Safran SA (SAF) Earnings Call Transcript & Summary

Welcome to the Safran 2022 Revenue Conference Call. At this time, I would like to turn the conference over to your host, Olivier Andries, CEO; and Pascal Bantegnie, Group CFO. Mr. Andries, please go ahead.

Good morning, everyone. I am pleased to welcome you to the Safran Third Quarter 2022 call. I'm here with Pascal Bantegnie, our CFO. I would first like to have a thought for all individuals impacted by the conflict in Ukraine. It reminds us more than ever that sovereignty is not a vague concept and defense activities are a key asset to protect peace and stability. Let's go straight to Page 4 with a summary of our taking points. Air traffic recovery is still the #1 driver for our activity, as you know, with a very high level of volatility in China and a strong decline in Russia. Apart from these 2 countries, fundamentals are improving. China remains a key watch item for 2022. In this context, revenue grew by 17% on an organic basis in Q1 2022 driven by all activities, notably services in equipment and civil aftermarket. I will elaborate further on the impacts of the sanctions against Russia, but I want to take the opportunity to state that Safran is complying with all applicable sanctions and regulations. As a consequence, all exports of products and services to Russian customers are suspended and the operation of our joint ventures in Russia are halted. Pressure on supply chain and inflation were already 2 major watch items from the start of the year. The Russia-Ukraine conflict has an added strain to the situation requiring an even closer monitoring of the supply chain. In this challenging environment, Q1 revenue was in line with our outlook for full year 2022. Despite significant headwinds from the Russia-Ukraine conflict, we confirm our guidance. I am now on Slide 5. On the left-hand side, narrowbody ASK stood at around 75% of their 2019 level for the first quarter of 2022. So similar to Q4 2021. reflecting improving trends in North America and Europe, but a decline in Russia and China. In detail, narrowbody ASK as a percentage of 2019 were slowly increasing in January and February despite the Omicron wave in Western countries. As China took stringent and massive lockdowns according to its zero COVID policy, traffic in China tumbled in March. And at the beginning of April, as shown on the right-hand side, weekly cycles for CFM engines in China were at around 20% of their 2019 level, meaning that traffic in China was back to the low point of March 2020. On the contrary, during most of Q1 and in the first half of April, CFM engine cycles in North America were very close to their 2019 level. CFM engine cycles in Europe, including engines in CIS, are showing a positive upward trend since the end of January, despite the sharp decrease in Russia currently at minus 60%. [ Mid-quarter this ] was decrease in the number of COVID cases and high vaccination rates, recovery is moving on. To summarize, the strong increase in traffic in 2022 is still the backbone of our scenario, that prolonged its low level of domestic traffic in China is a point of caution. On Slide 6, let me share with you some of our main business achievements for the beginning of the year 2022. CFM delivered 239 LEAP engines in Q1 on track with our plan to ramp our production rates. Air France-KLM entered into exclusive negotiation with CFM International for the engine configuration of its future A320neo family fleet. The momentum on Rafale jet fighters exports continues with an additional order from Greece for 6 new aircraft. We have also recently received the first down payment for the Emirates order. Safran renews MCO contract for the French government, 1,600 helicopter engines for the next 10 years. A very good news with Arianespace, with a signature of Arianespace's largest contract ever with Amazon for 18, Ariane 6 launches for their project Kuiper. And as part of the mid-life modernization of the Tiger helicopter, Safran received an order from OCCAR, the organization for joint armament cooperation Europe for roughly 510 sites to equip the Tiger Mk3. Last but not least, Safran has been selected by a leading Middle East airline to equip their A350 business class seats. To conclude, and I am proud of our engineers' drive in innovation. Safran is France's leading filer of patents according to the 2021 patent index recently released by the European patent office. On Slide 7, an update of our climate strategy. Regarding Scope 3 emissions. From the use of our products sold as announced earlier, we have disclosed in our 2021 universal registration document, our emissions for all categories of products with an associated objective. Our commitment is to reduce Scope 3 emission from products used per passenger kilometers by 42.5% by 2035 compared to 2018, which means an average of 2.5% decrease per year. This objective has been set consistently with methodologies used by SBTi and in line with the International Energy Agency trajectory for the use of sustainable fuels in the aviation sector. It is consistent with the acceleration of our investment in research and technology that we have already started with 75% of our efforts focused on the environmental performance of our products. As a reminder, we have also set a new long-term objective to reduce CO2 emissions from our operations. This is the famous Scope 1 and 2 by 50% in 2030, in line with a 1.5-degree scenario. In 2022, we will strive to our objective certified by SBTi as being aligned with the Paris Agreement goals. On Slide 8, a quick focus on the most recent achievements in our climate strategy. CFM International and Airbus have signed an agreement to collaborate on a hydrogen demonstration program that will take flights around the middle of this decade. The program objective is the ground and flight test, a direct combustion engine fueled by hydrogen in preparation for entry into service of a zero-emission effort by 2035. Hydrogen combustion capability is one of the key technologies that CFM partners are developing and maturing as part of the CFM RISE program. As an example of Safran's ability to invest in technology, the investment we recently made via Safran Corporate Ventures is a start-up named Cranfield Aerospace Solutions, which is close to the University of Cranfield in the United Kingdom. This company focuses on commercial hydrogen electric propulsion flights and notably on Civil Aviation Authority certification of the Britten-Norman Islander passenger aircraft using hydrogen fuel cell power. This confirms Safran's strategy in net zero aviation in 2050, and will contribute to making Safran competitive player for the development of fuel cells for the aircraft. On Slide 9, let me give you a quick overview of Safran's Q1 sales for 2022. We enjoyed a strong plus 17% organic growth in Q1 2022 compared to Q1 2021. In line with our full year 2022 outlook. All of Safran's division contributed to this performance with a more pronounced increase in services and in particular, in civil aftermarket, which grew by 53% year-on-year in U.S. dollars. As expected, this index was down sequentially with a traditional entire pattern with strong spare part sales in Q4 2021. The increase in civil aftermarket revenue in Q1 is consistent full year outlook with front-end loaded growth in 2022, given easy comparisons from 2021. Let me now hand over to Pascal for more details on Q1 sales.

