U.S. Markets close in 1 hr 42 mins

Edited Transcript of SAF.PA earnings conference call or presentation 5-Sep-19 6:30am GMT

Half Year 2019 Safran SA Earnings Call

Paris Cedex 15 Sep 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Safran SA earnings conference call or presentation Thursday, September 5, 2019 at 6:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Bernard-Pierre Delpit

Safran SA - CFO

* Philippe Petitcolin

Safran SA - CEO & Director

* Ross McInnes

Safran SA - Chairman of the Board

================================================================================

Conference Call Participants

================================================================================

* Andrew Edward Humphrey

Morgan Stanley, Research Division - VP

* Christophe Menard

Kepler Cheuvreux, Research Division - Head of Aerospace and Defense Sector

* Douglas Stuart Harned

Sanford C. Bernstein & Co., LLC., Research Division - SVP and Senior Analyst

* Harry William Freeman Breach

MainFirst Bank AG, Research Division - Research Analyst

* Olivier Brochet

Crédit Suisse AG, Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Welcome to the Safran Half Year Results 2019. At this time, I would like to turn the conference over to your host, Philippe Petitcolin, Safran CEO; and Bernard Delpit, Group CFO.

Mr. Petitcolin, please go ahead.

--------------------------------------------------------------------------------

Philippe Petitcolin, Safran SA - CEO & Director [2]

--------------------------------------------------------------------------------

Thank you very much, and good morning, everyone, and welcome to our call to present our H1 '19 results. I will start with business highlights, and I will give the floor to Bernard for the financial. Then I will come back at the end with the presentation with an updated guidance for the full year. And of course, if you have any questions, we will be happy to answer them afterwards.

Going to Page 4, let's proceed with the presentation. We are extremely pleased with the excellent set of results of this first half of the year. Looking at the operational performance, it was extremely robust. Safran experienced the strongest organic growth in history with an organic growth of the sales of 14.2%. We shipped 861 LEAP versus 438 in H1 2018, 2x increase. Our cost of production are decreasing.

Regarding our orders, Paris Airshow was very positive with several major announcements in Propulsion and Equipment. We recorded 1,100 new orders plus commitments for the LEAP during the airshow, and we are very proud to welcome new customers. Ex-Zodiac businesses integration is continuing, expected synergies we have delivered in H1, and Aircraft Interiors is now enjoying a significant organic growth.

On the financial side, we delivered an excellent performance across all divisions. We beat our objectives for revenue and recurring operating income. I will come back later on, on our updated guidance for the full year of 2019.

On the MAX, 737 MAX, we confirm the negative EUR 200 million impact on our free cash flow for Q2 offset by higher cash from operating activities. This is largely a delay in cash timing, and we will gradually catch up when the 737 MAX will be back through the year. We are working closely with our partners, Boeing and GE Aviation, to actively manage production while the fleet remains grounded. As long as the MAX is grounded, we will expect a headwind on our free cash flow which should be around EUR 300 million per quarter as prepayments from airlines are reducing.

Lastly, we continue to prepare the future of aerospace in line with our ambitions presented at our Capital Market Day. We have therefore concluded new key strategic partnerships with MTU of Germany for the next generation of European fighter engine and with Airbus and Daher to develop a distributed hybrid propulsion aircraft demonstrator.

Now let's have a closer look at financials, Slide #5. Safran performance was above all our expectations in H1 2019. I remind you that H1 2019 figures include a 6-months contribution of Zodiac versus 4 months in H1 2018. Revenue was up 27.3% with a strong organic growth of 14.2%. Recurring operating income was up 35.9% at EUR 1.883 billion, representing 15.6% of our sales. It's an increase of 100 points. We've enjoyed an organic growth of 34.6%. Net profit reached EUR 1.353 billion. Adjusted net profit grew 45.2%, and basic EPS grew 44.2%. Free cash flow generation was very robust in spite of the 737 grounding and reached EUR 1.177 billion. This represents a 43.5% increase and 62.5% of our recurring operating income. Net debt position is EUR 3.9 billion. It includes the impacts of the IFRS 16 on our operating balance sheet, which represents EUR 529 million of new debt. Bernard will give you more detailed information on this subject in a couple of minutes.

Going to Slide #6, an update on the CFM56-LEAP transition. In H1, the LEAP confirmed status of engine of choice for airlines. We booked more than 1,150 LEAP orders at the Paris Airshow. After the Paris Airshow, we enjoyed a 61% market share with the LEAP on the Airbus A320neo family. At the end of July, the LEAP backlog was almost 16,000 engine. The exact number is 15,997 engines.

