, reflecting a soft start of aircraft production. Taking into account this operating environment, we revised our lead delivery forecast from plus 20 to 25% growth to plus 10 to 15% for 2024. Turning to slide five, business highlights. Some of our main business successes since we last spoke in February. On civil engines, CFM signed a service agreement with American Airlines on more than 400 Leap 1B, and the Chinese aircraft leasing company Calc placed an order for 40 LEAP 1A. With respect to LEAP durability, CFM has shipped the first LEAP 1A outfitted with its new reverse bleed system to Airbus. In helicopter engine business, we enjoyed a strong commercial momentum. We signed a support by the hour contract for 50 IL-2E with ADAC, It is a service which supports leading actors in helicopter rescue and medical transport in Germany and Netherlands. We won a new contract with the UK MOD to continue to support the RTM 322 engines powering the Royal Navy fleet of Merlin's helicopter for a further six years. And we have renewed our contract with the US Coast Guard to support more than 240 Arian Engines and Bristow Group selected Aria's 2B2 engines and supported by their contract for their new H-135 fleet. In military engines, Safran and Qatar Armed Forces signed a support agreement for the M-88 engines, powering their fleet of 36 Rafale. In our equipment business, we continue to sign several service agreements across all our activities. notably electrical harnesses with Malaysia Airlines, Berard, Nacelle with Cebu Pacific and Flyadil. Let me now hand over to Pascal for more details on Q1 sales.

Thank you, Olivier. Good morning, everyone. Starting as usual with FX, the USD remains strong in the quarter given the geopolitical context and interest rates expectations. Currency volatility is also on the rise. These two trends provide a favorable FX environment for Safran when it comes to edging heat exposure. So for 2024, we do confirm our edge rate target of $1.12 per euro, which is one cent improvement compared to last year. Specifically in Q1 2024, the average spot rate of 109 compares less favorably to Q1 2023, resulting in a negative impact on sales of about 50 million euros. Turning to page 8, Q1 revenues stood at 6.22 billion euros, a solid 19% organic growth, or 18% when taking into account the negative translation impact from the USD. Also, the net impact in revenue is neutral at group level. Change in scope reflects the divestment of cargo and catering activities from Safran Cabin last May. and the acquisition of Thales electrical system in October 2023 within equipment and defense. On slide nine, let me provide a few details per activity. Propulsion revenues stood at 3.1 billion euros, up 15% organic. OE revenue was up 10%. As Olivier already said, LEAP volumes were flat year over year at 367 units. reflecting the soft start of the year of aircraft production. In the same vein, helicopter engines and military engines had a soft start as well, as expected. Revenue growth was mainly driven by favorable pricing and mix, and positive volume growth in wide-body engines, plus 50% year over year. Service revenue was up 19% organic, mainly driven by civil aftermarket. Let me clarify the drivers behind the 27.3% gross performance. The sales coming from either CFM56 or G90 spare parts came in line with expectations, meaning positive volume growth and pricing, but no change in work scope. This significant performance is all attributable to CFM long-term service agreements. We did experience additional costs in some contracts, leading to additional revenue, as we recognize revenues as a cost incurred. So this is a phasing effect that will reverse as soon as Q2. And as you all know, Safran does not recognize any profits yet on these contracts. So on a full year basis, the Q1 performance has no impact on our full year guidance of plus 20%. Outside, civil engine services were slightly up in helicopter and military engines. On equipment and defense, revenues stood at 2.4 billion euros, up 23% organic. This is a much better growth than in proportion, as it faces a weaker comparative. OE revenue was up 27% organic, benefiting from a strong ramp-up in deliveries and narrowbody and widebody programs for landing gear, power and wiring activities, and nacelles. Services were up 17% on all activities, notably carbon breaks, ,, lending year spares, and MRO. Electronics and defense activities were strongly up in the quarter, led by higher deliveries in organics, guidance systems, and electronics activities. On aircraft interiors, revenues stood at 676 million euros, up 24% organic, which is still below the 2019 level for Q1. OE revenue was up 17%. Most of the increase came from custom cabin and galleys for A320. As you will have noticed, business class seat deliveries were down by 82 units, mainly due to continued delays in certification of some programs. But customer demand pushed out as well, as airlines expect to take deliveries of new airplanes later than expected, and some supply chain constraints. Services revenue was up 39%, a strong performance with good customer demand for spare parts in both seats and cabins. Olivier, back to you.

