Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Safran SA (SAFRF, Financial) reported a solid EBIT margin of 15.1%, a substantial expansion of 230 basis points.
- The company achieved remarkable cash generation close to EUR1.5 billion.
- Revenue grew by 19% year on year to EUR13 billion, with a 41% increase in recurring operating income.
- Safran SA (SAFRF) signed significant contracts, including the largest ever LEAP-1A engine order from Avolon and helicopter engine support contracts with Chinese group GDAT.
- The company reached important milestones, such as the certification of the LEAP-powered Airbus A321XLR and the successful maiden flight of Ariane 6.
Negative Points
- Safran SA (SAFRF) faced persisting supply chain constraints, leading to a drop in LEAP engine deliveries in Q2.
- There is pressure on cash flow related to some customer advances.
- The company experienced a significant drop in yield at the high-pressure turbine blade supplier, impacting LEAP engine deliveries.
- Aircraft interiors, despite reaching operating breakeven, still have excessive cash consumption due to engineering expenses and working capital requirements.
- The company is cautious about further risks down the road, notably on cash, while navigating a challenging supply chain environment and softer demand.
Q & A Highlights
Highlights of Safran SA (SAFRF) Earnings Call Transcript
Q: Could you help us understand why there is no revision to your guidance despite strong performance in equipment, interiors, and civil aftermarket services?
A: We are confident in meeting our numbers this year. However, we expect to deliver more LEAP engines in H2, which comes with a slight loss. Additionally, we anticipate less OE growth in propulsion, equipment, and interiors. Cash flow will depend on H2 deliveries and advance payments. (Pascal Bantegnie, CFO)
Q: Can you expand on the comment about demand softening in the second half?
A: The CFM56 aftermarket demand remains dynamic, driven by airlines' reluctance to retire older aircraft due to slower ramp-up of new generation aircraft. Storage levels are at record lows, and retirements are minimal. We are managing LEAP engine deliveries carefully to balance between airframers and airlines. (Olivier Andries, CEO)
Q: What is driving the unexpectedly high contribution of LEAP RPFH cost and revenue?
A: This is due to lower than expected time on wing for some engines, leading to higher costs and corresponding revenues. However, this has no impact on EBIT as these contracts are recognized at zero profit. (Pascal Bantegnie, CFO)
Q: Why are you confident in delivering significantly more LEAP engines in H2 despite Q2 issues?
A: The drop in Q2 deliveries was due to a significant yield drop in high-pressure turbine blades. We see a recovery in yield, which makes us hopeful for ramping up production in H2. However, the yield has not yet reached nominal levels. (Olivier Andries, CEO)
Q: What is your optimal cash level and net debt leverage going forward?
A: We ended H1 with a net cash position of nearly EUR900 million. We expect to generate EUR1.5 billion of free cash in H2. Our target leverage is from zero to 1 time EBITDA. Given ongoing share buybacks and M&A, we should be back to that range. (Pascal Bantegnie, CFO)
Q: Can you comment on the turnaround times for LEAP engines and the cash consumption for aircraft interiors?
A: Turnaround times for LEAP engines are still high but on a decreasing trend as we build capacity. For aircraft interiors, we aim to be EBIT breakeven for the full year and cash breakeven by 2025, with a target cash conversion rate of nearly 70%. (Olivier Andries, CEO and Pascal Bantegnie, CFO)
Q: What are the main drivers for the strong performance in equipment and defense?
A: Defense has shown significant growth, particularly in guidance systems and optronics. Strong aftermarket demand in carbon brakes, nacelles, evacuation slides, and oxygen systems also contributed. (Olivier Andries, CEO)
Q: Can you provide more details on the LEAP aftermarket growth and its impact on guidance?
A: LEAP LTSA revenue growth was above 50% in H1 compared to H1 '23, driven by higher shop visits and costs. This growth is from a low base and has no impact on EBIT. (Pascal Bantegnie, CFO)
Q: What are the lead times on HPT blades, and why did the yield fall at the supplier?
A: The yield drop at the HPT blade supplier was unexpected and significant in Q2. The recovery path is now visible, but the yield has not yet reached nominal levels. Lead times for these components are critical and impact our delivery schedules. (Olivier Andries, CEO)
Q: Given the strong H1 performance in equipment and defense, should we expect a slowdown in customer destocking?
A: Lead times for equipment differ from engines, so the phasing of deliveries varies. There is a risk of slowdown depending on inventory levels at airframers. We are managing supply chain challenges daily to meet demand. (Pascal Bantegnie, CFO and Olivier Andries, CEO)
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
