Safran S.A.

Philippe Petitcolin - CEO Bernard Delpit - Group CFO

Christian Laughlin - Bernstein Robert Stallard - Royal Bank of Canada Olivier Brochet - Credit Suisse Zafar Khan - Societe Generale Christophe Menard - Cheuvreux Antoine Boivin-Champeaux - Natixis David Perry - JPMorgan Harry Breach - Raymond James Charles Armitage - UBS

Good morning, everyone. Today we will discuss our third-quarter numbers, which you can download from our website if you do not have them already.

We are glad to present the third-quarter 2015 revenue, which confirms the favorable momentum of the Group and its very healthy prospects. Let's look at the highlights of Q3 2015.

Very strong revenue growth in our third quarter. Let's start with the LEAP development.

We have a LEAP development which continues to make very good progress. We are on track for entry into service as expected.

At the same time, we remain of course very focused on the preparation of LEAP production ramp-up in order to meet our customers' requirements. Let's look at the three developments.

First one, the one for Airbus, LEAP-1A. We have completed the hot weather and high altitude campaigns successfully.

To date we have logged more than 100 flights on the A320neo in line with Airbus plan. We have a second aircraft flying with our engines since September 29.

This good progress puts us on track for imminent engine certification. Regarding the LEAP-1 billion, the flying test bed campaign was completed this summer after 50 flights, totaling 268 hours.

We are now gearing up for the first flight of the 737 millionAX in early 2016 as planned. Regarding the LEAP-1C, we completed the successful installation of the first two integrated propulsion systems, engines and nacelles, on time in September to support the COMAC rollout which is now planned for November 2.

All in all, the LEAP program is on track. LEAP performance in line with our roadmap, delivery of the first LEAP engine scheduled in 2016.

We continue to prepare our supply chain to production ramp-up and we are upgrading and expanding our internal production capacity, especially with two new assembly lines dedicated to the LEAP in our plant in France in Villaroche with two new [production] lines. If we look at the next page on our business highlights, Airbus Safran Launchers awarded Ariane 6 development contract by ESA.

So we have a contract amounts for EUR2.4 billion. And this contract covers the development of Ariane 6 launcher in its two versions, Ariane 62 and Ariane 64.

We continue to make good progress in helicopter turbines development. Safran delivered on schedule the first production Arrius 2R engine to Bell Helicopter for its Bell 505 Jet Ranger X.

Engine certification is planned by the end of 2016. In aircraft equipment we are reinforcing our world-leading position in accessory gearboxes thanks to the creation of Aero Gearbox International in partnership with Rolls-Royce.

Aero Gearbox International, which will develop and produce accessory gearboxes for all Rolls-Royce future civil aircraft engines, plans to start the construction of the production plant at the end of 2015. First deliveries are expected in 2017.

In defense we expanded our presence on the Scorpion land vehicles program for the French Army. Safran was selected to provide optronics equipment for remotely controlled turrets in addition to its selection to supply the PASEO sight system via our JV with Thales called Optrolead.

In security, the rapid adoption of the itemizer 4DX Trace Detector in Europe demonstrates our ability to leverage on such technology to meet customer needs. We have shipped close to 900 itemizers since the beginning of the year to European airports to match EU screening mandates.

Let's look now at the financial highlights. Q3 2015, sales EUR4.141 billion, up 15.4% over last year, where we did EUR3.589 billion of sales, so an increase of 15.4% over last year for the Q3.

And if we take the sales of the first nine months of the year, we achieved EUR12.544 billion in the first nine months of 2015 compared to EUR10.797 billion for the first nine months of 2014, an increase of 16.2%. I remind you that at the end of June we had 16.6%.

So we are really in the same range as we were at the end of the first semester. The strong revenue growth in Q3 is driven by continuing momentum in propulsion and strength in security.

Services in propulsion are up 19% and equipment 24.1%. These two items, services in propulsion and equipment, continue to drive our revenue growth.