With regard to production, the ramp-up is still ongoing. We delivered 861 LEAP in H1 2019, up 97% above H1 2018. The LEAP has accumulated more than 5 million of flight hours and with 1,000 most reliable engine of its generation. Our unit cost of production is also decreasing.

For the CFM56, the progressive ramp-down is also ongoing as planned with 258 units shipped compared with 591 in H1 2018. One piece of information I wanted to share with you, the CFM56 family has accumulated more than 1 billion flight hours. This amazing engine will continue to generate aftermarket growth for Safran in the next decade.

Going to Slide #7. Before giving you some colors with our business highlights, a few words on our new business segmentation. As you know, we announced a new reporting on July 1 with 3 operational segments: Aerospace Propulsion; Aircraft Equipment, Defense and Aerosystems; and finally, Aircraft Interiors. This change with our operational organization will enable us to accelerate the implementation of our strategy particularly as regards more electrical aircraft and Connected Cabins, thanks to the synergies identified between the various activities within our new segment.

Coming back to the business. Beyond the CFM-LEAP transition, the Aerospace Propulsion segment did very well in H1. Our civil aftermarket business grew by 10.2% in U.S. dollars both in Q1 and in Q2, slightly beyond our guidance. This performance reflects the high demand for spare parts of CFM56 engines. For this fiscal year, we expect civil aftermarket to grow around 10%, slightly, slightly above our initial guidance which was high single digits. In our helicopter division, we have completed with success the certification procedure for the Arrano-1A engine in Europe and for the Arriel 2H in China.

Concerning our new Aircraft Equipment, Defense and Aerosystems segment, H1 2019 was very wealthy. Nacelles has continued to enjoy a strong organic growth with the ramp-up of the A320neo family and the A330neo family. This division has also benefited from strong growth in service activities. We signed several significant contracts in carbon brakes and electrical systems. And our auxiliary power unit, APU, has also been chosen by Saab for the Boeing T-X military training aircraft. In Defense, we continue to move forward for the entry into service of the Patroller drone, it's a tactical drone, with the first qualification test flight.

Going to Slide #8, talking about Aircraft Interiors. Cabin, we have signed several new contracts in H1. In Seats, we delivered the first various business class seats of Boeing and Airbus airplane. Besides business class seats deliveries, we have increased to 2,537 seats in H1 2019 from 1,495 in H1 2018. And I'm comparing March to June, just 4 months only. In our Passenger Solutions activity, we welcomed new contracts on IFE on a major Middle East company. We also welcomed our first customer from China. Since June 30, we received a lot of new orders for our RAVE system and new IFE system. As you may know, we are a small player, but I am confident in our ability to generate growth as we think today, we have the best product in the market. A lot of work has already been done to restore confidence and operational excellence. We must continue to work.

Before giving the floor to Bernard, I will give you our key priorities for the next quarters. The ramp-up of the LEAP remains our top priority. We maintain our production target of around 1,800 LEAP engines for the end of 2019. And our LEAP-1B deliveries will depend, of course, on the Boeing order. As we said before the summer, we are closely working with our partners, GE and Boeing, to be ready if necessary to adapt our production plan. On the aftermarket side, we will continue to manage our large fleet of CFM56 engines and ensure a smooth transition from the time and material model to a service contract.

Regarding the ex-Zodiac activities, we have to deliver the EUR 250 million synergies announced for 2022 and leverage our new organization to strengthen our leadership positions in equipment. And of course, we must continue to innovate, innovate and innovate and deliver stronger operational performance. This is Safran's recipe for success, and we do not intend to change the ingredients.

Bernard?

--------------------------------------------------------------------------------

Bernard-Pierre Delpit, Safran SA - CFO [3]

--------------------------------------------------------------------------------

Thank you, Philippe. I move to Slide 12 and 13 with a few words on FX and hedging. Average spot rate for the dollar was $1.13, it was $1.21 last year, creating a positive translation effect of nearly EUR 400 million in revenue. Hedge rate was $1.18, same as last year, except for the Zodiac activities. Mark-to-market effect on our financial result was a noncash gain of EUR 353 million resulting from a favorable change in fair value of the portfolio of currencies. And as you know, it is restated in adjusted set of data.

