Safran SA (SAF) Earnings Call Transcript & Summary

Welcome to the Safran Half Year 2021 Results. At this time, I would like to turn the conference over to your host, Olivier Andries, Safran's CEO; and Bernard Delpit, Deputy CEO and Group CFO. Mr. Andries, please go ahead.

Good evening, everyone, and thank you for joining us to this call to present our H1 2021 results. I will start the presentation with a glimpse of air traffic data in H1 on Slide 5. Then I will give an overview of financial and business highlights for the last 6 months. During H1, the increase in air traffic has been gradual and irregular. We already discussed the trough in February, a quarter ago. What you have seen since March is an ongoing gradual increase with a hike in May due to the upsurge of COVID cases in Asia. Since then, weekly cycles for CFM engines, both CFM56 and LEAP, have returned to their 2019 levels in China. In the rest of Asia Pacific, cycles are still going down, reaching minus 71% compared to 2019 mid-July for both CFM56 and LEAP. In North America, the level of cycles compared to 2019 has been quite stable in early July after a steady improvement. It is now around minus 15% compared to 2019 for all CFM engines. And in Europe, the improvement in flight cycles is more recent but seems rapid, with a level of minus 34% versus 2019, reached mid-July for CFM engines, out of which CFM56 were at minus 39%. All in all, weekly cycles as of July 18, to be compared to the same week 1 year ago for all CFM engines, were down 29.5% versus 2019, and CFM56 were at minus 35%. What we accept now, which are more contentious values selling around the world, makes us cautious yet still confident over the rest of the year. Looking at financial on Slide 6. Adjusted revenue reached 6 billion point -- EUR 6.876 billion. It was down by 21.6%, with a strong negative exchange rate headwind. On an organic basis, it went down by 17.3%. Adjusted recurring operating income was EUR 659 million, down 30.4%, representing 9.6% of sales. It is down 29.3% on an organic basis compared to H1 2020, but improving, but -- by 140 basis points compared to H2 2020 underlying margin. Operations generated EUR 701 million of free cash flow, a 22.2% decrease. This represents a 106% conversion to our recurring operating income, and it allowed to decrease our net debt position. All in all, our first half has been challenging in terms of top line, but thanks to a very high level of cost efficiency, profitability is increasing compared to H2 2020, where recurring operating income represented 8.2% of revenue after taking into account the effect of the Activity Transformation Agreement in 2020. On the cash side, a good cash generation has allowed us to reduce the net debt in H1. On Slide 7, a focus on Propulsion. Combined shipments for CFM56 and LEAP engines reached 448 units, down 16% compared to H1 2020. That means 211 LEAP delivered in Q2 compared to 188 in Q1 this year and 178 in Q2 2020. At the end of June, total LEAP backlog stood at more than 9,300 engines, and our market share on A320neo family is close to 60%. For CFM56, the progressive ramp-down continued as planned. 49 engines were shipped in H1, out of which 23 in Q2. Mid-June, GE Aviation and Safran launched a bold development program, the CFM RISE, targeting for more than 20% lower fuel consumption compared to the current LEAP engine. We also extended the CFM International partnership agreement by 2050. On aftermarket, given what we have observed in Q1, it is not a surprise that civil aftermarket revenue was down 25.5% in H1 compared to H1 2020, even with a year-on-year growth of plus 55% in Q2. Remember that Q2 2020 is a very low comparison basis. Spare part sales in H1 are still down year-on-year, especially CFM spares, and services contracts slightly decreased. In our helicopter business, the Arrano 1A engine that powers the Airbus Helicopter H160, is now certified in both Europe and the United States. On Slide 8, a few words on our Equipment, Defense and Aerosystems division and our Aircraft Interiors division. First, Equipment, Defense and Aerosystems, Safran has been chosen by Singapore Airlines to provide wheels and carbon brakes for its entire fleet of Boeing 777-9 through a tailored brake landing service contract. 31 aircraft are currently on order. Safran currently supports wheels and carbon brakes for 126 Airbus and Boeing aircraft at Singapore Airlines and Scoot, the low-cost airline of the Singapore Airlines Group, including A320, A350, 737-800 NGs, 737-8 MAX and 787. Safran signed a 12-year NacelleLife service contract with Corsair for the nacelles of its 5 Airbus A330neo. With this contract, the group commits to the repair of the nacelles and the general service of the thrust reverser at the time of their programmed removals, with the support of its network of experts for on-site nacelle inspections and its maintenance, repair and overhaul centers. Safran has launched Geonyx M, the new inertial unit for fast boats and amphibious vehicles. It complements the Geonyx land range as well as the Argonyx and Black-Onyx ranges, intended respectively for first-rank surface vessels and submarines. Coming to our Aircraft Interiors division. Safran regained customer interest in its products and achieved several commercial successes in H1, in particular with a German airline for the crew rest areas and the Skylounge Core business class seats of its future fleet of 16 A330neo aircraft; a Middle East airline to provide new Vue business class seats for its Boeing 737 MAX; and an Indian airline to provide Line Fit Z200 economy class seats for 75 A320 and A321. Efforts that we have engaged last year are going on. Restructuring actions are being taken in order to enhance the competitiveness of Safran. We still have manufacturing footprint optimization actions ongoing as we talk here. HR costs in H1 are down year-on-year, but more important is when we compare HR costs in H1 2021 to HR costs in H1 2019. We are still at the same level of savings of that what has been achieved in full year 2020. It is a result of 2 different effects in opposite directions. On the one hand, we benefit from a lower headcount, that is still decreasing yet at a slower pace. On the other hand, outsourcing, we have a lower use of short-time working scheme. It is around half the level we saw in the last 9 months of 2020. We are continuing our industrial footprint optimization. As an example, no later than 2 weeks ago, one new site closure has been announced, the Safran electrical components site in Santa Rosa, California, which is within Safran Electric and Power. All in all, with regards to costs, we navigated the crisis with a very cautious approach and put the same pressure on cost as last year. Research and development expenses are down 5% compared to H1 2020 and almost flat compared to H2 2020. OpEx in H1 2021 are down 13% versus H1 2020, and they are 28% below H1 2019 level, despite an increase compared to H2 2020 due to HR costs and lower use of short-term working as just expected. CapEx commitments are kept under control. And the impact of CapEx from cash is decreasing year-on-year. I now will give the floor to Bernard for the financials of the first half 2021.