Thank you, Pascal. To conclude, Q1 revenue and civil aftermarket growth are in line with our full year view. Supply chain production capabilities remain a key watch item. Our leap engine deliveries assumption is revised. to 10 to 15% growth in 2024 compared to 2023 to reflect the soft start of the year in aircraft production. We reaffirm our financial objectives for 2024 and are confident in our ability to deliver our financial performance for the year. I thank you for your attention and now Pascal and I will be very pleased to answer your questions.

Thank you. To ask a question, you'll need to press star 1 and 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 and 1 again. Thank you. We'll now take our first question. This is from the line of Ben Healan from Bank of America. Please go ahead.

Yeah, good morning, guys. Thank you again for taking the question. The first one I'd had was around Leap and the updated guidance. You've lowered Leap Guide as we heard from G last week, but aftermarket continues to be very good. So can you talk about your level of confidence around the $4 billion? I mean, it feels to me that there could be some upside risk to that. So if there's any color you can give around that, it would be very helpful. Secondly, we've had obviously production challenges, like you mentioned, across both OEMs and slow start to the year. Can you talk a little bit about how this is impacting your outlook for CFM aftermarket medium term? I mean, if you look at the data, retirements remain very, very low. The OEs can't deliver what they thought that they were going to deliver. So how does it impact your thoughts around that midterm peak of CFM 56 aftermarket? And then a third follow-up on cabin, it's been highlighted as an area of weakness in the supply chain. So can you just provide a bit of an update on the situation here and what exactly is causing the issues? Thank you.

Good morning, Ben, this is Pascal. On your first question about any upside we may have on EBIT, either coming from less lip deliveries or better after market growth. First, on lead deliveries, we are revising downwards our guidance for the year to plus 10 to 15% growth in deliveries. It has several impacts on the P&L. First, it has a negative impact on sales because we deliver less engines. It has a slight positive impact on EBIT because we are selling all these engines at a slight loss. Then it has a strong negative on free cash flow because we will receive less advanced payments compared to the initial budget we had. And there is a watch item which remains the inventory level because we need to make sure that we buy from the supply chain the strict amount of parts we need to build these engines and no more. Otherwise, there is a risk to have over-inventory sitting at our place. Now, on aftermarket, as I say, this is a strong performance in Q1, above our full year guide of 20%, but this is all driven by LTSA contracts, either for CFM56 or LEAP, and as you know, there is no EBIT impact due to the fact that we are not yet recognizing EBIT on that. And by the way, as I said, this strong performance will reverse as soon as Q2, so by the end of June, I would expect civil aftermarket to be in line with the full year guide, namely, you know, around 20%.

Ben, on the mid-term side for the CFM 56 aftermarket, I have to say, but you have already mentioned that, let's say, the lower ramp-up of new generation aircraft deliveries has a positive impact on the aftermarket for CFM56 spares as airlines basically have to fly more intensively with the CFM56 powered aircraft. As a consequence of that, the storage of the CFM fleet continues to decrease. It's down to 7.6% in March 2024, down from 8.1% in December 2023. This is a similar level as in 2019. And in 2019, there were not so many new generation aircraft in the fleet. So it's quite a very strong signal and a positive signal. Same situation on the retirements of CFM56 aircraft. It's a very low level of retirement. In Q1, there's only been 36 aircraft being retired, which is a very low level, even lower than before the COVID pandemic. So all that makes us feel good. about the mid-CFM56 perspective, especially the peak that we continue to see mid-decade, so 2025. But we believe, as we have already highlighted, that basically it will remain at this level for probably two to three years. So yes, this is a positive. On cabin and seats, on cabin and seats, Yes, we've seen some slippage of business class seats deliveries from Q1 that will slip into Q2 for certification and supply chain issues because the supply chain issues are still there everywhere. You have to know that basically the awareness authorities, FA and ASR, in the aftermath of all the events that happened, have just tightened quite significantly their request for certification, their requirement, the level of requirements, especially on the certification test. And that does impact the entire interior industry. It's not only us, it does apply to everybody. So the certification rules have basically been changing and are much more demanding now than they used to be. And this is in the aftermath of what happened. And this is the reason why basically all the players in the aircraft interiors, cabins, seats, all of them are basically struggling a little bit with the timing of the certification test. Hope it's clear.

