Dassault Aviation société anonyme (AM) Earnings Call Transcript & Summary

The context is the same, the context of war at the door of the EU in Ukraine against Russia, an energy transition that is very significant, and the unpleasant side of it, which is aviation bashing, and the Bourget air show is a good response to that, and the supply chain that has a certain number of difficulties recruiting people and the ability to supply face inflation, the drift of the energy prices which is creating quite a number of problems in deliveries. India has announced the acquisition and future negotiations on 26 aircraft for the Indian Navy. This contract will be negotiated between the two governments, as it was the case for the Indian Air Force. It's a great satisfaction for the company, for our partners Thales, Safran, and all the 500 companies contributing to build the Rafale, and especially the Navy Rafale. The military programming law, this law was voted. If there was no such law, we wouldn't have a plan going from 2024 to 2030. In 2027, there would be an event. It would question a certain number of things, but it is important to have this military programming law, as done with [ EUR 413 ] billions, including the 13 from the exceptional earnings to be still one. So, we are in this rationale of the military programming law, with the objectives to finalize the order for health to have Rafales for the Air Force. We said 137 in 2030, added to the 41 from the Navy. So, here we are delivering the Rafales of the fourth tranche, the second part, and we will deliver the fifth tranche that has been ordered. The developments are being pursued with the standard F4. We're preparing the standard F5 with future work on the UAVs, the beginning of the FCAS. We have installed a platform here at Saint-Cloud. We have engineers from Germany and Spain, who will join us, and they will prepare this combat demonstrator. We are in phase 1B. We will have a phase 2 that will have to be contractualized before the first flight in 2029. We're also working to deliver the retrofits of ATL 2, the maritime patrol that has to fit standard 6. We we’re working on maritime surveillance aircraft and in this [ law ] we have 12 aircraft that will have to be delivered. Five are [ under ] condition and the Albatross with 8X. So, all this has been clearly identified in the LPM. The Air Show, just a few words to say that it was a real success, the success of the Rafale. Of course, all our delegations, all the Falcon users in the world went to the air show, visited it and said that they wanted to meet the French authorities and they wanted to meet us too. A lot of the delegations there are still not equipped with the Rafale. We could meet them, therefore. A great attraction for our Falcon aircraft, especially a new attraction for the 6X because the 6X is in flight, and on the ground you can see it in flight, and you can also see it, visit the cabin with its internal design, the mock-up of the 10X, which is very popular. And all this can help us prepare for the future, and the Bourget Air Show was a place where we could talk about this. Now, as for decarbonization, as you saw it in the film, SAF, business jets are ahead of commercial aircraft in terms of SAF because we're using a lot of our fuels with this aviation fuel -- sustainable aviation fuel. Recruitment Operations, which are highly specific, because we need to recruit and hire more people -- we'll talk about this later on and we set up the L'Avion des Métiers; it was set up by the GIFAS, and we want young people to join Dassault. There was a small office next to our stand. We received 500 applications and we are working on them to help us hire people because we have a lot of tension in terms of employment. Now, our activities and programs in Greece. We delivered two new aircraft and four pre-owned Rafale. These are aircraft from the French Air Force, and they have been transformed; they're as good as new. We have pursued our prospection. We are holding discussions with some countries. One of them is going to come true, 26 for the Indian Navy. As for France, we've delivered two Rafales and we’ are continuing the development of our standards. As for the future combat air system, FCAS, we have a physical platform here at Saint Cloud. We've begun by setting up the common tools that will allow us to work in proper industrial teams, and the study has begun. It's pursuing all the studies we had begun in phase 1A. Now, the mission aircraft. The program is taking place normally for the maritime surveillance planes, Archange. We've delivered the seventh aircraft for ATL 2, which has been upgraded, and we're working, as I told you last March working on a project, future maritime patrol aircraft, based on the Falcon 10X. As for exports for Falcons, we have delivered the first of the four Falcons ordered last year from Korea, an aircraft for electronic war. As for the Falcon context, at the end of 2022, things had slowed down. We had a very good '22in terms of sales, with 64 orders taken. Now, it is slightly slower. Since the beginning of the year, 12 orders have been received in the first half, and in the meantime, we have delivered nine aircraft in H1 2023. As for the Falcon 6X, the first point is that we’re waiting for its certification. It will probably take place this summer. We are continuing the development of the Falcon 10X, and we’re continuing improving the Falcons in service. We've validated a new cockpit EASy IV. That will be proposed on the 7X and the 8X. We also have new modules available on our Falcons that we have installed and which is proposed on Falcon 6X and to be proposed on the Falcon 10X, also. As for aviation bashing, as I told you earlier on, I'd like to repeat, and you’ will hear me repeat this, 2% of CO2 emissions for global aviation, 2% for business jets. That is 0.04% of global CO2 emissions. This is what we are talking about. We are committed, as I said in the small film, to reach carbon neutrality by 2050, considering the obligations we’ have all taken. A year's use of all our Falcons, that's roughly 2,000 Falcons, that is roughly 24 hours of global video streaming, 5 hours of global HGV traffic, or 2.5 days of German power plant operation. So, that is to give you the perspective and show you how much business aviation costs in terms of CO2 emissions and we were a bit surprised that commercial aviation has been excluded from the green taxonomy determined in Brussels. They've only taken into account commercial aviation when we had engaged the decarbonization of the sector because we use SAF. It’s not just us, it’s the entire commercial aviation in the world. Our major competitors in the US and Canada and the United States and in Brazil are doing just as us, and