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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the Safran Q3 2018 Revenue Conference Call. I will now handover to Mr. Philippe Petitcolin, CEO; and Bernard Delpit, Group CFO.Mr. Petitcolin, please go ahead.
Thank you and good evening to all of you, could be good morning because I am in Seattle and Bernard is in Paris. So we have this connection which I hope is going to work properly for this conference.We are going to discuss, of course, the business highlights and the revenue for the third quarterand the first 9 months of 2018. The press release on the presentation are available on our website. To sum up the enhancements, Q3 2018 and 9 months 2018 sales grew strongly, thanks to a broad-based momentum. Zodiac Aerospace sales in Q3 2018 were in line with road map and the LEAP production continued to ramp up in Q3 and we maintained our annual target for deliveries. All in all, we confirm our full year outlook for 2018 we presented to you early September. Going to Page 4, the revenue highlights. The positive momentum continued in Q3 2018, and the performance was strong across the board. Q3 2018 sales were up 45.4%, including the contribution of Zodiac Aerospace, amounting to EUR 1.2 billion over the quarter. The organic growth was sustained at 11.4% as all activities contributed positively. When we look now at the 9 months of the year 2018, the reported revenue growth was 30.9%, including 7 months contribution of Zodiac Aerospace amounting for EUR 2.7 billion. The organic growth reached 10.5% over the first 9 months, thanks to a positive broad-based momentum in both Aerospace and Defense. Thanks to the year-to-date sales performance, we are well on track to meet our 2018 revenue target.Going to page 5 now. The update on CFM56 and LEAP programs. The LEAP ramp-up is the top priority for Safran. We are increasing consistently the production and deliveries of narrowbody engines to meet our customers' demand, combined deliveries of CFM engine LEAP plus CFM56 increased by 18%, 1 8, in 9 months of 2018 to 1,575 units from 1,333 last year. The production ramp-up of LEAP is continuing. LEAP deliveries increased from 257 in 9 months of 2017 to 741 deliveries in the first 9 months of 2018, including 186 units in Q1, 252 units in Q2 and 303 units in Q3. This unprecedented ramp-up puts a lot of pressure notably on the supply chain. Safran GE and the supply chain are 100% focus on analyzing the challenges. And we confirm our objective to deliver around 1,100 engines for the full year. The LEAP fleet service is doing well. It is growing and accumulating flight hours. And when we look at the CFM56 production, it is ramping down progressively with 834 deliveries in the first 9 months of the year versus 1,076 the year ago period. We expect to deliver around 1,000 CFM56 for the full year.Moving to Page 6, the Q3 business highlights. The LEAP commercial success is still on. All in all, the order intake for the LEAP has been very strong so far with 2,357 engines ordered since the beginning of the year, bringing the total backlog to 15,239 LEAP at the end of September. On the civil aftermarket, 9 months 2018 civil aftermarket for the U.S. up 14.7% in U.S. dollars terms as usual, including an increase of 16.4% in Q1, 8.8% in Q2 and 19.2% in Q3. We, nevertheless, confirmed our assumptions for civil market to increase in the range of 10% to 20% based upon the positive momentum of spare part sales and the slowdown in revenue recognition for services in Q4 2018. And the last point I would like to mention is -- on this page is Silvercrest. The fact that NetJets announced an agreement for the option to purchase up to 150 Hemisphere Cessna Citation powered with our engine Silvercrest.Moving to Page 7. In helicopter turbines, our recognized expertise allows us to size new market opportunities. Zunum Aero selected Safran for its hybrid-to-electric commercial aircraft, which will be available in the early 2020. Safran will provide an engine, Ardiden, to drive the Zunum electrical generator. In our nacelles business, we delivered the first A330neo nacelles to others in Q3. We have the complete responsibility for the nacelle of the Airbus A33neo.In carbon brakes, momentum is still doing extremely well. And in aircraft interiors, Safran was selected by a major U.S. airline to provide Optima business class seats for its 787 linefit and retrofit wide-body fleet.I now hand over the floor to Bernard, who is going to go through the financials in more details. Bernard?
