Welcome to the Safran Q3 2022 Revenue Conference Call. At this time, I would like to turn the conference over to your host, Olivier Andriès, Safran CEO, and Pascal Bantegnie, Group CFO. Mr. Andriès, please go ahead.
Good morning, everyone, and thank you for joining us to this Q3 2022 revenue conference. I'm here with Pascal Bantegnie, our CFO. Let us go straight to page four with a summary of our talking points today. Air traffic continued to improve in Q3. We expect now narrow-body ASK to fully recover its pre-crisis level, 2019 level, by 2023. The macroeconomic environment remains challenging. Supply chain difficulties to ramp up are still impacting our LEAP engines delivery plan. We've made progress with a 54% increase in LEAP deliveries versus Q2. We are also facing inflation pressure, notably in energy in Europe. Organic revenue growth was strong in Q3. We raised our full-year of 2022 outlook for revenue and free cash flow, thanks to solid growth in services and a new euro to dollar spot rate assumptions.
We have entered into exclusive negotiations with Thales to acquire their electrical system activities. It is a complementary contribution to Safran's portfolio of activities, which would expand further in the area of electric power generation. I am now on slide five. Narrow-body ASK stood at around 86% of their 2019 level in Q3 2022, increasing sequentially and reflecting the strong summer season in North America and Europe. CFM flight cycles are at around 84% of 2019 level at mid-October. CFM flight cycles are above 2019 level in North America, Middle East, and South America. In Europe, we are at 89% of 2019 level, which is very strong. The only area where CFM flight cycles are still well below 2019 level is China.
We are, as we speak, at 36% of 2019, which is above the low point reached mid-April, where we were at 20% of 2019 level. Traffic had reached around 80% during the summer. As you can see, strong volatility remains in China. Narrow-body ASK was at 81% on average of their 2019 level in the first nine months of 2022. Retirement remains low, 75 aircraft in the first nine months. Second generation of CFM56-powered aircraft are flown by airlines. Fleet storage is decreasing. We are at 11.2% at the end of Q3, to be compared with 14.3% at the end of Q2. We continue to monitor closely air traffic recovery in China.
I remind you that around 18% of our second generation CFM56 fleet in service is in China. Recovery of narrow-body air traffic, notably in the U.S. and Europe, and the utilization of second generation CFM56 fleets provide confidence in the overall outlook for Safran. Let's go to slide six. Let me share with you some of the main business achievements during Q3. CFM delivered 347 LEAP engines in Q3, which is up sequentially, +54% versus Q2. Civil aftermarket growth has been strong in Q3. We benefited from CFM56 spare parts pre-buying ahead of catalog list price escalation in November and some restocking effects. COMAC has certified the C919 aircraft in China. We will start deliveries of LEAP-1C engines in 2023.
To name a few long-term service agreements we signed in Q3, in the helicopter business to support over 900 Arriel helicopter engines operated by the U.S. Army. In landing gear, contracts to support A330, A320, A321 aircraft landing gear for Philippine Airlines as well as Cebu Pacific Air. In Nacelle business to support A330 CEO thrust reversers and A321neo nacelle for Cathay Pacific and A320neo nacelle for Spring Airlines. We signed a number of new contracts in Safran Seats. Both for line fit and retrofit, which highlights a renewed commercial momentum. I am now on slide seven. In Q3, the activity is improving year-on-year and sequentially. Revenue is up 18% on an organic basis compared to Q3 2021. This improvement has been driven by services across all businesses and also by an increased LEAP OE delivery stream.
Sequentially, revenue was at 8%, thanks to propulsion and aircraft interiors activity. In the first nine months, revenue increased also by 18% on an organic basis at EUR 13.4 billion. Let me now hand over to Pascal for more details on Q3 sales.