they're quite fast. They're going to use SAF. We are organizing ourselves in Europe, and in France. We have held meetings with the President of the Republic to develop SAF lines, and we are using our SAF in-house. So, we are really engaged in this decarbonization. So, seen from us, this green taxonomy, while we don't understand why we are excluded from it in Europe, and we will prepare legal recourse to understand. We'll take legal action to understand why we are not part of this taxonomy. It can handicap some of our subcontractors, especially SME’s in France. But in general, if I compare the United States and France, the United States are going very fast in decarbonization, with incentive systems, and Europe is using a hyper regulation vote, and this is something we’ would like to denounce because we don't see inefficiency in this hyper regulation. And this is not just limited to the aeronautical industry, but there are other industries that are highly affected by this hyper regulation, and we were all very happy to hear the President say that there are enough regulations, and we have to try to be more efficient and more pragmatic, rather than trying to always prepare texts and standards. As for the SAF, we are still doing research and technology in the framework of our companies. We have aerodynamical formulae. We're working on the maths and engine performance, and the future aerodynamic performance of an aircraft can be improved. We're working with those who are manufacturing the engines, and we want to be more sober with our engines, consume less. So, if we have SAF and we consume less, we are on the right track. And we have to optimize our air operations. Our clients, users, pilots can fly along traffic lines that don't consume a lot of fuel. They have the freedom to choose if they want to use more kerosene or less, or use more SAF or less, it's up to them to decide. And we have decided to buy forests, to reforest, to plant more trees and store the CO2 emissions. As for the 6X, we're waiting for certification. It's a question of a few days. We hope that it will happen this summer. There are always a few minutes before we sign all kinds of papers when we have to deliver. We have to study these papers, and this is the moment that is the most important, and we've been waiting for this for quite a number of weeks now. And at the same time, we are ramping up with the 6X, and as soon as we will have received a certification, we will commission this aircraft and we will begin deliveries to our first clients, and there'll be a demonstrator, and the future clients will be able to assess the 6X in flight, and this will definitely boost the sales of 6X. Falcon 10X, we are pursuing our work. We are very careful about the development of the engine. This engine exists, it equips the Gulf stream, but we're adapting it to our 10X Falcon with greater thrust and we are continuing this development with great attention, and the results are very good. So, we're quite confident about this engine and this is very important for an aircraft, especially considering what we have seen in the past. We're working on the cabin, the modularity of the cabin, the new size of the cabin. We can imagine all kinds of new things. And the other technological aspect is the carbon wings, and we are ready to develop the wing service, and the production of this wing surface, the first series, you see the pictures here from Biarritz. And they are at Martignas before they go to Merignac. Human resources. This is very important. Last year, we recruited a lot. This year, also, we're going to hire a lot of people – 1,400 employees – in the group, 1,000 in France, and it’s quite a large number. It's not very easy to find them. We are quite attractive at us. So we can't find them quick enough. So we are trying to find them everywhere, apprentices, engineers, and our workload is quite heavy with the ramping up in the design offices and all the ad hoc services. To make our aircraft fly, we need a lot of people. The sharing of the value in France. So there was an agreement between the trade unions and the MEDEF. At the beginning of the year, we at Dassault Aviation, we have this profit-sharing, this participation, and in 2023 it will represent 4 months of wages. So this is the right thing to do, and we are right at the top in terms of value-sharing. We've signed agreements with the trade union organizations this year in terms of their wages. We've increased their wages, although some say don't fuel inflation by increasing the wages too much, but inflation was quite high, so therefore the average increase was 6.2%. This agreement was signed by the CGC, CFDT and the UNSA. A few agreements on disabilities, disabled people, to improve the situation of some of the future employees. One of the major topics is the deployment of the new job typology in the metallurgy branch. This will have to be there in all the metallurgy branches, right from the 1st of January 2024, whether it's in the large companies or small companies. This is very important because we have to requalify each job and put each employee in each box in each job. So, this is a major job which is underway and we are quite confident about the time. We are also discussing with the trade unions to obtain an agreement on the methodology and to properly label these jobs. So business result, 1.6 billion order intake for this first half, with 12 Falcons, but also some additions. Regarding our pricing revision, on the export market, sales 2.3 billion, 9 Falcons, 2 exported Rafales. New, the 2 French Rafales and 4 pre-owned Rafales from the French Defense. So, that's 3/3. So 1/3 for export, a small 1/3 for French Defense Forces, and another third for the Falcons. The backlog is now standing at EUR 34.4 billion, excluding the 26 aircraft planned for the Indian Army. Without the Indonesian Army, and we're waiting for the first installment for the first 18 aircraft out of the 36 to be delivered, and we're still waiting for an order intake of 42 aircraft for France, so our backlog should increase by the end of this year. Now, adjusted consolidated income statement. EUR 151 million operating income, EUR 2,295 million for net sales. We have a financial income which went up. Our cash has helped us to invest in instruments with higher earning. The role of Thales and other equity affiliates EUR 210 million, taxes EUr 66 million. So, net income EUR 405 million, a net income margin of 17.6%. Self-financing is still high because our sales are bit lower in this first half. So, that’s 10.8% for self-finance. So we still have the 6X and 10X, and we’ are still working on the nitty-gritty of the 10X. So that's all from me for this First Half Year results. Now, I'm waiting for your questions.