Thank you, Olivier. Good evening to everyone. Slide 12. Just as a reminder, you know that the average spot rate was $1.21 against euro this year. It was $1.10 last year. It will create a negative impact on revenues. Hedge rate is at $1.16. As we said at the beginning of the year, no change against last year. And we had some mark-to-market impact of the spot rate at close in our account, but you know that we stated that in the adjusted data. On Slide 13, some of the dates on our FX strategy. The hedge book totaled EUR 29 billion at the beginning of this month. The euro-dollar peaked at $1.23 on January. Then the trend reversed and based on news flow from central banks, leading to a stronger dollar with the euro-dollar reaching a low point at $1.17 at the end of March. So we took this opportunity, first, to spread the risk of KO by moving away the nearest barriers. Now 83% of these KO barriers are above $1.25. And we also took the opportunity of this FX landscape to add new options to the 2024 book at strides consistent with our long-term rate targets between $1.14 and $1.16. But for 2021, we are very comfortable with achieving a rate, a hedge rate of $1.16 for the full year. I suggest we skip the Slide 14, which is the usual bridge between consolidated data and adjusted data that I will comment, so let's move to Page 15. One-off items were negative for EUR 195 million. It reflects impairment for one equity-accounted investment and several programs. We also booked EUR 31 million of restructuring costs. Net financial income was EUR 84 million negative compared with EUR 117 million in H1 2020. It reflects the higher cost of debt, with EUR 51 million cost of debt in H1 this year, including the cost of 2 major transactions for bonds and converts in H1. And it also reflects foreign exchange losses of EUR 28 million this year. Income tax charge was EUR 100 million, representing an apparent tax rate of 26.2%. So adjusted net income group share was EUR 269 million. EPS was EUR 0.63, a decrease of 47%. On Slide 16, on revenue. So adjusted revenue reached EUR 6.876 billion in H1, down 21%, and we're still at 57% on H1 2019. 2 comments here. Currency reflects the weakening dollar, and Q2 sales for all divisions are now above Q1 level. Of course, Q2 comparison basis is much easier than Q1, so the 10% increase in Q2 is a good start of the recovery, but again, the comparison basis were low. It's not written in this slide, but I think it's worth mentioning that the 10% organic growth in Q2, the breakdown is 14%, 1-4, on Propulsion, 9% in Equipment, but still down 4% in Interiors. On Slide 17, recurring operating income went done from EUR 947 million in H1 2020, to EUR 659 million in the end of June. So it's down 30%. On an organic basis, recurring operating income went down 29%. We have experienced strong negative volume impact on all activities, especially civil aftermarket, which is obviously detrimental to recurring operating income recovery. And on the other hand, cost savings have been achieved in R&D and personal expenses and external services. Obviously, some elements cannot remain as low as in 2020. For instance, short-term working, as Olivier said, will not bring the same savings in 2021 compared to 2020. And some external services that have been frozen in 2020 have to rebound. But all in all, we have managed to bring operating expenses in H1 down compared to H1 2020 and still down, again, 28% compared to H1 2019 level. And I think that's one of the main achievements of the first half of 2021. So the group recurring operating margin stood at 9.6% of sales, which remains below H1 2020, but improved compared to H2 2020 underlying margin that was 8.2%. Slide 18 on R&D. Total R&D spend was EUR 640 million, of which EUR 426 million were self-funded R&D. R&D sold to customers, which include works funded by agencies mostly in France, is increasing by EUR 64 million compared to H1 2020, mainly driven by higher spending and works coming from the French aerospace plan. Self-funded R&D expenses decreased by EUR 21 million, and that's only due to lower development expenses on civil and regional aircraft programs. Given the back-end weighing profile expected in terms of activity and profitability, we have very carefully managed R&D expenses. We decreased by 35% compared to H1 2019 and in line with savings achieved in 2020. As a result, R&D impact in P&L decreased by -- decreased at 4.7% of sales. On Slide 19, the overview of business performance in all 3 divisions. Recurring operating income has been impacted by negative volume impact, a