Safran reports first-half 2022 results

Paris, July 28, 2022
 

H1 2022 adjusted data

• Revenue €8,560 million, +24.5%; +17.3% organic 
• Recurring operating income €1,047 million (12.2% of sales, +260bps)
• Free cash flow €1,665 million

 

H1 2022 consolidated data

• Revenue €8,675 million
• Recurring operating income €968 million
• Free cash flow €1,665 million

 

FY 2022 outlook (adjusted data)

• Revenue outlook raised on stronger USD and free cash flow outlook lifted to reflect significant customer advance payments
• Recurring operating margin outlook confirmed

The Board of Directors of Safran (Euronext Paris: SAF), under the Chairmanship of Ross McInnes, at their meeting in Paris on July 27, 2022, adopted and authorized the publication of Safran’s financial statements and adjusted income statement for the six-month period ended June 30, 2022.

 

Foreword

• All figures in this press release represent adjusted data, except where noted. Please refer to the definitions and reconciliation between first-half 2022 consolidated income statement and adjusted income statement. Please refer to the definitions contained in the footnotes and in the Notes on page 9 of this press statement.
• Organic variations exclude changes in scope and currency impacts for the period.

CEO Olivier Andriès said: “Safran posted solid results in the first half of the year amid improvement in air traffic in all regions of the world except China. Our ability to ramp up production rates is somewhat constrained by a fragile supply chain as the world emerges from the pandemic and we are working hard to ensure timely delivery to airframers. We will continue to optimize our cost base and implement commercial actions to counter inflationary pressure. We feel confident in achieving our full year guidance and beyond.”

 

Half-year 2022 results

 

Revenue

The global narrowbody capacity increased throughout the semester in all geographies but China. In H1 2022, narrowbody ASK were at 78% (on average) of 2019, with Q2 2022 at 81% of Q2 2019.

H1 2022 revenue amounted to €8,560 million, up 24.5% compared to H1 2021, 17.3% organic. Change in scope was €(37) million¹. Currency impact of €533 million reflects a positive translation impact of USD revenues, with an average €/$ spot rate of 1.09 in H1 2022 (1.21 in H1 2021). €/$ hedge rate was at 1.15 (1.16 in H1 2021). Q2-22 sales increased by 27.0% at €4,489 million (17.6% in organic) compared to Q2 2021.

On an organic basis, H1 2022 revenue increased by 17.3%:

• Propulsion increased by 20.2% driven by a solid civil aftermarket activity (+47% in USD) highlighting strong spare parts sales for CFM56. In contrast, spare parts sales for widebody and services contracts exhibited lower growth. In H1 2022, combined shipments of CFM engines reached 492 units (465 LEAP and 27 CFM56), compared with 448 in H1 2021, with a notable increase in LEAP spare engines. Military engine activities were down due to lower M88 deliveries and despite higher services. Helicopter turbine activities registered a slight decrease both for services and OE.
  Q2-22 sales increased by 21.6% due to civil aftermarket revenue, up 41% compared to Q2-21 (as a reminder civil aftermarket: +53% in Q1-22);
• Equipment & Defense was up 11.5% driven by aftermarket services in all divisions but Defense. OE sales were up mainly thanks to nacelles (LEAP-1A powered A320neo and A330neo). Avionics activities registered a slight increase during the first part of the year. The widebody market remained low, notably on the 787 program impacting the wiring and landing gear businesses.
  Q2-22 sales increased by 10.7% compared to Q2-21 mainly due to landing gear and nacelles services;
• Aircraft Interiors revenue increased by a solid 29.6% from a low comparison base a year ago. Growth was primarily driven by services for both Seats and Cabin activities. OE Cabin (toilets for A320, A350, 737 and galleys) performed well during the first half of the year. A positive contribution was recorded in IFE activities, both OE and services.
  Q2-22 sales increased by 29.7% compared to Q2-21 thanks to all activities both in OE and services.

^{1 Divestment of EVAC in June 2021 and Safran Ventilation Systems Oklahoma (Enviro Systems) in November 2021.}

 

Research & Development

Total R&D, including R&D sold to customers, reached €719 million, compared with €640 million in H1 2021.

Self-funded R&D expenses before tax credit were up 9.2% at €465 million in H1 2022 including:

• Development expenses slight increase at €259 million (€249 million in H1 2021);
• Research & Technology (R&T) self-funded expenses at €206 million (€177 million in H1 2021) mainly driven by the RISE program.

The impact on recurring operating income of expensed R&D was €358 million, down (0.5) point of revenue compared to H1 2021, driven by phasing of some R&D programs for which EIS is delayed. It represents 4.2% of sales, consistent with mid-term target of 4.5% on average for 2021-2025.

 

Recurring operating income

H1 2022 recurring operating income² reached €1,047 million, +59% compared to H1 2021 (+54% organic). It includes scope changes of €(3) million and a currency impact of €36 million.