[Interpreted] [ Nicholas Abid ] from Frankfurter Allgemeine Zeitung. What about Berlin's decision to export Eurofighters to Saudi Arabia. This decision, according to you is it understandable? And are you more worried as for the opportunities to export SCAF.

[Interpreted] Well, it's a country sovereign decision made by a country called Germany. I will not dare and make a comment because I don't want to be the object of comments in your national papers. Now this experts decision is a sovereign decision by member states, and that's very good. And of course, I'm worried France has expressed its concern as well. We have a business model to produce and sell jet fighters giving preference to France. So if there is cooperation in the future, we will give preference to those countries cooperating with France for their development. But -- we don't think that if there is -- we don't know -- if there is no export, we will not go for the future development of such programs. So that's a concern. We will have and this will be in the hands of policymakers. Such decisions will be in the hands of policymakers.

[Interpreted] I'm from Le Point magazine. Do you think that the recent orders from India will lead you to increase the production?

[Interpreted] Well, the answer is yes, even though we were proactive, we anticipated, we were at less than one. Our pace will be three. Some of the parts are already at this phase -- phase 3 in order, indeed, to meet the challenge of these expected orders. So it is going to increase the pace of production for Rafale, for India and for Indonesia alike, since we're waiting for the entry to force of the contract with Indonesia for 18 aircraft in the coming days and another 18 aircraft in the future.