Good evening. Thank you, Philippe. I go directly to Page 10. The euro-dollars spot rate was very close in Q3 to last year's spot in Q3. So it has a slightly positive impact for revenues. But year-to-date, average still above last year's, so it will have a still negative impact on the revenues year-to-date. And for hedge rate, of course, we set the rate at $1.18 and no change. On Page 11. So 11.4% organic growth, EUR 1.2 billion Zodiac contribution this quarter and that leads to EUR 5,348,000,000 of sales in Q3.Page 12, 10.5% organic growth year-to-date, negative impact of currency for EUR 393 million and EUR 2.7 billion contribution of Zodiac. That leads to EUR 14,854,000,000 sales year-to-date.On Page 13, some highlights for the Q3. Double-digit organic growth across the board for our main businesses; 12.1% for Propulsion, 10.9% for Equipment and 10% for Defense. Included in those figures civil aftermarket was strong in Q3, especially for services slightly above our expectations. We do not disclose the same period for Zodiac, but I can provide you with more details and our estimates of growth for the Zodiac businesses. Aerosystems was strong in Q3, up 7% organic. Cabins back to growth 10% organic in Q3 and seats still negative in negative territories, down 13%.Page 14. Organic growth 10.5% year-to-date. Civil aftermarket 14.7%. We forecast some seasonal impacts in Q4. And remember also that Q4 last year was very high for civil aftermarket. And some estimate of Zodiac revenues year-to-date, aerosystems is up 1%, cabin is flat and seats down more than 20% year-to-date.On Page 15, just on hedging, no changes. We have taken the opportunities of the market to restructure our portfolio of options when needed in order to raise the KO barriers to secure our strike rate in line with previous announcements and we will rephrase that at the end of November during our Capital Market Day. Now, I leave the floor to Philippe for the outlook.
Yes. Thank you, Bernard. Based on the first 9 months performance, we confirm the outlook for 2018. I like to highlight that 2018 outlook notably benefits from the stronger civil aftermarket growth than the secular high single-digit growth strength. Gross margin improvement of CFM56 OE and advanced payment of export contracts for military purposes. The 2018 assumptions reflect this trend and are unchanged compared with the H1 earnings announcement. I also like to precise that the estimated negative impact from the transition between CFM and LEAP includes some cautiousness. We are a bit cautious regarding this negative estimated impact. These assumptions are detailed in the next slide. Thank you for your attention. And we are now ready, Bernard and I, to take your questions.
[Operator Instructions] We have first question from Christian Laughlin from Bernstein.
I just have one question on the civil aftermarket, if I may please. Basically, Philippe, if you could just discuss any sort of trends you've seen in the quarter with respect to what the key driver of the growth was, be it unit growth in just coming through the shops or a change of scope of work or a bit of both? And how that sets up for Q4 to the extent that you've had some visibility in the Q4 so far?
Yes. Thank you, Christian, for your question. In fact, the growth when you get this kind of level of growth, it cannot be one single variable, which is going fine. I mean, we received more shop visits than what we had anticipated and the value, I mean, per shop visit was also higher than what we had anticipated. For the pricing, pricing is valid for 1 year. So there was no influence on the pricing of the past -- on this third quarter compared to the second or the first quarter. It's just the question of quantity of shop visits and the cost of shop visits.
So we have another question from Ben Heelan from Bank of America Merrill Lynch.
I think there's been a few incremental concerns on aftermarket going forward given the rise in the oil price that we've seen and the potential impact on airlines. Could you maybe talk a little bit if you've seen any change in behavior from the airlines' result of that. And then secondly, on equipment services have, obviously, been extremely strong relative to OE. On top of the cost savings, I think, was the key driver of the margin improvement. Is mix potentially going to be an equally big driver of margin improvement going forward?
Okay. Ben, I will try to answer your question. The first one regarding the aftermarket and the potential influence of the oil price. As of today, we've seen absolutely no change. The airlines, all of them, they fly a lot. They fly all the airplanes every day. And when you look at the growth of the traffic we are still between 6% and 7% since the beginning of the year, after 2 very good years in 2017 and 2016. So the traffic is there and again, we've seen, as of today, absolutely no impact of the oil price. The second question related to equipment, it's true that the improvement of the equipment business is coming from a very aggressive cost reduction program, but on the other hand, we are now benefiting from some contracts, which have been taken couple of years ago, especially in the nacelles business, as we have the full nacelles in production for the A320neo LEAP and the full nacelles for the A330neo. And as you know, when airlines get their airplanes, they put stock -- a safety stock called the initial provisioning and we are benefiting from these 2 programs of this very nice business of initial provisioning. The second element, which is also doing extremely well are the carbon brakes. I remind you that we own more than 50% of the full world market of carbon brakes for commercial aircraft. And as the airplanes, I just said, are flying a lot, this business is growing also very nicely.
If I can just give some color on that. Core equipment, the total growth of services is 11% up and it's balanced between our nacelles business and landing system.
So we have another question from Phil Buller from Barclays.
Phil from Barclays. I guess I'm just keen to follow up on the prior questions, I guess, on civil aftermarket. I mean, in the release, you talked about true cycle growth trends being, one, in the high single digits. But obviously in Q3, where we're a full 1,000 basis points above those levels and that's off the comp of last year, which was 500 basis points above that level, too. So I guess, I'm just curious to know how you and we should think about this in general terms and maybe that's premature ahead of the Capital Markets Day, but should we expect to see a moderation of growth just trending towards the true cycle mean over time or should we expect growth proportionately lower than average for a period and post this outgrowth, which I guess, is how we normally end up getting to averages over time.