Yeah, that's very clear. Thank you.

Thank you. We'll now take our next question. Please stand by. Next question is from the line of George South from Bernstein. Please go ahead.

Hi, good morning, everyone. First question on the guidance. I mean, you are reducing lead deliveries by about 160 deliveries this year, which is not immaterial, but you left the full year revenue guidance unchanged, including for the civil aftermarket. So where's the positive offset coming from for you to stick to the revenue guide? And second one, You know, this is the first time we're speaking since the investor day from GE recently. And, you know, we know that your accounting is independent. You're going to wait until the CMD to share your financial targets. But I was wondering if you could share some early qualitative thoughts as you look at their charts showing the lead targets out to 2028. Now, what would you say are the biggest source of variation between their and your targets? Is it primarily just conservatism on the profit recognition, which is the case through 2025, or differences in spare consumption or even MRO? What are the main buckets of differences? Thanks.

Good morning, Georges. First, on your question with respect to LEAP, true, the downward revisions is about 150 to 200 engines. Have in mind that it's not only installed engines, but also spare engines. So we expect to deliver less spare engines this year compared to the initial budget. And as you know, these spare engines come with some profit. On the revenue guide, true, this downward revision and leap will have a negative impact on revenue. But in the meantime, as you can see, we experience more revenue coming from services, not only in propulsion, but also in equipment and interiors. So all in all, we have not changed our revenue guide. We also had some contingencies included in that guide, which have now disappeared. Keep in mind as well that the dollar is a bit stronger compared to the $1.10 per euro assumption that we have, so it also helps in terms of revenues. On your second question on the profit recognition on LCSA contracts for the LEAP, we won't provide more color than we had in the past, and I won't refer to what GE said as their capital market day. As you know, it will be the bulk of our discussion on December 5th when we held our capital market day. The dynamic is good. We see flying hours going up, meaning more cash today being recognized in our statements, but no impact in terms of profits, as you know. So the profit recognition methodology will be described later this year.

Thank you. Thank you. We'll now take our next question. This is from the line of Ian Douglas Pennant from UBS. Please go ahead.

Thanks very much, Ian Douglas Pennant at UBS. Could you help me understand a bit better the nature of the LTSA effect in Q1? Just a little bit more detail on exactly what this is. please. And then secondly, I just want to confirm on Leap, you have indeed cut production capacity versus your initial expectations, and we're not going to see an inventory build, which would impact sales in future periods. So given that your engines are a tight point in the supply chain, you're not going to build up some kind of buffer stock in any way.

Good morning, Jens. On your question for LTSA dynamics in Q1, we have recorded more costs in Q1 that we had expected. As you know, we recognize revenue as we incur costs, so meaning more revenues, and this is why you have a strong aftermarket growth in Q1. But part of the costs we do recognize in Q1 were expected to fall into Q2. So we won't see this cost meaning revenues in q2 this is why i'm saying that by the end of june on the full semester i would expect city aftermarket to be more or less in line with the full year 20 guide of 20 so don't expect this you know strong q1 performance to have any impact on the full year guide

And, Yann, on the second question, it is not our intention to build a buffer of lip engines because this means cash, you know. So, yes, indeed, we will replanify, as we say, our purchasing of parts because we are not going to build engines that the aircraft manufacturers are not going to take. We need to manage our cash and our inventory.

