Safran S.A.

Good morning, everyone. Pleased to welcome you to Safran's '22 earnings call.

I'm here with Pascal Bantegnie, our CFO. Let's go straight to Page 4, with a summary of our talking points today.

Air traffic recovery is continuing. We expect narrowbody air traffic to return to pre-crisis levels in the course of 2023, supported by the lift of travel restrictions in China.

We recorded solid sales growth and profitability. Free cash flow generation in 2022 was strong, exceeding our expectations.

This performance was achieved in a challenging macro environment with supply chain constraints and inflationary pressure. We have also discontinued our activities in Russia further to the sanctions decided by the U.S., U.K.

and European authorities. We are proposing to shareholders a EUR 1.35 dividend per share for 2022, reflecting our confidence in the future.

2023 is expected to be a strong year for customer demand. We expect more than 20% growth in revenue and profit, and a cash generation over EUR 2.5 billion.

I will provide color on our guidance at the end of this presentation. I am now on Slide 5.

Air traffic evolution remains 1 of the key drivers for all of our businesses. First, when we look at global narrowbody capacity, Q4 2022, narrowbody ASK were at 86%.

The trend has been positive through the year, with an increase each quarter despite strong volatility in China. In the early weeks of 2023, the recovery continues, supported by China acceleration with the lift of travel restriction.

Second, when we look at CFM flight cycle on the right of the slide, they have almost recovered pre-crisis level at 97% for the same week of 2019 level as of beginning of February 2023. CFM flight cycles are above the 2019 level in North America, in the Middle East and in South America.

Europe has recovered at 85% of 2019 level. And China has strongly recovered since mid-December 2022 at 93% of 2019 level early Feb.

Retirements remained low with a mere 114 second-generation CFM56-powered aircraft retired in 2022. Fleet storage is at 11.6% at the end of the year, improving versus 16% at the end of 2021.

We expect narrowbody air traffic recovery to continue and to return to 2019 level in the course of 2023. I'm now on Slide 6.

Let me share with you some of the main business achievements during Q4 2022. CFM delivered 324 LEAP engines in Q4 and 1,136 in full year 2022, up 34% versus 2021.

We enjoyed a strong win rate of more than 70% on the A320neo in 2022. The LEAP engine has been selected by key airlines around world, like Air France-KLM, Qatar Airways, Delta Airlines, easyJet, IAG, to name a few.

The backlog amounts to almost 10,000 engines at the end of 2022. Civil aftermarket revenue growth has been positive in Q4, plus 4.3% sequentially, after a strong CFM56 spare parts prebuying in Q3.

Full year growth stands at 29.3% at the top of the range of our guidance. In Q4 2022 and early 2023, we signed a few significant contracts.

2023 has started very well with the largest ever CFM LEAP engine order signed with Air India. CFM will exclusively power the airline's fleet of 210 Airbus, 210 Airbus [ A320, A321neo ], and 190 Boeing 737 MAX family aircraft representing 800 LEAP engines plus [indiscernible].

Air India also signed a CFM service contract. On FCAS program, we have reached an important milestone with the award of the contract for the Demonstrator Phase 1B to our engine joint venture with MTU.

Also in military, we signed a support contract for Tyne engines equipping maritime patrol Atlantique 2 aircraft. On defense, Safran's optronic observation system has been chosen for Eurodrone.

In the helicopter business, the next-generation single-engine helicopter AW09 from Leonardo will be powered by the Arriel 2K engine, the latest version of the Arriel family. In wheels and brakes, Safran will upgrade more than 300 737NG from steel to carbon brakes for American Airlines.

Now on Slide 7. Let me give you an overview of Safran's financial performance in 2022.

Revenue was up 25% at EUR 19 billion, in line with our guidance. Recurring operating margin was up 80 basis points at 12.6%, in line with our latest guidance, thanks to strong growth in Services.

Free cash flow was EUR 2.7 billion, a year-over-year increase of nearly EUR 1 billion, exceeding our expectations, supported by customer advanced payments, notably for [indiscernible]. All in all, we were able to post very solid results with a strong execution from our teams.

On Slide 8, an update on asset portfolio management. In terms of divestment, we have sold non-core activities, notably Pioneer Aerospace.

Parachutes closed in April, as well as Safran Arresting Systems closed in June. We have signed an agreement to sell Cargo & Catering activities within our Cabin business.

The closing is expected in Q2 2023. In parallel, we have also made bolt-on acquisitions, notably Orolia in our defense business closed last July.

Aubert & Duval, for which the closing is expected in Q1 2023. As a reminder, this acquisition is made under a consortium with Airbus and Tikehau Ace Capital.

I also mentioned during Q3 release that we have entered into exclusive negotiation with Thales to acquire their electrical system activity. The closing is expected in Q2 2023.

All in all, divestments represent approximately EUR 400 million of cash-in, and acquisition, approximately EUR 650 million of cash-out for transactions closed in 2022 and those already committed for 2023. On Slide 9, an update on our climate strategy.

First, our CO2 emissions reduction targets have been validated by the Science Based Targets Initiative in conformance with its Criteria and Recommendations. SBTi has also determined that our Scope 1 and 2 target ambition is indeed in line with the 1.5-degree trajectory.