Still on FX, Slide 13. Safran hedging portfolio now almost USD 29 billion as options and other derivative instruments. The targeted hedge rate for the 2022 period are unchanged. And in the first semester, we have increased the firm coverage of this period mainly in 2022, and we will continue for the rest of the year.

Page 14 is a bridge between consolidated and adjusted accounts. As always, I draw your attention on 2 main statements. First is PPA impact for EUR 176 million, of which EUR 156 million corresponds to the PPA of Zodiac Aerospace, and it reflects the restatement of the impact of remeasuring assets at the time of the Zodiac Aerospace acquisition for EUR 156 million. And second is the mark-to-market impact of hedging instruments in consolidated financial income for EUR 353 million, as I mentioned a few minutes ago.

Page 15 is the P&L. As I will comment on revenue and recurring operating income in the next slide, I will focus here on other items. One-off items were positive for EUR 32 million. It comes from the capital gain generated by an asset disposal. Net financial income was EUR 32 million negative. It reflects notably a lower cost of debt. Income tax charge was EUR 496 million negative, representing an apparent tax rate of 26.3%. H1 last year apparent tax rate was 21.8% as it benefited from positive research tax credit and from tax implication of IFRS 15 implementation. So today's 25% or 26% apparent tax rate is more in line with long-term trend. So adjusted net income for group share was EUR 1.353 billion. Basic EPS was EUR 3.13, a strong growth versus last year.

Slide 16 for the revenue. Revenue has reached EUR 12.102 billion, up 27.3%. It includes EUR 840 million of changes in scope mainly due to the ex-Zodiac Aerospace contribution with 2 additional months of activities versus first half of 2018 and a positive EUR 410 million currency impact due to a positive translation impact. So it leaves 14.2% increase for organic growth, up EUR 1.346 billion with all divisions enjoying a tremendous growth; Propulsion, up 19% or up EUR 911 million; Aircraft Equipment, Defense and Aerosystems, up 8.6% or EUR 321 million additional revenue; and Aircraft Interiors, up 11.9% or EUR 107 million additional revenue.

On Slide 17, recurring operating income. It grew from EUR 1.386 billion in H1 last year to EUR 1.883 billion this semester, up 35.9%. It includes a 2-month additional contribution of ex-Zodiac activities for EUR 40 million. On an organic basis, recurring operating income grew 34.6% with positive volume effect in all activities both from OE and services; cost reduction and productivity gain spread over all businesses; and negative impact of EUR 107 million from the CFM56-LEAP transition, at the top end of the range announced in our initial guidance for the full year; and higher R&D charge to the P&L as expected.

For R&D on Slide 18, a few words. Total expenses were EUR 851 million, of which EUR 651 million for R&D expenses excluding what is sold to our customers. It represents a EUR 86 million increase due largely to the scope impact with Zodiac activities. Excluding the 2 additional months of scope impact, R&D expenses are up EUR 44 million. Amortization and depreciation of R&D have increased by EUR 40 million. It is mainly explained by a depreciation of an asset for EUR 30 million. And as a result, R&D in P&L decreased at 4.6% of sales versus 4.8% last year due to a very strong increase in our sales.

Slide 19 is a brief overview of business performance. In a nutshell, it shows organic growth and profitability improvement across all businesses. I will come back on each BU in 1 minute. Just here a quick comment on the corporate center or holding. It was almost balanced in H1 2019. Here, it's EUR 17 million negative. Last year, it was EUR 80 million negative for the full year, and I expect that to be in the same region for 2019 full year.

For Aerospace Propulsion. Revenue stood at EUR 5.9 billion, up 19% on an organic basis, thanks to continuing momentum in OE, bus, civil and military and services. Recurring operating income grew at EUR 1.227 billion. That means an operating margin at 20.8% of sales, a 180 bps increase versus last year. The profitability benefited from the civil aftermarket growth, the higher contribution of military activities and the helicopter turbines maintenance activities that grew double digits. The transition CFM56-LEAP was a headwind of EUR 107 million on H1 profit. CFM deliveries dropped, and their positive margin also reduced. The reduction of a negative unit margin -- unit cost, sorry, on LEAP did not offset the sharp increase in volume deliveries for LEAP. And we expect the transition to be positive on H2 in order to end within the range of EUR 50 million to EUR 100 million negative impact for the full year of 2019.

Slide 21, on Equipment. You know that it now reflects dynamics of the regional Aircraft Equipment division of Safran plus the ex-Zodiac aerosystem businesses and the ex-Defense BU of Safran. OE revenue has grown to EUR 4.553 billion, up 8.6% organic. OE was up 7.6%. Services were up 10.9% organic. Recurring operating income has reached EUR 588 million, up 33%. Operating margin reached 12.9%, and we intend to keep this very high level until the end of the year.