Thanks. On the first question, I guess it's a detailed question. I'll follow up. Thanks so much.

Thank you.

Thank you. I'll now take our next question. Next question is from the line of Phil Buller from Berenberg. Please go ahead.

Oh, hi there. Thanks for taking the question. I've got three, if I can, please. Sorry. On the growth rate for OE for LEAP this year, obviously, that is quite a big change. Is that exclusively the B? Or is the A contributing in any way to that, please? This is primarily B. OK. Thank you. And the storage topic was interesting. obviously very good from a mixed standpoint, but is there a capacity limit approaching in any way? It feels like we can't really retire any less planes at this point, so from an MRO capacity or a spare parts production standpoint, are there any constraints approaching?

Today, our our outlook for shop visits on the CFM56. As we said, in Feb, it's a high single-digit growth for the full year. And basically, there's the worldwide capacity to make it happen. So the capacity is there. And we don't have much supply chain issues on the CFM56 spare parts. Here and there, we need to focus, but it is not something that we believe will impair our ability to deliver spare parts.

Thank you. And just finally, on the LTSA topic, I appreciate the lack of margin being recognized, but is there anything you're seeing when you're doing the work, either positive or negative, that may lead to your program margin assumptions changing in any way. Intuitively, it feels like earlier booking of revenue is possibly not a good thing, but perhaps I'm thinking about that wrong. Thanks.

It's still early. So we see ups and downs. So that's why we've decided to be cautious. Pascal?

Yeah, it's a balance of positive and negative news depending on contracts and where engines operate. So there is no change to our view. But from one contract to the other, we could face additional costs or less costs compared to expectations. But all in all, no change in our global view.

Thanks very much.

Thank you. We'll now take our next question. Next question is from the line of Ross Law from Morgan Stanley. Please go ahead.

Hi. Morning, everyone. Thanks for taking my questions. So first one on interiors. You mentioned some customer push-outs and supply chain disruption. Are you still comfortable with maintaining at least the kind of break-even level this year? That's the first one. And then secondly, on aftermarket growth, just a quick one. Of the 1.9 billion sales in propulsion services, can you give us an idea of how much was specifically LEAP? Thank you.

On interiors, yes, we maintain our target for break-evens this year on interiors. I confirm. We maintain this objective.

So to be more specific, I would even say we expect to be slightly profitable in cabin and at breakeven for seats. And seats, I guess, is the main point of your question. On aftermarket, LEAP RPFH represents a small portion of our civil aftermarket index. We have not quoted any number. I think in the past, so I won't. Maybe to give you more color on the civil aftermarket guidance, as we say, revenues coming from spare parts on either CFM56 or the ice rust engines came in line with expectations. When we guided for a 20% growth full year of civil aftermarket, we say during the Fed call that there should be less growth in spare parts and higher growth than the 20% average on services. Specifically in Q1, we see the spare parts growth in line with expectations, but on services, the growth rate was much higher, but for a small portion of the civil aftermarket revenue base.

Okay. Thank you very much.

Thank you. We'll now take our next question. This is from the line of Robert Stallard from Vertical Research. Please go ahead.

Thanks so much. Good morning. Morning. Morning. First of all, regarding the LEAP, how confident are you with this revised delivery plan, particularly with regard to the 1B? If the 737 issues continue, is there a risk of Boeing essentially destocking you or bringing down production again? That's my first question. And then secondly, Airbus announced yesterday they're raising the A350 rate to 12 per month later this decade. Would that require any additional capex or investment for SAFON?

Thank you. Hello, Robert. On LEAP, the 10 to 15% revised guidance is our best estimate. Now, the situation is the one you know, you know. Still a little bit foggy, I would say. So this is our best estimate. We'll see what happens in Q2. And we, I don't know, we think, I mean, this is our best assumption. We think we may, we'll see what happens in Q2 at B. And from there, we'll see whether we revise or not this guidance for the full year. That's the best I can say. On A350, there's not much capex involved to increase to 12 on our equipment. This is mainly landing gear for us, some other wiring and electric equipment. So, no, I don't expect there's any big capex requirement to do that. And the 12 rates was the rate that was originally planned before COVID.