Safran is among the first aerospace companies in the world to have its decarbonization commitment approved by SBTi. This recognizes that our climate road map is in line with the goals of the Paris Agreement.

Second, we have deployed what we call the Energy Sobriety plans in our European facilities to reduce total energy consumption by at least 10% in 2024 compared to 2019. It is consistent with our global target of reduction of Scope 1 and 2 emissions.

Finally, on Scope 3, to address CO2 emissions from our supply chain, we have mobilized our 400 main suppliers, representing 80% of emissions from purchases. First step is to be able to have a clear view on their emissions.

So far, we are able to assess accurately CO2 emission and maturity of their decarbonization trajectory of more than 80% of these main suppliers. Let me now hand over to Pascal for more details on 2022 results.

Thank you, Olivier. Good morning, everyone.

I will be commenting today the adjusted accounts for which a bridge from consolidated statements is presented on Page 11. The adjustments remain unchanged either relating to FX or PPA.

The numbers circled in the table, EUR 4.5 billion, reflects the change in mark-to-market of instruments hedging future cash flows, which are recorded in financial income in 2022. As you know, it's a pure accounting entry, no cash impact as our derivative instruments will hedge future USD cash inflows.

On the same topic, on Slide 12, USD has been strong in 2022, ending the year at 1.0675 after a low point reached in September at 0.9550. We took benefits of the attractive levels to further improve our hedging portfolio.

This is why a hedge rate of $1.13 per euro will apply in 2023, providing a $0.02 improvement from 2022. This is 1 of the items that will help mitigating inflation in 2023.

As per our policy to hedge on a 3 to 4 years horizon, we'll continue to hedge 2027 in the course of this year. On Page 13, which provides a summary of the income statement.

Olivier already highlighted the solid revenue growth and margin expansion, so I will commence with below the line items. First, we have a strong increase in share profits from joint ventures, which are mainly attributable to Shannon Engine Support, which is our engine leasing company with AerCap, and [indiscernible] company involved in selling CFM56 used parts.

One-off items amounted to EUR 450 million, which is a similar level compared to 2020 and 2021. Beyond the impairment of Russian programs mostly booked in H1, an impairment loss has been recognized against Safran Cabin goodwill, reflecting a WACC of 8.5% which was 7.5% last year.

So 1 year delay in the recovery of aircraft interiors, and as Olivier mentioned, the upcoming divestments of the Cargo & Catering activities. This impact has been partially offset by a capital gain on disposals of EUR 63 million.

Most of that was already booked in H1. In financial income, the cost of debt was EUR 56 million.

In addition, the strong USD had a negative impact on revaluation of some USD positions in the balance sheet and provisions, explaining most of the negative EUR 95 million. Tax rate comes at 31.4%.

When you restate EBIT from goodwill impairment, the effective tax rate comes closer to 26%. Net income to the parent is nearly EUR 1.2 billion, EUR 2.76 per share, which is up 55% from last year.

Now moving to Slide 14. As expected, 2022 was a year of recovery, with solid organic growth each quarter.

Q4 sales increased by nearly 12% at EUR 5.6 billion. On a full year basis, revenue is EUR 19 billion, 60% organic growth, which is more or less EUR 2.4 billion of additional revenues.

We had a strong positive translation impact on sales due to the average euro-dollar spot rate, which is [ $0.13 ] below the 2021 level. The strong USD has a dilutive impact on EBIT margin for the same euro EBIT.

Any single cent change in spot rate translate to more or less EUR 90 million of revenues on average with no margin. Same chart on recurring here on Page 15.

The strong improvement of the recurring operating income at EUR 2.4 billion, up 28% organic. margin improved from 11.8% to 12.6% of sales, 80 bps, in line with our October outlook.

The solid performance demonstrates our ability to offset the impact of inflation and the discontinued activities in Russia. The main driver is growth in services across the board and notably in civil aftermarket, and I'll come back on that.

Increase of profit sharing was a drag on margins compared to 2021. As we already mentioned during the Q3 release, the excess operating performance that we achieved in 2022 has been given back to employees through the release of 100% of their optional profit-sharing scheme.

We also, in the late days of December, granted the exceptional bonus to French employees in the context of inflationary pressure. In 2023, as expected, we will be back to a normal employee profit-sharing scheme, same as 2019.

R&D on Slide 16. Self-funded R&T increased by 20%, reaching around EUR 470 million.

75% of our efforts are directed towards decarbonization, notably through the RISE technology program. The EBIT impact of R&D represents 4.3% of sales, a level which is consistent with the average mid-term target that we disclosed at the Capital Market Day in '21.

Capitalized R&D is EUR 278 million, slightly down compared to '21 in the absence of any new large development program. Moving now to performance by activities, starting with the propulsion on Slide 17.

Revenue was EUR 9.5 billion, up 18% organic, equally balanced between aftermarket and OE deliveries. OE is at 18%.

Deliveries, we already mentioned that for LEAP engines are up, plus 291 engines year-over-year, yet behind Airframer's plan. Other deliveries, notably high-thrust engines, Rafale engines, helicopter turbines were down.

