Safran S.A.

Peter Campbell - Vice President, Financial Communications Philippe Petitcolin - Chief Executive Officer Bernard Delpit - Chief Financial Officer

Ben Heelan - Bank of America Merrill Lynch Olivier Brochet - Credit Suisse James Zaremba - Barclays Robert Stallard - Vertical Research Tristan Sanson - Exane BNP Paribas Harry Breach - Raymond James Celine Fornaro - UBS Sandy Morris - Jefferies

Thank you. Good morning, and welcome to our call to present our third quarter 2017 revenue announcements.

We will be discussing the press statement and presentation that we distributed this morning and published on our Web site. We want to draw your attention to the disclaimer page of the presentation that contains important information and that qualifies the information given therein.

In particular, the presentation contains forward-looking statements that is subject to risks and uncertainties as more fully explained on the disclaimer page. Please also note that the purpose of this call is to discuss our revenue announcement and that we will not be repeating old information or giving new information on the proposed transaction with Zodiac Aerospace.

You may always find the latest public information regarding our proposed transaction in the dedicated investor section of our Web site. And with that, I hand over to Philippe.

On the call this morning there is Philippe Petitcolin, Safran's CEO; and Bernard Delpit, Safran's group CFO. Over to you, Philippe.

Thank you, Peter. Good morning, everybody and welcome to our conference call.

Bernard and I will present Safran's business highlights and revenue performance for Q3 2017 and afterwards of course we will answer your questions. To start, as we expected, Q3 revenue growth was very strong.

Up over 11% organically for the group and for all our business which contributed to this growth. The growth we see over the first three quarters of the year has led us to announce today that we now see full year revenue growth above the level we guided for, so we are raising our outlook for 2017.

I will come back to that at the end of the presentation. So let's start with the revenue highlight.

Q3, strong organic growth of 11.3% at more than €3.8 billion coming from all the activities of the group. On nine months period, the reported revenue growth was 3% but I remind you that we had our space launcher activities in our revenues of H1 2016 until we formed the ArianeGroup joint venture with Airbus.

So the organic growth over the first nine months of the year is slightly more than 5% and mostly driven by services in propulsion, aircraft equipment and defense. An update on the LEAP program.

We delivered, so key points, we delivered exactly 110 LEAP engines in Q3, 49 for Airbus, 61 for Boeing. Bringing the deliveries of the LEAP engines to a number of 257 and the end of September 2017.

For the LEAP-1A we are 16 airlines in operation with more than 335,000 flight hours accumulated to date. On the LEAP-1B we are 8 airlines in operation and for the LEAP-1C we delivered our second shipset of IPS.

I remind you that we supply not only the engine but also the nacelle. So we supplied the second shipset for the second flight test aircraft.

Also business highlights for Q3 2017. The CFM56 remains nevertheless our number one production engine with 366 engines produced in Q3 and a total of 1076 engines for the first nine months of the year.

We launched new high power helicopter engines called the Aneto engine and we got our first launch customer, Leonardo, for their machine the AW189K. As disclosed at the NBAA, the Silvercrest engine certification will be delayed.

And finally on this page a very important indicator. The growth in our civil aftermarket has grown by 14.5% in Q3.

So growth of 14.5% in Q3, bringing this indicator to a growth of 10.4% over the first nine months of the year. Other business highlights.

We are extremely pleased with the first flight of the A330neo where we enjoy a lot of equipment, going from the nacelle, landing gear, carbon brakes, electrical systems. So we are very pleased with the success of this brand new Airbus.

We signed also during this quarter a lot of new carbon brakes contracts confirming our position of the world leader in carbon brakes for commercial aircraft. That’s the main highlights of the quarter from me and I am going to pass to Bernard who is going to give you more information regarding our financial performance.

Thank you, Philippe. Good morning, everybody.

On page 10, just to mention that the main point to be underline here is the move of spot rate into Q3 but it leaves average spot rate year-to-date close to 2016. Page 11, Q3 sales, €3815 million.

