Welcome to the Safran Q3 2021 Revenue Conference Call. At this time, I would like to turn the conference over to your host, Olivier Andriès, Safran CEO, and Bernard Delpit, Deputy CEO and Group CFO. Mr. Andriès, 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 with some Q3 business highlights. Afterwards, Bernard will go into more details on our financials, and I will conclude this presentation with our 2021 outlook. First, I would like to take the opportunity to warmly thank Bernard for his long-standing exceptional contribution to Safran. I'm on slide five. 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 nine 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 well, 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. If you go now on slide six, 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. We observe a continuous improvement in terms of narrow-body ASK.
Mid-October, narrow- body ASK is at 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 route 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 17th. 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 -9.6% versus 2019. Asia Pacific, the situation is improving. CFM cycles reach -62, so this is the worst region. We are 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 -9.5% compared to 2019 for all CFM engines. In Europe, as I said, summer season allowed a very strong improvement. CFM's flight cycles are now -26.7% versus 2019, while we were at -70% until the end of May. All in all, weekly cycles as of October 17th for all CFM engines were down 24.5% versus 2019, and CFM56 were at -31%. Turning to slide seven, some propulsion business highlights for this quarter. Propulsion, we delivered 256 engines in Q3. 226 LEAP engines compared to 172 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 point, our civil after-market indicator is still down -7.7% in nine months, 2021. 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 light carbon brakes, we've been selected by the Canadian ultra-low-cost carrier for their 737 NG and MAX fleet.
In Aircraft Interiors, campaigns still go on, and we've been selected by the big U.S. airlines to provide business class seats for a new order of 200 single-aisle aircrafts and by an Asian airline to provide economy and business class seats for some of their Boeing 787s. Cost timeline. We keep costs as low as possible. HR costs in nine months, 2021 are down compared to nine months, 2020. 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 Belgium and Ontario sites at Aircraft Interiors.
Full transfer of work will be completed before the end of 2021. In the wiring business, Electrical & 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 a Mexican site in Chihuahua. All in all, operational expenses are down in nine months, 2021, compared to nine months, 2020, and down compared to nine 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 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 $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. Now 88% of these KO barriers are above 1.25. We also added new options to the 2024 book at strike rates compatible with our long-term rate targets.
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. That's up 10.4% year-on-year and up 5.7% sequentially. 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 is 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 military engine volumes. Civil aftermarket up 43.8%, and this increase is essentially driven by a strong increase in spare parts and services contract are also up close to 10%.
M88 engine for the Rafale fighter deliveries were up at 16 units in Q3 compared with six units in Q3 last year. 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. Services in equipment were up 23.6% organic, driven by landing gears, carbon brakes and nacelle activities, and to a lesser extent, aerosystem 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 recovering. Services in this division increased by 54% from a very low comparison basis. That was nice to experience this increase the first time since a long time, with spare parts 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. All in all, Q3 growth in line with expectations. Now Olivier for full year guidance.
Thank you, Bernard. 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 for free cash flow, thanks to new Rafale export contracts, advance 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 improvements. LEAP 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.
Thank you. Thank you, sir. Ladies and gentlemen, if you wish to ask a question, you may press zero one on your telephone keypad. It's zero one on your telephone keypad. We have one first question from Mr. Robert Stallard from Vertical Research. Sir, please go ahead.
Thanks very much. Good morning.
Morning, Robert.
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. 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? Are we starting to see an increase in the dollar value of shop visits? 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.
Thank you, Robert . Yes, we had a strong aftermarket Q3. We have not seen so far a restocking of spare parts from the shops. 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. 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 trend in Q3 as in Q1 and Q2, meaning dollar value per shop visit slightly down compared to 2020. Supply chain. You are absolutely right to raise the supply chain concerns.
Yes, indeed, 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., we see also tensions on raw materials availability. I can quote, of course, semiconductors, but more impacting raw materials in chemicals and also materials, metallic materials such as aluminum and so on. Those are basically concerns that we will have to address, because this is a challenge for the ramp-up to come across the supply chain widely.
That's very helpful. Thank you.
Thank you, sir. Next question is from Mr. George Zhao from Bernstein. Sir, please go ahead.
Hi, and good morning, everyone. 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? Given that potential reversal and also assuming no new Rafale export contracts, you know, can you grow cash flow in 2022 versus this year? Second quick question. You know, earlier in the year, you talked about high single-digit civil aftermarket growth underlying your guidance. You know, can you still achieve that given we're at down high single-digits year to date?
Hi, George. It's Bernard speaking. I will talk about the free cash increase.