Services revenues were up 19% organically, essentially driven by the 29.3% growth in civil aftermarket, so let me provide some color on that. I would say, as usual, growth is driven by spare part sales, notably on the CFM56 second gen.

We've seen the volume of shop visits being up, but less induction than initially expected, and we already discussed that in Q3. The good news came from the revenue per share visit which increased even more than we initially expected.

Thanks to heavier work up, we are back now to 2019 levels and the net pricing effect coming from the end of 2021. In addition, we also benefited from inventory buildup at third-party shops during Q3, which was pre CLP.

On the high-thrust engine side, the spare parts performed very well as well, and service contracts had a slight positive contribution to growth. Recurring operating income of EUR 1.7 billion, up by 23% organic.

Again, the main driver is civil aftermarket growth. CFM56 and LEAP transition was a negative contribution with lower CFM56 deliveries and higher LEAP deliveries, which are coming at a negative margin.

On Slide 18, on Equipment & Defense. So sales of EUR 7.5 billion, up 11% organically, driven by a strong recovery in Services, which are up 25%, I would say, across the board.

OE revenue was up only a small 3% organic, thanks to increased deliveries in the sales on the A320neo and A330neo. Aerosystems, Electronics & Defense also performed well.

But we had low volumes on the 787, impacting notably landing gear, wiring and power distribution. There's a strong improvement of the recurring operating income, EUR 0.9 billion, up 25% organic, driven by the growth in Services and growth in OE, notably in net sales and Electrical & Power.

Orolia company, we acquired last year, is now fully consolidated in H2, and it had a relative contribution to Electronics & Defense. All in all, the recurring operating margin is coming at 11.6%, up 1.3 points versus 2021.

Aircraft Interiors on Slide 19. We reached almost EUR 2 billion of revenues, up 25% organically from a low base.

This is still 40% below 2019 revenue. OE was up 21% organic with strong growth in Cabin activities, galleys, lavatories and Custom Cabin.

In seats, OE contribution was negative due to less business class seats deliveries by about 20%. Services was up 37%, both in Seats and Cabin.

As you can see, the division posted a loss of EUR 140 million, a negative 7.1% recurring operating margin. Cabin managed to reach operating breakeven in Q4, thanks to growth in its activity and the positive impact from the ongoing industrial footprint optimization.

To say the least, in Seats, the performance is disappointing. Services positively contributed, but lower OE volumes had a negative impact.

We are still facing some supply chain issues as well as engineering and production cost overruns. So we are deploying strong efforts to stand these losses going forward with a dedicated recovery action plan put in place.

Free cash flow in that division, which is not shown on the chart, deteriorated by approximately EUR 300 million year-over-year, mainly due to unfavorable working cap variation with a large increase in inventory and customer receivables, and the cash-out of the social plan we started in 2021. Our objective for 2023 for the division is to reach breakeven, but we acknowledge that this remains a challenging target in [ Seats ] activity.

On Slide 20, free cash flow came at a record level of EUR 2.7 billion, up nearly EUR 1 billion from 2021, exceeding our expectation. This excellent performance is driven by a couple of reasons.

EBITDA of EUR 3.5 billion, up nearly EUR 800 million, 28%. A good contribution of working cap with different trends.

First, inventories were strongly at -- it was a negative increase of EUR 1.6 billion in order to ensure minimal disruption of deliveries to our customers, and this effect was fully offset by the deferred income. We saw an increase of EUR 550 million, notably thanks to the RPFH contracts in [indiscernible] and helicopter engines.

We also received significant customer advance payments from Rafale's export contracts as well as for LEAP. Cash CapEx was added by nearly EUR 110 million, to continue to grow our production and MRO capacity.

On Slide 21, Safran ended the year with a net cash positive of plus EUR 14 million, which is 1 year ahead of the Capital Market Day '21 target. So we had a free cash flow of EUR 2.7 billion, a dividend payment of [ EUR 0.50 ], which is EUR 225 million.

The net cash out impact from acquisitions of nearly EUR 500 million, and we started our share repurchase program and we already acquired 2.4 million shares at the end of 2022 for EUR 270 million. So Safran is now fully deleveraged, and we enjoy a strong balance sheet with a gross cash position of EUR 6.7 billion, and this is reflected by S&P.

They upgraded Safran's credit rating to A- in December with a stable outlook. Regarding shareholder returns on Slide 22.

For fiscal year 2022, Safran is proposing to its shareholders a dividend of EUR 1.35 per share, which represents a 40% payout ratio on the restated net income. So the net income was restated to exclude, as we did in 2020 and 2021, the contribution from the French government for short-time working and the contribution of employees in 2022.

In fact, the French employees gave up their top-up contribution, which we call [indiscernible] in French. And we also restated net income from the goodwill impairment at Safran Cabin.

So we are returning nearly EUR 600 million to shareholders this year. A quick update on the ongoing liability management transaction.

I'll remind you, the objective is to hedge the potential dilution of our '27 convert. At mid-Feb, we have purchased around 4 million shares on a cumulative basis.

We expect full completion by next summer, market conditions permit. Olivier, back to you.

