Safran reports strong performance for first-half 2014 results
Adjusted revenue grew 4.4%, adjusted operating income up 16.5%
driven by a strong performance in civil aviation
Full year operating income outlook upgraded
All revenue figures in this press release represent adjusted revenue. Please refer to definitions contained in the Notes on page 11. Comparisons are established against 2013 figures restated for the application of IFRS 11, Joint Arrangements..
Key figures for first-half 2014
First-half 2014 adjusted revenue was Euro 7,208 million, up 4.4% year-on-year (5.3% organic). Adjusted recurring  operating income at Euro 981 million (13.6% of revenue), up 16.5% year-on-year. After one-off items totalling Euro (10) million, profit from operations was Euro 971 million. Adjusted net income - group share of Euro 632 million (Euro 1.52 per share) compared with Euro 658 million in 2013 which included a capital gain of Euro 131 million from the sale of Ingenico shares. Consolidated (non-adjusted) net income - group share at Euro 650 million (Euro 1.56 per share). Net debt position of Euro 1,797 million as of June 30, 2014, with positive free cash flow generation (Euro 41 million) while heavily investing in R&D and the transition to LEAP. A dividend of Euro 1.12 per share was approved by the shareholders at the Annual General Meeting of May 27, 2014. An interim payment having been made in December 2013 (Euro 0.48 per share), a final payment of Euro 0.64 per share was made in June 2014. H1 2014 civil aftermarket  was up 9.4% in USD terms driven by first overhauls of recent CFM56 and GE90 engines. Growth in Q2 2014 was 6.5% compared to a strong level of business in Q2 2013. Full-year expectation for low to mid-teens growth is unchanged. Full-year 2014 outlook revised on the basis of strong first-half activity, especially in civil aviation, Safran now expects:
- As previously, for adjusted revenue to increase by a percentage rate in the mid-single digits compared to 2013
- Adjusted recurring operating income to increase by a percentage approaching the mid-teens (previously low double digits) compared to 2013 (at a hedged rate of USD 1.26 to the Euro).
- Free cash flow representing 35% of adjusted recurring operating income remains achievable (previously close to 40%) on the basis of updated assumptions for higher recurring operating income, increased self-funded R&D and tangible capex, an element of uncertainty being the amount of advance payments and the rhythm of payments by state-clients in the second half.
Key business highlights for first-half 2014 During the Farnborough Air Show, CFM recorded orders for 1,062 new engines (862 LEAP & 200 CFM56), in addition to LEAP and CFM56 services agreements, at a combined value of USD 21.4 billion at list price. Following the air show, the LEAP order book stands at over 7,500 engines (orders and commitments). Safran will participate in GE’s new engine, the GE9X, selected by Boeing as the exclusive powerplant on its new 777X long-range. Safran will have a total stake in this new engine programme of slightly more than 11%. Safran was selected by Airbus to supply the nacelle for the future A330neo. These nacelles will use Safran’s expertise in the use of composite materials, acoustic treatment and system architecture incorporated in the Airbus A380 nacelles. CFM International has initiated ground testing of the first LEAP-1B engine for the 737 MAX. The LEAP-1B engine fired for the first time on June 13th, three days ahead of the schedule set when the program was launched in 2011. After a series of break-in runs, the engine has successfully reached full take-off thrust. Safran and Airbus Group have agreed to create a 50-50 joint venture to gather ultimately into a single corporate entity the launcher systems from Airbus Group and the space propulsion systems from Safran. Signing of the programme joint venture transaction and initial start of operations (phase 1) are expected before the end of 2014. Safran completed the acquisition of the Aerospace Power Distribution Management Solutions and Integrated Cockpit Solutions business of Eaton. The business is consolidated with effect from May 9, 2014. At the Eurosatory 2014 international defense show near Paris, Safran showcased PASEO, a new generation of combat vehicle sights, which offers unrivaled performance in the detection, identification and designation of air-land threats, based on the integration of very-high-resolution digital optronic sensors. The TSA Pre✓™ programme continued to grow and is now fully operational in 29 out of the 45 major airports participating in the programme. Under its Universal Enrolment Services (UES) contract with TSA, MorphoTrust USA is the only authorized provider of the TSA Pre✓™ application programme which enables trusted travellers to speed through airport screening.
Paris, July 31, 2014 - The Board of Directors of Safran (Euronext Paris: SAF) met in Paris on July 30, 2014 to approve the financial statements for the first-half of 2014.