Thank you, Olivier, and good morning, everyone. Starting with FX trends. U.S. dollar trends in 2022 has been significant, and it is at multi-decade highs. At close of the quarter, euro-USD rate was 0.97, which is down 15% year to date. We are taking advantage of that to continue purchasing hedges at attractive rates. With a book now of $50 billion, Safran is fully hedged until 2026. I'm pleased to provide an update of the overall hedge rate corridor over 2023-2026, and this new profile is based on gradual improvements across the forward curve, reaching 1.12 at best in 2026, which is a $0.04 Improvement compared to the previous expectation. Any single-cent change in hedge rate translates into EUR 60 million in EBIT, and this will provide a further mitigating factor against rising inflation.
The backdrop of a strong dollar is a diluted impact on EBIT margin for the same euro EBIT. Any single cent change on spot rate translates to EUR 90 million of revenues on average with no margin. Turning now to page 10. Q3 revenues stood at EUR 4.8 billion, which is a solid 18% organic growth. Excuse me. Or 30% when taking into account a positive translation impact from a stronger USD. Service activities were up 35%, which is 23% organic, mainly driven by civil aftermarket growth. OE was at 25%, 14% organic, driven notably by higher LEAP engine deliveries. Also, the net impact in revenue is not material. Change in scope reflects the divestment of both Enviro Systems and Arresting Systems, as well as the acquisition of Orolia from July 2022.
Let me now provide some details per activity on slide 11. Propulsion, EUR 2.5 billion of revenue, up 26% organic. OE revenue was up 29% organic, supported by the solid increase in LEAP deliveries, both year-over-year and sequentially. At the end of Q3, on a cumulative basis, total shipments of LEAP engines are now close to the full-year 2021 total deliveries. Sales revenues were up, driven by a solid 36% growth in civil aftermarket. As indicated during our July call, growth is mainly driven by the CFM56 spare parts sales. Again, volume of shop visit is up year-over-year and sequentially, but still below our initial assumptions. We can confirm that revenue per shop visit is holding better than initially forecasted.
We believe this is a consequence of some pre-buying effect ahead of annual catalog list prices escalation and some inventory rebuild at shops or airlines. LEAP engine spare parts and services were also positive contributors to the civil aftermarket growth. Our full-year target of 25%-30% growth is confirmed. In equipment, EUR 1.8 billion of revenue, up 7% organic. There was no growth on the OE side due to the continued low wide-body build rates. The good news in the quarter is the resumption of 787 deliveries. Services were up in equipment 19% with growth across the board from repair activities in landing gears, carbon brakes, nacelles to avionics systems. Aircraft interiors, EUR 0.5 billion of sales, up 22% organic. OE revenue was up 20%.
Most of that increase came from cabin, with a notable increase in galleys and lavatories for A320. Services revenue was up 28%, driven by cabin spare sales. In seats, the commercial momentum is growing, but supply chain disruption negatively impacted deliveries in the quarter. Switching to slide 12. Safran has two outstanding OCEANE maturing in 2027 and 2028 for a total of EUR 1.7 billion. These bonds carry a conversion right whereby the bond holders would be entitled to receive a number of new or existing ordinary Safran shares. In particular, the 9.3 million OCEANE bonds issued in 2020 and maturing in 2027 currently carry a potential dilution of 2.18% of capital.
With a current conversion price of EUR 107.26, we have a high probability of redemption at maturity and could even consider an early redemption from June 2024 if the stock trades above EUR 139 at that time. This is why we are launching a share repurchase program of up to 9.4 million shares with the aim to fully eliminate the risk of equity dilution from the outstanding 2027 convertible bonds. Market permits, this plan will be executed within the next 12 months. Until we fully execute this program, we do not intend to launch any other share buyback. We will also assess, in due course, the opportunity to hedge the potential dilution risk linked to the 2028 OCEANE. Olivier, back to you.
Thank you, Pascal. Let me now conclude with our guidance for 2022. On the back of the nine-month performance, we are raising again our guidance. Adjusted revenue is now expected at around EUR 19 billion to reflect solid growth in services and a new euro to dollar spot rate assumption at 1.05. Free cash flow is now expected to be above EUR 2.4 billion. Adjusted recurring operating margin is expected to be at around 12.6% at the new 1.05 euro to dollar spot rate, which takes into account the impact of returning 100% of the optional profit sharing to French employees. At 1.18 euro to dollar spot rate, which was our initial spot rate assumption when we disclosed our guidance back in February, the margin would be slightly above 13%.