Thank you, Pascal. Let me now give you some insights on Slide 24, about how we foresee the environment for 2023.

Our main assumptions are, we expect air traffic to continue to recover with narrowbody ASK reaching their 2019 level in the course of 2023. January showing encouraging trends.

LEAP OE engine deliveries to increase by around 50%, which means around 1,700 LEAP engines to be delivered in 2023, nearly 600 additional engines versus 2022. Civil aftermarket revenues in dollars, up in the low 20s, driven by positive trends in volume and price, while work scope is expected to be flattish.

Key watch item remains supply chain production capabilities, an industry-wide challenge. Moving to Slide 25.

With this set of assumptions, Safran expects to achieve for full year 2023 at the current perimeter with a euro-dollar spot rate of 1.05 and a hedge rate of 1.13, an adjusted revenue of at least EUR 23 billion, an adjusted recurring operating income of around EUR 3 billion, a free cash flow of at least EUR 2.5 billion with potential upside subject to payment schedule of some advanced payments. We are making good progress, and I do confirm that we are on track to meet the Capital Market Day 2021 financial targets for 2025.

In closing, on Slide 26, I would like to focus on our key priorities. We are prepared to face changing business conditions.

I guess we have demonstrated our ability to adapt swiftly when needed. We are focused to meet customer demand by managing the ramp-up in OE deliveries despite supply chain difficulties, and here, LEAP is our top priority.

We anticipate inflation pressure to continue in 2023 with an expected impact about twice of what we had in 2022. We have a clear and ambitious research and technology road map, leading to more investment to tackle the greatest challenge of our industry, that is decarbonization.

And last but not least, as already mentioned, we are on track to deliver our Capital Market Day 2021 targets, and -- if not already, slightly ahead on some metrics. And Pascal and I are committed to deliver on this expectation.

Thank you for your attention. We are ready to answer any questions you may have.

I have 3 questions, if possible. Maybe I'll ask them 1 at a time.

But the first 1 was regarding clarifying on your civil aftermarket commentary. I understand you mentioned work scope flat, prices and volume up.

When we look at the number, sort of the low 20s versus where you are in 2022, it sounds like sequentially, it's not much of an improvement, I guess, despite China reopening, traffic, et cetera. Can you walk through those assumptions regarding sort of like why not a bigger volume improvement given China [indiscernible] time, et cetera, if you can elaborate on that?

Daniela. Yes.

On civil aftermarket, volume is up. Has been up in full year 2022, but less than the narrowbody ASK, indeed.

Remember, China has been extremely volatile, and the pickup of the Chinese traffic has been at the very end of December 2022, at the very end of the year. And we've lost also all share visits related to the Russian traffic.

So on the narrowbody ASK takes into account the Russian traffic, of course, because of the sanctions, we don't have initial visits related to Russian activity. The work scope has been up in 2022, as Pascal has mentioned, coming back to the pre-crisis level.

And we expect it to be flattish in 2023. And price has been up as a consequence of our catalog escalation decision.

Just for 2023, we expect share visits to reach the 2,000 level, so that's not a big step for 2023.

And the second question is just relating to the strong free cash flow guidance and also the strong free cash flow delivery this year, and taking into account sort of your prior commentary regarding potentially going back to buybacks. So I was wondering if like the free cash now sort of changes your timing?

Could we sort of perhaps move to that maybe earlier than expected?

Daniela. So we are fully deleveraged today.

We are raising the dividend, coming back to the 40% payout. So we will return, as I said, nearly EUR 600 million to shareholders.

We have a share repurchase program being executed right now. As I say, we will -- we expect to finalize that program by, let's say, this summer.

So I will come back to you in the second half of this year to see what else we could do. In terms of capital allocation, our priority #1 will always be organic investments, and there is a lot to do given the very strong customer demand that we see that was even amplified with the Air India deal we signed last week.

M&A also is an option. We disclosed divestments that we've made last year, but also on the acquisition front, some bolt-on acquisition.

And just finally, sort of you've reiterated the 2025 guidance. But just based on your commentary for Interiors 2023 breakeven, I guess, by 2025, that guidance still had over 10% margin.

Is -- has the mix between divisions for 2025 changed in any sense versus the CMD, or it's the same mix with just a very back-end loaded Interiors improvement?

Sure, there is a shift of 1 year in the recovery of the Aircraft Interiors division performance. We were expecting to reach operating breakeven in 2022.

Now we are pushing this target for 2023. So by 2025, you're right, we won't be at 10%.

Hopefully, we will approach that 10% target, meaning that Propulsion and Equipment should do slightly better if we want to be in the 16% to 18% operating margin by then.

I guess first question, could you just walk through the margin drivers to get to the implied 13% guide for this year? And you mentioned twice inflation impact in 2023.

Is that by margin impact, or could you just clarify what that means? And second related question, coming back to that 2025 guide, back at the CMD when you framed the path towards that 16% to 18% as back-end loaded, was 13% the margin you had envisioned for '23, the midpoint year?

And with only 120 basis points of cumulative improvement from '21 to '23 despite the strong aftermarket recovery and 400 basis points more to go, I guess, what's the path to getting to that 16% to 18%?