Up 8.5% or 11.3% organic. Currency impact is negative mainly coming from dollar.

Year-to-date €11853 million, up 3% or 5.1% organic, scope impact negative coming from the space activity. Page 13, breakdown by activity.

Propulsion, €2,303 million, up 12% or 14.4% up organic. Equipment, €1,225 million, up 1.4% or 5.3% organic.

Defense €281 million, up 11.1%, organic 12.6%. For propulsion, OE revenue up 13.3%.

So this is up 11.1% and you can read on the right side of Slide 13 the other growth drivers and offsetting factors including lower volumes of high thrust engines and the headwinds in helicopter turbines as well, and lower shipments of A380. Year-to-date, propulsion, €6,994 million, up 1.2% or 4.9% organic.

Equipment, €3,940 million, up 5.1% or 4.6% organic. Defense, €905 million, up 1.8% or 7.9% organic.

Let's spend some time on page 15. It was a busy quarter for the treasury team.

We replaced all instruments knocked out in the summer and firmed up hedging for 2019 and 20. As you can read in the box, we have restructured the maturity and levels of barriers to adapt the new FX conditions.

As a result no change. 2017 of course remains hedged at $1.21.

2018 remains hedged at $1.18 and for '19 and '20 we remain with the same range of targeted hedge rate with a maximum of $1.18. And now I will leave the floor to Philippe for the outlook.

Thank you, Bernard. Looking at our 2017 outlook.

As I mentioned earlier, we have decided to raise our expectation for 2017 adjusted revenue on a full year basis. The reported adjusted revenue to regrow above 3% at an estimated average rate of $1.10 to the euro.

Previously we said 2% to 3%, now we say above 3%. Excluding the effect of the equity accounting of ArianeGroup from July 1, 2016, the revenue growth is expected to be in the mid-single digits.

Previously we used to say low to mid single digits. Second point I want to mention is the total headwind for 2017 on our adjusted recurring operating income coming from the CFM56-LEAP transition including potential additional actions to ensure time on wing, is likely to fall in the range €350 million to €400 million, slightly higher than the previous assumption which was between €300 million and €350 million.

We confirm our previous expectations for 2017 on the adjusted recurring operating income which will be close to the 2016 level. And regarding the free cash flow, we confirm our previous guidance that free cash flow should represent above 45% of our adjusted recurring operating income.

This is basically what we wanted to tell you this morning. Bernard and I, we are now waiting for your questions.

Just coming back to what you just said for LEAP. You said the extras cost is potential cost.

So is this a provision? And can we talk a little bit more about what's driving this cost.

How are underlying LEAP costs and any comment on how to think about this into 2018? And then secondly on the guidance, there's been no change to the profit guidance for the full year but aftermarket clearly very strong, and then you've got this 50 million headwind.

So is there anything else within the numbers that's offsetting this 50 million headwind that's keeping the group guidance for EBIT unchanged? Thank you.

Thank you for your question, Ben. Regarding the first point or your first question.

Yes. It is only a provision at this stage.

What we have observed to be totally clear on this point, we have observed a premature loss of coating on the high pressure turbine shroud which is made by our partner in CFM on some engines. So we have decided to go on the conservative side, the safe side.

And we have decided to take provision on the full quality of engines that we believe may, we are not sure, we have only a few cases as of today, may be impacted by this small product. So this is what we did.

And we do not expect at this stage any impact on 2018. Your second question regarding the guidance.

Yes, you are right, the level of spare activity is really good since the beginning of this year. We have not taken anything in addition to the point I just mentioned regarding our focus for the operating results.

But when we say close, you know it's something, it's difficult to explain but when we say the level of operating income should be close to 2016, close could be under, could be over. So when we said close at the beginning, maybe we are a little bit under today.

I believe we may end, of course we don’t know yet what's going to be the last quarter of the year but we may end over 2016.

I would go for two things, please. The first one is one this LEAP headwind.

Just to understand if there is anything else in terms of lack of volumes in the shops at the moment or production cost slipping a little or learning curve not being met. That would be the first question.