We are confident in our ability to deliver this new guidance. Thank you for your attention. We are now ready to answer your questions.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press zero one on your telephone keypad. We have a first question from Victor Allard from Goldman Sachs
Good morning.
Morning.
Morning.
Thank you for taking my question. I have three if I may, potentially. My first question would be on the CFM56 service outlook into Q4 and into 2023. Interested in particular, if you could please provide details on the driver for the unchanged full-year guidance in civil aftermarket, despite your strong performance in Q3 and the significantly higher pricing for part of Q4. On my math, your guidance implies a sequential dec line in Q4, both in absolute dollar terms, but also in relative terms versus 2019. My second question would be on LEAP OE, and if you could please give details about the driver behind the swift recovery in deliveries in the quarter, and if this has changed your views on the supply chain at all.
I think you were expecting a recovery in the supply chain by the end of 2023, where some of your partners and competitors see it by mid-2023. Then my final question would be on the solidarity claims, clawback agreement that you struck with employees, last year. I think that you mentioned in your presentation that your margin guidance included the impact of returning to 100% of the optional profit sharing, to French employees. Should we understand that this is a return to 100% of the pre-crisis practice or a return to 100% of the capped level which have been defined in the agreement? Thank you.
I will take the first two, and we'll let Pascal answer the third one on the clawback agreement. Outlook for Q4, our guidance assumes a Q4 2022 flattish versus Q4 2021. The reason for that being that the Q4 2021 has been very strong with a lot of pre-buying of spare parts just in anticipation of the catalog price increase that has been focused last year in Q4. This year, because we have announced a price increase, you know, at around 10% this year, we've seen an anticipation of the pre-buying effect of spare parts. This has occurred starting in September, and this is why we have had a very strong Q3 2022. Now, that may appear a little bit conservative. We'll see.
We still remain in the 25%-30% band for the civil aftermarket revenue growth in 2022 versus 2021. I can say it will be, let's say, in the mid- to high range of these bands. Your second question relating to LEAP OE. Yes, the good news is that we have seen a strong increase of LEAP engine deliveries sequentially in Q3 versus Q2, more than 50%, as we said. I have to say, we have just stabilized the depth of delay. We have not started yet the recovery and, let's say, the melting of the depth of delay. In our opinion, the supply chain issues will remain up to the end of 2023.
On your third question, we have an agreement for the third year in a row with the French unions, whereby French employees have agreed to a significant cut in the profit-sharing scheme that is in place. This year, in 2022, there was a clawback clause that was saying that should we trigger, you know, a certain level of EBIT margin this year in case of, you know, overshooting the EBIT margin guidance, then we would return EUR 1 for EUR 1 additional EBIT to French employees. We have triggered, you know, the first trigger. This is why we will return 100% of what we call the optional profit sharing .
I'll take the first one, Robert. Yes, Boeing has declared that the engine is a pacing item. We are late with Boeing, as we are late with Airbus on deliveries. Boeing basically is planning to deliver 31 aircraft a month. We are on this plan. The point is, basically when is going to be the date of ramping up to 38 a month? You know that this is planned for 2023. This is currently in discussion with Boeing. Yes, we are impacting both airframers' deliveries. We are late. We are probably not the only, you know, equipment being late.
I mean, once again, the supply chain issue is overwhelming across the board in the aerospace industry, but we have to recognize we are late.
On the second question, we expect to close the Thales electrical activities acquisition during Q1 next year. We've said that the sales they had in 2021 was about EUR 120 million, so a year ago. The profit level is in line with Safran Electrical & Power within the equipment branch where it will be consolidated. I remind you that this is the fourth acquisition in that field in the past 10 years. We started with the acquisition of Goodrich Electrical Power Systems, then Eaton Primary Distribution System. We within Zodiac you know acquired some good activities in distribution. Now this is I would say one of the ultimate technology bricks that was missing in our portfolio.
We will have, thanks to that acquisition, you know, a wide business in electrical activities ranging from generation, distribution, and conversion.