That's great. Thank you very much.

Thank you. We'll now take our next question. This is from the line of Tristan Sanson from BMP Paribas Ixan. Please go ahead.

Yes, good morning, gentlemen. Thanks for taking my question. The first one would be maybe on spare engines. Last year, you had a pretty front-loaded spare engine activity in Q1. Can you comment on how the business has been behaving recently? this year in Q1, and you said you're expecting a slightly less supportive trend for the whole year than initially expected. If you can quantify a bit, that would be great. Second is on equipment shipments. I'm a bit surprised by the strength of the shipment, for instance, on the A320neo in Q1. We know that in the past you had slightly differing trajectory compared to our farmers, maybe a bit lower at the beginning of last year. Is there some kind of restocking ongoing to support the A320 that is supporting your activity right now? And final one, I just wonder whether you had any ideas about how to use the production capacity that was freed by the reduction in the lead production target for this year? whether you could relocate that to spare engines. That's not the case, but maybe to other engine types or spare parts production or anything else that would be useful. Thank you.

Good morning, Tristan. On spare engines, we expect no impact on the spare engine ratio compared to the installed base. But as we have less installed engines, as I said earlier in the call, there will be less spare engines. But in terms of ratio between the two, it is unchanged. That ratio is reducing over time. It was significantly higher than the average of the 7-8% that we usually quote on the program like CFM56 or what we expect on the LEAP. So you should expect this ratio to gradually reduce over time. And again, in 24, same as in 23, I would expect the shipments of spare engines to be front-end loaded in H1 compared to H2.

Yeah. Tristan, on the equipment shipment, you can see page 14, you know, especially on DA320 NEO. There's a significant increase on landing gear sets. There's almost no increase on MACELE. And at the end of the day, this is for the same aircraft. So it's just a question of buffer at the airframe. So basically, this means that they had a buffer on the cell, and they wanted to basically to increase their buffer on landing gear. But basically, it reflects. Our deliveries do reflect the demand of the airframe.

There was a third question about shall we build more spare engines or move from 1B to 1A?

From 1B to 1A we have already discussed the fact that there is almost no commonality between both engines, even if the supply chain is partially the same. What I can only say is it will give us, as a consequence, some breath air and basically facilitate, I would say, our adherence to the airframe demand and to the airline's demand.

I didn't specifically mention the 1A or shift from 1B to 1A, but I mentioned the possibility to increase spare parts production, which I think in the past is sometimes something you use to use some free capacity available. Is it something you're considering today, increasing the production of spare parts as well?

We have not been, let's say... We have not struggled on spare parts. Supply chain issues have not been so far a big issue for spare parts deliveries. So no, there is no direct link between LEAP production and CFM56 spare parts production. No, we have not been limited on our ability to produce spare parts that are needed by the market.

That's really helpful. Thank you so much to both of you.

Thank you. We'll now take our next question. Please stand by. Next question is from Chloe Le Marie from Jefferies. Please go ahead.

Yes, good morning. I'd have a follow-up on the LEAP, please. I was wondering if you could confirm at which rate you're delivering to Boeing at the moment. Is it tracking in line with their own production, or are you closer to the 38 that they intend to ramp up rather soon, and how should we think about the evolution of LEAP deliveries as they go back to that rate? Second question is on interiors. The two Products for which you disclose deliveries were down 25% lavatory and business class seats. So are economy seats and other OE products up strongly or is it a matter of pricing for OE sales to still be up in the division? Thank you.

Hello, Chloé. Rate of delivery of LEAP-1B to Boeing, we have basically continued in Q1 to deliver as per their initial request. So basically the buffer of engines that are at Boeing, of LEAP engine at Boeing has increased since the start of the year. And obviously we take that into account for the adjustment of the deliveries going forward. On interiors, no, economy seats are moving up. Deliveries of economy seats are moving up. I don't have the indicator here. We've not mentioned it, but it's up. It's up.