And the second one is also on LEAP, on the quality escape that has 1A and the 1B. How do we stand in terms of the recovery there or are we still behind or is it basically behind us.

The first -- good morning, Olivier. Regarding your first question on the LEAP, I think I told you last quarter when we presented our H1 results that it was operationally challenged every day.

It remains a challenge every day. We are committed to deliver more than 460.

At the beginning of the year we said 450 to 500. Today we feel more than 450 engines during the year.

We are still in line and I don’t see, as of today, why we would not do that. So, yes, we are going to deliver more than 450 engines in 2017.

We don’t have lack of volume. We have, of course, this learning curve, which is also a challenge.

But we are in line with everything we committed for at the beginning of the year. And when we said at the beginning of the year, $300 million to $350 million, it's because there are always uncertainties in this kind of challenge when you have so huge learning curve and ramp up at the same time, to accomplish.

Regarding your second question on the disc. We had two issues on this.

We started with an issue earlier in the year that we disclosed on quality of our supplier for the low pressure turbine disc which was made by Safran. Only Boeing was impacted potentially by this quality escape.

Most of the engines are back with a customer. I think there may be a few, less than five, which are still to be retrofitted.

But it's really behind us. The second quarter was related to the HPT discs made by our partner and for me, the same thing.

Most of this issue is really now behind us.

If I may follow up. Is this generating some cost for you to compensate the OEMs and this is included in the 350 to 400 or is this something that...

Of course it is included. Everything is included.

Yes. And it's not major.

My first question is just on the mix of what's driving, the higher spare volume in CFM56 in terms of the age. Is that coming, for example, from older engines perhaps, we have seen some of them with your peers.

And the second question is, in terms of the equipment division, the mix of, I suppose OE to services has been very stable year-on-year. And I was just wondering if you could remind me on the medium term outlook in terms of where that mix goes.

Thank you.

Thank you, Jim. The first question regarding the spare, no, I would say that the increase we enjoy in the beginning of the year is coming from what we call the second generation of CFM56, they are not coming from the old engine but from the latest generation, called the second generation of CFM engines.

It has been the case for many years now. The increase, the growth in the spare is coming from this new generation of CFM56 engines.

Second question related to equipment and the split between OE and spares in equipment, maybe I will let Bernard answer more in detail but you have to understand that some of our businesses are really, it's the norm you see everywhere in the world in the equipment business such as landing systems. But we have two specificities.

The first thing is coming from our electrical system and you have to understand that in wiring electrical system there is almost zero spare in this business. It's really a business where you do most, not 100% but most of your business with OE.

We don’t sell harnesses but airlines as a service. And the second business where we have also some differences with the broad numbers that you see everywhere in the equipment business is coming from our nacelles business.

Where until now we were for some of the nacelles, a second tier supplier to another equipment manufacturer. So our level of -- our percentages of services was lower than what it should be.

With new businesses, we have warned by customers which has nacelle for the A330neo or the nacelle for the A320neo LEAP, we are now a tier one supplier and we really enjoy everything related to this status in terms of services. But Bernard, maybe you have the numbers?

Not much to add. It's on page 21 of the presentation.

So the mix of usage table. It's 31%, about 31% in 17%.

It was approximately the same figure in '16 and going forward we expect it will remain in the range between 30% and 33% or 35%.

My first question regarding the loss of coating on the shrouds. Does that relate to both the 1A and the 1B there into the LEAP or is 2A specific there.

And the second question regarding Silvercrest. Is that resulting an additional R&D cost in 2017 and into next year?

Thanks so much.

First question, Robert. Potentially this problem of premature loss of coating could affect both 1A and 1B.

Until now we found only some cases on 1A. That’s the only thing I can tell you.

I don’t know more than that. So we have found nothing so far on 1B.

But in our provision, we have taken both. Again, being on the conservative side.

Slivercrest R&D, yes. If we have to, and we will have to work to improve our HP compressor performance and to do that we will have to spend more money in R&D 2017 and potentially of course also in 2018.