That's very helpful. Thank you.
The next question comes from George Zhao from Bernstein.
Hi, good morning, everyone. First on revenue per shop visit, you know, in the past you talked about the gains from pricing slightly offset by USM usage. As we think about the 10% price increase that's set to take effect this year, how do you think about the net impact on revenue per shop visit going into next year? And, you know, does that pricing increase, you know, does that merely preserve the margins gven that the costs are also increasing significantly, or are you achieving higher margins as a result of these, you know, announced pricing increase? Second quick one, spare engine deliveries, are they still running above normal? And, you know, if so, when do you expect that to normalize?
George Zhao, we are not going to elaborate today on 2023. As Pascal Bantegnie has outlined, the volume of shop visits this year is going to be lower than what we expected initially at the start of the year, and this is mainly coming from China and the volatility in the Chinese domestic air traffic. We have also the impact of the Ukrainian Russian war, where we are not going to, you know, sell any spare parts to Russia. The volume of shop visits will be lower. The good news is that the revenue per shop visit is going to be higher than what we expected initially for some reasons.
One is that, this is good news, we see a pickup of the content of the workscope. The workscope is increasing again, which is good news. This is, I think, this is an effect, an impact that is going to last, obviously, next year. This is good news. We have seen as we said, the impact of the trade buy focused on Q3, but this is also improving the situation. We've seen also an impact of rebuilding of inventory, you know, within the shops because this inventory had been consumed during the pandemic. All in all, we are in line.
I mean, we are in line because there's a good compensation or balance between those two effects, and we are aligned with our initial expectations for the global revenues of aftermarket sales.
The next question comes from Tristan. Sorry.
Sorry, this is on the second question on spare engines.
Spare engines. The spare engine. Yes, we are going to deliver more spare engines this year than we expected initially. But basically, you know, we are always in same range as usual. I mean, we are within a band which is usual. We are going to deliver more spare engine this year than initially expected.
All right. Thank you.
Thank you. The next question comes from Tristan Sanson, from BNP Paribas Exane.
Yes. Good morning, Olivier, Pascal. Thanks for taking my questions. Couple of questions. Just wanted to have a bit more details on the optional employee profit sharing. To understand where, based on the initial guidance, you are planning like 13% margin or you would have achieved a certain a bit more than 13 %+, 30 basis points that is today given back to employees. Maybe you are trending for 13.4%, 13.5%. You say today under the new guidance is converging to 12.6%. Can you confirm that is the right view? You said there's another layer that can be triggered. Can you tell us what is the maximum level of outperformance that can be absorbed by this next trigger?
If we want you to achieve 12.7 or eight or nine, does it mean that you need to do 40, 50, 60 bps incremental? That would be helpful. Second question was you're giving at the same time EUR 1 billion to shareholders who buy back and a good support to employees, which should, I guess, help in the salary negotiations with unions. Can you tell us how they are progressing today and how you're navigating the labor cost inflation for 2023 as a consequence? Final quick one.
Pascal, you said that you were considering that you are fully hedged until 2026, and you gave a pretty clear statement of your actual level of forwards for the years to come or equivalents for the years to come. Can you tell us at what kind of OE deliveries you consider that you are fully hedged? I'm not gonna ask about actual OE rates or everything going, but roughly total production for LEAP deliveries, is it at, in 2026 at 2,500, 3,000 engines, what's the other magnitude we should have in mind?
Okay. Let me take the first one. Your understanding is right. We have been able to cross the first trigger of over-performance in terms of EBIT margin. This is why we are returning 100% of the optional profit sharing. As I said, it means 0.3% of margin, meaning that the underlying EBIT performance is 13.4%. We can't report 13.4% because we are returning that money one to one to employees. We have a second trigger starting higher than that, which would, if we were to cross the trigger, would return maybe an additional 0.4%, 0.5% of margin. All in all, we will always report a bit more than 13% of EBIT margin.
If we were to overperform even higher than what we think, then we would return that money to employees only.
To be precise, that's applied to the previous FX environment, so, it's now-
Yes.