You are right. I mean, from the delays in the deliveries of A320 create some positive working cap impact. 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. 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. You have it right. 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 a, let's say, a set quarter by quarter improvement of the air traffic recovery. As we speak, as I said, we are on track. Q3 was a strong improvement versus Q2, the 24% improvement. The high single digit growth assumption for full year 2021 relies on a further improvement in the fourth quarter of around 30%, meaning a Q4 improvement on civil aftermarket of 30% versus Q3. All indications that we have today are pointing in the right direction.
Great. Thank you.
Thank you, sir. Next question is from Madame Céline Fornaro from UBS. Madame, go ahead.
Yes. Good morning. Thank you for taking my question. My first one would be on the better outlook for the LEAP engines, and if you could just comment if the increase is coming from, you know, direct OEM demand or also from spare engines. My second question would be regarding, you know, 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? Thank you.
Okay, Céline. On LEAP deliveries increase, it's a combination of both. When we mention at the start of this year, 800, we had some cautiousness. But yes, indeed, we've had, let's say, more, let's say, some upside on spare engines. So the two combines leads us to guide on 900 deliveries max. Okay? On some more color on demand for spares, as I said, our guidance basically is consistent with a further improvement in Q4 of 30%. We count on a strong November month, as I said, before the prices are going to increase. That's one. We don't expect a big inflow of USM parts 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 CFM56 second generation powered aircraft being retired. 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 USM parts to date.
Thank you. Maybe if we could just follow up on your last point. Would you expect that the airlines, again, maybe postpone their retirement decision if they are nervous about the supply chain on their, you know, potential new aircraft delivery?
What I can say is, today airlines have not so far taken any decision to retire aircraft. That's what we see. They are more in the wait-and-see mode. The good news is, compared to our last call, the level of, let's say, unused unutilized aircraft on the CFM56 fleet has gone down. We had a level of 20%-25% of the fleet that was unutilized, you know, in the beginning of the year. We are now at 16%. 16% of the fleet is unutilized, meaning 84% of the fleet is flying.
Brilliant. Thank you very much.
Thank you, madam. Next question is from Mr. Ben Heelan from Bank of America Merrill Lynch. Sir, go ahead.
Morning, guys. I've got a question on November and the pricing. What is giving you that confidence that you are gonna see that buy of spare parts ahead of the pricing? 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. 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 break even 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 will be great. Thank you.
Confidence on Q4, we have orders for November. We see a big inflow of orders for November. We know that November is going to be a strong month. 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.
In order to get back to breakeven, it's a combination of a take-up of the top line, the revenues, which we start to see at the very end of the year, and all the measures that we have taken to lower the breakeven point. It's really a combination of both. We need the top line to come back.
Okay. Thank you.
Thank you, sir. Next question is from Mr. Harry Breach from T. Rowe. Sir, please go ahead.
Yes, thank you for taking my question. Hello, Olivier. Hello, Bernard. May I just ask two 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? Secondly, just maybe when I think about the full year guidance and I think about what may have changed over you know 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. Interiors 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 when making comments on Q3 that in fact, services, so you can call it retrofits, but services in aftermarket, in seats and cabin, for example, trolleys and galleys, was a good driver of improvement of revenue sequentially in Q3. I mean, we've seen some improvement. I'm not saying that we have seen big orders for big retrofit campaigns 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. We are optimistic because we've seen some interest from airlines to both cabin and seat business to see this improvement.
Following your question on EBIT, there are so many moving parts in a P&L that, as you said, maybe the spare parts was in line with what we said before. 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. It's in Q4 that we really will see this again new improvement. As you said, we've seen some spare engine orders that were not as strong at the beginning of the year as we have seen since the end of H1. It's been a good part of 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. All in, it means that we are very confident. We will stick to the guidance in terms of improvement of the margin, and 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 it will continue afterwards.
That's great. Thank you.
Let me stress again, the key message is we are on track in Q3. This is reassuring. All in all, yes, we are more confident to achieve the guidance.
Great. Thank you very much, both.
Thank you, sir. Next question is from Mr. Christophe Menard from Deutsche Bank. Sir, go ahead.
Yes, good morning. Thank you for taking my question. I had one question on the shop visit content. I think you mentioned in H1 that shop visit content was reduced, the work scope, I mean. Have you seen a change in late Q3, and are you seeing a change in Q4? 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%-15% lower in 2024 versus 2019?
Okay, Christophe, I'll take the first one. Bernard will answer the second one. On the 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 turbines. We have not seen a change of trends in Q3, so we are still in the same, let's say, sort of dynamic, still slightly down compared to 2020. Maybe too early to say for Q4, but the expectation is it's going to be slightly down this year. The guidance takes that into account.
For your headcount question, Christophe, I think I will leave it to the Capital Markets Day to update you on 2025 ambitions. I would say that we are in the process now of ramping up again. 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. The midterm target, we have to reassess it. 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 -1,500 people compared to the end of 2020. 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. We will have to ramp again, including the workforce and an accelerated research and technology development ahead of us to address the decarbonization and so on. All in all, there's going to be, now, from now on, an increase of the work scope of the workforce.