Recurring operating margin improved by 260bps at 12.2% of sales (9.6% in H1 2021):

• Propulsion recurring operating margin increased by 1.8pts driven by services (mostly civil aftermarket) and favorable volume of LEAP spare engines. Profitability was impacted by lower CFM56 deliveries and a negative contribution from military OE deliveries. Helicopter turbine activities had a slight negative impact on the margin compared to H1 2021. The first-half was also impacted by the non-cash impairment of CFM engines stranded in Russia for €(22) million, related to Shannon Engine Support (equity accounted joint-venture);
• Equipment & Defense recurring operating margin increased by 2.6pts reflecting an improvement in all divisions except Defense which has been flattish. The strong margin upswing is mainly due to growth in services notably landing gear, carbon brakes, aerosystems and nacelles. OE nacelles had a positive contribution thanks to A330neo and A320neo programs;
• Aircraft Interiors posted a recurring operating loss of €(82) million. The recurring operating margin increased by 7.6pts compared to H1 2021, supported both by Seats and Cabin thanks to a strong growth in services. Cabin activities recovery is on track whereas Seats is facing supply chain and program cost-overruns. The breakeven target is therefore moving from full-year 2022 to H2 2022.

^{2 Operating income before capital gains or losses on disposals / impact of changes of control, impairment charges, transaction and integration costs and other items}

 

Adjusted net income

In H1 2022, non-cash one-off items were €(92) million including impairment charge for several programs €(148)M (of which €(90)M related to Russia) and capital gain on disposals of €60 million.

Adjusted net income – Group share was €536 million in H1 2022 (basic EPS of €1.26 and diluted EPS of €1.22) compared with €269 million in H1 2021 (basic EPS of €0.63 and diluted EPS of €0.61).

It includes:

• Net adjusted financial expense of €(193) million, including €(115) million exchange revaluation of positions in the balance sheet, €(48) million impairment of financial assets in Russia (notably non-consolidated investments) and cost of debt of €(38) million;
• An adjusted tax expense of €(211) million (27.7% apparent tax rate).

In total, the non-cash impairment charge related to the sanctions against Russia amounts to €(160) million pre-tax.

The reconciliation between H1 2022 consolidated income statement and adjusted income statement is provided and commented in the Notes on page 10.

 

Free cash flow

Free cash flow³ of €1,665 million benefitted from significant Rafale advance payments. Safran resumed its investments in production capacity and low carbon initiatives with capital expenditures (tangibles and intangibles) increasing to €(407) million (€(329) million in H1 2021).

The favorable working capital evolution (€426 million) reflects significant customer advance payments and strong deferred income from rate per flight hour service contracts. Inventories significantly increased during the first half in an effort to protect on time deliveries to customers.

^{3 This non-accounting indicator (non-audited) is equal to cash flow from operating activities less change in working capital and acquisitions of property, plant and equipment and intangible assets}

 

Net debt and financing

Net debt was €425 million as of June 30, 2022 (€1,544 million as of December 31, 2021), as a result of a strong free cash flow generation.

At the end of June 2022, cash and cash equivalent stood at €6,208 million, up from €5,247 million at the end of December 2021.

Replacing the 2015 Revolving Credit Facility coming to maturity at the end of the year, Safran has set up a €2 billion undrawn sustainability-linked revolving credit facility available until May 2027 (with two one-year extension options) with a cost indexed on reaching two ESG annual objectives (Scope 1 & 2 CO2 emissions and percentage of women among senior executives).

 

Currency hedges

The hedge book amounts to $45.1 billion in July 2022, compared to $32.6 billion in April 2022 notably due to the activation of additional hedging related to the EURUSD rally towards parity. In the meantime Safran continued to hedge year 2025 while lowering the probability of knock-out of the portfolio. The book is composed of options with knock-out barriers spanning from 1.18 to 1.30, representing a risk on the size of the book and on targeted rates in case of a sudden increase of the euro.

2022 is hedged: targeted hedge rate of $1.15, for an estimated net exposure of $9.0 billion.

2023, 2024 and 2025 are hedged: targeted hedge rate from $1.14-1.16, for a respective estimated net exposure of $10.0 billion, $11.0 billion and $12.0 billion respectively.

2026 is partially hedged: targeted hedge rate from $1.14-1.16; $7.5 billion hedged out of an estimated net exposure of $13.0 billion.

 

Portfolio review

Safran continues to manage actively its asset portfolio:

• The divestment of Safran Aerosystems Arresting Systems was closed on June 30^th 2022;
• The acquisition of Orolia was closed on July 7^th; the activity will be integrated within Safran Electronics & Defense in H2 2022;
• The share purchase agreement of Aubert & Duval was signed with Airbus and Tikehau Ace Capital on June 21^st (closing expected in Q4 2022).