For Aircraft Interiors, Slide 22. This new segment reflects 3 businesses: Cabin, Seats and what we call Passenger Solutions. First half 2019 revenue amounted to EUR 1.640 billion compared to EUR 980 million last year. On an organic basis, revenue grew 11.9%. All activities have experienced a positive organic growth in H1, which is very good. OE was up 10.2% driven by businesses program, toilets and floor-to-floor activities and in-flight entertainment. Services up 16.8% mainly driven by Seats. And the new Passenger Solutions unit, which combined notably water and waste management and in-flight entertainment, has enjoyed a growth in line with division growth. Recurring operating income increased EUR 53 million on an organic basis and was EUR 85 million in this first half.

Page 23 is our cash flow statement. Free cash generation was very strong in H1 at EUR 1.177 billion, which represents an increase of 43% versus last year thanks to a 34% increase in EBITDA. Free cash flow represented 63% of recurring income -- of operating income or 87% of net income. It was impacted by 3 exceptional items: negatively by the MAX grounding by around EUR 200 million as expected; it was positively impacted by the disposal of an asset; and also by a positive cutoff impact between 2018 and 2019 of tax within the consolidation team of French corporate taxes. In detail, EBITDA has been driven by strong organic growth across all divisions. Working capital increased by EUR 863 million, and CapEx spending remains stable.

Page 24, very quickly with the usual bridge of our net debt position. It was EUR 3.269 billion at the end of last year. It has mechanically increased due to the implementation of IFRS 16. And then the other drivers were free cash generation, the dividend payments in May this year, the share buyback of EUR 458 million in H1. On July 1, we launched a new tranche of EUR 400 million, which was completed during the summer. So to date, our buyback program announced in 2017 has been completed up to 90%.

Nothing really to mention on the balance sheet on Slide 25, so I now leave the floor to Philippe for the updated and upgraded guidance.

--------------------------------------------------------------------------------

Philippe Petitcolin, Safran SA - CEO & Director [4]

--------------------------------------------------------------------------------

Thank you. Thank you, Bernard.

On Slide 27, as a reminder, our financial year guidance is based on various set of assumptions. We adjusted one of them regarding to our civil aftermarket indicator. In February, when we announced our initial guidance, we said that we expected the high single-digit growth to take into account the good trends notably for spare parts. We think our indicator will go now at around 10%. The rest of the other assumptions still unchanged.

Going finally to Page 28. To take into account the strong momentum in all our activities, we raised our fiscal year 2019 revenue and recurring operating income outlook at an estimated average spot rate of $1.13 to the euro. In 2019, the adjusted revenue is expected to grow by around 15% in 2019 compared with 2018. Previously, we said in the range of 7% to 9%. And on an organic basis, based on Safran's assumption on the LEAP-1B deliveries to Boeing, the adjusted revenue is expected to grow by around 10%. Previously, we said around 5%. The adjusted recurring operating income is expected to grow comfortably above 20%; previously, we said in the low teens, at a hedge rate, I remind you, of $1.18 to the euro.

Regarding the cash. To take into account the 737 MAX situation, we are to refine our free cash flow outlook. From June 30, 2019, Safran revised the free cash flow impact of the 737 MAX situation to approximately, as Bernard said, EUR 300 million per quarter to reflect the decrease of prepayments for future deliveries. Based on an assumption of return to service of the Boeing 737 MAX in Q4 of this year, free cash flow is expected to be in the range of 50% to 55% of our adjusted recurring operating income. Previously, we said 55%. Now we say in the range of 50% to 55% as recurring operating income outlook is raised. In case of the grounding of the MAX until the end of 2019, the free cash flow to adjusted recurring operating income should be slightly below 50%. As I said earlier, the current Boeing 737 MAX grounding impact on our free cash flow and any extension in 2019 is a deferral in cash collection and should reverse in the following quarter. It's not a lot of cash.

Thank you for your attention. That's the end of our presentation. But just before the Q&A session, I have proposed to Ross McInnes, who is the Chairman of our Board and who is with us this morning, to update you on my succession plan. I think it's not me who has to talk about that. Thank you. Ross?

--------------------------------------------------------------------------------

Ross McInnes, Safran SA - Chairman of the Board [5]

--------------------------------------------------------------------------------

Thank you. Thank you, both Philippe and Bernard. Good morning.