[Interpreted] Thierry Dubois, Aviation Week. I have 3 questions. on the SAF, the sustainable alternative fuels, you say that you're better than commercial aircraft. Could you give us some figures still talking about SAF? Are the Falcon customers ready to pay more for that. And regarding the supply chain, you said that there were some problems in hiring that you were struggling with the commodities and raw material that it was disrupting the deliveries. Is it visible up to the stage of delivery to your customers?

[Interpreted] Well, why am I saying that business aviation is ahead, and internally, we use 30% of SAF. I've made it's mandatory to use 30% of SAF for Falcons that are flying internally. Our customers are free to make their decision but we know that they want to rely also on SAF, but I have no statistics because we do not collect this data in a systematic fashion, unlike commercial, aircraft or airliners. Now they are subject to 10%, I think, share of SAF by Brussels regulations. So we are ahead of them because our customers are ready to pay a higher price for this alternative fuel, with a 30% blend, because they want to move on with decarbonization and because they're aware that it is the solution for the future and in our -- we've discussed it with our American colleagues and counterparts and everybody is on the same wavelength. So we are all confident that since these fuels -- alternative fuels are available in the airports, but we know we only account for small volumes. And these small volumes can be used for business jets. You go to Le Bourget and you can fuel your aircraft with this 30% blend, and some airports in the U.S., and when you say, we use it inside the company, we use it also in Little Rock when we fly our customers. For our customers, we also have a SAF supplier and 30% of SAF for the maiden flights before delivery to our customers. So we're confident that our customers, particularly in Europe, our European customers really want to go for this decarbonization effort and they will rely heavily on SAF. Now, regarding disruption on the supply chain, of course, it's put the producers and manufacturers under pressure. We are a bit late in some areas, but we're very agile because every time we have a part missing, we carry on assembling and make sure that we will get the part at the right time eventually for the final assembly. Our Falcon customers are fully aware of that and they understand our problems. And we discuss with them every time there is a small delay so that everybody will accept it. No problem.

[Interpreted] [ Vincent Ami ] from Challenge. What about the Rafales delivery windows? I wonder whether you will deliver for the French market '28 or '29. We've recently read also that Dassault is getting prepared to have a Plan B for SCAF. You also have a cloud project with the Dassault system and some see that it's a kind of an incipient or an incipient program for the SCAF.

[Interpreted] For Falcons, we do anticipate the orders because we know there will be so many orders. It's always difficult, but for the Rafale, we take the contract as a function of our production capacity. We say, we'll move on to production Phase 5 -- 3, sorry, or maybe more because -- and then there are problems with the subcontractors and hiring people, et cetera. But when we sign a contract, we say to our customers when we think we will be able to deliver. It's from T0 of the contract. It's 38 months approximately, and then there's 1 aircraft delivered per month. So for the 26 Indian aircraft, if the entry into force is in 2024, we will deliver them at the end of 2027 approximately. We still are able to keep up with the pace. Now, if there are many more contracts coming up they will be difficult. But these are problems of a rich company. And our Plan B well, some have said that we shouldn't have a Plan B. I've always said we should have a Plan B. It's not a Plan B, we are with Plan A, which is to develop the F5 standard for the Rafale for 2035 roughly approximately. And maybe a fighter drone by 2035. And it's not a substitute for SCAF. SCAF will carry on with its pathway. It is currently in the demonstration phase. We are working on the technology and in 2029 and everything goes fine, the first flight will happen in 2029. Now, if we sign an agreement for Phase 2 of the contract because we're still in Phase Ib, now if everything is aligned, we should reach Phase II and we'll have to make sure that the governments of the 3 countries agree upon a program. So then it will lead to a development, et cetera, et cetera. And I have already said, it won't be before 2045. Some say it will be 2044 before they said 2040. When I was not happy, I used to say 2050, but it should be around 2045. So we have the Rafale and then the SCAF. Rafale to 2035 and then the SCAF.