Thank you, Olivier, and good morning, everyone. Starting as usual with FX. The USD was meaningfully stronger versus euro in June, with an average spot rate of $1.12, representing a drop of $0.09 year-over-year, providing a boost to our sales. The USD is even stronger these days below $1.05, and we are making good use of it. We continue to edge year 2025 at attractive rates compared to our targets. 2025 now exited $5 billion of hedging out of an estimated net exposure of $12 billion. For 2022, as we said before, our target hedge rate remains at $1.15 per euro, which is $0.01 better than what we had in 2021. Turning to Q1 revenue on Page 12. We benefited from solid organic growth of 17% which is in line with our full year guidance. Reported revenue was EUR 4.71 billion, an even greater growth rate of 21.8% when adding the positive currency impact. Before going through more details by activities, one can note that services accounted for most of this increase. Olivier already mentioned the 53% growth in civil aftermarket, but this actually applies to all 3 divisions. Services activities were up 33.5% of which 28% was organic. On the OE side, it was up 12.3% of which 8% is organic, driven by the expected ramp-up in narrowbody aircraft bid rates, while widebody, notably the 787 and helicopter engines were down year-over-year. Change in scope reflects the divestment of EVAC and SVS Oklahoma last year with a negative impact of EUR 20 million in revenue, both activities previously reported in aircraft interiors. On Slide 13, some details for activity. We have booked some revenue coming from Russia during Q1 before we start any activity at the beginning of the war. Starting with propulsion, which was up by 24.4%. OE revenue was up 15% due to an increase in lead deliveries, 51 more engines delivered in Q1 '22 compared to last year and it did outpace the continuous run down for the CFM56 as expected. In military, Rafale M88 deliveries were down at 12 units comparing to 15 units a year ago. And as I said, it compared to wide deliveries were slightly down. Service revenue was at 31% in propulsion, mostly driven by civil aftermarket. Civil aftermarket was up 53% and driven by spare part sales for CFM56 engines and, to a lesser extent, from the good growth, I would say, 2-digit growth in highest risk engine spare parts and services. The drop in traffic in China during Q1 has not yet translated into lower spare part sales in Q1. Services in helicopter turbines and military aircraft engines were slightly down in Q1 compared to a resilient Q1 '21. In equipment, revenue was at 17.2%. OE revenue was up 8%, reflecting the increase in narrowbody build rates and very low level of 787 deliveries. Services were up 37% on almost all activities, notably on carbon brakes, net sales, aero systems and landing gear support activities. Defense activities were flattish in the quarter. Lastly, in Aircraft Interiors, we recorded a growth of 30.7%. This is a strong increase, which compared to the pit observed during the first part of 2021. OE revenue was at 25%. Most of the increase came from cabin with a notable increase in galleys for A320 and 737 and in lavatories for A320 and A350. Service revenue was up 46% driven by seats in all geographies and by cabin, spare sales and MRO activities. Back to you, Olivier.