For 2017 this will not change our forecast and our guidance.

And just a quick follow up on the Silvercrest. Has there been any progress on maybe damages from the customers that are impacted from this and has Textron been discussion with you whether they might want to switch the engine on their planned aircraft.

Not at all. In fact, Cessna has confirmed and publicly confirmed that it changes nothing.

We are totally committed to the program and to our engine, and we are totally pleased with what we are showing them so far regarding the performance of the engine. But I will remind you that their entry into service is later than the one of our first customer.

Three questions. First one is a follow up on the LEAP and the coating issues.

So first, I think that some of the shrouds you are using there are made of CMC but can you say was there connection between these coating issues and the usage of ceramic matrix components in the engine. And can you tell whether you have a second source for this coating or this component and whether this second source has the same problem.

I know that you are using a lot of dual sourcing on this engine. That’s the first block of questions on the LEAP.

Second one would be on the overall usage of capacity in the CFM assembly line. So we have been discussing since the Paris air show about the potential to run faster the total CFM production by either adding more LEAP or ramping down more progressively on the CFM56.

What is your view right now? Do you think you can push a bit further the assembly line or are you pretty saturated on the next two three years on the existing plant.

And the final question will be in the Slivercrest delays. Just to understand where the issues are coming from.

I think you spoke about few months of delays in the press conference but they will have to have a confirmation of that. And do you see a risk of further provision for the problem?

Thank you, Tris. First question on the shroud itself.

There is no issue with the shroud is really in CMC, as you said. It's ceramic matrix composite metal.

Again, we are not in charge of the development of this section of the engine and not in charge of the production. So for all very specific questions regarding quantity of sources, I think you should refer really to our partner who is in charge of the development.

But there is no issue with the shroud itself. It's just a question of the coating.

The coating is made with two layers and there is today a premature loss of this coating. But there is nothing wrong and no issue at all with the shroud itself, it's just a question of coating, which is kind of thermal coating which is put above the shroud itself and there is a peeling of this coating which is causing this provision we have taken.

But there is nothing wrong, not at all, no issues at all with the shroud itself. Regarding your question on the second source, we referred to our partner to get more data on that.

It's not really in the responsibility of Safran. Third question related to the production and the capacity of our production of CFM and LEAP.

I want really to remind you that for 2017, for the first nine months of the year when you take the production of the LEAP plus the production of the CFM, we don’t talk it by the CFM but CFM remains by far our number one production engine with more than 1000 engines already produced since the beginning of this year. When you take the sum of the two we enjoyed for the first nine months of the year a total quantity of LEAP plus CFM of 1333 engines, which is a record.

We never did so many engines in nine months of the year. Coming to the base of your question, are we going to do more?

We are committed, of course, in 2018 2019 and 2020 to achieve a total production of LEAP which is going to be above 2000 in 2020. There are some discretions with customers but at this stage no commitment on our side and I am not really in a position.

I don’t want us to commit for anything before 2021 until, and I hope you understand that, until we have better understanding of the strengths of our supply chain. It's not only yes.

It's not a question of final assembly. Final assembly is not a product.

We have invested in lines, moving lines in order to support this level of production. It's a question of the strength of the total supply chain coming from base material.

Coming from the forging, coming from the casting. And until we are 100% sure that all our supply chain, starting from the beginning will be able to support such level of quantity, yes, at that stage we will discuss that.

Until then we prefer to remain with the commitments we have made as of today. Last question is related to Silvercrest.

I never said few months. The question I had this morning was, are you talking about weeks or are you talking about months and I said we are talking about months.

I never added anything related to the quantity of month. We are in discussion with our customer.

We have first implemented all the points. Two years ago we said where do we improve.

We have solved all these issues but as of today, the performance of the HP compressor does not completely meet our expectation in certain areas of the flight envelope. So we are discussing with our customer, positive actions are underway.

But as of today, we have not -- we have different scenarios we are discussing and until we come to the final accepted scenario, it is too early to give you more information regarding this potential issue.

