Philippe Petitcolin - CEO Bernard Delpit - Group CFO

Christian Laughlin - Bernstein. Celine Fornaro - Bank of America Merrill Lynch Harry Breach - Raymond James Christophe Menard - Kepler Cheuvreux

Welcome to the Safran First Quarter 2016 Revenue Conference Call. I now hand over to Philippe Petitcolin, CEO and Mr. Bernard Delpit, Group CFO. Mr. Petitcolin, please go ahead.

Good morning, everyone, this morning, we're glad to present our first quarter 2016 of revenue which confirms the favorable momentum of the Group and its healthy prospects. Let us look at the highlights for the Q1 2016. We're at a very historic start of the year with strong revenue in Q1, total sales of €4.2 billion, up by 7.8% compared to the Q1 of 2015, with a continuing momentum in aerospace, propulsion and equipment and in the security activities. The revenue growth on an organic basis is 6.7% up compared to last year. Revenue in propulsion, OE are up 14.9 and so almost 15% up compared to last year. Services which is an element that you like to see is up 10.1% in aerospace activities including civil aftermarkets for 8.6% up compared to last year in dollars and service in aircraft equipment up 17.2% in euro compared to last year. The defense market revenue are as expected, down by 3.2% in the first quarter and in security, we're, as I just said, in very high increase, a strength of 9% organic growth compared to last year. If we look a bit more in details about our program and let us start with the LEAP. The LEAP development continues to make very good progress. We're on track for commercial deliveries as planned, at the same time, as a preparation of production ramp up remains the cost on focus for all our teams. If I look a little bit more in details on the LEAP 1A, you will remember that the engine has been certified in November last year by both the FAA and EASA. We have delivered the first series production LEAP propulsion system including the engine and engine nacelle early April so we have those for the A320neo in accordance with the schedule established five years ago. We have a flawless flight test program on A320neo and A321neo, with today, about 800 hours logged in 300 flights, since the middle of 2015. We have zero engine issues, all regarding condition engine is on spec and commercial deliveries will start in Summer 2016. For the LEAP 1b, engine certification is also on track, flawless first flight in January for the first several in 737 Max and we have started the one year flight test certification program. As of today, as of yesterday, we had built 157 flights for 350 hours of flight and today, we have three airplanes flying - entering to service is scheduled for 2017. We continue, as I just said, to prepare for entering to service and production ramp up, we're working on the supply chain, readiness, the LEAP supply chain is basically the same one as the CFM56, we have about 80% of common suppliers between the CFM supply chain and the LEAP supply chain. We're also investing in production capacity. We're investing in new assembly lines in our plants south of Paris and we just announced a couple of weeks ago that we're going to build a third production of composite parts after the ones we have already in the U.S. and the second one in France, we're going to build a third plant in Mexico. If you just look at the highlights, the other highlights for the first quarter of 2016, CFM again, if you look at the total engines which are in backlog today, we have almost 14,000 engines, exactly 13,949 engines, we booked a nice share of orders during the first quarter and 542 orders and commitments for the CFM56 and 673 orders and commitments for the LEAP, the total LEAP backlog as at the end of the first quarter at 10,534 engines. In Aircraft equipment, we did also very well. We booked in our electrical systems the nice contracts of the new helicopter, Airbus helicopter, the H160, in defense, we got awarded by the French Army, the contract for the UAV, the tactical UAV of the future for the French. We even believe that we will have in the future, large opportunities for export contracts. And in security, all the activities were in line with our expectations especially in border control where we booked very nice contracts for Singapore and Changi Airport. During the capital market day, we said that our detection activity was up for sale, we signed on April 21, an agreement to sell Morpho Detection to the Smiths Group for an enterprise value of $710m and there is transaction which remains a capital gain before tax had clearance expand of euro dollar. I will now let Bernard give you a bit more information regarding the financial outlook before coming back to you for the guidance of 2016.

Thank you, Philippe. Good morning, everyone. I'm on slide 7. Just to say that the FX euro dollar was slightly better than last year with an average spot rate of 1.10 compared to a 1.13 last year. And this explains a €39 million positive impact of currency on our 2016 Q1 revenues. The organic growth of 6.7% which is €264 million is the breakdown of that is on page 9. So it is 10% for propulsion, 1.9% for equipment, it is negative for 3.6% for defense. It is strong at 10.9% for security. And as you can read on page 9, the main growth drivers are OE per service on CFM56 up 10% versus the Q1 2015. Military engines both Rafale engines and TP400 engines are up. We have seen a continued momentum in the aerospace services for both propulsion, 8.2% up in euros, equipment 17.2% in euros for equipment, for the offsetting impact, we mentioned here free of certain impact, lower helicopter turbines and softer spares and support revenues for helicopters as well, lower production for A330 and in defense, because of the FELIN program for the French Ministry of Defense. It explains 100% of the negative organic growth in the defense business. Regarding FX, nothing new since the capital market day so you won’t find anything new in page 10. We have a $1.24 for €1 as a target for the hedge rate in 2016. And now, I will leave the floor to Philippe for the outlook for 2016.