Thank you, Pascal. Let me now give you some insights on Slide 15 about the impacts of Russia-Ukraine conflict. First and most obvious impact is on Safran direct activities with the suspension of foreign exports of products and services as well as operations in Asia. This 2% sales exposure to Russia encompasses the regional Superjet 100 aircraft for which I remind you Safran supplies, notably the SaM146 engine and some helicopter programs, Safran was chosen by Russian helicopters to supply the RTM engine for the Kamov 62 and the [ IS ] engine for the Kamov 226 as well as spare part sales and related services for approximately 1,000 CFM engines that were aircraft operated by Russian airlines, Airbus and Boeing. The estimate that this represents a margin impact of around 70 basis points in 2022. Then supply chain, notably raw material procurement was already under stress before the start of the conflict as we discussed before. Pressure has increased significantly, resulting in further inflation in the cost of raw materials, freight, energy prices. We estimate that this will have an additional impact of around 80 basis points on our 2022 margin. Regarding titanium, we have now secured our needs for 2022. We are, in the meantime, developing and securing alternate sources for 2023. The total impact on margin from the suspension of operations with Russia, and inflation amounts to around 150 basis points. We will fully offset it with additional and vigorous cost savings, commercial measures and deferral of some expenses. In addition, Safran and our joint venture's balance sheet exposures have to be further assessed with regards to the development of the Russia-Ukraine conflict and its consequences. Notably, the decision by Roscosmos to suspend the 9 remaining Soyouz launches through Arianespace that had to occur in 2022. And the 12 CFM56 and LEAP engines leased through our joint venture with Shannon Engine Support, which is a 50-50 joint venture that we have now with AerCap, those engines being stranded in Russia. On Slide 16 now, our full year 2022 outlook is confirmed, assuming a quick recovery of domestic air traffic in China. Safran now expects the euro to dollar spot rate of 1.14 versus 1.18. Under this new assumption, Safran still expects to achieve adjusted revenue between EUR 18 billion and EUR 18.2 billion. Adjusted recurring operating margin around 13%, and free cash flow generation of around EUR 2 billion. As I said in February, the state of the supply chain, particularly in the ramp-up phase, and the cost inflation in energy, freight and raw materials remain key watch items as well as the geopolitical environment. Thank you for your attention. And Pascal and I will be pleased to answer your questions.

[Operator Instructions] First question is from Madam Daniela Costa from Goldman Sachs.

It's actually Olivia on Daniela's team. I think we have 2 kind of key questions. The first one was if you could just walk us through in a bit more detail some of the measures that you're taking to offset that 150 bps of additional headwind. It would just be good to get some color more on where you're able to make some of those additional cost savings and what some of those [ decide ] expenses might look like? And then as sort of a secondary question. Sort of given all of the pressure on supply chains and obviously, earlier this week from Raytheon, we've heard about kind of some of the issues that they're having on the supply chain. It would just be good to get a sense of your thoughts on production rates and the ability to ramp up. We've some headlines this morning that you might be getting back to sort of the levels of production in mind precrisis. So would just be good to kind of hear your latest thoughts on production rates there.