-12.6.
Yes, absolutely.
Okay.
This calculation is made on the spot rate of 1.18. Correct.
Thank you.
Maybe I'll take the third one on FX. We are fully hedged until 2026 with an improvement of as much as $0.04s compared to the previous guidance. Remember that at the Capital Markets Day, all our financial trajectory was based on a spot rate of 1.20, but on a hedge rate of 1.16. If we can achieve 1.12, it will be a $0.04s improvement. This is based on the, you know, LEAP deliveries on an annual basis at the time of, I would say, north of 2,000 engines, as we've said during the Capital Markets Day. This underlying assumption is unchanged.
Based on the discussion with the employees, we have had along the year discussion with the trade unions and the employee representative in the course of the year. I remind you in France, especially in France in 2022, on average, we have increased the salary by 4%. It's been 3% that we have announced at the start of the year. We've basically complemented that by an additional 1% on average focused on the low wages in June. We have not started the discussion for next year. We are going to start those discussions in January.
Of course, we can expect the representatives to tell us, you know, that inflation is high, et cetera, and their expectation is going to be for, let's say, higher than usual salary increase. The negotiations have not started yet.
Okay. That's clear.
Uh.
Thank you, Olivier. Thanks, Pascal.
Thank you. The next question comes from Ben Heelan from Bank of America.
Morning. Hope you guys are well. Two for me. I wanted to come back, Olivier, on a comment you made on aftermarket because flat in Q4, given the price increases that have been discussed seems it seems quite a quite a weak level. I get the comp is very difficult. Is there anything in terms of volumes being negative in Q4 that we need to be aware of, or is it fair to say that that's a relatively conservative view? That would be the first. Secondly, in Q3, we saw a big sequential improvement in LEAP deliveries. How should we be thinking about LEAP deliveries into Q4? Is it fair to see another sequential improvement, or should we be thinking around the same level as Q3?
Thank you.
Maybe I'll take the first one, Ben, on the aftermarket. You know, we had experienced the same seasonality in the past years, where Q4 was the strongest quarter, given that the price escalation is always taking place on the first of November. We believe this year that some sales have been pulled forward into Q3 because we've seen abnormally high level of sales in Q3. This is why we stick with our full-year guidance. Maybe the seasonality will be slightly different this year. Q4 should be flattish, which means flat to slightly up. Is there potential upside there? We'll see at the end of the year. At this point in time, you know, as Olivier said, we believe we'll be in the mid to the high end of the range.
Ben, on LEAP OE deliveries, the expectation is that Q4 should be similar to Q3.
Very clear. Thank you.
The next question comes from David Perry from JP Morgan.
Yes. Good morning, gentlemen. Thanks for taking the questions. I've got three, please. The first one is just to clarify your message on the new FX hedging, please, Pascal. 'Cause you keep talking about $0.04 , you've said it a couple of times, as the sort of better rate. That really implies you're targeting the 1.12, whereas the slide shows 1.12-1.14. Can I just tie down, do you think we should all be putting 1.12 into the model? That's the first question. The second question may be for you, Olivier. You talked about Boeing deliveries that I believe on the call two days ago, this sort of 31 a month that you alluded to today. It's 20 for production and 10 a month is coming out of inventory.
They really are producing at a very low rate. I'm just surprised that you are struggling at those levels. Maybe if you could comment on that. Then my third one, I don't know if it's a comment or a question, maybe it's both, if you'll indulge me. In my view, a share buyback to offset a convertible bond is not really a share buyback. I don't know about other brokers. I already had it in my model because you had to do it anyway. You always had to neutralize that convertible bond. To me, that's different to the messaging you've given since the CMD about capital returns. Why wouldn't you be doing a share buyback over and above the buyback to neutralize the convertible bond? Thank you.
Yeah, I'll take the third one. Yes, you're right. I'm aiming to hit here a corridor of 1.12 - 1.14, meaning that 1.12 is achievable. One twelve compared to 1.16 is a $0.04 improvement at best. This is what the hedge book can deliver in the coming years.