So for 2016, we confirm the outlook we gave you already which means that in terms of revenue, we expect an increase in low single digit at an estimated average rate of $1.11 to the euro. We also expect an adjusting securing operating income to increase by around 5% on the total increase in margin rate at the range of $1.24 to the euro that Bernard just mentioned. And free cash flow to represent a bit more than 40% of the adjusted recurring operating income. This is what we wanted to tell you and we're now welcoming any questions if you have any.

[Operator Instructions]. The first question is from Christian Laughlin, Bernstein.

Two questions from me, please. One, could you comment on civil aftermarket trends in propulsion in the quarter with respect to changes in unit shop visits, scope of repairs and pricing drivers of the sales volume growth that we saw in the period? And then two, probably a pretty obvious question given recent press reports, specifically, do you think that Zodiac fits into your business or if you don’t want to comment about a specific company or a potential target or what have you, in general, Philippe, could you clarify your views on doing a big deal in the near term?

The first one regarding civil aftermarket, we just showed you an increase of 8.6% which is basically what we said we would achieve during the year. We said high single digits, that was our expectation and our forecast of the year so we're really in the middle of these forecast we gave you at the beginning of the year and if you look at a big more in detail, the three factors you mentioned, you know, the first one is of course, the slight increase in the quantity of shop visits, after one quarter, it is difficult to tell you exactly what will be the trend. We forecast around 5% for the year. There second item, is of course the pricing and the third one is the value cash per visit which in our view, again, one quarter is not a big time for comparison, but remains for the first quarter, at least remains at the same kind of value cash per visit we have enjoyed in 2015. So the three items are positive in this trend of the aftermarket for propulsion. The second question is - it is brought up, we're not going to discuss and comment any kind of market rumors so don’t expect me to give you any kind of information on any specific regarding the strength of your second question, I just want to remind you what I said at the capital market day, I just said that opportunities and I'm reading here, opportunities which will reinforce our footprint in aerospace equipment with the DNA, high tech tier 1 recurrence, service aftermarket tools, so ours will be looked with appropriate financial discipline. That is the only thing I can tell you.

The next question is from [indiscernible] Bank of Canada.

I noticed in the aircraft equipment division, you had a very strong service revenue growth of 17%. I was wondering what the organic number is for that division?

For the total equipment - aircraft equipment division, it is 2%, 1.9% for the total OE per services and for the 17.2% increase in sale for services and equipment, it means 13% organic growth for services and equipment.

That is a strong number. I was wondering what has been the principal driver behind that in the quarter.

Well, to be honest, I think that the numbers in the first quarter of 2015 were not so high. And that is still good. So yes, it is good, but it is just in line with our expectations for the year. We're not higher than the forecast for the year 2016. We remind you that the first beginning and then the first half of 2015 because we compare quarter with quarter, what was not so good in terms of services for equipment, the only ones which we're doing really well, we have the brakes and wheel but if you talk about the nacelle business, for example, it was not so good. So yes, it is very good, we're very happy with the numbers, 13% organic, 17% total but again, it is just in line - it is good but it is in line with our forecast of the year.

And then just a final one from me. On the security division, you have now announced the Morpho disposal. Are there any other disposals you are anticipating for this division?

Again, I come back to what we said during the capital market day. We said at that time, that we had decided to put the detection activity of our security business up for sale and we just signed this agreement with the Smiths Group a couple of days ago for the rest of our security business which are identity and security. We said that strategic options were under review and we do not hold out any options. So this is where we're. We're just in the phase of looking at the various strategic options for the rest of our security business.

The next question is from Celine Fornaro, Bank of America Merrill Lynch.

I've got two questions, if I may. So the first one would be, is if you could comment on the progress of your space assets and where we're on that with Airbus and if you are still OK with your guidance to achieve this kind of JV - new structure by year end. And my second question, Philippe, would still be on comments around M&A that you made, I think it was at the Investor Day, where you said that there wasn’t an intention to add a new pillar to the Group. Thank you.