Security confirmed a strong revenue trajectory with plus 29% as all businesses grew. Sales in defense increased slightly.

Let's talk now about an indicator that you like to follow, the civil aftermarket. Civil aftermarket was up 18.5% in USD terms in Q3 and 24.4% year to date.

The growth continued to be driven by overhaul activity for second generation CFM56 and GE90 engines in the context of a favorable environment for airline customers. Helicopter support services are also on the right side with a nice increase in sales.

Before I move to financials with Bernard, just a word on our Silvercrest program. First of all, I would to say we have a good engine.

We have 11 engines ground tested, six engines flight tested on our flying test bed, and we have achieved over 3,200 hours of testing. However, these tests have shown that we need to carry out additional work to meet operational life and performance specification.

We are short in performance and operational life versus the specification of our customer. These kind of things happen.

We know what to do; we just have to do it. It's going to take a bit of time and a bit of money, but we know what to do.

Now I'll let Bernard introduce our financial part of the presentation.

Thank you, Philippe. I think that most of the highlights have been already given.

I directly jump on page 9 just to give you the breakdown of the revenue bridge. Strong organic variation, EUR166 million, that's 4.6% up, and of course a strong currency impact as well coming from mainly the euro-dollar rate.

In terms of our different activities, it's on page 10, the breakdown of the 4.6% organic growth you see there, it's 5.7% up in propulsion. It's 0.8% down in aircraft equipment.

That figure was 1.2% down in H1. In defense it's 1.2% down, and that was 1.7% down in H1.

And in security it's very strong organic growth, 17.7% up. It was only 7.9% up at the end of H1.

I move on to page 11 for the year-to-date situation. So it's 4.9% organic growth, 7.8% for aerospace propulsion.

It's down 1% for equipment, 1.5% for defense. And it's up 11.2% for security.

And that is an overall increase in revenues, including currency impact, of 16.2%, broadly the same trend that we've seen at the end of H1, with strong revenues revenue, strong momentum in services and security activities. Just a word on page 12 for our hedging.

The only thing that has changed is our forecast for 2018, with an achieved hedge rate of $1.08, which has materially improved since June thanks to our hedging policy. You see that the firm part of our hedge book in 2018 has been -- has decreased in order to increase -- to improve the achieved rate.

We keep the same target of the low $1.20. I think that's, for the financial part, that's the main things I wanted to outline.

Thank you very much, Bernard. So in terms of outlook for the full year, we confirm the outlook we gave you already.

The adjusted revenue should increase by a percentage of high single digits at an estimated average rate of $1.20 to the euro. If the average rate remains as it is today, around $1.12, the revenue would consequently grow by a percentage in low double digits.

The adjusted recurring operating income is expected to increase by a percentage in the mid-teens at a hedge rate of $1.25 to the euro. And the free cash flow is expected to represent 35% to 45% of the adjusted recurring operating income.

Again, before we come to the question session, a next second quarter, as seen by us, with two main points, a very strong revenue growth and the LEAP program proceeding according to plan. Thank you.

Let's pass to the question session.

Yes. Thank you very much.

Good morning, everyone. Just one question from me on the civil aftermarket.

In terms of characterizing the source of the continued strong growth that you've seen, is it driven more by unit volume increases, that is more engines that are coming in for overhaul, or is it driven more by greater expenditure for engine?

Well I think it's more the second point. If we look at the quality of shop visit we are experiencing since the beginning of the year, in June we told you 7%.

Today we have a little bit increased this percentage to 8%. So the increase of the quality of shop visit we see is about 8% higher than last year.

So to answer your question, it's more the quality or the value of each shop visit which makes the difference.

Thanks very much. Good morning.

I have a couple of quick questions. First of all, again on the aerospace aftermarket, a lot of this growth has been coming from deferred maintenance on the CFM56.

How far do you think the airline industry is through this deferred maintenance? How long do you think we have to go?