David, yes, as I said, the good news is we've picked up LEAP deliveries versus Q2, but this is not enough. This is not enough. We are not yet recovering our depth of delay, and we are still struggling on castings, especially in the U.S. When I say we, I'm talking about CFM. Once again, this is a combination of Safran and GE. We need both to deliver the complete engines. We are struggling with casting in the U.S. We are struggling with some key components as well, especially electronic components. It's an everyday battle to deliver to Boeing and to others as well. Same. This is the same struggle.
On the third one, I'll take it. We are fully aware that the share repurchase program that we are announcing today is to avoid any equity dilution in the future. This is not a straight share buyback where we would, you know, cancel shares and have a direct dilutive impact. We've already said that in 2022, given the agreements we have with the French unions in France, it was inadequate to launch a straight share buyback. The social and political context in France prevents us to announce any such straight share buyback in 2022. That's why we delay any potential straight share buyback. First, we will execute this almost EUR 1 billion share repurchase program to avoid the dilution of the OCEANE.
We'll see later on if we are able to announce such a straight share buyback in the future.
Just to clarify, you think it's unlikely in the whole of 2023 that you'd have any share buyback over and above the OCEANE one? Or is it possible?
It's too early to say. Frankly, it will take, as I said, you know, up to maybe a year to buy back this 9.4 million shares. We will have that discussion again maybe in H2 next year. Yeah.
Okay. Can I be a bit greedy? Can I just throw one more in? This is something I'm a bit confused about, which is you've been talking quite a bit about this profit share. Does this profit share, this sort of 0.3%-0.5% of margin, relate to prior years, it's a catch up, or is this just relating to current earnings? Because if it's the latter, it's a bit odd to talk about a margin before wages. If it's a catch up, then I understand why you're putting this emphasis on it.
It's based on the 2022 EBIT margin. The agreement was saying that should Safran overperform in 2022, given that the French employees have agreed to a cut in their profit sharing scheme, then we would return, you know, above a certain trigger, we would return EUR 1 per EUR 1 of overperformance. I can confirm that we are raising, you know, the revenue guidance and free cash flow guidance. Indeed, the EBIT margin is higher than expected. On a reported basis, we can't show that because we are returning all the overperformance to French employees based on the 2022 EBIT margin.
As a complement, remember our guidance for 2022 was assuming a contribution from our French employees relating to, let's say a portion of their profit sharing. The deal was basically this global clause with steps. We are just applying this agreement with our employees. The complete return to normality in terms of profit sharing will be in 2023. The complete return to normality will be in 2023.
Okay. Thank you for clarifying.
The next question comes from Harry Breach from Stifel.
Yes. Good morning, Olivier. Good morning, Pascal. Can I just maybe ask?
We can't hear you very well, Harry. Can you speak up a little bit?
Yes. Is this a little bit better, Pascal?
Not really.
I'll try dialing in on another line. Go to another question.
Okay. Sorry.
Thank you. The next question comes from Christophe Menard from Deutsche Bank.
Yes. Good morning. Thank you for taking the question. I had actually three remaining. The first one is on the sales guidance in 2022. You said sensitivity on sales is EUR 90 million per 1%. So if we do the math, we should be between EUR 18.6 billion and EUR 18.8 billion for this year, and you're actually guiding to EUR 19 billion. What is the incremental growth coming from? Is it civil aftermarket, where you're moving a little bit the needle? That was the first question. The second question is on the free cash flow over the period. I mean, you guided at the Investor Day last year, a guidance of EUR 10 billion between 2021 and 2025.
I mean, you keep improving the free cash flow guidance. Is that guidance still valid, or is it above EUR 10 billion? I mean, any granularity you could give would be helpful. The other element is on the LEAP OE deliveries in 2023. I understand from what you say that we will be slightly below 1,200 engines for 2022. Where are you seeing 2023 at this stage? Can you talk about this or give some indications?