Well, it's a difficult question and we will try really to update you and give you a lot more data during the next Capital Market Day. What we think really is that on the long term, the high single-digit growth in this civil aftermarket is something which still makes sense and we still believe that's where we have to grow. Except that for the last 2 years, we have been above this number and so far 2018 is also very good. We said, Bernard and I, that in this index of civil aftermarket, there are 2 main components, the spare parts and the services. And the services are not going to grow during Q4. So that's the reason we prefer for the moment to keep our target at around 12% for the year.
So obviously, Q4 we have a bit of a feel for but, obviously, as we're entering 2019 we are then lapping some very aggressive multiyear comps. So in terms of how we think beyond the quarter, are we expecting the seasonality that we're going to see in Q4 to perhaps repeat in 2019 or is it too early to say?
No, it's too early, maybe, Bernard?
Well, of course, because when we manage large fleets in certain contracts, at the end of the year you still have some settlements, some regularization and so forth. So you have -- you always have something at the end of the year when you meet the managers of the airlines. That's the only thing I can find. We'll see if it's as strong as we expect in Q4 to see if it has an impact for the next quarters of 2019, it's too early to tell. But what I can say is that our expectation in Q4 this year is it will be -- we will have some specific impact for the large fleet contracts.
So we have another question from Mr. Olivier Brochet from Crédit Suisse.
I will ask a follow-up on that question first, if I may. So when you say no growth in Q4 for the services side, are we seeing decrease on just flat revenue? That's my first question. The second question on that is, can you give us a rough order of magnitude between time and material and services in the aftermarket growth number that we have here? And the second question is, I will just simply ask Philippe, you are in Seattle, just asking you what you hear about NMA and if there are any change of views on Zodiac from your Boeing friends?
Maybe, Philippe, I can -- yes, I will answer the first question. Definitely, we are expecting something flattish in Q4 for services. So it might end at the high-end of the range of 10% to 12% when you look at civil aftermarket all in. The breakdown between time and material in services, in fact, it's the breakdown between spare parts and the rest of the civil aftermarket, it's around 2/3 in spare parts and 1/3 in services.
Olivier, on your question on NMA and Zodiac, on the NMA, I have a meeting in 1 hour with top management of Boeing. So I will maybe know more in 1 hour, but as of now, I don't have any update on this program. I still believe that Boeing is going to make it and we are going to fight in order to put our engines, systems, equipment on this new platform if Boeing decides to launch it. Regarding Zodiac, yes, it's also part of this stretch. I have to reassure our customers that we are on the right track and that even if we are not yet at the level of performance that the customer would like to see, we are improving and we do everything in terms of methodology, in terms of people, in terms of support to get to the level expected by Boeing. So yes, my visit here was for both.
So we have another question from David Perry from JPMorgan.
Gentlemen, different subject, please. Just on your comment, Philippe, on the guidance for the transition costs on LEAP, maybe it's just a language thing. You said your guidance was conservative and I just wasn't sure what you meant by that. You mean you've been too conservative so you think you'll be at the lower end or you're cautious and you think maybe you'll come at the higher end of that. Just sorry to be pedantic, just wanted to clarify.
No, no, don't be sorry. I will let Bernard answer this question.
So definitely, David. We think we have the cautiousness and if we don't be this cautiousness we'll be below the low end of the range.
Okay. And I mean, is that a possibility or is the message you're conveying that's less likely now?
We convey the message that it's a possibility.
To do better?
Exactly.
To do better, of course, but when you are in a period of such a ramp up, I mean, and because of all the risk we have -- when we start the year, we always have this kind of cautious. So months after months, we release some part of our cautiousness and we tell you in the EUR 100 million to EUR 150 million it embarks quite large cautiousness, and we think it might end below the low end of the range that we gave in September.
So we have another question from Andrew Humphrey from Morgan Stanley.
A couple from me. Apologies if I missed the answer in the nuance early on. But if I look at your aftermarket guides for the full year, the guide appears to imply flat revenue overall in aftermarket, so spares and services in Q4. Can you confirm whether that's the case? And secondly, on the buyback, you announced the 2-year buybacks kind of last 6 months appears to be about pro rata in terms of what you've done, the share prices have gone up over that period. Are you going to sort of plow ahead with that come what may in terms of share price or are you going to be a bit more intentional about it?