Good morning, Pascal -- Olivia. On measures, basically, it's going to be a 3, 4 plan. Cost savings is one. Price is the second one and commercial plan. Our price and commercial plan basically is more or less the same. So I would say twofold. On cost savings, basically, we have asked, and we are going to apply cost savings in all of our activities and for all type of costs. I mean, the usual operating cost. I mean we have met stringent cost-saving measures in 2020 and 2021. There was a low point, and we have planned in 2022 to increase our operational expenses just to accompany the ramp-up. Basically, we -- I mean we have planned to be in a rebound here. So basically, what I'm saying is we are just going to smooth basically the ramp of our operational expenses, which basically is a significant effort because we need to manage our operator, but we are going to make it. And the second point is on the commercial side. First of all, we have decided to apply fully and rigorously all our contractual escalation formula on price. Sometimes it gives us a significant number, but we have decided to apply those contractual escalation formula. And this we help pass through a portion, just a portion of, let's say, the inflation. And we have decided also to chase vigorously some commercial opportunities with additional spare engines to give you an example, additional M88 engine for the French government and some other kind of measures. So cost savings, escalation formula applied fully, commercial opportunities for which we are very confident, and this is why we are totally committed and we are going to fully assess those headwinds. Last point, though, I need to -- I'd like to say, we've decided to preserve, protect our research and technology effort. So we have not hit our research and technology efforts. But we -- as part of the measures, some of the development spending for some programs will just be a little bit pushed to the right and that will help as well.

And then just any comments around kind of production rate ramp-up as well?

Yes. production rates. So as I have said at the start of the year, and this is even more true. Supply chain is our #1, let's say, watched items and our teams are fighting every day to get parts in order to serve our customers. I mean no surprise. I mean, other colleagues that have communicated earlier this week in the U.S. basically are seeing the same story. So we are totally focused to execute the ramp-up in 2022 and 2023. And yes, as I mentioned this morning to the press agency as an answer to a question that was raised, we have an agreement with Airbus on 2024. They have asked us for volume of engines, and we have answered positively. This volume of engines is basically consistent with the commitment that we have taken before crisis. And important for you, it does not require for this 2024 production level that was asked -- that has been asked by Airbus for which we committed there is no additional CapEx.

Next question is from Mr. Robert Stallard from Vertical Research.

I have a couple of questions for you. First of all, on this whole titanium issue and your ambition to back-source the Russian supply. How much spare capacity is there in the Western aerospace supply chain to offset the [ SNPO ], both for what you might call raw material on titanium but also parts?. And then secondly, to follow up on the previous question. Does Boeing keeping the MAX rate at 31 per month give you a little bit of breathing room and a bit of extra capacity to support that Airbus A320 ramp?

I can't give you a precise answer on the spare capacity in the rest of world. I mean I'm not the one that is able to answer that question. What I can tell you is basically, we are, at the moment, securing alternative sources for our needs in 2023 and we have turned to U.S. suppliers as well as Japanese suppliers. And basically, I'm very confident that we are going to be able to secure our needs for 2023. I have to say that the price for titanium is moving up, which is basically a result of the fiber. The demand is high because we are not the only one to turn to U.S. and Japanese suppliers as you can imagine. So the demand is high compared to the capacity in place. So price is moving up. On the MAX, Boeing still plans to ramp -- to add 48 before the end of this year on the MAX, let's say, production rate. But it is true that they've been shifting a bit this step from 31 to 38 by a few months. And this helps a bit, for sure.

Next question is from Mr. Ben Heelan from Bank of America.

I wanted to come back on the first question from Olivia because I'm not sure I got it because you were at rate 63 in pre-COVID at the end of 2019 and you had committed to go to rate 65 in 2023. That was my understanding. So what do you -- I am a bit confused about what you mean for 2024? You mean 2024, you're agreeing rate 63 or will 2024 be higher than the 65 in '23? So that would be my first question because I've got a bit confused on that. And then secondly, on FX, obviously, the FX environment is super attractive for you right now. Is there an opportunity to accelerate hedging and lock in some of these lower rates through '24, '25?

I will take the first one and Pascal, will take the second one. Look, Airbus has asked for a volume of LEAP-1A engines for 2024, okay? And so we have agreed on this volume. It happened that this volume is basically exactly the same as the one we have committed before the crisis. So it's not up to me to comment on rates. It's up to the framer to comment on rates. I'm just telling you, as answering to your question, yes, we have an agreement for 2024 on a number of engines and it happens to be the same as the one we have committed before the crisis.

