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Welcome to the Safran Q3 2021 Revenue Conference Call. At this time, I would like to turn the conference over to your host, Olivier Andries, Safran CEO; and Bernard Delpit, Deputy CEO and Group CFO.Mr. Andries, please go ahead.
Good morning, everyone. Thank you for joining us today for this Q3 2021 revenue conference. I will start the presentation with recent air traffic trends and read some Q3 business highlights. Afterwards, Bernard will go into more details on our financials, and I will conclude this presentation with our 2021 outlook. But first, I would like to take the opportunity to warmly thank Bernard for his long-standing exceptional contribution to Safran.
Thank you.
I'm on Slide 5. In Q3, the activity is improving year-on-year and sequentially. Revenue is up 11.6% on an organic basis compared to Q3 2020. This improvement is mainly driven by services across all businesses. Sequentially versus Q2 2021, our Q3 revenue is up 4.5% organically. Propulsion and Aircraft Interiors did better than in Q2. Equipment, Defense and Aerosystems were flattish versus Q2.In the first 9 months now, revenue decreased by 9.3% on an organic basis at EUR 10.6 billion. This is obviously due to Q1 2021, as Q1 2020 was -- if you remember, was immune from the crisis and saw a strong comparison basis in the first quarter of this year. We are comfortably on track to meet full year revenue guidance. As expected, we anticipate a strong Q4, which is supported by air traffic trends.So if we go now on Slide 6, air traffic trends. As of today, the trajectory of air traffic is in line with our central scenario. We are on track. Summer season has been positive, especially in the U.S. and even more so in Europe, and we observed a continuous improvement in terms of narrowbody ASK. Mid-October, our narrowbody ASK is up 74% compared to 2019, so we are trending towards 80% in Q4, which, if you remember well, was our basic assumption for our guidance. However, the road to recovery remains somewhat bumpy, and we have observed in August that traffic can deteriorate rapidly if travel restrictions are implemented to face COVID-19 upsurge.Some comments on weekly cycles for CFM engine per geography as of October 17. In China, after the decrease observed in August due to the spread of variant Delta, flight cycles have improved and recovered rapidly and CFM cycles are now at minus 9.6% versus 2019.Asia Pacific, the situation is improving. CFM cycles reached minus 62% so this is the worst region, we're still low due to strict border control measures. In North America, the level of cycles compared to 2019 has been quite stable during the summer season at a high level. We are now at minus 9.5% compared to 2019, for all CFM engines.In Europe, as I said, summer season allowed a very strong improvement. CFM flight cycles are now minus 26.7% versus 2019, while we were at minus 70% until the end of May. All in all, with these cycles as of October 17 for all CFM engines, we're down 24.5% versus 2019 and CFM56, we're at minus 31%.Turning now to Slide 7. Some propulsion business highlights for this quarter. Propulsion, we delivered 256 engines in Q3, 226 LEAP engines compared to 172 million in Q3 2020. Our market share on A320neo family is still at 59% as of September 30, 2021, and we delivered 30 CFM56 compared to 39 in Q3 last year.Key points. Our civil aftermarket indicator is still down minus 7.7% in 9 months 2021, but the most important, it is up 24% sequentially in Q3 2021 versus Q2 2021, so a very strong improvement quarter-to-quarter. It is a 43.8% increase year-on-year in Q3. To be mentioned, sustainability, we have run an engine test campaign on the first helicopter engines using 100% sustainable aviation fuel and it went very well.Aircraft Equipment, Defense and Aerospace. So carbon brakes, we've been selected by the Canadian ultra low-cost carrier for their 737NG and Max fleet. In Aircraft Interiors, campaigns still go on, and we've been selected by a big U.S. airlines to provide business class seats for a new order of 200 single-aisle aircraft and by an Asian airline to provide economy and business class seats for some of their Boeing 787.Cost, Slide 9. We keep costs as low as possible. HR costs in 9 months 2021 are down compared to 9 months 2020. And compared to 2019, we are still achieving savings that are in line with savings achieved in full year 2020. Headcount is down compared to end of 2020, while, as expected and already mentioned in H1, given the increase in activity, short-term working scheme is now less utilized.We are continuing our industrial footprint optimization. Full closure of Bellingham and Ontario sites at Airport Interiors, Full transfer of work will be completed before the end of 2021. The wiring business, Electric & Power closure of Santa Rosa site in the U.S. has been announced and the transfer of work is ongoing to another U.S. site, Denton in Texas and the Mexican site in Chihuahua. All in all, operational expenses are down in 9 months 2021 compared to 9 months 2020 and down compared to 9 months 2019, with savings in line with what has been achieved in full year 2020. We are engaged to maintain cost discipline while the business is recovering.I'll now give the floor to Bernard.