Just a couple of questions. Firstly on the aftermarket growth in the third quarter was very strong.

Clearly there was a relatively soft comparison in the third quarter 2016. I think that previously you were thinking about aftermarket growth this year, if I remember correctly, of about 7%.

I am just wondering have you sort of -- do you think that we might be seeing a slightly stronger performance. What are you sort of seeing in terms of shop visits looking into the months ahead?

And then my second question is completely different. I suppose one of the things we have seen in the last year or two has been more of the air framers looking to develop their nacelle capability and to start taking work back in house.

And as I am sure you know, one of your large Connecticut based competitors has started to confront this issue for certain programs. How are you thinking about what your OEM customers are doing in terms of looking to take nacelle work back in house either on in production programs or in future programs?

And how you are thinking about that relationship and that potential loss of revenue.

Thank you. Harry, for your two questions.

First one related to aftermarket. This is true, our guidance of the yes is 7%.

As of today we are above 10%. So accept there is a big drop in the last quarter.

We should be in the nice part of the show and have a guidance which should be a bit over this 7%. Don’t forget, as you said, that the comparison with 2016 was really in favor of the third quarter of 2017.

I will remind you that this first quarter of 2016 was a lot higher with more than -- if I remember, correctly, more than 12% increase compared to the year before. So comparison is going to be tougher but nevertheless, as of today with what we foresee, we think that we should be above the target we gave at the beginning of the year.

Second question, it's really a question you should ask to the air framers. But again our job is to be as competitive as possible provide the best products to our customers.

We are in discussion, we are talking to one of our key customer who has already decided to come back into the nacelle business. We hope we will be able to show our customer that we provide the necessary competitiveness in each and remain the supplier of choice for this customer.

But again, the final decision is with the customer. We do everything we can to support our customer and to show that we are, again, the best solution for the future.

But I cannot tell you more because the final decision is not with me.

And Philippe, so just as a follow on, if the customer choose to offer an in house nacelle on an in-production program, can it be economic for an airline customer to switch nacelle provider for the same fleet of aircraft or do they have to make quite a compelling price case in order to make it economic. What are the barriers to switching, I guess?

You know the airline does not buy the nacelle, the nacelle is part of an SFE product, it's not a BFE product. So the end customer will not see the nacelle comes from Mr.

A or Mr. B.

The only potential problem, I am thinking loudly to try to answer correctly your question, is for an airline which will have ordered and purchased some airplanes in 2020 with nacelle from Mr. A and in 2025, we will have the nacelle for Mr.

B. So they may have in terms of spare parts, in terms of services differences because it will not be any kind of interchangeability between the two products.

That’s an issue that the OEM, the air framer, will have to solve with its customer. But, again, you know nacelle is not a BFE product so whatever the air framer decides to pick as a supplier is on choice.

What percentage of equipment is nacelle at the moment? Can you remind me?

Pardon?

Can you remind us about roughly what percentage of the revenues and equipment the nacelle business is?

I think it's approximately 20%.

Two quick questions, if I may. The first one would be just a quick update on what you are thinking in terms of CFM56 deliveries for 2017.

And also just coming back to your comments on your LEAP deliveries for 2017, you said you will be aiming to get somewhere close to 450. However, GE said that they are looking for 150 LEAP deliveries in Q4.

So if I take that number and use your nine months, I actually get basically much shorter than that. So if you could just explain the difference where it's coming from?

And my second question would be, if you could comment on the pick up that we have seen a little bit on the helicopter business and it seems to be more military helicopters and if it's anything related to French budget spending on how do you see that going forward, both for helicopters and the French defense budget. Thank you.

Good morning, Celine. Regarding CFM56, we have an objective to deliver around 1400 engines this year.

It's something we forecasted and mentioned at the beginning of the year. We are still committed today to this quantity of engines for 2017.

Second question related to what GE may have said. I don’t know, I was not in their discussion with you.

What I understand is that, as you may have said, 150 more than last year. But I can tell you, I had some meetings personally with GE guys again last week.