Okay. Is that the one -- okay. I wasn't aware that there was a commitment for 2024 pre-COVID. That's what I think the confusion is.

Okay. No. There was agreement to ramp. Before the crisis, there was an agreement to ramp, up to a certain number of engines, okay? There was an agreement to ramp up to a certain volume of engines per year before the crisis. Disregarding the year, there was an agreement. I'm just telling you that Airbus ask for 2024 is consistent with this target that we had agreed to before the crisis, and this is why we have an agreement for -- to basically to meet Airbus demand for 2024. I'm not saying more than that.

Okay. And for FX?

Yes. On FX, you're right to say that at $1.05, this is a great opportunity for Safran to improve the average hedge rate of its portfolio. As you know, we are hedging with a 3- to 4-year horizon, meaning that the new hedges that we book today in our portfolio aims at hedging year 2025. So the benefit of the current spot rate at $1.05 or let's say, between $1.05 or $1.10 will only benefit in year 2025. But it's good news. Shall we accelerate or at sometimes decelerate? I will not recommend to do that because let's imagine that the spot rate goes to parity, there will be a lack of opportunity if we were to accelerate today. So we have been very consistent in our approach for the past 10 years, and I guess, quite successful in the way we manage FX. So we continue to hedge as per our plan, and will fully hedge 2025 this year. The benefit of the that, that will only occur in some years. But basically, when you look to the guidance we gave at the CMD, which was hedge rate range from 1.14 to 1.16 for the years to come, it's 1.15 this year then we provided a range. We are quite comfortable today to be at the low end of this range.

Next question is from Mr. [ Will Thurston ] from Bernstein.

On the margin question, if you defer on some of the expenses to mitigate margin headwinds this year and assuming those costs still come back. So how does that affect the margin trajectory in the future years? Could we see an even more back-end loaded margin trajectory given this? And the related question on price, and you talked about pushing through the pricing escalators. If we go away from the engines under time and material, how does this work for engines that you have under the flight hour contracts? Can you push through higher pricing increases for those engines under contracts or do you end up with less availability for those versus the time material?

Okay, maybe I'll take the first one. Just to make it clear, what we are talking about today about the way to offset the headwinds we have in margin is naturally a cut, an additional cut in general expenses. As Olivier mentioned, as we are in a recovery year with a 20% growth rate in revenue, it's more a lower rate of increase in expenses. So we are not cutting more expenses. We are growing expenses less than the plan. That's the way I will answer the first one. Do you want me to answer the second one? On pricing power, the point was more on equipment rather than in proportion, you're right to say that in RPFH contracts, we don't have so much headroom to change the price because we have an agreement for the next 10, 12 years, and we have to apply the contract. What we meant is that for other businesses and typically in equipment, we have a price escalation -- contractual price escalation formula that we strictly apply whatever our customers think, it is all right, and we did it. And this offset not -- the full inflation that we face with our suppliers, but part of the inflation was, I guess, why they discussed during the past call, the past road shows. So we have really a strict application of this formula.

And to complement what Pascal has said and for sake of clarity, this is not relating to CFM56 spare parts because we have -- I mean we have a pricing policy where we adjust and revise the catalog price every year in November. So this has been done in November last year, and this is ready for the full year. So what we are talking about is not relating to spare parts pricing policy.

I would maybe add a last comment on this. I know we are well known to, let's say, under-promise and over-deliver. I guess you will all recognize that we face a significant headwind in margin this year, and we will absorb it. We are committed to fully offset that impact. Meaning that don't expect that we have more headroom to be the 13% EBIT guidance at the end of the year. I mean we are making a significant effort to do that.

So next question is from Mr. David Perry from JPMorgan.

I've got 2 questions, please. The first one is just on capital allocation. I think you gave a very strong message with the full year results and road show. I think the words you used were the Board will need to provide an attractive and quick return or decide an attractive and quick return to shareholders. In the last couple of months, you've had all these headwinds that you've been discussing. So I just wondered if that makes you feel more inclined to be more cautious on the capital allocation or whether it's an unchanged commitment there? The second question, please, is inflation. I'm sorry to ask again, you had a lot of questions on it. This is something I'd like to understand because you talked about only being able to offset a portion of the inflation. Now we've heard comments recently from Airbus and MTU that say the escalation clauses are very bespoke in aerospace to the input costs the company has. So for example, hypothetically, if 60% of your cost was nickel, then nickel would be 60% of the calculation and the escalation clause. So I just want to understand, is that true for Safran or do your escalation clauses completely match your input costs? If not, why would you be different to other companies? And why is only a portion is being passed on?