negative effect of under-absorption of fixed cost, but a positive impact coming from lower expenses. And this is what I'm going to explain on the next slide, starting with Propulsion on Slide 20. Revenue was EUR 3.249 billion, down 20% or down 15% on an organic basis. OE revenue was down 15.6% in the first half due to lower LEAP engine deliveries, and CFM56 continues to run down. We delivered 399 LEAP engines. That is 11% less than in H1 2020. And we delivered 49 CFM engines, CFM56. That is 42% less than in H1 2020. Services revenue in Propulsion were down 22% driven by civil aftermarket revenue and military services. Civil aftermarket was down 25.5%. I remind you that it was down 53% in Q1. So it's a 55% increase in Q2. And we've seen some sequential improvement from Q1 to Q2, up 15% in 2021. The drop of 25% year-to-date was mainly due to lower spare parts for the CFM56 engine and to a lesser extent, for high-cost engines. Services contract slightly decreased as well. 2 activities had been resilient in Propulsion: helicopter turbine activities with a double-digit organic growth thanks to services; and OE military sales thanks to higher M88 deliveries for the Rafale program as planned. Recurring operating income decreased at EUR 504 million, with an operating margin at 15.5%, close to full year 2020 operating margin. Despite cost savings, the operating margin is strongly impacted by the drop in civil aftermarket and to a lesser extent, by military support activities. Helicopter turbines have been a very good, strong positive contribution in H1 2021. For the record, we did not book any loss of completion for long-term CFM56 services contracts. For Equipment on Slide 21. So sales totaled EUR 2.972 billion, down 18% or 14% on an organic basis. OE revenue was down 20% or 15% on an organic basis and up 6% in Q2. Services were down 14.5% in H1 or 10% organic, but up 18% organic in Q2, notably with carbon brakes, landing gear support activities and nacelle. Despite Defense support growth, Electronics & Defense activities decreased in H1, mainly driven by avionics, sighting, guidance systems and optronics activities. Profitability decreased at EUR 270 million and represents 9.1% of sales. And this decrease was mainly driven by the drop in volume. And the one-off items of EUR 59 million were booked mainly due to impairment of 3 programs. Now Aircraft Interiors. Sales totaled EUR 646 million, down 40% or 35% organic. Aircraft Interiors is again the division that has most suffered from the crisis. We believe it has reached the trough in Q1. OE revenues were down 37.6% or 32% organic in the semester, including a 5% decrease again in Q2. Sales were strongly impacted in Cabin due to lower volumes for galleys and lavatories and for floor-to-floor activities in catering and inserts. And in Seats, due to lower volumes as business class seats, were down by almost 60% in H1 2021. Services revenue in Aircraft Interiors were down 45% or 42% organic and again, 5% in Q2 driven by Seats aftermarket as well as Cabin spare sales and then MRO activities. So the recurring operating income decreased again and was negative for EUR 110 million. Operating margin was strongly deteriorated at 17% negative. But thanks to cost savings, recurring operating income decrease remained limited considering the size of the sales decrease. Operating income reduced by EUR 10 million this semester when sales were down more than EUR 400 million. It demonstrates the depth of the restructuring achieved in this business, that paves the way for a strong rebound as soon as demand comes back. Some words on free cash flow. Free cash flow reached EUR 700 million, despite a 24% decrease in EBITDA. Free cash flow generation was driven by cash from operations of EUR 733 million; tight control maintained on investments at EUR 329 million, down from EUR 421 million in H1 2020. And working capital improved by almost EUR 300 million this semester, essentially driven by a strong increase in receivables and a good control of inventories. Some words on liquidity. I'm sure you've noticed that we have been in the market to issue bonds in March and to restructure a convertible in June on top of a EUR 500 million bank loan signed with the EIB at the beginning of this year. So in a nutshell, Safran liquidity is strong and sound. And I guess, that Page 25 says almost the same thing, with a net debt of the last 12-month EBITDA at EUR 1.2 million at the end of June. Net debt is -- has been reduced, and nothing really to say on the balance sheet at the end of June. Olivier, I'll pass to you.