Well when we look at the quality of shop visits, we just mentioned 8% is not that big. And I don't see in this 8% a kind of deferred maintenance that will be done, because it has not been done in the past and we are recouping some of the shop visits which were supposed to be done.

We do not see this point as a major item of the strength of our business today. It's not something major, if any.

All right. And then secondly, on the Silvercrest you said that it will take a little money and a little time.

I was wondering if you could quantify how much a little is.

That's a good question. Again, I said and we confirm that this will have no impact on our guidance of this year and we said a very limited one on the next few years.

We -- I don't have the number yet. But to give you a kind of trend of what it could be, I would say that it will not change the R&D curve and the reduction of the self-funded R&D we are forecasting for the next coming years.

And another way to say, I could tell you that a few months of good CFM spares will easily absorb the sort of amounts this will cost over the next few years.

Yes. Good morning, gentlemen.

I would have three questions. The first one on hedging.

In the slides in -- slideshow in June you were saying that it was the 2018 hedging that was done at $1.18. In this one you said 2018 plus.

Does it mean that all the EUR8 billion which are shown on the slide are just for 2018 or are they extended to more than that? And is there something that we should take into account in terms of the cost of restructuring the portfolio in the [2015] accounts?

That's the first one. Second one is on Silvercrest.

Should we expect any additional schedule slippage or is this where you were guiding for in April? And the third one is what is your take on an increase of the production rate of A320 to 60?

Is it something that you are supportive of or are you still reluctant?

Okay, Olivier. It's Bernard here.

I will answer the first question on hedging. You're right.

Now we're referring to 2018 and beyond because of the optimization of our option portfolio, hedge portfolio now starts to go beyond 2018. And you're right.

The thing I wanted to underline is that we have worked on the volumes, of course, but it has a positive impact of course on the achieved rate. You've seen that we have moved from $1.18 to $1.08 for the existing firm hedge.

So that's positive. But you're right; we are now starting to work beyond 2018.

Excuse me, Bernard, does that mean that the EUR8 billion that we see on the chart are not just for 2018 and that basically the --?

No, no. No.

Our target in terms of total volumes for the hedge portfolio for 2018 alone remains at EUR8 billion, but we are starting also to work for the next years.

Okay. Perfect.

Thank you.

Olivier, for the second and the third question, I will to answer. Regarding the schedule of Silvercrest, I said that what we have to do in order to meet the customer spec will take a bit of time and a bit of money.

I said a bit of time. When I say that, I would guess today it's in the range of 12 months, the time we need to make the product conform to the spec.

18 months really is the max, but my range is 12 to 18, with a target to not exceed 12 months. The third question was related to the production of the neo and the MAX.

You said Airbus and Boeing are talking about exceeding a production rate of 50 aircraft a month. Yes, we are in discussions with both of them to try to come to an acceptable solution which will not put at risk our ramp-up and our supply chain.

We try to satisfy the customers, but, as I said in July, we could not accept to jump to 60 at the speed that they wanted us to do it because we thought it was risky. It was not a question of willing or not willing.

Of course we will try to please our customers, but we cannot go above a certain level of risk. So we are working with them.

And I hope, I wish we come to a positive conclusion which will satisfy the customers and do not introduce an extra risk for us.

If I may -- thank you very much, Philippe, for that. If I may go back to the Silvercrest, the 18 months that you look at, are they on top of what has been announced in April?

Yes.

Or are they -- they are on top?

Yes. It's 12 months.

I hope it's going to be no more than 12 months to go, which has been said earlier.

So something in 2018 basically?

12 months, yes.

Thank you. Good morning, everybody.

I have two questions, please. You said LEAP is on track, but could you please give us a little bit more detail on that in terms of on the neo, how is the fuel performance and the weight?

Can you give us a little bit of detail on that? Is that pretty much in line with the parameters or are there things that need some more work?

And the second question is just on security. Clearly very strong growth that we've seen this year so far.