Okay. On capital allocation, the view is clearly unchanged. As you can see, we confirm our guidance for EUR 2 billion free cash flow generation this year. As we've mentioned previously, by the way, it will be more front-end loaded as we do receive advanced payments and Rafale export contracts, mostly in H1 compared to H2. But clearly, as the Board said many times that they will their review practice with respect to our shareholder returns and they will. As we say, we already had some discussion at the board and we continue to have discussion. And during the year, we'll report to you with the Board's decision with that respect.

David, on the -- I'll take the second one on the inflation, yes, you well understood. We are going to pass through a portion of it to our customers. We have different type of escalation formula across the board, depending on our activities, our treatment, different from OE or aftermarket and dependent on the type of equipment. So some are capped, some are non-capped. So at the end of the day, in some cases, we can -- in some nice cases, we can fully pass through the inflation to our customers. In some other cases, we can only pass a small portion of it. And so the end result is an average. Keep in mind, we -- yes, we can patch through a portion of it. It's not given colors on the proportion, but retain it's a portion of it. But this is something interesting on which we are going to focus at the group level. We are getting into a world where basically in the last decade, we are enjoying a very low inflation, and we have been used to it. But we believe we are entering to a world where we are basically -- we are not economists, but we can expect that inflation is going to be much more significant going forward. So this is why, together with Pascal, we have decided to pay significant attention on escalation formula, maybe define those and find a way to make sure that for the future, we are going to be as much protected as we can.

Okay. I have to think about it. I guess it just makes it difficult for us and obviously for you going forward because the inflation is probably here to stay, commodity prices are going to be volatile up or down. I'm just wondering how we on the outside, it's not a question, it's an observation. I was wondering, on the outside, even they have to sort of model this and stay on top of it. But anyhow, we've made some interesting conversations going forward, I think.

Next question is from Mr. Tristan Sanson from BNP Paribas.

The first one is just the technicality, but I think you mentioned in the past to 40 bps of cost inflation this year. Wanted to understand whether the 150 bps you talked about is added to this? Or was it including the 40 bps or the net pressure you're facing this year? The second question is on the duration of the cost pressure because we know that the duration of raw material supply contracts is pretty long. So the pricing renegotiation will be spread over the coming years and the pressure will take time to materialize. So when you look at your evolution of your cost structure going forward, do you think there will be further margin pressure if the raw material prices do not go down further raw material pressure that you will need to offset through additional cost saving in '23 and '24. And the third question would be on pricing as a follow-up of the conversation or the discussion you just had. You said that the pricing on parts is renegotiated once a year in November. That's why it is a list price. My question is, do you think operators understand today that they will have to structurally face a lower level of discounts going forward to the list price? And as a consequence, that you can at least fully recoup the cost increase on the parts and maybe part of the OE engine cost increase through the aftermarket prices?

Okay. Then maybe let me start at least on the first one. We've mentioned in the past that the inflation will come at a cost in 2022, up to 40 bp of margin. What we are seeing now is that on top of this 40 bp, we have an additional 80 bp impact on margins. So total, it's 1.2-point of margin when we compare 2022 to 2021. So it's clearly coming from energy, transport, freight and price increases that some suppliers push towards us.

Just on the duration of the inflation pressure on raw materials, probably a little bit too early to say in the project, but we have to be prepared to a scenario where this pressure is going to be prolonged beyond 2022. And probably it could have effect -- an impact on 2023. So yes, we are prepared to face, let's say, a prolonged headwind in terms of inflation beyond 2022, and we'll have to cope with that for sure. On the pricing of parts discounts are contractual, mostly, with third-party shops. So we cannot address that instantly, I have to say. Now a question that we will have to ask to ourselves is basically what are we going to do in November at the end of this year for the catalog price increase for step-ups. But I won't comment that today. It's much too early, but this is obviously going to be a question for us.