Chairman and CEO Jean-Paul Herteman commented:
“Safran posted record profitability in the first half 2014 with recurring operating income up 16.5%, standing at 13.6% of turnover, demonstrating once again our ability to deliver across all our businesses.
In addition, the excellent commercial activity, topped off by the Farnborough air show, continued to provide comfort in the demand for our technologies. The CFM56 programme is lasting longer, the LEAP programme is selling faster and we scored successes on new programmes such as the GE9X and the A330neo which will bolster our long term standing.
The very healthy and profitable growth we are experiencing in civil aerospace allows us to raise our profitability guidance for 2014 while bringing more resources to bear in order to strengthen our supply chain and increase our development capacity to manage the ever higher programme volumes and rhythms as well as additional opportunities. We now expect our R&D and capex in 2014 each to be somewhat higher this year than last, as a consequence of the outstanding commercial success of these programmes. However, a decline in cash consuming investments (capex, R&D) is confirmed for 2015/16.
Favourable aftermarket indicators and strong original equipment output, underpinned by growing air traffic and aircraft programme rates, provide a strong foundation for our medium and long term forecasts.”
First-half 2014 results
Safran delivered very good progress in performance in first-half 2014.
Solid growth in revenue. For first-half 2014, Safran’s revenue was Euro 7,208 million, compared to Euro 6,907 million in the same period a year ago, a 4.4% year-on-year increase. On an organic basis, revenue grew by 5.3%.
First-half 2014 revenue increased by Euro 301 million on a reported basis, or by Euro 365 million on an organic basis. Organic growth was driven primarily by continued momentum in most Aerospace activities (OE and services). Avionics and the Security business also contributed to this performance.
Organic revenue was determined by applying constant exchange rates and by excluding the effects of changes in structure. Hence, the following calculations were applied:
The unfavourable currency impact on revenue of Euro (119) million for first-half 2014 reflected a globally negative translation effect on revenue generated in foreign currencies, notably in USD, CAD and Brazilian Real. The Group’s average spot rate was USD 1.37 to the Euro in the first half 2014 vs. USD 1.31 in the year-ago period. The Group’s hedge rate improved to USD 1.26 to the Euro in the first half 2014 from USD 1.29 in the year-ago period, somewhat mitigating the translation effect on revenue. The achieved hedged rate for 2014 is USD 1.26.
Recurring operating margin reached 13.6% of revenue. For first-half 2014, Safran’s recurring operating income was Euro 981 million, up 16.5% compared to first-half 2013 restated figure of Euro 842 million, (12.2% of revenue). After taking into account the positive currency hedge impact (Euro 44 million) and the slight impact of acquisitions and newly consolidated activities net of disposals (Euro 14 million), organic improvement was Euro 81 million, representing 9.6% year-over-year growth.
This improvement was primarily driven by aerospace aftermarket activities in the Propulsion and Equipment businesses. Recurring operating income at the Defence and Security businesses was stable compared to the year-ago period.
One-off items totalled Euro (10) million during first-half 2014, including acquisition and integration costs, notably related to the activities acquired from Eaton in the period.
Adjusted net income - group share was Euro 632 million (Euro 1.52 per share) compared with Euro 658 million (Euro 1.58 per share) in 2013 which included a capital gain of Euro 131 million from the sale of Ingenico shares.
In addition to the rise in profit from operations, this improved performance includes:
Net financial expense of Euro (11) million, including Euro (21) million of cost of debt. Tax expense of Euro (313) million (32.6% effective tax rate).
Dividend to shareholders
A dividend of Euro 1.12 per share was approved by the shareholders at the Annual General Meeting of May 27, 2014. An interim payment having been made in December 2013 (Euro 0.48 per share), a final payment of Euro 0.64 per share was made in June 2014.
Pursuant to current legislation, subsequent to the placings made by the French state in 2013, a further 3.6 million shares belonging to the French state will be offered to Safran employees and former employees via a specific subscription offer. The relevant documentation will be made available in due course.
Balance sheet and cash flow
Operations generated Euro 41 million of Free Cash Flow. The net debt position was Euro 1,797 million as of June 30, 2014 compared to a net debt position of Euro 1,220 million as of December 31, 2013. Free cash flow generation of Euro 41 million was driven by the cash from operations of Euro 1,140 million, devoted to an increase in working capital needs of Euro (319) million to sustain rising production rates, and increased capital expenditures (Euro (299) million) and continued R&D investment. Other major cash outflows in the semester were a 2013 final dividend payment of Euro (266) million (€0.64 per share) to parent holders, and the acquisition of Eaton’s power distribution management and cockpit integration activities (Euro (197) million).