I know it can be quite lumpy because of these single large orders. Could you please give us some idea of what the normalized organic growth number you're looking for going forward?

You used to talk about 10%. What that would be, the normalized level that you're hoping for in the medium term.

Regarding your question about the neo and question on our focus on the performance, we are at this stage totally confident that we will meet, at the entry into service, the requirements of the specification of Airbus. What does it mean?

It means that we are where we are. We are in line with what we had scheduled in terms of development, in terms of improvement of the performance.

We are not yet at what we need to be in nine months. But we know how to get there and we have sufficient resources in terms of improvement, technical improvement to be confident on our ability to meet the performance requested by our customer.

In terms of security, if you look at the market, the overall market of security and identification, detection and security, the average growth area is in the range of 7% to 8%. We are doing better.

It's obvious. We have the chance to have big contracts which are very successful in terms of identification.

I could mention the Chile identification contract, which is going extremely well, the Albanian one. We have won many, many contracts which are really providing us with a lot of sales and good sales.

In terms of detection, we were quite low last year in delivering the big tomograph we supply for our customers for airports, and especially in the US with the TSA. The airports were not ready.

We told you that the infrastructure was not ready to accept these new machines. Now they are, so we are delivering our machines.

And in terms of security, you know that the world is becoming more and more difficult in terms of security. And all the equipment, all the software, all the products we develop are really touching the goal in terms of customers.

And we are doing also very well in this field. So all together we are exceeding our average increase of business we should see year after year, and we are very pleased with that.

Could I please just ask a supplementary? Could I ask on the Silvercrest?

I know you've had two questions already, but you mentioned two things. One is the fuel burn is too high, and secondly the operational life span.

Again, could you help us to understand where exactly the fuel burn issue is? Is it in the new technologies that are new to yourselves and what about the operational life?

Where's the problem there? I just need to understand which bit of the engine is causing the first problem and the second.

Okay. Yes, we -- I can spend more time on this.

But again, when you talk about performance and operational life, these are the resultants of the design and the resultants of the design. So if you want to go more into the details and understand, we need these additional developments, we really focus on achieving a better control over [case distortion] at high temperatures.

We had some problems. And controlling it, case distortion, means better controlling clearances to avoid leaks and air recirculation that do not contribute to thrust.

So clearance control and optimized airflow play a major role in the performance [retention]. So that's what we are going to work on.

We know what to do. It's just a question of a bit of time and, as said, a bit of money.

Yes. Good morning.

Two questions on my side. The first one is on the guidance.

You are maintaining the guidance and you had a very strong performance again in aftermarket this quarter. We may expect probably a solid order performance in Q4.

So I was wondering whether you're not raising the guidance because precisely Silvercrest is having some kind of program issues. So that was the first point.

And the second point was actually on the LEAP. You mentioned that it is on track.

Fuel consumption, you talked about it. I just wanted to know whether the unit cost was also on track.

I understand that you're using some kind of special material on that plane -- on that engine, sorry. And is it -- are you happy with the unit cost you are seeing on those special materials at this stage?

Thank you.

Okay. I will answer the question on guidance for civil aftermarket.

As you said, we confirm our guidance. You know that we said that comps will be tough in H2 and in Q4 especially.

Q4 last year was strong. That's why we don't think we should change our guidance today for civil aftermarket since there's nothing to see with the Silvercrest issue.

Regarding -- Christophe, regarding your question on the LEAP, you asked are we happy with the pricing. We -- it's difficult for me to say that I'm happy with pricing from suppliers, but I have no surprise.

We knew what we would get and we knew when we selected some specific material, the pricing of this material. And we have absolutely no surprise.

And all of this pricing, including the unit cost of the LEAP engine, is in line with our business plan.

Yes. Good morning, all.

I have three questions. The first one is, sorry, it's again on Silvercrest.

I just wanted to make sure that the EUR696 million on balance sheet is related to past capitalized R&D. And second, you said no cash impact for this year but I suspect there will be some cash impact in the coming years when using your provisions.