Okay. George.

On your first question on moving parts on EBIT going from '22 to '23. So more or less, this is a EUR 600 million improvement in EBIT that we are contemplating.

On the tailwinds, I would name civil aftermarket will definitely provide a boost in the improvement of hedge rate, [ $0.02 ] compared to 2022. The recovery in Aircraft Interiors increase in services beyond the civil aftermarket and some productivity.

Now on the headwind side, growing the LEAP volumes by 50%, as you know, has a negative impact on the margin. As expected, profit sharing for our employees is also a drag on margins for this year.

R&D is expected to increase by nearly EUR 150 million. And you've mentioned inflation, I confirm that we expect 2x impact we had in '22 when we looked at '23.

So all in all, we see an improvement of EUR 600 million. Now on our '25 guide for EBIT margin.

Are we on track with a 13% EBIT margin more or less in '23? The answer is yes.

Remember that the guide we provided at the Capital Markets Day was with the spot rate euro-dollar at 2020. The guide we provide for '23 is using a euro-dollar spot rate average of 1.05, and as you know, this has a dilutive impact.

If I start back from 2020, we had an operating margin of 10.2%; '21, 11.8%; 2022, 12.6%. So it's already a 2.4% improvement in margin in 2 years.

If we achieved 13% in 2023, it's 2.8% improvement in 3 years, nearly 1 point of margin improvement in 3 years, which is exactly what we've mentioned as moderate increase in margin for the first part of our plan. In the second part of our plan, we've mentioned a strong increase in margin which, in our view, is more in the range of, let's say, 1.5 points of margin improvement in '24, '25, which should bring us to our target.

Again, the dollar assumption is clearly different in '23 compared to what we guided for at the CMD.

On that 2x impact for inflation, is that by margin impact year-over-year? Because I think in 2022, you had sized that at about 120 basis points.

Are you saying it's going to be 240 this year, or what do you mean by the 2x in that?

Yes, exactly what we mean. So I confirm that excluding inflation and salaries, inflation was 120 basis points drag on margins.

In '23, we would expect that the margin impact to double at 200, 250 basis points. If you add the salary increase on top of that, it's 3 points of margin that we are losing in 2023 due to inflation, so we need to offset that.

How do we do that? As you know, we are passing some inflation to our customers.

FX 1.13 hedge rate is definitely 1 of the mitigating factor. Cost control is another item to offset inflation.

So we have to face huge inflation coming from energy, raw materials, salaries, transportation costs and so on.

Yes, Olivier, Pascal. Two questions for me, please.

The first 1 on LEAP. We should be going through a number of shop visits at the moment.

Do you have any surprises, anything that you are on the contrary, very satisfied with in terms of content or time on wing? That's the first question.

Second 1 on the free cash flow. Can you walk through the building blocks for 2023 in terms of what you expect for inventories for the deferred income down payment CapEx and so on to help us frame the number?

Olivier. On LEAP, the behavior of LEAP in service is as expected in, I would say, a normal environment is, I would say, slightly more difficult in harsh environment.

New engines are suffering a lot in a harsh environment. I mean, the Gulf especially or India.

And as a consequence of that, basically, we have slightly more shop visits coming from those regions compared to our expectations with a higher work scope.

Olivier. On the free cash flow for 2023, so we say that we were expecting at least EUR 2.5 billion.

Talking about working cap expectations, I would say, neutral to positive. Inventory should be more or less stable in value compared to 2022.

I would expect lower than payments that we had in '22. Also, there could be some -- an upside risk if we do receive some down payments that we are expecting in '24.

There is some uncertainty about Rafale down payments falling into the end of '23 or early '24, that's why we say at least EUR 2.5 billion. We'll continue to enjoy higher deferred income because of the RPFH service contracts that we have on the helicopter business and the LEAP, as well as the contracts we have with Safran Landing Systems for Wheels & Brakes, where we are paid per landing.

So should the traffic be higher than what we think, we will benefit from that. In terms of R&D and CapEx, you would expect the cash-out to increase in '23 compared to '22.

A couple of questions from me. First of all, we saw [ CFA ] Airbus revising its ramp plan on the A320.

I was wondering if you could give us any idea of what potential benefits is to you with older aircraft CFM56-powered aircraft flying for longer and then helping you with your 2025 target? And then secondly, probably for Pascal, a technical one.

On the acquisitions that closed -- are supposed to close in 2023, are they in the guidance or not in the guidance? And if they're not in the guidance, how much could they add?

Robert. On the ramp plan announced by Airbus yesterday, the demand is clearly very high, as confirmed by the recent announcement of the record order from Air India.

So when you look at the global air traffic, the demand is very high. And as a consequence, that does justify a ramp-up beyond the level that was contemplated before the crisis.

But this ramp is going to be paced by supply chain, the supply chain capability to follow and to deliver. So as the demand is high, we think it's not going to be at the expense of, let's say, fewer cycles from CFM56-powered aircraft.

The LEAP-powered aircraft are going to get an increasing share of the global flight cycles, obviously, in the narrowbody. But this is expected since -- even before the crisis.