Okay. Christophe, good morning. I'll take the first one on the guidance. Yeah. You're right that guiding at EUR 19 billion in 2022 implies not only a positive translation in FX effect from a spot rate of 1.05, but as well as a better organic revenues. As you say, it's coming from the aftermarket business in Propulsion as well as in Equipment. In terms of cash, we guided for north of EUR 10 billion of free cash flow generation from 2021 to 2025 at that time. We keep over-delivering on free cash flow. It's partly due to new contracts we sign on the Rafale, for example, Indonesia or the Emirates. Over the next five years, we should be way north of the guidance we gave at the Capital Markets Day, for sure.
Christophe, on LEAP OE deliveries, your math are correct. Meaning that for 2022, we should expect to be below 1,200 deliveries. Your math are correct. For 2023, at the Capital Markets Day one year ago, we had mentioned the target to get to 2,000 LEAP deliveries in 2023. This is a very strong, very significant step-up versus what we are going to achieve actually in 2022. What I can say at this stage is that it remains our target, but we have to recognize it's going to be a challenging target discussing with our colleagues.
Okay. Thank you. Thank you for the clarification.
Thank you. We have Harry Breach from Stifel on the line. Please go ahead.
Yes. Good morning. Can you hear me better now, Olivier and Christophe?
Harry, welcome back.
Thank you. Just if I can, maybe just sort of a couple of questions. Firstly, you know, Olivier, maybe following from Christophe's point about LEAP OE deliveries next year. When we think about the broad dynamics of it, right? Higher deliveries, improving learning curve, and recurring unit cost performance, early customer discounts fading. Should we think about LEAP original equipment as being broadly a little bit of a headwind next year to earnings or a more or less neutral? Second question, if I can, was really on ArianeGroup and with the delays in the first launch of Ariane 6. Is there any charge that ArianeGroup has announced that it may need to take this year that you could have to recognize your 50% share of in equity income?
Maybe finally, if I can, just with aircraft interiors, I mean, it looked as if the third quarter went reasonably well there. Can you just update us, Pascal, in terms of when you're thinking about sustainable breakeven at aircraft interiors? Thank you.
Harry, I'll take the first one. We have always said, and remember, you know, the famous traffic lights chart at our Capital Markets Day from Pascal Bantegnie presentation. We have always said that the ramp-up of LEAP deliveries would be headwind for our margins as long as we don't reach PAC-7. We will not reach PAC-7 on LEAP in 2023. We are not planned to reach PAC-7. And with the impact of inflation, it's going to be an additional headwind in that aspect. Yes, indeed, the LEAP deliveries in 2023, whatever the number is going to be, it's going to be higher than what we will achieve in 2022. Obviously, it's going to be headwind, but it was planned. It was planned.
Mm.
Ariane 6.
On Ariane 6, as you said, Harry, the maiden flight is now pushed back to Q4 2023. ArianeGroup is incurring additional costs on the Ariane 6 program, meaning that the cost at completion of this program is increasing. Remember that during the July presentation for the first half earnings, I say that we have fully impaired the goodwill related to the Ariane 6 program. We are no more at risk from any new impairment on the Ariane 6 program. On interiors, we had the ambition to be a bit breakeven this year. We change our view given the first half, as the H1 performance at the July call, saying that we were now aiming for a breakeven in H2, saying as well that it would be a challenging target.
I can only confirm this is challenging, and if I had to say anything, maybe we'll be at breakeven in Q4 and not H2. I would say the recovery keeps slipping a little bit. It remains challenging, notably in the seat business.
In seat. Yes.
Because of inflation, because of Russia, but because as well of overcost in development and production, as we've already mentioned during the H1 call.
Can I, Olivier?
Yes.
Will, will you just allow me LEAP headwind. I guess one thing that has changed. I know you point out inflation as clearly being a headwind in terms of LEAP next year. On the other side, I guess escalation clauses should be running quite favorably. Do you think overall the balance between the two issues will be about neutral or could be a little positive?
No. No, Harry. It will be negative. We are not going to be on the OE side, focusing on the OE side and looking at the contracts we have with the airframers, especially with the airframers. We are not going to be able to pass through the rising cost of energy, raw materials, et cetera, et cetera, to our airframer clients. It's going to be negative. The headwind that we had planned because of the ramp-up at the Capital Markets Day and taking into account the learning curve and all the cost reduction program that we are basically executing as planned, this inflation effect is just going to basically increase this headwind, and we are seeing it.