Latest in the press statement are a chapter on governance. We've launched the succession process to find a successor to Philippe. Now it's obviously big shoes to fill. The Board has defined the characteristics with the source. We have also defined the key challenges and objectives for the next 7 or 10 years. And we have organized the time line and steps which we think are required to finalize the selection in coming months. After giving careful thought to this endeavor, we considered the items, the elements, the ingredients of a successful transition. And in order to ensure for the business' smooth transition while guaranteeing a seamless handover, we came to the conclusion that it made sense to extend Philippe's term of office by 6 months to December 31, 2020, which dovetails nicely with Philippe's own plan. Therefore, our conclusion on this, all the ingredients the Board feels are in place for a successful transition.

Thank you, Philippe.

--------------------------------------------------------------------------------

Philippe Petitcolin, Safran SA - CEO & Director [6]

--------------------------------------------------------------------------------

Thank you, Ross. Now we can move to the Q&A session. Please, any questions?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question from -- comes from Olivier Brochet from Crédit Suisse.

--------------------------------------------------------------------------------

Olivier Brochet, Crédit Suisse AG, Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

I would like to, if I may please, the first one, if you could discuss a bit more in detail the shop visit numbers, mix, content and how they are evolving on the CFM56, please. And the second one, at the CMD, you presented an R&D outlook that includes assumption on the NMA development and the Silvercrest for Textron. Given the situation at Boeing and Textron, how do you feel this has evolved? Or how could it evolve, please?

--------------------------------------------------------------------------------

Philippe Petitcolin, Safran SA - CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Olivier. I will try to answer these questions. Regarding the shop visits mainly on CFM56, we see an increase of the shop visits which is in line basically with our guidance and our forecast of around 5% per year, and we continue on this trend. Regarding the content of the shop visits, we have not seen any change since the beginning of this year. The shop visits remain quite big, quite heavy. And that's one of the reasons we have this indicator of services for engines which is growing by a bit more than what we were expecting at the beginning of the year, 10.2%. So no big change, no change. In fact, in the behavior of the airlines, still a very, very good business and very strong performance on the onshore business.

It's true that, on your second question, at the Capital Market Day, we talked about the NMA and the Silvercrest. NMA is not moving really at this stage. We do not have a lot of discussions with Boeing. We continue to work on the project, but I do not think you should talk with Boeing, but I do not think that we can expect a launch in the coming weeks. It's -- but again, it's still a very, very production -- project, and we do our best to be selected as the engine supplier.

Regarding Silvercrest, this is true that we lost Cessna on the Hemisphere. It's not really a loss. As the program is put -- has been put on hold, and so we have decided to continue and finalize the complete development of our engine and be sure that all the improvements we have been thinking over the last couple of years be introduced on the engine, and the engine will be ready when it will be ready. And I believe it will be the best engine of its category. I remind you that the category is propulsion for business jets of 10,000 to 12,000 tons of thrust.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

Next question from Doug Harned from Bernstein.

--------------------------------------------------------------------------------

Douglas Stuart Harned, Sanford C. Bernstein & Co., LLC., Research Division - SVP and Senior Analyst [5]

--------------------------------------------------------------------------------

Two questions as well. First, could you walk through in a little more detail how the MAX is affecting the LEAP-1B performance in terms of you're not getting cash payments now, you were at a lower rate, so you would think there may be less operating leverage, could be some more costs when you then again have to ramp back up? I would assume on the positive side, you also have more stability now on the supply chain, so perhaps if you could walk through how LEAP is -- the LEAP situation is going with respect to the MAX timing.

And then second, on interiors, if we go back sort of to the old days of Zodiac, this was a low-teens-margins business. You're making some real improvements here. But what has to happen to get it back to those levels? And when could we expect that?

--------------------------------------------------------------------------------

Philippe Petitcolin, Safran SA - CEO & Director [6]

--------------------------------------------------------------------------------

Okay. Doug, I will try to answer the first question with Bernard. I will try to answer the operational side of the LEAP-1B, and Bernard will talk about the financial side, and I will answer the interiors. Regarding the MAX, we are producing today the engine at the rate of 42 airplanes a month. We have stopped nothing. We are still delivering to Boeing more than 20 engines per week. We were supposed to move in terms of production rate, but we are at 42. So for us, it's not something which is -- which has a lot of impact on our supply chain. We have adapted our supply chain to this production rate. But when you look at the LEAP between the 1A and the 1B, we almost doubled the production between H1 2018 and H1 2019. So we are doing fine. The discussion will be at a point at which rate and how fast do we increase the production rate above the 42. But we are producing today, if I take the 1A and the 1B, around the 40 engines per week. We are at -- between the installed and the spare engines for the 1B, we are around 23 engines a week. And on the 1A, between the installed and the spare, we are around 17 per week. So the production is still going very well. And again, we have worked with our supply chain in order to minimize or be sure that we have no impact, and our suppliers still feel good about the future of the program.