So that's my first question. My second one is to come back on Christophe's question on the EBIT guidance, not revised up despite -- or very slightly in H1 despite very strong growth in aftermarket.

So I'm not questioning the civil aftermarket growth guidance, but more the EBIT guidance which looks to me a bit shy. So are you -- is it a matter of caution or is it something else?

I'm not sure I've got you on that one. And my third question is related to the LEAP-1 billion.

When do you think this engine and the aircraft MAX will enter into service in 2017? Can you be a bit more precise as we approach this period of time?

Thank you.

Okay. So I will answer to the first question.

The EUR696 million of assets related to Silvercrest at the end of June were both intangible and tangible assets, but mainly intangible and, as you said, R&D that were capitalized. By the way, you know that since April 1, 2014, we do not capitalize anymore R&D expenses for Silvercrest.

And what you refer to in terms of the use of provisions, yes, it will -- it could happen in the next years. But we think it's completely manageable when looking at the size of our Safran cash flow.

Regarding your -- Antoine, your second question and the fact that we maintain our guidance for the year. Are we shy?

I don't think we are shy. I've never been shy, but conservative?

Could be. I don't know.

We'll see at the end of the year. We prefer to be on the conservative side but on the very optimistic side.

It's the way we work at Safran. You know us.

And I'm not planning to change this way of working and the way of doing business.

Thank you. But just a question, it's not a matter of additional provisions on power-by-the-hour contracts that you are currently --?

No, no. Don't forget that we had a guidance at the beginning of the year.

We have already changed and improved and increased our guidance at the middle of the year. We prefer to stay on this safe side, if you call it a safe side, and deliver at minimum what we said we would deliver.

Regarding the LEAP-1 billion, you said are you in line and where are you in terms of development of this product? We are in line.

We should deliver before the end of this month the first two engines for the first Boeing 737 millionAX, which is scheduled to fly during the first quarter of 2016. We should deliver the next two engines for the second 737 millionAX before the end of this year.

And we are on schedule for certification and entry into service, which is today scheduled for mid-2017. No change in terms of schedule seen by the engine supplier.

Yes. Good morning, gentlemen.

I've got three questions. The first two are for Bernard, please.

Bernard, it's a philosophical -- well they're both philosophical questions. The first one is just your views on capitalized R&D, because if I take the comment from Philippe that it's a few months' worth of CFM profits, we could still be looking at writing off half of the R&D on Silvercrest here.

So just philosophically, as the new CFO, your view on capitalized R&D would be helpful. Secondly, and again it's a philosophical question, just your view on your FX hedging strategy, because what I'm really surprised by is that your FX hedge cover for 2018 has actually dropped compared to three months ago, which is very, very unusual.

Yes, you've got a better rate, but it seems odd the way you've done that. And then the third question is for Philippe, please.

Could you give us any comments at all about the EU investigation into the aftermarket, please?

Thank you, Dave. I'm not sure I really fancy philosophy this morning, but I try to answer the questions as I can.

On capitalized R&D, as everyone looks at cash, I don't think it's really an issue. But, as you said, when you capitalize R&D, you have to test it.

And we do that on a regular basis. By the way, as I said previously, we stopped capitalized R&D on Silvercrest one year -- more than one year ago.

So it means that we adapt, if you will, our capitalization policy when it has to be adapted. And that's what we've done.

So I don't think it's a question of being more risky or not risking some of the capitalization; it's according to IFRS rules and I think we do it very seriously. And of course, as you understand it from our press release we'll test the almost EUR700 million of assets on Silvercrest and then we will decide what kind of impact it could have on our 2015, but you know it's a one-off.

Then on FX strategy, I love the way you think it's a quite unusual situation. We have continuously said that we are optimizing our policy in operating a portfolio.

You know that there is a big gap between the achieved rate for today, which is due to hedging portfolios taken two or three years ago. And because of the very sharp decline in the US/euro spot rate it opens a window of opportunity in terms of optimizing the rate.