As Bernard has mentioned, we'll come back with more details on the Capital Markets Day, and we will not get back to the previous level.
Thank you very much. Can I ask a quick follow-up just on the free cash flow? On the last call you mentioned already, or 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're mentioning Rafale again this time. Is it an incremental order or is it the same order where you got all your prepayments?
I would go for the second answer. We have not added any new names in terms of contracts. For the customers that we already had, they have decided to add some new orders. As a consequence, we have received or we will receive in by the end of the year, new down payments.
Okay. Thank you very much.
Thank you, sir. Next question is from Mr. Jeremy Bragg from Redburn. Sir, please go ahead.
Morning, guys. If I look at the aftermarket, if I look at ASKs, as you said helpfully, they're tracking at 74% of 2019's levels. If I look at your aftermarket revenues in 3Q, it looks like it's somewhere around 63%. If we're looking roughly at this 11 percentage points gap between what the underlying market's 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. 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, you know, the cost reductions seem to be good despite the end of the short work time or short time working. I wondered if that had actually been a little bit better than had been previously anticipated. Thank you.
I'll take the first one, and maybe Bernard will take the second one. On ASK, if you look at Q3, we started Q3 at -40%. At the end of June, we were at -40% on ASK for narrow-b ody. At the end of September, we were at -30%. That's one element. In mid-October, we are at -25%. With this, we are confident that we are on track with the trajectory that we have in mind. That's why. Now, you cannot translate directly the ASK into spare part revenues because of green time, because of work scope evolution. There are a number of elements. You cannot have a direct translation. Now, green time, we see green time continuing.
I mean, we've not seen in Q3, let's say, a 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, there's going to be a catch up. 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. What you've read in slide nine of Olivier's presentation is really in line with the initial plan. Nothing new here. We've no additional savings. It's versus budget and plan. It's what we have decided that now we are implementing.
Thank you very much, both.
Thank you, sir. We have no other questions. Ladies and gentlemen, I would like to remind you that if you wish to ask one, it's zero one on your telephone keypad. We have another question from Mr. Tristan Sanson from Exane BNP Paribas. Sir, please go ahead.
Yes, good morning, gentlemen. Thanks for taking my question. I'm 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, some supplier delays, specifically in the cabin, without being more specific about what type of elements, and especially not wanting to make any finger-pointing. Can you comment a bit on your side, how you monitor the preparation of production ramp-ups there, and whether you see any challenges related to on-time delivery or quality of these products as you ramp up that production? Thank you.
Okay. On our side, we had a challenge earlier 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, OTD issues with Airbus or Boeing. 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, especially in the U.S., a higher level of attrition as expected, and we need to recruit people now to allow the ramp-up, and it's tough.
There's a high level of competition to recruit people these days. 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 supplier, getting better organized. You see potential for you to not leverage the situation, but adapt to the situation and maybe grow externally your internal business to provide better control to the OEMs?
Well, you know, 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 vertical integration. If any project that we have would have to make sense strategically and financially. Participating in consolidation of the supply chain is not our strategy.
Sure. I guess we'll talk more about this on December 2. Thanks so much for your answers.
Thank you, sir. Next question is from Mr. David Perry from JPMorgan . Sir, please go ahead.
Yeah. Hi, gentlemen. Thanks for taking the question. I've got two, please. The first one is, Bernard, 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 weighting, please, if you've got that. 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 would all flow to margin because of various headwinds. One of those headwinds you flagged might have been FX, another was R&D.
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 gonna 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? Thank you.
Hi, David. Good to hear you. On civil aftermarkets, Q4 is always a strong quarter. We reiterate here that it's gonna be, again, a strong quarter, and I would say even more than years before crisis because we are in the recovery. I will not quantify that, but I would suggest that it could be between 25%-30% of the total civil aftermarket of full year. Cecilia will check that with you. Again, it's always a strong quarter, and it will be again a strong quarter. Now, on the cost-saving side, of course, we will come back on this hot topic on the second of December.
As you said, we are confident that hedging will still be a positive starter 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 two to three years, and I hope it will continue like that. Just one comment on what you said, when you said, "We don't expect a new program for an engine in the next years." Even if there is no decided program, on our side, we have to work and get prepared for that. R&T, research and technology, will have to increase because we are preparing ourselves for the next generation of engines.
I think, and we will explain it at the Capital Markets Day, R&T, 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 2nd . Looking forward to it.
Yes. Yes, indeed.
Thank you.
Thank you. Thank you, sir. We have no other questions.
Okay.
Okay. Thank you. Have a good day. See you at the Capital Markets Day on second of December.
Bye-bye.
Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.