Thank you, Olivier. I directly jump on Slide 12 on FX. Average spot rate was $1.18 in Q3, close to last year's $1.17, creating a negative translation effect on revenues. Hedge rate was $1.16 in Q3, no change here.On Page 13, some comments with regards to our hedge book. The hedge book totaled almost USD 30 billion mid-October. That was approximately the same figure as in July. The euro-dollar rate reached a low point at $1.15 on October, and we took this opportunity to spread the risk of KO by moving away the nearest barriers. And now 88% of these scale barriers are above $1.25. And we also added new options to the 2024 book at strike rates compatible with our long-term rate targets. So we are very comfortable with achieving a rate of $1.16 for 2021.On Slide 14, adjusted revenue reached EUR 3.7 billion in Q3 2021, at up 10.4% year-on-year and up 5.7% sequentially.And directly move to Slide 15 for more details. Propulsion revenue were EUR 1.8 billion in Q3, up 17.4% on an organic basis. OE revenue in Propulsion slightly up 1.6% organic and services up almost 30% organic. Civil OE revenue is slightly down with higher LEAP engine deliveries but lower CFM56 and high-thrust engines volumes. Civil aftermarket up 43.8% and this increase is essentially driven by a strong increase in spare parts, and services contracts are also up close to 10%.M88 engine for the Rafale fighter deliveries were up at 15 units in Q3 compared with 6 units in Q3 last year. And the helicopter business is flattish, with growth in services offset by lower OE deliveries.In the Equipment business, EUR 1.5 billion revenue in Q3, up 5.6% on an organic basis. OE revenue in equipment was down 2.2% organic, mainly impacted by 787 program production rates from landing gears, wiring and despite higher volumes of nacelle for the A320, and services in Equipment were up 23.6% organic, driven by landing yields, carbon brakes and nacelle activities and, to a lesser extent, Aerosystems activities.Aircraft Interiors, almost EUR 400 million revenue in Q3, up 11% on an organic basis. OE revenue in Aircraft Interiors is slightly down 1.4% organically, with lower volumes in galleys and lavatories for A320 and A350, compensated by in-flight entertainment deliveries recovery. And services in this division increased by 54% from a very low comparison basis, but it was nice to experience this increase, the first time since a long time, with spare part increasing in galleys, trolleys, and inserts and MRO activities. All in all, Q3 2021 is improving year-on-year but also sequentially up 4.5% organic across all divisions, driven mainly by services.I will not comment on the year-to-date slide, Page 16. So all in all, Q3 growth in line with expectations and now Olivier for the guidance.
Thank you, Bernard. So turning to Slide 19 and to conclude this presentation. We comfortably confirm our full year 2021 guidance for sales and profitability. We are able to raise, for the second time in the year, the guidance of free cash flow. Thanks to new Rafale export contracts, advanced payments and a positive working capital contribution, free cash flow generation is now expected to be above EUR 1.5 billion. Obviously, this guidance is based on a number of assumptions, notably on civil aftermarket, which relies on further fourth quarter improvement. These deliveries are now expected to be around 900.Ladies and gentlemen, we are on track. We are now at your disposal for the Q&A session.
[Operator Instructions] We have our first question from Mr. Robert Stallard from Vertical Research.