As of June 30, 2014, Safran had cash & cash equivalents of Euro 1.5 billion and Euro 2.55 billion of secured and undrawn facilities available.
Capital expenditure amounted to Euro (299) million in the first half of 2014, an increase of (72) million Euros compared to the year-ago period. The increase in capital expenditure is principally due to the intensification of the test and certification phase of the LEAP engine programme, and to the increase in carbon brakes production capacity (notably in Malaysia).
The level of investment in the first half and revisions to the production level of CFM56 and LEAP engines to be fulfilled now lead Safran to expect tangible capital expenditure in 2014 to increase by between Euro (70) million and Euro (100) million compared to 2013. In 2013, capital expenditure amounted to Euro (544) million excluding the proceeds of the sale of assets, principally an office building in Paris.
Research and development
Total R&D expenditures, including customer-funded, reached Euro (982) million.
The self-funded R&D effort before research tax credit was Euro (709) million or 9.8% of revenue in first-half 2014, up Euro (122) million compared to first-half 2013. It reflects notably an intensification of the ramp-up in spending on LEAP development. The impact on recurring operating income after tax credit, capitalization and amortization was Euro (320) million, an increase of Euro (49) million compared to last year, including R&D expenditure on Silvercrest which is fully expensed since April 1, 2014.
Safran revises its forecast of R&D for 2014 given the level of spending in the first half and:
the intensification and acceleration of the LEAP test and certification campaign; spending on the GE9X engine programme commencing in 2014 rather than 2015; higher spending on Silvercrest.
The level of self-funded R&D spending should increase by Euro (50) million to Euro (100) million compared to 2013 with a lower level of capitalisation.
The additional resources committed to these programmes reflect the strong demand for CFM and Safran aircraft engine technologies, attested by their outstanding commercial success.
On the basis of the positive momentum seen in the first half of 2014 in its commercial aerospace businesses and the evolution of capex and R&D, Safran has revised some key assumptions underpinning the full-year 2014 outlook:
A healthy increase in aerospace OE deliveries. Civil aftermarket increase by a percentage in the low to mid-teens. Revised: an increase of self-funded R&D of the order of Euro 50 million to Euro 100 million compared with 2013 with a lower level of capitalisation. Revised: an increase in tangible capex of the order of Euro 70 million to Euro 100 million compared with 2013. Profitable growth for the Security business, characterized, unlike other activities, by significant exposure to translation effect. Continued benefits from the on-going Safran+ plan to enhance the cost structure and reduce overhead.
In line with these assumptions Safran has adjusted profit and free cash flow guidance, detailed below:
Safran expects on a full-year basis: As previously, for adjusted revenue to increase by a percentage rate in the mid-single digits compared to 2013 revenue restated for IFRS 11 (at an estimated average rate of USD 1.30 to the Euro). If the average EUR/USD spot rate of 1.37 were to remain throughout 2014 the mid-single digit growth objective for adjusted revenue would remain achievable, the positive effect of the improving hedge rate partially offsetting the adverse translation effect. Adjusted recurring operating income to increase a percentage approaching the mid-teens (previously low double digits) compared to 2013 recurring operating income restated for IFRS 11 (at a hedged rate of USD 1.26 to the Euro). The hedging policy isolates adjusted recurring operating income from current EUR/USD variations except for the part generated in USD by activities located in the US, subject to the translation effect when converted into Euro. Free cash flow representing 35% of adjusted recurring operating income remains achievable (previously close to 40%) on the basis of updated assumptions for higher recurring operating income, increased self-funded R&D and tangible capex, an element of uncertainty being the amount of advance payments and the rhythm of payments by state-clients in the second half.
Safran now expects annual net USD exposure for 2015-17 to range between USD 6.2 billion and USD 6.5 billion due to strong growth of businesses with exposed USD-denominated revenues.
2014: Hedging is finalised at a hedged rate of USD 1.26.
2015: Hedging is almost completed at a hedged rate of USD 1.25. Accumulators are in place to hedge the additional exposure.
2016: Exposure of USD 5.0 billion is hedged at a rate of USD 1.25 (including knock out option strategies). Hedging of an additional USD 1 billion will be added through accumulators as long as €/$