Thank you, Bernard. Turning to Slide 29 and to conclude this presentation. The evolution of air traffic at the global level is consistent with what you have seen -- what we have foreseen at the beginning of this year. We have been cautious in considering that reaching our full year target implies a meaningful ramp-up in the second half. And that remains to be done. We see reasons to be both confident and cautious. On the one hand, vaccination rollout all around the world has been impressive. On the other hand, the spread of variants is still a threat to the growth in sales and profitability that is expected for H2. A delay in the pace of civil aftermarket recovery during the second half of the year constitutes an element of risk to this outlook. We are confident in our capacity to go on managing cost reduction and manufacturing footprint optimization. Our full year 2021 outlook is concerned for sales and profitability. It is raised for free cash flow. Taking into account Rafale export contracts, advanced payments, we now expect an increase in free cash flow generation above 2020 levels. Ladies and gentlemen, we are now at your disposal for the Q&A session.

[Operator Instructions] And we have our first question from Robert Stallard from Vertical Research.

I have 2 questions, please. So the first one is you noted that there -- Bernard, that there had been an improvement in the aftermarket in the second quarter sequentially. I was wondering if you've seen any signs of airlines pulling forward some of their aftermarket demand from the second half, in preparation for the summer. And then secondly, I was wondering if you could give us an update on how your deliveries to Boeing are going on the 737 MAX and whether you're still below their production rate -- current production rate of 16 per month.

Yes. Hello, Robert. Yes, indeed, as Bernard said, the aftermarket in Q2 improved versus Q1 by 15%. I will not say we see airlines pulling forward spare parts purchase. We have not seen that yet. On deliveries to Boeing for the MAX, Boeing has indeed increased the monthly rate of production. Remember that we had delivered quite a number of LEAP engines to Boeing in the course of 2020 in advance of their needs. So there's still a significant number of LEAP engines that are out there in certain, ready to be mounted on aircraft. So what we delivered to Boeing on a monthly basis is not connected, is not directly related to their production rate because of what we delivered to them in 2020. Now overall, we -- I mean, we said at the beginning of this year that the number of LEAP engines that we would deliver in 2021 would be in the same range as last year. This is what we said. I can say today that it's going to be up north of 800. So it's going to be a step-up versus 2020, a small step-up. More LEAP-1 engines delivered to Airbus, less LEAP-1B delivered to Boeing because, once again, because of the advanced deliveries we've made in 2020.

So we have another question from Celine Fornaro from UBS.

My first question would be regarding on the spare parts performance in the Propulsion division. And I know in Q1, the weakness you explained it, due to the catalog issues that you had in Q4. So clearly, there was a pull-forward there at the end of last year. What are you seeing in Q2? And also, presumably now, you start to have a feel of what could happen in Q3, so does that relate to the more cautious statement that you're making on aftermarket for the remainder of the year? So that would be my first question. And my second question would be related to Interiors and the overall outlook on profitability for this year given the heavy losses on the first half and potentially a limited pickup in business given the widebody exposure for the second half.

Okay, Celine. Spare products, yes, we have explained the pull-forward as one of the reasons why there was a slight decrease in revenue per shop visits in Q1 2021 compared to 2020. We said as well that there was also, let's say, some airlines pushing the fan and turbine part of the work scope, pushing forward. When I look at the, in Q2, revenue per shop visit, we are in the same vein as Q1. So basically, the trend that we are seeing in Q1 has remained in Q2. We see a step-up of spare parts sale in Q3, in relation to the pickup of the air traffic that we are forecasting. And basically, what we've seen, remember, we were at minus 40% of narrowbody ASK in June. End of July, we are close -- we are at minus 30%. So we have seen a step-up. So normally, that should materialize in spare part revenues soon in Q3. Interiors profitability, as Bernard said, there has been a tremendous action plan to reduce the breakeven point both from Seats and Cabin. The fact is that H1 has been a trough in the top line. And I can say it's been an achievement to be where we are, considering the top line that has significantly fell in H1 versus H1 2020. So now, going forward, on Seats, we expect a better H2 than H1, with, let's say, more activity and a better top line. Same for Cabin, and so we still target breakeven at the very end of the year. And now, maybe, Bernard, you can complement.