Just a couple from me. First of all, you had a very strong aftermarket performance in Q3, and you sound very confident about this essentially continuing into the fourth quarter. But I was wondering if there was any unusual sort of situation you see. Are you seeing any of your customers restocking on spares, for example? Or are you starting to see an increase in the dollar value of shop visits?And then secondly, on the supply chain, obviously, a lot of commentary across the sector about concerns in the supply chain but you don't seem to have any. I was wondering if that is the case.
Thank you, Robert. Yes, we had a strong aftermarket Q3. We have not seen so far restocking of spare parts from the shops, but we expect it will happen in Q4. And we expect that we are going to get big orders, especially in November before we are going to increase our price for next year. So we expect to have a strong November and we expect, indeed, shops to, let's say, stock spare parts in November.Dollar value per shop visit, no change of trends since the start of this year. So we are in the same vein in Q3 as in Q1 and Q2, meaning dollar value per shop visit slightly down compared to 2020.Supply chain. You're absolutely right to raise the supply chain concerns. Yes, indeed, we -- I mean, the supply chain has been fragilized during the crisis. And we see today, all across the supply chain, concerns about human resources. It's difficult after what happened to recruit again, and we see difficulties to recruit the people that we need both in France, in the U.K. We see that it's even more acute in the U.S.And we see also tensions on raw materials availability. I can quote, of course, semicon, but not impacting raw materials in chemicals and also materials -- metallic materials such as aluminum and so on. So those are basically concerns that we will have to address because this is a challenge for ramp up to come across the supply chain, widely.
Our next question is from Mr. George Zhao from Bernstein.
On the free cash flow guide increase, how much of that was related to delays of the A320 deliveries and the associated timing of cash concession payments potentially pushed out into 2022? And given that potential reversal and also assuming no new Rafale export contracts, can you grow cash flow in 2022 versus this year?And second quick question. Earlier in the year, you talked about high single-digit civil aftermarket growth underlying your guidance. Can you still achieve that, given we're at down high single digits year-to-date?
George, it's Bernard speaking. I will talk about the free cash increase. You're right, I mean, from -- in the delays in the deliveries of A320 create some positive working cap impact. But I think it has played a limited role in the increase of our guidance. Most of the improvement is coming from new down payments for the M88 Rafale engine business. So yes, I mean, the deliveries are creating some positive impact.I will not answer the 2022 question. I will leave it for the year-end call, but you have it right. But please keep in mind that down payments for Rafale fighters was the main driver of our free cash flow guidance improvement this quarter.
George, on your second question relating to the high single-digit guidance on civil aftermarket outlook. We have always said since the beginning of this year that our guidance was based on, let's say, set quarter-by-quarter improvement of the air traffic recovery. And as we speak, as I said, we are on track. So Q3 was a strong improvement versus Q2, the 24% improvement.The high single-digit growth assumption for full year 2021 relies on the further improvement in the fourth quarter of around 30%, so meaning a Q4 improvement on civil aftermarket of 30% versus Q3. All indications that we have today are pointing in the right direction.
Next question is from Madam Celine Fornaro from UBS.
My first one would be on the better outlook for the LEAP engine. And if you could just comment, if the increase is coming from direct OEM demand or also from spare engines?And then my second question would be regarding on the spares recovery and growth that you pointed to, if you could maybe provide a little bit more color regarding the CFM56 and what you're seeing there in terms of demand for spares and if you see a competition for used serviceable material coming in, and when would you expect that to start to pick up?
Okay, Celine. On LEAP deliveries increase, it is a combination of both. We -- when we mentioned at the start of this year 800, we have some cautiousness. But yes, indeed, we've had, let's say, more, let's say, some upside on spare engines. So the 2 combined leads us to guide on 900 deliveries now, okay?And some more color on demand for spares. As I said, our guidance basically is consistent with further improvement in Q4 of 30%. We count on a strong November month, as I said, before the price are going to increase. That's one. And we don't expect a big inflow of new starts in 2021, simple reason for that is that there has not been many aircraft being retired. I can give a number. Since the beginning of this year, there has been only 77 second -- CFM56 second-generation powered aircraft being retired, so we are in the same vein as 2020, and we are in the same, let's say, trajectory as what we see since the start of this year. No big aircraft retirement, means no inflow of [ response ] to date.