Okay. Ben, I will answer the questions. On the civil aftermarket, we said it's going to be flat for services, but we still have some growth for spare parts in Q4. So it's not flattish for the whole civil aftermarket, it's flat for services, but still growing for spare parts, right. For buyback, maybe you've seen our next general assembly resolutions. We will propose to raise the price for the buyback, so it's part of the strategy and we will make some more announcements at the Capital Market Day. So nothing specific to add on that.
And just a follow-up on that aftermarket question. I mean, that would suggest then that mechanically your full year guide would need to go up even though you haven't officially raised it today, is that right?
No, no. We said that we might end at the high end of the range, but we think we will be in the region of what we said in September, including, again, flat for services in Q4, but still growing for spare parts.
So we have another question from Tristan Sanson from Exane.
Three questions, please. The first one is on the slight adjustment to your guidance on CFM transition and that mention of cautiousness being baked in. You mentioned actually in the assumptions to your guidance 2 elements, one being the CFM56 volumes, one being the negative margin on LEAP deliveries. Can you tell us whether the cautiousness is rather on the side of the CFM56 contribution or on the LEAP unit cost? And when I see at the beginning that you're mentioning gross margin improvements on CFM56 OE, I suspect that the good performance on spare engine deliveries here is probably one of the factors, but I just wanted to have your view on this. The second question would be on the ramp-up of Space-Flex v2. We heard about some of the difficulties that Airbus may have on ramping some of the option of the A321neo with the Space-Flex option installed on it. Can you tell on your side how the ramp-up happening? Is it happening in the satisfying view for you? And the third question, can you tell us what's the business case for the Silvercrest looks now after the good news we've been having at the recent NBAA show? Should we expect this program to become a profit center at some point or do you need another customer to make it a real interesting business case?
Okay. Tristan, I will answer the first and the last question. On the CFM transition, I think we have cautiousness across the board, but as you mentioned what was really different from our initial plan is that the prices and the margins of the CFM56 were above our initial expectations, but where we still have some cautiousness is on the LEAP ramp-up. On Silvercrest, I think we are looking for other customers, of course, in order to cover the cost of capital, but we are optimistic for the future of this business and of this engines. But yes, of course, the more clients we have, the more successful it will be and one application is not enough for the kind of investment that we will make on this engine.
If I may just ask for a precision to your helpful comment, Bernard. On the first point, the CFM transition, you said so far the CFM56 pricing and margin was a driver of good surprise, which basically underpin the H1 results improvement, but now the cautiousness is on the LEAP ramp-up cost. Is that the way I should understand it?
Yes, you can understand it this way. We haven't removed the cautiousness that we have taken since the beginning of the year on the LEAP.
Tristan, on your second question, was it -- I didn't understand very well, was it related to the Space-Flex from Zodiac on the A320?
Yes.
Okay, that's what I heard. So it's growing a lot better and we expect to meet completely the expectation of Airbus 2019. We are, as you said, experienced some problems at the beginning, but most of these problems now are behind us.
So we have another question from Harry Breach from Raymond James.
Just 2 questions, if I can. First on Zodiac Aerospace. Are we getting to a point where the book-to-bill is getting closer to 1 on the seat side. Can you give us a feeling for that? And then when we think about supply chain execution for Propulsion, can you give us a feeling in terms of on-time, on-quality delivery to Safran whether the sort of trends are sort of improving, about stable or maybe getting a little bit less good?
Okay. I will try to -- Harry, to answer this question. On Zodiac seats, we are not yet sure that the book-to-bill equal or greater than 1. We are still in this curve that was initiated 2 years ago. We knew when we bought the business that it would take time to bring back momentum for new orders and increase of sales. Why? Because a project for seats is something in the range of 2 years. You have an engineering phase, you have an industrialization phase and then you have a production phase. And the engineering phase lasts between 6 and 18 months according to the complexity of the product. So we knew that with the problems we had at Boeing, with the problems we had at Airbus and with airlines, net sales would drop over the next couple of years. So we are in this hole, I hope that 2019 will be better. We do everything we can, but it's not guaranteed yet. So that's for the first question. But again, it's -- to conclude you on Zodiac seat, this -- in this Zodiac seat evolution of the sale, nothing that we were not expecting. From the Propulsion supply chain, the supply chain is doing better. We are now seeing that 2 things, this learning curve and they know what they have to build and they do it on time. And the second thing is that there is a reduction of the CFM56 and about 80% of the supply chain is common between CFM and LEAP. We see also the advantage of having people who are available to help us get this ramp-up on the LEAP. So yes, an improvement. Are we at the nominal level? No. We are not yet at the nominal level, but it is improving.
So we have no further questions. [Operator Instructions]
Well, if there are no other questions, I guess, I think we are done. Thank you very much for attending our conference call and hope to see you at our Capital Market Day on the 29th of November. Bye-bye.
Bye-bye.
Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.