If I may complement, when it comes to pricing, the key question is not really about aftermarket and spare part sales because a portion of cost inside sustaining price of the spare part is not to be changed. Really, when we think about the pricing forward that we need to get back is clearly outside the aftermarket business, it's more on the OE side and typically on the equipment market.

The next question is from Christophe Menard from Deutsche Bank.

The first one is on the 150 basis point cost reduction. Just why -- what could go wrong? I mean, you seem extremely convinced about your ability to achieve it. I mean it's pre-to-order to be honest. But it seems to be a strong conviction. So my question was trying to understand what are the risks around this. And I will follow up with another question.

Christophe, yes, we are fully committed and very confident we are going to achieve this. I mean inflation is not in our control. It does impose on us, but OpEx and expenses are under our control, fully under our control. So we are 100% confident that we are going to execute this cost saving program. We are 100% confident that we are going to apply rigorously the contractual escalation formula because this is contractual, whatever the reaction of -- potential reaction of our customers are, this is contractual. So we are going to apply it. And we are 100% confident on, let's say, the commercial opportunities that we have taken into account because they are new. So simply deduced, simply said, yes, we are confident, 100% and committed.

Don't over focus about the cost side of the mergers. As Olivier said, it's a mix of cost and commercial. There are many, many measures we are taking. So don't put too much of a size on the cost side of it, for sure.

Okay. So the other question actually 2 other questions. One is quick. The Russian impact, the 50 basis points, is it all margin? Or do you have any write-off in this? And the second -- the third question, sorry, is around China. When will it be a pain for you in terms of aftermarket? I mean, I understand from your press release that at the end of March, you saw some -- you started seeing some impact. Is -- I mean, 1, 2 months is manageable, but is more than this, not manageable on your guidance?

And maybe I'll take the first one on the write-offs. We have not yet done any write-off of assets in our accounts. We are still evaluating the situation, which is very complex with respect to the sanctions which are changing almost every week from the EU and from the U.S. So we have now a good idea of what are our assets, but also what are our liabilities, and we will make our own idea by the end of June to see if we need to write off some assets. I would say slightly, but it's not a given at this point of time.

On China, Christophe, obviously, we cannot expect the traffic to go suddenly from, let's say, 20% of its level in 2019 to back to 100% in a matter of a few weeks. This will not happen. So we have taken into account that hopefully, it will recover, but the key point, I cannot give you a very precise view, but what's going to happen in the next 3 months is going to be the key point. So basically, where we meet by the end of July, we know then we'll see what will have happened in China in the first half of the year. So the evolution of the traffic in the next 3 months is basically risky.

Next question is from Harry Breach from Stifel.

Can I just touch on a couple of things, and forgive my poor hearing. Maybe you answered this. With the 80 basis points of cost inflation you've spoken about for this year, is this all secured contractually now? There's no sort of upside risk to that number? Secondly, you kindly gave us a number for the CFM56 engines in Russia, you said around 1,000. Can you possibly give us some idea of the number in China as well? And then maybe just finally, is there any light or any impression you can share with us in terms of what you're seeing sort of worldwide for shop visit trends and work scopes?

Harry, I'll take the first one. Is the 80 bp headwind and margin-locked? Yes. Is there an upside risk to that number? Yes.

That was a simple answer. On China, I don't have the precise number of CFM engines line in China, but I would say China represents roughly 15% of our -- the overall fleet -- of the overall traffic. And our market share in China is typically, let's say, in line with our overall market share. So I would say China should represent roughly -- it's approximate, yes, but should represent roughly 15% of our CFM fleet. Maybe we'll come back to that on that one with more precise number if needed. But this is -- I think this is an adequate proxy. And shop visit trends. Late of Feb, we said, if you remember well, we said that we were expecting the narrowbody traffic and cycles to increase by 35% to 40% versus 2021. And we have said at the time that the volume from visit would grow roughly same way, 35% to 40%. So with what we said today and because of China, you should expect to be at the low end of the range, at the low end of the range, number one. We have said in February, that we would expect the traffic to recover before the end of this year. What you should expect now considering the situation is a recovery by early 2023, okay? Last but not least, you have to take into account that the Russian fleet and the Russian traffic represents 3% of the overall fleet, 3. And we won't benefit from initial visits for this Russian fleet. So 3% that we will not have.