And maybe if I could just follow up on your last point. And would you expect that the airlines again maybe postpone their retirement decision if they are nervous about the supply chain on their potential new aircraft delivery?
Today -- what I can say is today, airlines have not, so far, taken any decision to retire aircraft. That's what we see. So they are now in the wait-and-see mode. The good news is compared to last time, the level of, let's say, used -- unutilized aircraft on CFM56 fleet has burned down. We had a level of 20% to 25% of the fleet that was unutilized in the beginning of the year. We are now at 16%. 16% of the fleet is unutilized, meaning 84% of the fleet is flying.
Next question is from Mr. Ben Heelan from Bank of America Merrill Lynch.
So I've got a question on November and the pricing. So what is giving you that confidence that you are going to see that buy of spare parts ahead of the pricing? And when you raise prices, should we be assuming that you are going to be returning to the kind of historic level of pricing that you saw pre COVID? That would be the first question.And then second question on Interiors. I think the commentary around the half year was that you were expecting that the Interiors business should be getting close to breakeven at some point in Q4. Obviously, you've seen a bit of a tick-up from the revenues in Q3. Is that still the case? Just any color there would be great.
So confidence on Q4, we have orders for November so we see a big inflow of orders for November. So we know that November is going to be a strong month, so this is what is giving us some confidence. The pricing escalation that basically we will have by the end of this year is going to be comparable to what we've seen pre-crisis and in 2020.On Interiors, as we have always said, we are still targeting to reach breakeven, let's say, in the very last weeks of this year. H2 will be negative, not as negative as H1. And in order to get back to breakeven, it's a combination of a takeup of the top line revenues, which we'll start to see at the very end of the year and all the measures that we have taken to lower the breakeven point. So it's really a combination of both. But we need the top line to come back.
Next question is from Mr. Harry Breach from Stifel.
May I just ask 2 questions just on Interiors again? A slightly different angle to Ben. Can you give us any feeling about how the retrofit business there is doing as well as the sort of the repair side?And secondly, just maybe when I think about the full year guidance and I think about what may have changed over the last few months, maybe more spare engine deliveries on the positive side. Aftermarket looks as if it's on track with what you were hoping for the full year. In theory, it has come back to positive organic growth in the third quarter, which is reassuring. We have lower 787 production rates, as Boeing told us earlier on this week. Olivier, I guess what I'm getting at is do you feel maybe sort of even more confident in your EBIT guidance than you did maybe back in July?
Okay. Harry, I will take those questions. On Interiors, I think that I mentioned on my -- when making comments on Q3 that, in fact, services so you can call it retrofit, but services and aftermarket in Seats and Cabin, for example, trolleys and galleys was a good driver of improvement of revenue sequentially in [ Q3 ]. So I mean, we've seen some improvement. I'm not saying that we have seen big orders for big retrofit campaigns for -- from airlines. It's not the case, but aftermarket and services for this division is improving indeed. What we need to see in the near future is our new orders and new campaigns. And we are optimistic because we've seen some interest from airlines to both Cabin and Seat business to see this improvement.Now and starting your question on EBIT, there are so many moving parts in the P&L that, as you said, maybe the spare parts was in line with what we said before. So no surprise here. We could have hoped for a more dynamic aftermarket, but we know since the beginning of the year that it will be back-end loaded. So it's in Q4 that we really will see this, again, new improvement.As you said, we have seen some engine orders that were not as strong at the beginning of the year as we have seen since the end of H1. So it's been a good part of the -- our confidence in the guidance. I would say also on the cost side, what we've been achieving is also a good driver of the guidance. So all in, it means that we are very confident, we will stick to the guidance.In terms of improvement of the margin, and I remind you that the idea is to be 300 basis points at least above what was achieved in H2 last year, which was a trough in terms of profitability. We will recover that strongly in 2021 and we will continue afterwards.
So to stress again, the key message is we are on track in Q3. This is reassuring. And all in all, yes, we are more confident to achieve the guidance.
Next question is from Mr. Christophe Menard from Deutsche Bank.