This is just a consequence of the induction of new aircraft in the fleet. But the demand is very strong.

We fully understand, let's say, the ramp-up aspiration from the airframers.

Rob. On your questions around acquisitions and divestments, our 2023 guidance is made as the current perimeter.

Meaning that we have not included any P&L or cash impact coming from the divestment of cargo/catering, which is expected to close by Q2. Neither have we included the Thales Electrical System or Aubert & Duval acquisitions that are expected to close either in Q1 or Q2 this year.

So it will come on top of our guidance.

Just a quick follow-up then. So when they do close, do you expect us to give -- you to give us an update saying half year results, that some -- we'll have some more information on them?

Well, we'll see what kind of details in terms of final shorts we can provide. Typically, what I discussed earlier about Orolia, that we are consolidating since July 1 last year is that it has a relative impact on our Electronics and Defense activity.

We didn't disclose details about revenues and EBIT margin, but I can confirm that it was a good acquisition from operation and financial performance.

I have a few technical questions to start with. Just -- I wanted to understand really in terms of employee profit sharing catch-up, was there any additional catch-up in Q4 compared to the level that you commented on with Q2 numbers?

I think you did it on Q3, but I'm not sure. So if you have any insight on this, that would be interesting.

The second element, I wanted to understand what has been in 2022 the full year contribution of Ariane, and whether there was any headwind coming from a fairly complex year for this business, and how you see it contributing to the bottom line in 2023? And the third one is on your appreciation of LEAP aftermarket profitability going forward.

If we combine your comments on the reliability of the engine, which is good in normal environments, but higher cost as of today in a harsh environments. And the cost inflation pressure that you talked about, does it mean that you're comfortable with the idea that you should [ book ] your margin for some time, maybe for a longer period of time?

How do you approach this equation would be interesting to us.

Tristan, on the employee profit sharing, we had 2 steps, 1 in Q3 and another one in Q4. The one we had in Q3 is that we signed what we call an exit agreement with French unions more than a year ago now, which say that any excess operating performance above the given thresholds of operating margin would be given back to employees.

And given the performance we had at a constant euro-dollar rate, we had to release 100% of the optional profit sharing in French until this month, okay? This was in Q3.

In Q4, it's true that we had -- which is beyond the profit-sharing scheme. We decided, given the context of the inflation in France, to pay an exceptional bonus of EUR 750 per French employee.

So when you do the math, you will see that we paid more or less EUR 35 million to French employees in Q4. So it came in 2 steps, okay?

On your second question regarding ArianeGroup. I will maybe let Olivier elaborate on the situation.

But in terms of contribution, we had a positive contribution of ArianeGroup in 2022, even beyond what we had in our budget. So we didn't have any drag coming from ArianeGroup in 2022.

And Tristan, on the overall situation of the launch, as you know, the situation is globally difficult as we are coming to the end of the Ariane 5 launches. We have 2 large plans in 2023, and this is the end.

Ariane 6 is delayed. And as we speak, the maiden flight is planned at the very end of 2023.

And we -- basically, we are not operating Soyuz launches anymore since the invasion of Ukraine. And Soyuz was planned to basically to be -- to help us during the interim phase between Ariane 5 and Ariane 6, and this we don't have today.

And there has been the failure of the Vega launch. So this is a combination of factors which basically -- where the consequence will be that there are not going to be many launches in the course of 2023.

So this is going to be a drag, a pressure. But on the other side, on the military side, basically the results are quite good and positive.

So this is why basically we don't expect -- in terms of results, ArianeGroup to be a drag on us, a significant drag on us in 2023. Relating to your question on LEAP aftermarket profitability.

As always, there are some headwinds and there are some tailwinds when you look at the profitability of contracts over a long time period, because we are talking about 10 years' or 12 years' contracts. And as you picked up, let's say, the situation in harsh environment is, let's say, is a pressure.

But on the other side, we have also some tailwinds. Overall, we have decided to be cautious on the LEAP aftermarket up to 2025 precisely because we want to see exactly what the behavior will be in service.

Seats takes time, as it has happened in the very early days of CFM56. And also we learned from, let's say, the in-service behavior, and we take decisions in terms of improving the reliability and the time on wing of the LEAP through, let's say, design changes.

So this is what we do, and the maturity of the engine will improve over time. So this is why it's too early to elaborate more on, let's say, the overall profitability of the LEAP aftermarket over a long duration.

That's very helpful, especially the comment on Ariane effects for this. Just to make sure I understand properly on LEAP aftermarket, it means that we stay at 0 margin on the long-term [indiscernible] agreements until 2025, and you will give a view on the future margin in 2025 for the years after, roughly?

Well, we expect to provide more details at the next Capital Market Day, so I guess it should be in the '24. So within a year from now or 18 months from now, we will explain into much more details how we expect to manage the transition between CFM56 and LEAP aftermarket, given that we are moving to some extent from time and material to RPFH model, so we'll provide details at the next CMD, yes.

Looking forward to it.

Yes. Same for us.

Very excited about that.

Three questions. I'm sorry, there's a bit of repetition, but could be slightly different angles.