We are both totally committed to deliver more than 450 engines total LEAP in 2017. So 150 may come, I said may because again I don’t exactly what does it pick up to but it may come to 160 more than last year.

More than 2016. Third question on helicopter business.

Our hope is it's picking up. You know we are now for more than two years in this situation of very low quantity of helicopters both for the civil and the military market.

There are some potential good news coming on, our selection by Leonardo by the way was a very good news for us. They have some decisions made by the French government to, as you may remember, made by the previous defense minister to buy more than 150 H1160 from Airbus Helicopters that they call HIL.

That would be also a very good news for us. So, yes, we expect in 2018 this business to pick up again but it's too early to tell for 2017 it will remain as a level we told you it would be.

Bernard, you want to add something?

Just to say that the comps were easy to beat because last year's services for helicopters. That’s also a reason why there is this pickup.

And as you said today, it's coming from a contract with the ministry of defense in France.

Thank you very much. But just on, Philippe, following you on your target for the CFM56 of 1400, you have done basically 1470.

So if your level of production in Q4 is similar to Q3, you are going to be way over that. Is that the right way of thinking of there should be a step down in Q4.

We delivered 1059 at the end of September, something like that. So we delivered 1076.

So if we deliver 1400, we still have 324 to make during the last quarter of the year. So 324 is really in line with the peak of the LEAP.

Don’t forget that the LEAP is going to replace the CFM. So we cannot continue at the same production level, the production of the CFM, and at the same time produce most 200 LEAPs during the last quarter.

Apologies for this, don’t usually trouble you. I mean just very swiftly, has the passion of CFM56 deliveries being what you expected?

Because aside from a step down late in 2016, we really haven't begun to make a transition in terms of what we are manufacturing. Is that what you expected and does that pose you extra challenges, extra costs or anything.

Or is it actually just good news, please?

Well, regarding the [function] [ph] CFM, we are really in line with what we were expecting. We have enjoyed new orders of CFM and something we already said last time we presented our H1 numbers, we said we enjoy more orders.

And it was specifically the case during the Paris Airshow. So we are very pleased with the level of CFM.

Today, there are many airlines which are still buying some, for example A320ceo not neo. And for the ones which are buying this ceo, most of them I think I said the level of about 90% market share in 2017.

Most of them buy these airplanes with our CFM engines. So these are news.

It means that you are going to produce CFM engines longer than expected and higher rate than expected at the beginning when we did this transfer and swing from CFM to LEAP. But regarding 2017, I remind you that in 2016 we produced 1693, so almost 1700 CFM.

We are going to produce four 1400 in 2017. So it's our addition in next year.

And fortunately there will be another addition. But it is life because at the same time we will have to adjust the production of the LEAP at something between 1100 and 1200 engines.

If I may add some figures. Year-to-date we have 200 CFM56 less than last year and we are 224 LEAP more than last year.

So we have started the transition and the mix is changing. So, yes, even if we have more orders for CFM56 than what we planned two years ago, the transition has changed, has started.

And the mix is actually changing.

Right. Gentlemen, I understand that more ultimately is better.

But we are very narrowly sort of obsessed with this transition that the whole industry is going through. If we make more CFM56 for longer, does it alter our cost profile?

Does it prolong the transition headwinds, is what I am vaguely driving at? But perhaps this is for the full year.

I understand your point. Of course it means that we will stop the production of CFM56 later than what we said.

So it means in a certain that the assembly line will be more with CFM56 longer than we expect but in terms of cost we don’t see that as a game changer.

Not at all because don’t forget that in terms of assembly, for example, we don’t use the same lines between the CFM and the LEAP so we cannot say that one is going to take some capacity away from the other one. In terms of cost coming from our supply chain, I can guarantee you that for our suppliers, I am very pleased if we order more CFM, so we do not expect them to come back to us and also our price increase or whatsoever.

Thank you, everybody. That ends our presentation of our Q3 numbers.

We want to thank you all for having attended this session and we wish you a nice day and a nice weekend. Thank you very much.