I had 1 question on the shop visit content. I think you mentioned in H1 that shop visit content was reduced, the work scope, I mean. Are you seeing a change in late Q3 and are you seeing a change in Q4?And the second question is on the workforce. We've seen mentions of increase in workforce at Safran. Does it change your objective of a workforce 10% to 15% lower in 2024 versus 2019?
Okay, Christophe, I'll take the first one. Bernard will answer the second one. On work scope, as I quickly mentioned, yes, you're right. I said for Q1 and Q2 that we had seen a slight reduction of the work scope compared to 2020, especially on fan and low-pressure turbine. We have not seen a change of trends in Q3, so we are still in the same, let's say, sort of dynamics, still slightly down compared to 2020. Really too early to say for Q4, but the expectation is it's going to be slightly down this year. And the guidance, take that into account.
For your headcount question, Christophe, I think I will leave it to the Capital Market Day to guide you on 2025 ambitions. I would say that we are in the process now of ramping up again. So necessarily, we'll see some increase in the headcount, mostly in factories outside of France, but also in France because of what we have to do in terms of engines. But the midterm target, we have to reassess it. But I think the workforce in 2025 will be below where we were in 2019 because we have improved our efficiency and the lean policy in all and every businesses of Safran.
Now to give some additional color to that, as we speak, we are at minus 1,500 people compared to the end of 2020 so you see the headcount has continued to decrease. There has been a level of attrition slightly higher than what we expected. And I can say we've reached a low point now because, let's say, what is ahead of us is the ramp-up. So we will have to ramp again, including the workforce and an accelerated research and technology development ahead of us to address the decarbonation and so on.So all in all, there are going to be now -- from now on an increase of the work scope or the workforce. But as Bernard has mentioned, we'll come back with more details on the Capital Market Day and we will not get back to the point though.
Can I ask a quick follow-up just on the free cash flow? On the last call, you mentioned already -- you increased already the free cash flow guidance on the last call. And that was linked to Rafale as well, if my understanding is right. I mean, you mentioned Rafale again this time. Is it an incremental order or is it the same order where you've got higher prepayments?
I would go for the second answer. We have not added any new names in terms of contracts. But for the customers that we already had, they have decided to add some new orders. And so as a consequence, we have received or we will receive, by the end of the year, new down payments.
Next question is from Mr. Jeremy Bragg from Redburn.
If I look at the aftermarket, if I look at ASKs, as you said, hopefully, they're tracking at 74% of 2019's levels, and if I look at your aftermarket revenues in 3Q, it looks like it's somewhere around 63%. So if we're looking roughly at this 11 percentage points gap between what the underlying market is doing in terms of ASKs and what your aftermarket revenues are doing, I wondered if you could comment on how much of that was timing stuff, like green time and how much of it was lower scope. And when that gap goes away and whether this gives you confidence on this is what's giving you confidence on the 4Q numbers?And then the second question, please, is on cost out. Is it fair to say that your cost control is similar to or better than what you were expecting at the start of the year? Because when I was reading that slide, it just occurred to me that actually, the cost reductions seem to be good despite the end of the short work time or short time working. And I wondered if that had actually been a little bit better than had been previously anticipated.
I'll take the first one and maybe Bernard will take the second one. On ASK, if we look at Q3, we started Q3 at minus 40%. End of June, we were at minus 40% on ASK for narrowbody. And end of September, we were at minus 30%. So that's one element. We are mid-October and mid-October, we are at minus 25%. So this -- with this, we are confident that we are on track with the trajectory that we have in mind. That's one.Now you cannot translate directly the ASK into spare part revenues because of green time, because of work scope evolution. So there are numbers of elements. So you cannot have a direct translation. Now green time, we see green time continuing. We have not -- I mean, we've not seen in Q3, let's say, reduction of the green time level compared to what we've seen in 2020 and 2021. We've not seen an acceleration but we've not yet seen a decrease. We know that green time will not last forever. We know it's just a question of phasing and, at some point in time, they're going to be a catch-up. But to date, we are still impacted by green time.