I'll keep them short. So the first one, just probably -- and given your comments about slightly less reliability of the environments, I just wonder if you are still as committed to the flight per hour business model or whether you think the mix of new business that you want to underwrite will change going forward?

The second question is, could you just tell us what type of price increases you are achieving on the current FBH contracts on LEAP, please? You've commented about the spares price increases but not on the FBH.

And the third one, if I can just come back to this question of the share buyback. I'm just trying -- sorry, or potential capital return, I should say.

I'm trying to square the circle. You talk about EUR 2.5 billion of free cash flow.

It's free cash flow, it's post the organic investments at your priority. You talked about the EUR 600 million of dividend return.

There is a huge amount of surplus from the cash flow when you have net debt. I just want to understand what your messaging is, and your willingness or commitment to return that excess cash to shareholders?

David. I will take the first 2, and let Pascal deal with the third one.

The services contract that we signed today on LEAP are predominantly fly-by-the-hour contracts, as we have already communicated. We have some time and material contracts as well, especially with airlines where -- that do have their own in-house maintenance facilities and maintenance activities.

So we deal with them through sort of time and material and license contracts. And our, basically, strategy going forward is to facilitate, as time will come, third parties' involvement into the LEAP aftermarket services.

But this will only occur when some knowledge, some well-shared knowledge in the marketplace will be there on the LEAP behavior. Third parties can only join in the party when the LEAP behavior is going to be well understood and well known, as it is the case for CFM56 today.

And so we expect that going forward, there is going to be, let's say, an increased proportion of time and material from where we are today. And once again, we are going to facilitate that as much as we can.

On the price increase for flight-by-the-hour contract, we have escalation formula, this is part of the contract, with basically as we have already mentioned, with a cap. In the earlier contracts [ we saw dead-band ] also and what we call a [ leap-out ] meaning that beyond the second threshold, we share 50-50 the inflation.

So with that, the rate per flight hour is increasing year-on-year following this escalation formula.

And roughly, what would the average increase be, say, in '22 or '23 on an LTSA?

I cannot elaborate on that today. But I can say this has been, in fact, a tailwind as inflation has been higher than expected in 2022.

So we'll see an impact for the rates in 2023. This is why I said there are headwinds, tailwinds.

And on this one, the escalation is going to be a tailwind.

David. On your free cash flow and share buyback question, let me walk you through the, I would say, the bridge from '22 to '23 in terms of net cash position.

We expect to have EUR 2.5 billion of free cash. We will return nearly EUR 600 million through the dividend payment.

We have engaged into a share repurchase program of 9.4 million shares, which is with the current share price, nearly EUR 1.2 billion of cash outflow. We already had, let's say, EUR 0.3 billion cashed out in '22, meaning that the remaining portion is EUR 0.9 billion.

On top of that, we have already signed agreements to acquire Aubert & Duval and Thales Electrical System, let's say, for EUR 0.2 billion to be cashed out this year. So when you do the math, we should end up the year, before any other M&A acquisitions, around EUR 0.8 billion, okay?

So the net cash position should increase across the year. And we'll discuss the potential of return to shareholders when we have ended the execution of the current share repurchase program, which is by this summer, more or less.

Yes. Olivier and Pascal, maybe 2 remaining questions.

The first 1 maybe on the Seat activity. Can you give us concrete examples of the recovery action plan that you have put in place over the recent months to regain control of this business, and maybe what are the most critical points at present in this activity?

And maybe if I may, on the LEAP OE. So you guys announced roughly a 50% increase in deliveries in '23.

I was wondering what was your degree of confidence regarding those -- the 1,700 LEAP engines? And on top of that, as new engine deliveries have been disrupted in recent quarters, I wanted to know if we should build into our models a bit more [indiscernible] than the normative level?

Okay. Yan.

On Seats, in the course of 2020, 2021, we have had a lot of actions in terms of footprint optimization to reduce cost, and so this is behind us. And in 2022, as I said, we've seen a significant pickup in new campaigns, new commitments for new seats developments, et cetera, et cetera.

So what is key is really to enhance the engineering process and ensure that the engineering performance will be on time, on cost, on quality. So this is the #1 focus; engineering on time, on cost, on quality.

So the quality of development. And the second point is supply chain.

We have suffered a lot from supply chain issues, and so we are going to strengthen overall the supply chain management. Adding more people, more qualified people, following the suppliers, anticipating, making sure we smoothen as much as you can the overall difficult situation of the supply chain.

So it's all about processes, I would say, now ahead of us, transforming the engineering and also strengthening the supply chain management. On LEAP OE, yes, we are confident on the 1,700.

We've discussed that in depth with our partner team. And yes, we've communicated on that.

We are confident that we should be able to be around there, and this is meeting our 2 airframer clients' demand. On spare engines, the spare engine ratio has been higher in 2022 and will be higher in 2023, let's say, compared to the usual numbers because we want to make sure that our customers are satisfied.

And a very key guidance we have given to the teams is we need to ensure that aircraft keep flying, always. Aircraft keep flying.

No aircraft on ground. So anytime there's whatever issue planned, unplanned on an engine, we need to have spare engines available to keep our customers fly, always.