So Bernard, maybe a few words on the financial side.

--------------------------------------------------------------------------------

Bernard-Pierre Delpit, Safran SA - CFO [7]

--------------------------------------------------------------------------------

Yes. On the financials, as we keep the production rate and delivery rate at the same level as planned, I mean, we don't have a lot of impacts on costs, which I think was your question. The main impact is on free cash flow, and this is something we explained in April, we don't get the cash from Boeing because Boeing doesn't deliver the plane. So it's part of the cash that is missing. And what we are saying now is that as airlines are not prepaying for the aircraft anymore, we don't have our share for the engine. So the difference between the impact in Q2 and the impact going forward, if these impacts on prepayments, roughly, and this is a rule of thumb, less than 50% was paid -- was prepaid and a little more than 50% was paid at deliveries, now we miss the part that were supposed to be prepaid. That's why we have increased the impact of the grounding from Q2 to Q3 going forward.

--------------------------------------------------------------------------------

Philippe Petitcolin, Safran SA - CEO & Director [8]

--------------------------------------------------------------------------------

Thank you, Bernard. Regarding your question on interiors, we maintain really that by 2022, we should be in the range of 13%, 14% in our business as an operating result. We believe that the margin will be more than 10%. And again, 12%, 14%, 15% is our target. How do we get there and why does it take some time? I remind you that for cabin, for example, we have a lot of activities, production in high-cost country. California is the main center of production of cabin, and California is not known as a cheap area for producing cabin part. We need, in order to improve our margin, to transfer a lot of this work to low-cost country and mainly Mexico. But in order to do that, you need to have a clean sheet of paper. You need to have your production under complete management. You need to have a supply chain which is answering to all your questions, and we have not yet started. We just started, but we have not yet moved the production from California to Mexico. Today, we do that. There is a huge potential for improvement of our margins.

And for the seats, we have to work more on generic products. We have to like work, like for cars, make generic products and then adapt these products for the airlines. It's something which is under development, but again, we have not seen the results of these new lines of product.

And finally, we have to work on our supply chain. It was too splitted between a lot of small suppliers. We have to consolidate this supply chain and get better performance from our suppliers. So globally speaking, we are in line with what we got and where we are going. And we really believe that by 2022, we'll be at the performance we described during the Capital Market Day.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

Next question from Andrew Humphrey from Morgan Stanley.

--------------------------------------------------------------------------------

Andrew Edward Humphrey, Morgan Stanley, Research Division - VP [10]

--------------------------------------------------------------------------------

One was just on LEAP. I wanted to clarify the commentary that you just made previously. I think when we've spoken earlier this year, you were in the process of ramping up to 30 engines a week for Boeing by May, and we're happy for kind of any excess engines that weren't going on, on when to be delivered to the spares pool. Should we interpret your commentary today as a change from that and perhaps indicating that you're going slightly slower on ramp-up? And if so, I guess what is it that's going better on production economics that's allowing you to keep your guidance for the impacts of the LEAP transition this year?

And the second question is just on military. I wonder if you can give us a bit more of indication of how much higher military deliveries contributed to first half revenue and whether that continues in the second half.

--------------------------------------------------------------------------------

Philippe Petitcolin, Safran SA - CEO & Director [11]

--------------------------------------------------------------------------------

Thank you, Andrew. I will start the answer, and I will let Bernard finish on the impact of the cost of the LEAP and on the military performance of the first semester.

Regarding the production of the LEAP, you are right, at the beginning of the year, Boeing was supposed to go to 57 airplanes per month. And we were putting ourselves in order to support this production requirement and produce starting in May 30 engines per week for Boeing. Today, as you know, the production has been reduced from 52 to 42 a month. Airplanes are now produced at 42 a month. And we have adapted our production in line with the requirement of the customer. That's a fact. And of course, the ramp-up is not as high as the one we were expecting at the beginning of the year. Again, this is temporary. Today, the airplane is back in the air. I'm sure that Boeing is going to be -- that's what I write anyway, will be pushing us to move back into production ramp-up. But you're right, we are producing today at a rate of 42 when we were expecting at the beginning of the year to be at 57. So instead of 30 engines per week, we are closer to 20 engines per week. That's just the fact.