 

Full-year 2022 outlook

Safran raises its revenue and free cash flow full-year 2022 outlook (at current perimeter, adjusted data) to reflect a stronger USD and significant customer advance payments:

• Revenue of €18.2-18.4 billion at a €/$ spot rate of 1.10 (versus €18.0-18.2 billion at 1.14 previously);
• Free Cash Flow generation of €2.4 billion (versus €2.0 billion previously).

Safran confirms its recurring operating margin outlook of c.13.0%.

The main underlying assumptions are confirmed, in particular those relating to the civil aftermarket revenue growth between 25% and 30% (in $ compared to 2021) and no further disruption to the world economy.

 

Governance

At its meeting of July 27, 2022, the Board of Directors decided to coopt Alexandre Lahousse as a Director. He joins the Board of Directors from that date.

This cooptation, proposed by the French State, is a consequence of the resignation of Vincent Imbert who is retiring from his position within the French Defense Procurement Agency (DGA).

Alexandre Lahousse has also been appointed member of the Innovation, Technology & Climate Committee, replacing Vincent Imbert.

The ratification of his cooptation will be submitted to the 2023 Shareholders’ Meeting.

Alexandre Lahousse has been head of the Industrial Affairs and Economic Intelligence Department (S2IE) of the French Defense Procurement Agency (DGA) since January 1, 2022.

 

Agenda

• Q3 2022 revenue : October 28, 2022
• FY 2022 earnings : February 17, 2023
• Q1 2023 revenue : April 26, 2023

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Safran will host today a conference call open to analysts, investors and media at 8.30 am CET which can be accessed at +33 (0)1 72 72 74 03 (France), +44 (0)207 194 3759 (UK) and +1 646 722 4916 (US) (access code for all countries: 56698017#). Please ask for the "Safran" conference and state your name. We advise you to dial in 10 minutes before the start of the conference.

The webcast will be available via Safran’s website after registration using the following link: https://onlinexperiences.com/Launch/QReg/ShowUUID=D1037790-4C7D-45EE-A8FB-767C26050E92.

Participants will have access to the webcast 15 minutes before the start of the conference.

Please make sure you have the latest version of your OS and of any browsers installed on the device you will used before attending this event.

A replay of the conference webcast will be available until October 26, 2022 by using this same link.
A replay of the conference call will be available until October 26, 2022 at +33 (0)1 70 71 01 60, +44 (0) 203 364 5147 and +1 646 722 4969 (access code for all countries: 425021903#).

The press release, presentation and consolidated financial statements are available on the website at www.safran-group.com (Finance section).

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Key figures

 

1. Adjusted income statement, balance sheet and cash flow

 

 

2. Segment breakdown

 

 

3. Number of products delivered on major aerospace programs

 

 

4. Research & Development

 

 

Notes

Adjusted revenue:
To reflect the Group’s actual economic performance and enable it to be monitored and benchmarked against competitors, Safran prepares an adjusted income statement in addition to its consolidated financial statements.

Readers are reminded that Safran:

• is the result of the May 11, 2005 merger of Sagem SA and Snecma, accounted for in accordance with IFRS 3, “Business Combinations” in its consolidated financial statements;
• recognizes, as of July 1, 2005, all changes in the fair value of its foreign currency derivatives in “Financial income (loss)”, in accordance with the provisions of IFRS 9 applicable to transactions not qualifying for hedge accounting (see Note 3.f of the 2021 Universal Registration Document).

Safran’s consolidated income statement has been adjusted for the impact of:

• purchase price allocations with respect to business combinations. Since 2005, this restatement concerns the amortization charged against intangible assets relating to aircraft programs remeasured at the time of the Sagem-Snecma merger. With effect from the first-half 2010 interim financial statements, the Group decided to restate:
  • the impact of purchase price allocations for business combinations, particularly amortization and depreciation charged against intangible assets and property, plant and equipment recognized or remeasured at the time of the transaction and amortized or depreciated over extended periods due to the length of the Group’s business cycles, and the impact of remeasuring inventories, as well as
  • gains on remeasuring any previously held equity interests in the event of step acquisitions or asset contributions to joint ventures;
• the mark-to-market of foreign currency derivatives, in order to better reflect the economic substance of the Group’s overall foreign currency risk hedging strategy:
  • revenue net of purchases denominated in foreign currencies is measured using the effective hedged rate, i.e., including the costs of the hedging strategy,
  • all mark-to-market changes on instruments hedging future cash flows are neutralized.

The resulting changes in deferred tax have also been adjusted.

H1 2022 reconciliation between consolidated income statement and adjusted consolidated income statement:

 

The change of mark to market of instruments hedging future cash flows recorded in financial income in H1 2022 stood at €(5,601) million reflecting the USD rally (from 1.13$ on December 31, 2021 to 1.04$ on June 30, 2022). It purely an accounting entry, with no cash impact, as hedges are intended to be exercised with future receipts of US dollars.