Olivier, Pascal. Can I ask -- I'm surprised no one else has asked generally about the supply chain.

Can you comment particularly on the propulsion side, about whether supply chain performance compared with the last time we all spoke in October. Is it more or less stable, is it improving?

And what today -- what's your best idea of when it's going to be more or less back to normal in terms of on time, on quality? Then maybe a slightly different one, just looking at LEAP OE.

I think back at the CMD in late 2021, you were back then expecting the breakeven at the gross margin level, gross profit level to be in 2025, at the latest. A lot of things have moved around since December 2021 in terms of cost and the delivery numbers.

Is that still what you expect for the breakeven date at gross profit level for LEAP? And Pascal, you probably won't be able to help me, but maybe you can show a little bit of light on -- the CFM LEAP transition was something that you used to comment on, or Bernard did.

And I understand that with the significant volume decreases with COVID in 2020, you decided it really makes sense to talk about that. But can you maybe -- now things are maybe a little more normal, can you give us some feeling about the year-on-year change, that CFM to LEAP transition on the OE side, what the EBIT impact was maybe in '22, and what you look for in '23?

Hello, Harry. I'll take the first 1, and will let Pascal elaborate on the other one.

On the -- I mean, the supply chain issues are wide in the industry. As you know, overall.

It's on propulsion, on equipment, on avionics and components, on raw material, it's everywhere. Has it -- overall, has it improved in the last month?

I would say, no, not totally. It has improved a bit on propulsion, but if I look at the wide industry, I would not say so.

But slight improvement on the propulsion, where basically, we are not pacing -- as you know, we are not pacing anymore our airframers clients, and we believe it's going to last at least to the end of 2023. I mean, we should not be overoptimistic there.

It's going to last. We still have issues on equipment everywhere, especially in the U.S.

We have shortages of raw material, it's an everyday fight to get raw materials. Some suppliers are trading here and there, and so we need to have -- to increase our teams dealing with our suppliers.

Supply chain management is, by far, our #1 priority in 2023. We are fighting every day to get components.

It's tough, it's very tough, so it's an every day's fight. And as we speak, we don't see yet an overall significant improvement.

It's also impacting some of our aftermarket activities. I can see that in, for example, in the landing gear maintenance and repair.

I can see that in the helicopters. So it's an overall impact, which will last at least up to the end of 2024.

Harry. At the Capital Market Day '21, we said that our intention was to reduce the cost of producing the LEAP by 15% by 2025, reaching at the latest in 2025, gross margin breakeven.

Are we on track? The answer is yes.

The teams together with GE are working well on this plan. We are executing decreasing costs month after month of the LEAP engines.

What is new is inflation. So are we going to meet that guidance?

The answer is yes before inflation. So now, we have to work on new action plans in order to offset inflation, which was not in our books when we had this plan back in December '21.

So now in terms of cost reduction, we are on plan. Now answering your third question on the, let's say, quantifying the impact of the CFM56 LEAP transition.

As you know, I won't provide a content for that. What I would say is that the unit loss we have per LEAP engine is decreasing moving forward to '23.

But as we deliver more or less 600 additional engines in '23 compared to '22, in value, there is a bigger drag in '23 compared to '22 driven by volume more by the unit loss that we have per engine. We'll take maybe our last question.

Yes. I had 3 questions.

First, coming back on the M&A. You mentioned Aubert & Duval, it's quite a complex transaction.

It's a consortium. How will you actually integrate this?

Are you fully consolidating it, or -- I mean -- just -- that's for -- just the accounting approach. Second question is on the cash guidance you provided at the CMD.

Again, you're providing a very strong free cash flow guidance for this year. The EUR 10 billion you mentioned, our 2021 to 2025, are you in a position today to kind of give us more a bit level?

Because you will certainly be way above the EUR 10 billion. And the last question was more about the -- where do you see the profitability in the Defense and Equipment division going?

You mentioned in the call that you were seeing upside to what you said at the CMD, but are we talking 100 basis points additional, or is it -- could it be more by 2025?

Christophe. First question, we will own only 1/3 of Aubert & Duval, together with, as you know, Airbus and Ace Capital.

So it will be accounted under the -- equity accounted in propulsion for 1/3, okay? So it would be only a small contribution, if I may say so, to the accounts.

The cash guidance, when you sum up what we had in '23, '22, and the guide for '23, you can already see that we are overshooting the EUR 10 billion guidance, at this point in time, I would say, by at least EUR 2 billion. So EUR 12 billion on a cumulative basis given what we have already done, including the guidance we have for '23.

Then the profitability targets for propulsion and equipment. Propulsion, we say the 20% plus by 2025.

This is still our target. Is there any upside on top of that?

We will see in due time. Equipment, I guess, we say 15%.

Could it be better in Defense? Clearly, we are supported by the spending we see in France.

But not only in France, in Europe, in the U.S. as well.

So we'll see in due time. I would say we stick on this target.

As I said before, part of that is offsetting the shift of 1 year in the recovery of Aircraft Interiors. But the Capital Markets Day guidance is clearly on track to us.

Okay. Thank you all, and looking forward to see you in the coming weeks and months.

Thank you.