Celine, this is Bernard speaking I will start with the space query. In the press release, we said that we're making good progress. We're expecting the signing very soon. And for the closing, it will not be yearend, it will be at the end of this semester, so we expect the joint venture to be fully operational on July 1.

Okay, regarding, Celine, the second question, I will just say what I just said that at the capital market day, I said that opportunities, you know, that will reinforce our footprint in aerospace equipment with a DNA close to ours will be looked at, that is what we're doing.

The next question is from Harry Breach, Raymond James.

Just two small questions. Firstly, with the supply chain for LEAP, can you give us a feel about the performance of your suppliers on that, particularly are they delivering to quality and to schedule so far, can you give us any feel for bottlenecks or issues and then the second question was on the long-running topic of the commission's inquiry brief, can you tell us if there has been any further communications from the commission, I presume you have responded to the questionnaire many months ago now. But it would be interesting to have an update on where that is, please?

You know, Harry, regarding your first question, we're at the beginning of the ramp up, it is maybe a bit too early to tell you exactly how strong we feel we - it is something where every day, you have issues to solve but this is regular industrial business and we believe today that we're fine and we will be able to support our customers. We don’t see any broken point, we don’t have anything red, but we have, of course, some suppliers where we still have to support them. But it is very normal, you know, in this kind of product it is something that we do every day with any kind of new product, it could be landing gear, it could be wiring, in this case, I believe you are talking about the LEAP but this is very, very normal. So as of today, no blocking point, nothing major, no red point, but attention, attention, attention which is why we have dedicated team, you know, we mentioned that and we have people showing you exactly what we do every day during the capital market day, that is what we do and so far, we're doing fine and we're happy with the results. The second question regarding the European community, we had a first set of questions, I will remind you that it's not an investigation, it's just an inquiry at this stage, we answered the first set of question, we had the second one, we answered it and we're truly responsive and proactive in addressing the questions of the EU which is where we're, I don’t have more information to share with you.

So there has been a second question sent to which you have--

It was not a second complete set, it was more some questions that wanted to get more information or maybe get a better understanding of the answers we get.

I'm in for clarification really, Philippe.

Yes. It was more clarification, the second set, that new question, they were not new questions, they were, better understanding of the first answers we gave on the set of questions we got.

The next question is from Christophe Menard, Kepler Cheuvreux.

I had two questions, one related to the 800m, could you update us on the progress made, if any on those issues on the gearbox and what are the potential implication for you as a partner in the program. I know it's not one of your parts but you are a partner on that program. And the second question, I don’t know if there is much update to give on Silvercrest since last month, but if you have any color on that, any progress, that will also be helpful in understanding what has been done. Thank you very much.

So Christophe, to answer your first question, it is true that the power gearbox which is designed and produced by the partner, an Italian partner, Avio Aero General Electric had some problems since the beginning of the year, we had two issues, the first one was a quality escape, concerning some material structure and strength of the specific part. This one has been fixed. The second issue which is still alive is in the service one, it was shorter than expected lifespan of one specific part of the PGB, of the power gear box, only two of the four engines, by the way, each aircraft are potentially affected, we're supporting as a partner, we're fully committed to support Avio for solving the problem as soon as possible. They are applying and we're applying with EPI, a two-step approach with a name carrying fix which is going to be ready in the next few weeks and definitely one which will be a bit longer, we're talking about months instead of weeks to set us this complete and definitive fix. So this is for the A400M and for the Silvercrest, if you remember, I mentioned that we have three phases to follow. The first one was understanding of the problems we have and this one is behind us, totally finished. The second one, we're still in is verification so we're producing, as of yesterday, by that understanding what is good and we have the solution. This one will be finished by mid-year, mid 2016 and the third stage is the validation where we're going to build engines with all these new products, the first engine to test will be on the bench before year end and we expect, as we said a few months ago, justification of the engine beginning of 2018. So we're fully in line with everything we told you the last time we discussed this issue.

So just on the end there is no large financial implication to be expected on the issues if I understand well?

There is no what?

Large financial implication or penalties or to be expected on the A400M fix?

At this stage, again, you know, EPI is totally focused on solving the operational problem, I'm not aware of any kind of financial implication, we may discuss that later on with customers but it is not something we have on the agenda as of today.

Thank you. [Operator Instructions].

So if there are no further questions, thank you very much to those of you for attending this conference call and we wish you a very nice day. Thank you.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may now disconnect.