Bernard, maybe the impact on the financials?

--------------------------------------------------------------------------------

Bernard-Pierre Delpit, Safran SA - CFO [12]

--------------------------------------------------------------------------------

Yes. So let's come back on what happened in H1 and what we plan for H2. In H1, CFM56 deliveries dropped by almost 60%. As we make positive margins on this engine, you can expect that the total margins in terms of euro have also dropped.

On the LEAP side, as we have almost increased by 100%, 97% the increase, you can imagine that it couldn't be offset by unit cost reduction. But the LEAP unit cost reduction was almost 10% when I look at the unit cost at the end of June versus the average unit cost in 2018. So we have this cost reduction, but it could not offset the skyrocketing growth in terms of LEAP deliveries.

What will happen in H2? Our assumption is that CFM56 margin will continue to drop, and we expect deliveries to drop by almost 30% versus H2 2018. We think that the LEAP margin will improve in H2 versus H2 2018, thanks to continuous improvement in cost even if we may have some impact of lower ramp-up in terms of a fixed cost absorption. So this is something we are looking at, and we will tell you more by the end of the year. And we have still uncertainty around nonrecurring cost that we have to provision in order to ensure time on wing for the new LEAP. What will be also some -- a kind of offsetting factor is the mix between spare engines and installed engines. We see that as positive versus the negative impact of maybe a slower ramp-up than the one we expected at the beginning of the year. That's why we continue to see the transition between EUR 50 million and EUR 100 million negative even as if in H1, it was negative for EUR 107 million. So the bridge between the EUR 107 million impact in H1 and the full year guidance means that we are positive for the transition in the second half.

For military sales, it's a mix between OE and services. We have the positive impact of services in H1. We don't think it will be that strong in H2. But in terms of OE, we delivered 22 Rafale engine in the first half, and we think it will increase in H2. We suspect it will be in the region of 40 engines to be delivered in H2. So H2 should be strong in terms of military OE and maybe a little smoother for military services, but a good momentum for military sales not only on engines but also in services for the helicopter turbines and other businesses.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

Next question from Christophe Menard from Kepler Cheuvreux.

--------------------------------------------------------------------------------

Christophe Menard, Kepler Cheuvreux, Research Division - Head of Aerospace and Defense Sector [14]

--------------------------------------------------------------------------------

I had 2 question. One is close to the previous one. It was on Propulsion. The EBIT margin is impressive in H1, and I wanted to understand, if possible, how sustainable is the growth in helicopter turbine services. You mentioned double-digit growth in H1. Is it something that can be sustained into H2 and also in 2020? Does it mean that we basically have, I mean, a strong ramp-up in growth ahead of us?

The other question still on Propulsion is you are raising, I would say, the civil aftermarket guidance to 10%. How much of this could be linked to the MAX grounding in the sense that some airlines are restocking spare parts for 737NG? Is there any sensitivity, or is it purely business momentum? And this -- so that was about Propulsion.

The second question, on interiors, again, the growth in services, at 17% organic, mainly Seats, seems quite impressive as well. Is it an indication that you're regaining market share in services? Or is it a trend that you've seen in the past? Because on my side, I find it quite impressive in terms of the momentum at the moment.

--------------------------------------------------------------------------------

Philippe Petitcolin, Safran SA - CEO & Director [15]

--------------------------------------------------------------------------------

Bernard, first question. I will answer the interiors.

--------------------------------------------------------------------------------

Bernard-Pierre Delpit, Safran SA - CFO [16]

--------------------------------------------------------------------------------

Yes. For the helicopter business, we see the increase in services in the same region in H2 of basically 10% up. For OE, I would be more careful because we don't see any rebound in OE deliveries. But for services, and you know that it's about 2/3 of our business is in helicopter, we are optimistic. For OE, I wouldn't bet anything for the moment. And for aftermarket, frankly, we don't see for the moment any impact of the grounding in term of shop visits or even in term of scope of the shop visit because you have to understand that now we are servicing engines that have been putting in maintenance by the airlines some 3, 4 or 5 or 6 months ago, so you can't have an impact of the grounding for the moment. And as soon as we see any impact, we will, of course, flag it, but we don't see that in our figures today.