Yes. Okay. It means that you just cannot take the first half as the run rate of losses for second half. We need to -- we think we can halve it. That's, I think, the best guidance I can give for H2 losses for Interiors. Do you get it, Celine? So it was...

Yes. So you meant that you're going to maintain the loss for over the full year...

Of course. It's going to still be lossmaking in Q3, and we think we can break even somewhere in the last quarter. So on a full year basis, it's going to be both what you've seen at the end of June, but don't take H1 and double it to get the full year figure. Of course, you will see the material improvement at the end of the year.

So we have another question from George Zhao from Bernstein.

In the first question, we've seen pretty strong traffic recovery in the U.S., China and Europe, but as you've noted, the other regions still remain quite weak. So could you quantify for us the proportion of your narrowbody engine fleet before COVID that was outside of those 3 stronger regions? And given that we're now more than halfway through the year and total narrowbody ASK still trending below your conservative case, what type of contribution do we need from those other regions to get to your traffic and aftermarket guidance for the year? And second question, a quick one. On Equipment, could you just elaborate on which product areas have been leading the aftermarket recovery and how that compares versus Propulsion, when you look at similar aircraft class, so narrowbody engine versus narrowbody equipment? Any color there?

Okay. It is all. On the respective weight of the various regions for our, let's say, CFM business and cycles, I'll try to give you some guidance. Europe weighs for around 30%, Europe, including Russia and CIS, close to 30%. North America is above 20%, 22%, 23%. That's about it. China is around 15%. And APAC as well, APAC, Asia Pacific is around 15%, so to give you some keys, okay? On the Equipment, I will let Bernard respond.

Okay. I understand the question, George, is about where is the pickup in Q2 coming from in the various businesses that we have inside the Equipment division. Is that it?

Yes, exactly, whether it's wheels and brakes versus some of the other ones. Any color is good certainly...

Yes. Yes, yes. So Q2, for the Equipment division, was 4% up on organic, total revenue, but it's up 9% on an organic basis. And the main part is coming from our nacelle business that had seen a strong recovery in aftermarket in Q2. Our Landing Systems business in Q2 was also quite strong. And I would also say that the Aerosystems division has also done quite a good job. Electrical and power and our Electronics & Defense business in Q2 were a bit more flattish, if not down. This is how I can detail the pickup in revenue in the Equipment division. And again, I would say that most of the improvement came from services. On an organic basis, the Equipment in services are -- were up 18%, and I would say that all divisions, excluding electrical and power were up in services for Equipment in Q2.

Got it. And any comparisons to the Propulsion side when you take similar like narrowbody versus narrowbody?

We have to work on that. We will try to elaborate the answer later, George.

So we have another question from Ben Heelan from Bank of America.

So my main question is on visibility in Q3. I think we heard from GE earlier in the week that they were expecting a 25% improvement in shop visits sequentially in Q3 versus Q2. And so could you give us a bit of color about how you're seeing shop visit visibility and how that kind of plays into your aftermarket expectations into the second half of the year? And then the second question, I think you obviously highlighted in the presentation you've done a lot of restructuring of debt maturities and the balance sheet in a pretty good position. Can you talk a little bit about capital allocation and how you guys are thinking about capital allocation as we're starting to hit the recovery?

Okay. I will take the last one then. I don't think it's the right time to talk about capital allocation at the time. We will have a Capital Markets Day at the end of the year. I think that will be the right timing and place to talk about capital allocation. So please keep your question for later on. Olivier, you can take the one or I can answer on GE?

So basically, Ben, we've said at the beginning of this year, and we confirm, that the total volume of shop visits for 2021 should increase compared to 2020 by mid-teens. So this is our number. At the end of H1, we are below the volume of shop visits that we had reached in H1 2020. Just simple math because of the strong Q1 2020. So we are below. Now we see a step-up in Q3 versus Q2. In Q2, we had around 15% more shop visits versus Q1 2021. So there has been one step. We see a further step in Q3, but it's maybe too early to quantify. And we will see a further step in Q4 in order to get to the overall volume I mentioned.

Ben, just one comment because the read across between GE and Safran is always very difficult because we don't have the same fleet. And by the way, I think that when we make comments on shop visits, we look at shop visit for the second generation of the CFM56 engine as we think these are the ones that really matter in terms of value. And I guess, that our partner in GE, they are looking at all shop visits, not only second gen for CFM56 and not talking of non-CFM engines.