We have a little bit more, let's say, ability and maneuverability to pass through the inflation on the aftermarket side than on the OE side.
Clear. Thank you, Olivier.
Pascal.
Thank you. The next question comes from Chloé Lemarié from Jefferies.
Yes, good morning. Thank you for taking my question. I have a couple. The first one is on China, which is obviously clearly lagging in terms of the recovery. I'm wondering how much of an upside this would represent for you in 2023. Essentially, how much below China and maybe APAC in general stands versus the typical splits in civil aftermarket? The second would be on the pre-buy effect.
That you've seen ahead of the 10% price increase on spares. Are you able to estimate roughly how much of that typical pre-buy you've seen, moving forward to Q3? Is it a fourth? A half? I understand it may be tough to estimate, but any color on, what you've seen in September above the norm, would be helpful. I may have a follow-up. Thanks.
Chloé, on China, you know, this has been so volatile in the course of 2022 that it's a little bit too early to predict what's going to happen in 2023. When we say that, basically we predict the narrow-body air traffic to come back to the pre-crisis level in 2023, we assume that it's going to be the case as well for China. This is really the key point here. I mean, we'll see what happens. You have seen that, following a Communist Party meeting that occurred two weeks ago, they have decided to continue the zero COVID policy. It may well be that China will remain volatile next year. I don't know. It's difficult to predict.
The complete recovery to pre-crisis level assumes a recovery as well in China. On the pre-buying effect, I would not give any color on a Q3 impact versus Q4, and so it's no color.
Thank you very much.
Maybe a last question.
Yeah. The last question comes from Aymeric Poulain from Kepler Cheuvreux.
Yes. Thank you very much for taking my question. Yeah, two more, please. The first is on the inflationary pressures. I think this year you said the wage inflation was kept relatively low thanks to the early negotiation in France, around 3%-4%, and you were able to raise the price of the parts earlier last year, about 5%-6%. Now you're raising the price of your spare by 10%, and I think CPI in Europe is between 6%-10%.
Could you just elaborate on that, given the importance of the aftermarket to compensate margin-wise the inflationary pressure, whether that means you would still expect some inflationary margin pressure in 2023? Second question is on the COMAC ramp-up and the impact on the volume of deliveries of LEAP to COMAC. Do you have a clear plan on that and visibility and what would be a reasonable volume target for 2024, 2025 for that specific program?
I'll take the first one, good morning, Aymeric, on inflation. I remind you that we gave a number earlier this year about the inflationary pressure we were having on the earnings. I quoted a number of 120 basis points, taking into account raw materials inflation, transportation inflation, and inflation coming from energy. To be frank, that number is slightly higher than this 120 basis points, but we are offsetting all of that through all the actions we've already discussed. It did not include you know the let's say inflation or the rise in wages.
Right, we had first a 3% increase in wages in France earlier in the year, and then we added on top of that another 1%, it was back in May or June, given the inflationary environment. It's too early to discuss the inflation impact in 2023. We will do that in February when we guide for 2023. The least we can say is that we don't feel any relaxation in terms of inflation and you can you know only expect you know a rising inflation, particularly in energy in Europe, for example.
Mm-hmm.
Yeah.
Thank you.
Yeah, absolutely. COMAC, yes, as I said, we are going to deliver our first serial LEAP-1C engines to COMAC next year. We are going to deliver the very first one at the end of this year, but you should not expect a significant ramp-up in 2023. We are talking about a few tens of engines, no more.
Okay. Ramping -up to, towards what figure? Do you have a visibility on that?
No. As I said, it's a few tens. I won't be more precise than that. It's going to be ramping up slowly in terms of aircraft deliveries and therefore engine deliveries.
Great. Thank you.
Okay. Thank you very much. Have a good day and talk to you soon, guys. Bye-bye.
Ladies and gentlemen, this concludes the conference. You may now disconnect.