$1.08 is due to the euro/dollar rate at the beginning of 2015, of course. But again, what we say here is that the $1.08 is not our target because we know that we will continue to work on our portfolio of options.

But it's -- there is nothing very specific. By the way, you see that the total FX hedging portfolio was EUR24 billion at the end of June.

It's now close to EUR21 billion. So there is no neither hidden strategy or magic trick; it's just the way we optimize under the surveillance of our auditors and Board.

And we have a very clear policy and we optimize it.

I will come, David, to the more -- the less philosophical question, the one related to the European Commission. Yes, David, we received a questionnaire from the European Commission, which is a request for information related to MRO for large commercial aircraft.

We are in the process of responding to the European Community request. And of course we will cooperate in their efforts to understand the aviation industry.

That's the only thing I can say about this subject, and I hope you understand.

Just quickly, can you tell me the spares growth for the CFM56 in the third quarter? Then secondly, I think on the first-half conference call in July, Philippe, you said you expressed confidence that the margins in propulsion could be kept in the upper teens range in coming years despite the ramp-up of the LEAP.

And the guess is we're bit further through 2015 and maybe your internal planning process for 2016 and beyond is a little bit more advanced. Just wondering whether you could tell us about your confidence level in that again.

And then finally, with regard to the Commission's questionnaire, I'm just wondering whether you can give us any sense of whether the focus of the questionnaire is about the issuing of MRO licenses, about long-term services contracts or about the whole spectrum of activity in MRO.

Thank you. I will answer the first question.

In fact we do not disclose details inside the CFM56 -- the civil aftermarket indicator. So -- but for CFM, the trend is good.

Nothing really to underline here compared to what we have previously said on CFM. But we disclose figures on total civil aftermarket.

Regarding your -- Harry, your second question on what I said in July. I said that I would maintain what my predecessor used to say, which is that during this period where we are going to move from the CFM to the LEAP, we believe that we could maintain high double-digit margin in the propulsion business.

High teens.

High teens. High teens, yes, that's what you say.

High teens. So I maintain that, yes, we will -- at this stage, after three or four months later on the road, I do not see a change in this statement.

We are not going to say where we are today at over 20%. We are at over 20% at the end of June.

But to remain in the high teens, yes. It's a firm yes.

And your confidence level is about the same as it was in July or you're feeling a bit more confident?

Well, older I get in the job, more confident I get. In July I had only three months of seniority in the job.

Today I have six months in the job. Yes, I think even more confident today to achieve the mid-teens objective that we used to mention during this period of transfer from CFM to LEAP.

Yes. Regarding your last question, I cannot say more than what I said.

I'm sorry.

Hi there. Charles Armitage.

Going back to the Silvercrest again, and forgive me, I haven't been a gas turbine engineer for 20 years, but it seems trading life and fuel burn, fuel burn you increase -- to improve fuel burn you increase the temperature. To improve life you don't really reduce the temperature.

They're mutually fighting each other, yet you seem relatively relaxed about the solution. Again, can we just go through that again, please?

If I feel relaxed, it's just because I am totally confident in the expertise of my engineers. We are not telling you what we are telling you like this.

We have been working a lot. Again, we did a lot of testing.

This engine has more than 6,000 hours of tests. We know where we are.

We know what we have to do and we are going to do it. That's it.

When you mention the temperature that you need to increase for performance and some pressure which is to be not too high for life, we know that. That's the basis of an engine.

And again, we have to avoid the air circulation which [indiscernible]. I don't want you to think that it's a big, big thing.

No, it happens. We make engines.

We miss a little bit this one. You know we are not at the spec.

We are going to do it and we know what to do. And it's not a question of just taking it without any focus; we are totally focused on everything we do, including on this engine.

So thank you. Thank you, Charles.

Thank you, everybody. And again, good strong quarter and a good momentum on the LEAP program.

Thank you. Have a nice day.