So next question, from Jeremy Bragg from Redburn.

So first question, please. Are you still -- given that we're tracking a little bit below the trend line on narrowbody ASK, are you still comfortable with your guidance of getting back to 2019's level of shop visits by 2023, please? And then the second question is on my favorite topic, which is revenue per shop visit and USM. Could you just give us a feel, please, of the amount of USM that is in the system at the moment and whether you still think that you can keep revenue per shop visit flat despite maybe more USM coming into the system through pricing increases? And is there a risk that if you put prices up, you kind of drive customers to use more USM?

Okay. Jeremy, I will take those questions, and maybe Olivier will make some comments after. In terms of long-term or near-term trends, I must say that it's not an easy question. We will refresh our assumption at the Capital Markets Day to see when exactly it's going to be, 2023, 2024. We don't know yet. Maybe it's a question of quarters moving because as you said, the ASK is lagging behind what we had in mind at the beginning of the year in terms of strength. We will update that. I think it is too soon. It's really something complex because we have to take into account green timing, retirement, the amount of deliveries that Airframers will put on the market. And so there are so many moving pieces here. I think it's too early to update you on that. And I would say also the same thing on the revenue per shop visit. As we said, we are a bit below 2020 in terms of revenue per shop visit. Some part of the explanation, I think it has to do with the work scope that is not exactly the one that we had forecasted before. And -- but I have absolutely no means to give you an answer on the amount of USM in the pipe for the moment. The only thing I can say is that the total retired CFM56 engine is still very low. So I think that the level, the amount of USM is still a question mark for us for the future. But the basics of our answer, saying that you cannot take any retired aircraft and take the parts out to maintain a new aircraft, this is still valid. I mean it's -- the amount of retired engines will not give you exactly the same -- the exact question of how much of that will be taken to maintain new engines, new generation engines. So that's, again, a bit tricky, and we are working on that to refresh our assumption for the Capital Markets Day.

Jeremy, now what we can see is short-term because there has been a low number of retirements in 2020 and the early part of 2021. We won't see a surge in used parts in the short-term future, in the coming months. We won't see that in the coming months, and we will update you, as Bernard said, for the Capital Markets Day.

Lovely. And please, may I ask one follow-on one, which would be around Airbus production rate increases? Because I think, at the last quarter when we spoke, they hadn't been announced and now they have. So would it be possible to give a view on that, whether you feel that 70 or 75 is the right number, if it's possible for you to go there easily, et cetera, please?

Thanks for the question. Yes, we are listening carefully to all our customers, airline customers, leasing company customers as well. And I have to say, we are not sure that the market has the appetite for such rates and that rates well above 60% can be sustainable. This being said, we've agreed on the number of engines that we will deliver to Airbus in '21 and 2022. And we are discussing with them the numbers for 2023.

So we have another question from Tristan Sanson from Exane BNP Paribas.

It's Tristan from Exane. First, thank you so much for bringing forward the release today, this evening, it's much appreciated and much simpler for us. I have a few technical questions to ask, so I apologize for that. So really, the first one is on the employee profit-sharing agreement. So I remember that in H2 last year, you released the provision by EUR 103 million, which was actually a kind of excess provisioning for employee profit-sharing in H1 that you adjusted in H2. If I remember correctly, the employee profit-sharing agreement is a 2-year agreement that benefits also this year. Can you give us an order of magnitude of what is the kind of impact you have H1? Is it similar to the provision that you released in H2 last year? Is it linear or not at all, to get a feel for what will reverse once things normalize in 2022? That's the first question. The second, I apologize if you already explained this, but can you come back on the repayable advances in Propulsion impacting the recurring operating income in H1? What does it refer to? And is it significant in numbers? And the third one is a clarification on the free cash flow outlook. I just wonder whether your free cash flow trajectory for this year is better than expected. If you exclude the Rafale orders from Greek -- Greece and Egypt, is it well, yes, showing some improvement compared to your initial vision on that?

Okay. I will start with the last one, Tristan. Excluding the Rafale prepayments, recent announcements, it's going as planned. I mean it's okay, no major issues. So I was already comfortable with the initial guidance, and I am even more comfortable today with the announcement of some new prepayments for Rafale. The repayable advance in Propulsion, so you know how it works. We get some funding for some specific programs. And if the programs are not successful, we don't have to repay that. So that's -- when you book that, it's a positive. It's a one-off. It was material in the Propulsion business, but as we have all the exceptionals negative, I would say that the net exceptionals in the Propulsion was something like EUR 50 million at the end of H1. Taking that into account, there's also other negative exceptionals. And...