--------------------------------------------------------------------------------

Philippe Petitcolin, Safran SA - CEO & Director [17]

--------------------------------------------------------------------------------

Regarding, Christophe, your question on interiors, it's a mix of 2 things. The business is doing good. The airlines make money. And our performance allow us now to service directly these airlines instead of them going to alternate sources. And the second point is the backlog. We had a lot of backlog of spares which we have not delivered because the company was, as you know, under a lot of pressure from its customers. And they were really putting the first priority for OE deliveries, and they were late, very late in deliveries of services, mainly spare parts. So it's a combination of both. We are cleaning the backlog, and we do better directly with the customers.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

Next question from Harry Breach from MainFirst.

--------------------------------------------------------------------------------

Harry William Freeman Breach, MainFirst Bank AG, Research Division - Research Analyst [19]

--------------------------------------------------------------------------------

Philippe, Bernard, first of all, I think these are really strong results, so well done. Second, I just had 3 small questions. Firstly, and forgive me for being very slow on the uptake, can you just clarify for us, I think CFM was producing LEAP-1Bs at a 52 aircraft a month rate. Can you let us know what month it moved down to 42?

Second question, just in a way following up on Doug's angle on interiors. When you look back at Aircraft Interiors at Zodiac, it was making mid-teens margin at a euro-dollar spot of 1.39 8 years ago. Clearly, we're in a much favorable spot rate. But as you know, there's a mix of Seats Europe and Seats U.S. I'm just wondering, if we've got a combination of a much more favorable spot rate and the move of production to Mexico, should we be thinking maybe about a little bit better than just mid-teens margins when we're looking out in a few years' time, all else being equal, with the spot rate?

And then final question, guys, just on supply chain bottlenecks. It's been a regular feature. This cause Philippe speaking about forgings and castings bottlenecks in the supply chain and it's a concern. I remember you saying vividly you address it every day. How do you find supply chain performance and bottlenecks given that rates come down?

--------------------------------------------------------------------------------

Philippe Petitcolin, Safran SA - CEO & Director [20]

--------------------------------------------------------------------------------

Thank you, Harry. Regarding the LEAP-1B, as you may remember, after Boeing decided to -- and the agencies -- regulatory agencies decided to ground the airplane, we slowed down the production from 52 to 42. I think it was in June, beginning in June that we decided to -- or May, May or June, I don't remember exactly, but it was in May-June time frame that we received the requirement of Boeing to reduce our production like the other guys. So all the production decreased to 42. Again, when we look at our forecast and our revised guidance, we maintain this production at 42. We have not neither increased this production nor decreased further the 42 a month. And I think it is a conservative attitude on our side. So yes, we are at 42, which represents, as I said a bit earlier, around 20 engines per week. But we were prepared and ready to move, and we had achieved for a few weeks at the beginning of the year a production of 30 engines per week, so we know it's working.

Regarding interiors and the fact that you may think that we are too conservative to give you a mid-teens profitability guidance for 2022, you're right, I mean our competitors do better than that, some of them anyway, not all of them. One, to be honest, is doing better than that. But I do not mean that by 2022, we will have totally optimized our product lines and our businesses. It's just a gauge. 2022 is a commitment we made when we proposed to buy the company that we would be able to recover the performance at a level of mid-teens recurring operating income. I believe, like you, that based on the past performance of Zodiac in the good years, we can think after 2022 at a better number than the mid-teen. But it's just a step. And as you know, we have to go step by step. You cannot change everything at the same time because you have customers to serve every day.

Regarding forging and casting, this is a good question. Today, of course, with production which is not growing and -- at the level we were expecting, we have less pressure coming from our supply chain to meet our demand. And regarding the forging and the casting, we, of course, have, every week, things to work on. But globally speaking, I didn't see over the last 2 or 3 months a huge pressure coming from deliveries of forging or casting which could be late. So of course, it's something, in answer to the question, which will make sense, I believe, a year from now. Thank you, Harry.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

(Operator Instructions)

--------------------------------------------------------------------------------

Philippe Petitcolin, Safran SA - CEO & Director [22]

--------------------------------------------------------------------------------

So I like -- sorry?

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

Sorry. No, no, there's no more question.

--------------------------------------------------------------------------------

Philippe Petitcolin, Safran SA - CEO & Director [24]

--------------------------------------------------------------------------------

So if there is no more question, I want to wish everyone a very good day, and thank you for having attended this presentation of Safran. Thank you very much.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.