I will take the one on cost out, maybe. I would say that it's in line with the plan. I mean, we were only announcing new initiatives when we are close to implementing those new initiatives. So what you've read in Slide 9 of Olivier's presentation is really in line with the initial plan. Nothing new here. We note additional savings, it's versus budget and plan, it's what we have decided that now we are implementing.
We have no other questions. [Operator Instructions] We have another question from Mr. Tristan Sanson from Exane BNP Paribas.
Sorry for the bad voice. I had a quick question about the cabin situation and the organization of the ramp-up of the OE activity. We had comments from Airbus yesterday saying that they were starting to see some quality issues on supplier delays, specifically in the cabin. Without being more specific about what type of elements and especially not wanting to make any finger pointing, but can you comment a bit on your side how you monitor the preparation of products and ramp-ups there? And whether you see any challenges related to on-time delivery or quality of these products as you ramp up back production?
Okay. On our side, we had a challenge earlier in this year on cabin deliveries for A220. We had a challenge and we were a little bit late on our deliveries, but we have fully recovered the situation during summer. We don't have any other, let's say, [indiscernible] issues with Airbus or Boeing. So we are on time on the cabin side and on quality. This being said and as I mentioned, the ramp-up is going to be a challenge because we face -- again, we face -- especially in the U.S., we face a higher level of attrition as expected. And we need to recruit people now to arrive the ramp-up and it's tough. There's a high level of competition to recruit people these days. So this is a challenge and Airbus has mentioned it rightfully so.
If I may ask a follow-up on this. In the past when we had specific difficulties in ramp-up in some elements of supply chain, the OEMs have usually pushed for consolidation to get stronger suppliers that better organized. Do you see potential for you to not leverage that situation but adapt to the situation and maybe grow externally your business to provide better control to the OEMS?
Well, we -- first of all, we don't comment on any future project that we could think of, but we are not intending to just vertically integrate for the sake of integrate vertically. If any project that we have would have to make sense strategically and financially. So particularly consolidation of the supply chain is not our strategy.
Next question is from Mr. David Perry from JPMorgan.
I've got 2, please. The first one is, I don't know if you have this number to hand, but just in a typical year, so say 2019, just what percentage of your civil aero spares or aftermarket normally happen in Q4, just to help me think about the [ waiting ] increase, if you've got that?And the second one, maybe you won't answer but let me try. Just a high-level question ahead of the big event that's coming up. Almost a year ago, Bernard, you told us about your cost-savings targets, but warned us not to assume they will all flow to margin because of various headwinds. One of those headwinds you flagged might have been FX, another was R&D. But nearly a year on now, it looks like you've locked in some really good hedging for 2024. It doesn't feel like we're going to get a major new aircraft program anytime soon. Just conceptually, are you feeling a little more confident about some of those headwinds, perhaps not being as big as you thought they might be a year ago?
David, good to hear you. On civil aftermarket, Q4 is always a strong quarter, always a strong quarter. And we reiterate here that it's going to be again a strong quarter. And I would say even more than years before crisis because we are in the recovery. So I will not quantify that but I would suggest that it could be between 25% and 30% of the total civil aftermarket of full year. So Cécilia will check that with you. But again, it's always a strong quarter and it will be again a strong quarter.Now on the cost savings side, of course, we will come back on this hot topic on the 2nd of December. As you said, we are confident that hedging will still be a positive driver for Safran in the coming years. I will not try to bet on the spot rate in 2025. But I think that what we have achieved so far gives us comfort on the hedge rate for the next 2 to 3 years, and I hope it will continue like that.But just 1 comment on what you said. I mean, you said we don't expect a new program for an engine in the next years. But even if there is no decided program on our side, we have to work and get prepared for that. So R&D, research and technology will have to increase because we are preparing ourselves for the next generation of engines. So I think -- and we will explain it at the Capital Market Day, R&D, even if there is no development decided by customers, will increase in the next years.
Okay. I will have to be patient and wait for December 2. Looking forward to it.
Yes, please.
We have no other questions.
Okay. Thank you, and have a good day. See you at the Capital Market Day on 2nd of December.
Bye-bye.
Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.