Is that going to be net positive?

Net positive, yes. Net positive, yes. And for the employee profit-sharing agreement, I don't know exactly what you mean. But if -- I mean, the savings that we made, if I may say so, in 2020 were based on the kind of targets that we had before the crisis, so this is the kind of savings that we made, and that was also compared to 2019, where we made a lot of provisions based on what were the results by that time. So I'm sure that the reversal would be not as high as the savings as the improvement in profitability will be gradual. So don't take the savings and take that as a headwind for the same amount when it will be reversed in '22.

So we have another question from Chris Hallam from Goldman Sachs.

So first, just to come back on the point you made that you aren't sure whether rate 60 is sustainable. I just wonder, is that a 737 plus A320 comment, i.e., is that 120 months? Because I suppose it's quite plausible that we end up in a sort of 70/50 production split between the 2 manufacturers. Or put another way, what 737 rate are you assuming to be uncertain on rate 60 from Airbus? And then separately, on free cash flow, previously, you had expected a balanced H1/H2 split, which probably meant around EUR 550 million per half. And you've obviously done much better than that in the first half. Now we have a prepayment in the second half on the military side of probably around EUR 150 million. So should we be expecting around EUR 700 million in the second half? Or was some of the H1 performance we saw were pull-forward from the second half?

We'll start with this one, Chris. Thank you for the question. No, don't take just the math, as you do there. Don't take the EUR 700 million as a run rate for the rest of the year because part of the strong H1 was due to some actions that we planned to do on the H2. So no, it's not going to be as high as the figure that you just mentioned.

What kind of fees...

Sorry. Yes?

Yes, go ahead. Sorry.

Yes. Fees on rates. First, I would like to outline that Boeing has been significantly successful in the first half of 2021 in gaining additional orders. They've got more than 500 additional orders for the MAX. So the good news is that the MAX has regained customer confidence, and Boeing has secured big orders from Southwest, United, Alaska, Ryanair. And I guess there are more to come. So I mean, you should not bet on a significant imbalance in market share between both Airframers. That would be a medium-term mistake.

So we have another question from Christophe Menard from Deutsche Bank.

Yes. I had 3 quick ones. Going back to GE and what they said. They said that -- I mean I understand that it applies to all their shop visits, so my question was more on the second generation. They said green time impacted them in Q2, but they expect less of green time impact in Q3 and Q4. Does that comment also apply to CFM56 second gen according to what you see at the moment? Second question is on FX and the efforts you made on the -- what you highlighted in terms of the barriers. Would it be fair to say that you could target in 2022 and 2023 the low end of the range in terms of FX rates? Or is it still undecided, I would say? Last question on the Equipment division and aftermarket. Did you see a high level of initial provisioning or airlines actually rushing to provision some spares or equipment in the Aircraft Equipment division specifically in Q2?

Christophe, I will take the first and the third one, and we'll let Bernard answer on the exchange rate. On green time, what we have seen in H1 2021 is in the same vein as what we've seen since the start of the pandemic, since -- same vein as H2 2020. And so we expect Q3, Q4 to be kind of the same as first half of 2021. We may be wrong, but this is what we expect. On Equipment, no, we don't -- we have not seen big IP orders from airlines for our Equipment business. We have not seen that.

Okay. And for FX, I will keep the range. It's too early to tell you exactly where we will end in the range. Clearly, today, the spot price is $1.18. So if you stay with this kind of rate for a long period of time, at the end, as I always say, hedge rate and spot rates have to converge. So if the spot rate stays at the same level, you cannot expect to decrease the hedge rate from $1.16, which is the situation today, to lower levels.

So we have another question from Harry Breach from Stifel.

Guys, just 3 quick ones. Firstly, Olivier, please forgive me, at the beginning of the call, you kindly gave some year-on-year comparisons for the number of cycles, I think, from the CFM56 fleet for the recent week. Could you please just repeat those data points, those figures you gave? Secondly, guys, we've talked a lot about spare parts and aftermarket. I'm just wondering, if we think about the spare engine side of the business, is that still very, very slow at trough levels? Are we starting to see any pickup on that side? And then, just finally, just turning to supply chain. How are you seeing supply chain performance sort of overall at the moment? Is it about the same in terms of the level of concern, improving or maybe going the other way?