But, Chloé, as you say, pricing plays a positive role in revenue there.

All right. Thank you.

and the aftermarket is uh is moving up as well on on cabin interiors cabin and seats it's moving up we'll take maybe a couple of questions if any thank you yes we have two more okay next question is from a line of christoph menard from deutsche bank please go ahead uh yes good morning thank you for taking my question

I had two last remaining questions. The first one is on the defense cells within equipment and defense. Correct me if I'm wrong, but it's probably the first time that you highlight such a high growth. So the question is, what was the level of organic growth and how sustainable is it across quarters for that? And the second is linked to your M&A. You mentioned liquid aeronautical oxygen systems. Can you remind us of your M&A priorities? I mean, you've been in the press for artificial intelligence units in France. So what are the priorities, bolt-on and technology-wise? Thank you.

Hello, Christophe. On defense, yes, we are planning for strong growth. on our defense, electronics, and equipment business for the full year. And we believe it's going to be sustainable. We are mainly involved in optronics, so optronics for UAVs, for helicopters, for combat vehicles, for ships. and vessels and submarines, so the demand is quite dynamic there. And we are also involved in navigation, inertial navigation, as well as we have a guided bomb named AASM, which is a guided bomb for which the demand is strong as well. So yes, I would say this is mainly organic. The growth is mainly organic, and this is sustainable, we believe. On M&A, our priorities are still the same, no change. Bolton Acquisition, and on defense, this is an area where we are looking at for Bolton Acquisition, if it makes sense. on technology-wise, economically-wise, to reinforce our portfolio of activities. But it has always to have a connection with what we do today. So yes, still both on acquisition. And artificial intelligence, this is an area that we look at.

Okay, just thank you very much for that call. On the defense organic sales growth in Q1 and the rest of the year, are we talking 20% or 15% or can you give some sort of an area of or a ballpark estimates of the organic growth we're looking at?

Just off in Q1, equipment and defense was up 22.7% organic. Defense was in the same vein. Yeah.

Okay, thank you very much.

Thank you.

The last question?

Yes, we have one more question. Please stand by. And the last question is from Olivier Brochet from Redburn Atlantic. Please go ahead.

Yes, good morning, Olivier. Good morning, Pascal. Thank you very much for squeezing me in. I will have three very quick ones. The first one on the LEAP LTSA. Is there anything in what you've seen in the first quarter that makes you confident that this is not going to happen again in Q2 or in Q3, this, I would say, higher cost that you've seen? Second one on the white body growth in commercial aftermarket. How does it compare with the average of the 27%? And last one on the 787, Boeing mentioned that it was producing at a lower rate than the five that they were targeting, around three probably. Does it impact growth in Q2, Q3 for you? Thank you.

Good morning, Olivier. Again, on the LTSA, this is purely a phasing effect between Q1 and Q2. Again, we were expecting some costs in Q1, Q2, Q3, Q4. Some costs that were due to fall in Q2 did fall in Q1. Hence, you know, the boost in revenue that we see. But once again, it will reverse, fully reverse in Q2. On the spare part sales for wide body, I would say, again, it's in line with the expectation. remember that back in 2023 we did experience lower growth in wide body engines spare parts compared to the cfm56 this year in 24 we would expect cfm56 spare parts growth to be lower than what we should experience in wide body engines because there is some kind of catch-up which is expected this year and what we see in q1 is that wide body spare parts growth is higher than cfm56

On 787, we are on board this aircraft through landing gear, through wiring, and also on cabin interiors, many seats, some seats. So yes, we may be impacted if Boeing does lower their production plan on 787. But it will not change significantly our equipment top line globally.

Thank you very much.

Thank you, Olivier. Thank you. Talk to you soon.

Thank you.

Thank you. This concludes today's conference call. Thank you for participating and you may now disconnect.