Can I just follow up? I'm definitely one of the slow readers in the community. So forgive my lack of understanding. When you say the 80 basis points of cost inflation is locked in, there's upside risk, I see that as meaning your purchase quantities and your freight requirements are not yet under contract with firm pricing for the full year. Is that what you're saying? There's still some quantities to be secured to govern the contract?

I'll give you one example, Harry, for example, on transport, we used to use the train, for example, going through Russia to ship some equipment to, let's say, China at this point in time, we cannot transport our goods through train in Russia anymore. So what are the alternatives? Ships. I can tell you, it's very expensive compared to train or even worse by the air. So it's quicker for sure, but it's much more expensive. So there is a question of mix as well into this inflation. We know where the prices are, even though you have secured your transport and your freight contracts, the mix is still an uncertainty. Can you go through some countries or not? So that's why there is, I guess, a slight upside risk to the numbers we provided today. Is that upside risk materialized, we'll do our best to offset again that risk, but I can't say now mid of April that there is no upside risk with respect to inflation.

Next questions from Andrew Humphrey from Morgan Stanley.

Just wanted to clarify a couple of things from earlier questions. You highlighted RPFH contract earlier on. Can I confirm. Did you indicate that those are the areas where it's most difficult to pass on cost inflation? So are there escalation clauses for RPFH contract where engines are already flying and those that are expected to be delivered over the next year or 2 or contracted to be delivered? Secondly, on titanium, you mentioned seeking alternative sources, building up alternative sources. Can you tell us where are the finished parts, I would imagine where you see greatest challenges in terms of sourcing alternatives? And then finally, just on volumes. I think some of the headlines this morning, you indicated that it's too early to be talking about volumes for 2025, particularly at the higher levels. We know some of the longer lead time, I think items on customs and forgings are sort of 3-year lead time items. So presumably, it's not that soon to be talking about volumes in those years. Can you give us a bit more clarification on that?

On the RPFH contract, most of those contracts basically most of the contract, there is a cap. So we have an escalation formula, but most of those contracts, there's a cap, a [ year-on ] cap. On titanium alternatives. So as I said, we've -- basically, we are, at the moment, securing the supply of what we call titanium billets for 2023. So we have agreements for that with U.S. suppliers as well as Japanese suppliers. Now the key point on which we are still working is basically for the forgings because in some cases, we basically -- we need to seek alternative sources for forgings. So this is being worked today, especially we, for Aubert & Duval, this company that basically for which we have announced the acquisition together with Airbus a few weeks ago. So this is being worked on. On 2025, it's too early to discuss that, simply because basically the long lead time items that we negotiated at the moment, basically for aircraft deliveries in 2024. So we still time ahead of us for 2021.

Last question is from Mr. Aymeric Poulain from Kepler Cheuvreux.

Most of the ones I had been answered, but perhaps 2 more on the impact of inflation. I mean, you don't seem to assume any demand destruction in your base case. But is there a risk at some point that this higher cost drives weaker volume demand, especially on the aftermarket. And I think that we see some signs of capacity are being revised down in the U.S. in particular. And if we have indeed a more kind of recessionary type of environment due to the significant inflation spike, do you see the 120 basis points gains being maintained? And you retain the price increase and the cost saving? Or is there a pass-through that goes on in reverse and some costs that maybe just delayed and that will lead the margin in a weaker-volume environment?

I think the first one, and let Pascal, maybe to add on the second one. We have now taken into account in our scenario fits on the demand. if you look at what has been announced by particularly by U.S. and European airlines. They are all basically communicating on the fact that the bookings are very high for the summer season. Even some U.S. airlines are saying that it has never been so high. So it looks like people are willing to travel and are accept to pay a high price for their tickets. So we've not seen any sign today of basically a demand for travel being hit by the higher prices today. We're not seeing that.

I don't know if I can elaborate more on what we said before that the way we are going to control this inflation is again to progressively release the expenses. So it won't be in line with the growth in revenue, but at a much lower rate in order to keep a good control on costs as we did in the past. Thank you very much.

Thank you for having spent some time with us today, and we wish you have a nice day. Bye-bye.

Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.