Maybe I can start with the supply chain to explain again how we manage the situation. We have a watch floor, when we look carefully at 700, which is a small portion of our supply chain, but we carefully watch 700. And we think that there are, let's say, a bit more than 100, less than 150, which are in a situation that need really to be managed. But for the moment, we haven't seen a lot of suppliers really turning into a very bad shape. Very -- a handful, I would say, have experienced a critical situation. So we don't see that as a burning issue. Even if we start to work very intensively with them to prepare for the ramp-up in the second half, we made across-the-board inquiries to be sure that they are ready, that they have all means, from a cash point of view, from a headcount point of view, to ramp up again. So I would say that, today, I don't have that on my agenda as a bottleneck for the ramp-up in the near term. If I can answer on spare engines. I would say that the situation has not much changed. I mean we haven't seen a lot of new orders. I would expect it to be stable in '21 versus 2020. I mean you can't expect airlines to purchase a lot of spare engines in the situation today. So stability is, I think, a good message here.

Yes. We've sold the same number of spare engines in H1 2021 than in H1 2020. Harry, cycles, so in June 2021, I mentioned that narrowbody ASK, so average seat kilometers, were at around 60% versus 2019, so basically, a minus 40%. That was in June. Now we are end of July, and end of July, we are at minus 30% versus 2019. This is year-on-year, same week that we compare, okay? On this, this is varying depending on the ratings, very irregular. So China, we've come back to the 2019 level in terms of cycles. In Asia Pacific, we are at minus 70%. I said minus 71%. That's minus 70%, roughly. In North America, we are at minus 15%. And in Europe, we are at minus 34%. This is now in end of July. This is where we are. So this gives us an overall minus 30%. Now we've seen for all CFM engines, now the LEAP engines are flying more because there are more LEAP engines flying now than it used to be in 2019, so they are flying more. And the CFM56 engines were at minus 35%. Does it clarify?

Yes. That's really helpful.

So we have another question from Andrew Humphrey from Morgan Stanley.

I've got a couple, if I may. One shorter-term one. I wanted to ask about some of the exceptional costs that you highlight in the first half of '21, particularly the EUR 180 million charge. Is that basically the same or equivalent to what your joint venture partner called out on one particular lossmaking contract? And can you shed any further light on that, what type of aircraft that is? And then a couple of longer-term questions. Firstly, in terms of -- as you look at your fleet at the moment, I understand your third shop visits are not a big part of the economic drivers. But do you have an expectation for how many engines in your current fleet will come in for their third shop visit? And finally, maybe an even longer-term question, following up on the presentation around the RISE demonstrated program, do you anticipate a significant package of improvement that could be applied to the LEAP or sort of intermediate stage or upgrades that could come to market before that 2035 time frame?

Definitely for me. So we'll start with the first one, with the exceptional costs. Do you refer to the EUR 195 million negative one-off items that we booked in H1? If it's related to that, it's really the depreciation of an intangible R&D asset for our space business, most of that. So there is nothing like a loss for contracts, so nothing like that. It's just depreciation.

Okay. On the long-term question, shop visit #3, third shop visit, I have to say that we have not made the breakdown between shop visit 1, 2 and 3 in our numbers. They are very huge, shop visit #3. You know that our fleet is quite young. So we are talking many shop visits, 1 and 2, as we speak. And so I don't have any flavor to give you on shop visit #3. Anyway, shop visit #3 is much less significant for us in terms of revenues.

And if any, that would be because of first generation of the CFM56 engines and the related impacts. Yes.

Now I'm not sure I understood your question on the RISE and LEAP improvement. Can you please repeat and clarify?

Yes, of course, and apologies if it was a bit unclear. I mean the -- I guess what I'm driving at here is you've clearly targeted a very significant improvement in efficiency with the RISE program as well as a significant departure in engine architecture from what we have today. I guess what I'm asking is how much scope there is for a sort of intermediate stage, not between the 2 architectures, but a material improvement to the LEAP engine in terms of efficiency that could come at an earlier date?

Okay. I see. Thank you. Okay. As we've said, RISE is targeted at 2035. This is a 2035 horizon. I would like to outline that we are not talking about the launch of an engine development. We are talking about a technology development and technology maturation program. So within RISE, there's a significant layer of underlying technologies, plus this disruptive architecture. But the underlying technologies that we are working on could apply to any kind of engines, whatever the architecture is, including the LEAP engine. So we would use this layer of underlying technologies. I talked about composite. We would go more composite for the forward part of the engine. We would go additive manufacturing. We would improve here and there. So those underlying technologies could apply to LEAP improvement program for an intermediate timing horizon. It could apply to any kind of new engine. Is this clear? Did it clarify?

Yes...

I will not quantify -- but I will not quantify. So we are done. Thank you.

Good evening. Bye-bye.

So we have no further questions, gentlemen. And ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.