PART IV. FINANCE - Safran
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PART IV.
FINANCE
CMD’16 | March 14, 2016 1
This document and the information therein are the property of Safran. They must not be copied or communicated to a third party without the prior written authorization of Safran.FINANCE IN SUPPORT
OF STRATEGY
Bernard DELPIT
Group CFO
CMD’16 | March 14, 2016 2
This document and the information therein are the property of Safran. They must not be copied or communicated to a third party without the prior written authorization of Safran.FINANCE IN SUPPORT OF STRATEGY Conservative accounting supporting transparency Hedging policy protecting performance Disciplined capital allocation sustaining growth Financial ambition creating success CMD’16 | March 14, 2016 3 This document and the information therein are the property of Safran. They must not be copied or communicated to a third party without the prior written authorization of Safran.
CONSERVATIVE ACCOUNTING
OE AFTERMARKET
Revenues booked at net contract price Revenues booked at net contract price
• including variable consideration (allowances…) Timing of revenue recognition depends on type of
All costs incurred are expensed contracts
• No capitalization of negative margins • “T&M”: at shop visit
• Long term service agreements (LTSA):
Margins booked at delivery ― ESPH: monthly billings
• Upon delivery if positive ― ESPO: fraction as monthly billings and remainder at shop visit
• No later than at delivery if negative
Margins
• T&M: at the shop visit
• LTSA: booked progressively
― Provisions to reflect future maintenance costs based on engine behaviour
& contracts requirements
Start up LEAP losses booked in P&L as incurred (2016-2020)
No anticipation of LTSA margins
CMD’16 | March 14, 2016 4
This document and the information therein are the property of Safran. They must not be copied or communicated to a third party without the prior written authorization of Safran.CONSERVATIVE ACCOUNTING
IFRS 15 PROJECT PRELIMINARY ASSESSMENT
IFRS 15 mandatory from 2018
2017 proforma for comparison Main areas affected
Opening impact on Equity at 01/01/2017
• Revenue based on milestones (Defense)
Implementation guidance yet to be finalized • Upfront revenues (R&D sales)
• Per Flight Hour service agreements
Project launched at Safran and ongoing
industry discussions
Some classification changes in the P&L
Key items • Some transactions with customers booked as charges could be
• Identification of performance obligations instead deducted from revenue (e.g. special warranties,
• Timing of transfer of control penalties…)
• Opening Balance Sheet
Early stage of analysis and assessment, next update at FY 2016 earnings
CMD’16 | March 14, 2016 5
This document and the information therein are the property of Safran. They must not be copied or communicated to a third party without the prior written authorization of Safran.CONSERVATIVE ACCOUNTING
Potential impacts of IFRS 15 implementation Takeaways
on current civil engines revenue
LEAP: 50-60% of aftermarket
on ESPH/ESPO
T&M: Limited potential impact
• Accounting under IFRS 15 expected to be close
Services to current T&M revenue recognition
ESPH/ESPO: recognition
of revenue when costs
are incurred (at SV)
Gradual transition for Propulsion
• CFM56 aftermarket will remain mostly
OE a T&M business
Limited potential impact
• LEAP will represent 20% of CFM fleet in the 2020’s
2020’s: P&L of services will remain dominated by current model
CMD’16 | March 14, 2016 6
This document and the information therein are the property of Safran. They must not be copied or communicated to a third party without the prior written authorization of Safran.HEDGING
PRINCIPLES INSTRUMENTS
To protect economic performance from €/$
Forward $ sales / Y+3-Y+4
volatility and provide time to adapt cost structure
to an adverse FX environment Accumulators: day after day hedging build up
To optimize financial benefits of hedging Options to increase coverage and/or improve
whenever possible without jeopardizing hedged rate
protection
Translation effect not hedged* No views taken on spot rate evolution
Transaction effect hedged through the coverage Benefits from long term volumes of net exposure
of net exposure to the $ (supported by backlog)
Mark to Market variations neutralized in adjusted Risk: loss of opportunities only
data
*except net investment hedge
CMD’16 | March 14, 2016 7
This document and the information therein are the property of Safran. They must not be copied or communicated to a third party without the prior written authorization of Safran.HEDGING
Yearly exposure: $7.4bn to $8.0bn Estimated impact on recurring operating income
Increasing level of net USD exposure for 2016-19 in line of target €/$ hedge rates
with the growth of businesses with exposed USD revenue €/$ EBIT impact
Target hedge vs previous
2016 & 2017 fully hedged
($bn) rate year (in €M)
3.7
5.7
7.4 7.5 7.7
Up to 250M
4.3
2.3 Up to 100M
2015 2016 2017 2018 2019
Target 1.25 1.24 1.22 1.17-1.20 1.15-1.20
€/$ hedge rates under conditions described in 2015 €250M to €500M of tailwind over 2016-2019e
annual results disclosure
CMD’16 | March 14, 2016 8
This document and the information therein are the property of Safran. They must not be copied or communicated to a third party without the prior written authorization of Safran.HEDGING
Reminder of the €/$ spot and forward rates seen in 2014 and 2015
2014 average spot 1.33 (High 1.39, Low 1.21)
2015 average spot 1.11 (High 1.21, Low 1.05)
In 2015, the forward rate for 2018 was on average 1.16 (High 1.25, Low 1.10)
In 2015, the forward rate for 2019 was on average 1.19 (High 1.28, Low 1.13)
Target ranges at “1.17-1.20 for 2018” and “1.15-1.20 for 2019” include opportunistic
hedges at 1.08 (as communicated in October 2015) and optional strategies at higher rates
set up in the course of 2014 which matured at the end of 2015
Where the achieved hedge rates for 2018 and 2019 will lie in the target ranges will depend
on whether the €/$ remains below 1.25 in 2016 and 2017
CMD’16 | March 14, 2016 9
This document and the information therein are the property of Safran. They must not be copied or communicated to a third party without the prior written authorization of Safran.CAPITAL ALLOCATION
Technological differentiation through R&D
• R&D spending peaked in 2014 and will continue to decline during period of the plan
• Discipline in sustaining engineering
• New opportunities to be selected under strict conditions
Capital Expenditure to support growth
• CAPEX peaking in 2016 – stabilization at a lower level going forward
• New products ramps, production rate increases, international footprint
Growing cash returns to shareholders
• Confirming 40% pay out ratio for dividend distribution going forward
Acquisitions
• In core activities only
• Under strict conditions of IRR and implicit rating
CMD’16 | March 14, 2016 10
This document and the information therein are the property of Safran. They must not be copied or communicated to a third party without the prior written authorization of Safran.CAPITAL ALLOCATION
R&D spending In €M
CAPEX spending
In €M
1000
1,000
2000
2,000 €2,100M
Total R&D effort
1,500
1500 €1,356M
1,000
1000 500
500
500 Total self-funded €495M
R&D
Capitalized R&D
0 0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016e 2017e 2018e 2019e 2020e
2015 2016e 2017e 2018e 2019e 2020e
Sustained R&T for the long term Supporting LEAP ramp up
Decrease of development spending as programs Production rate increases (A320, 737, A350, 787)
enter into service Production capacity (carbon)
Self funded R&D trending towards €1bn Strict investment criteria
Expensed R&D peaking in 2017 Trending towards 3% of sales by 2020
CMD’16 | March 14, 2016 11
This document and the information therein are the property of Safran. They must not be copied or communicated to a third party without the prior written authorization of Safran.CAPITAL ALLOCATION
€Bn
2016-2020 trends
Realized 2011-2015
WC
CFO* Trend 2016-2020
Growth in cash from operations (CFO*)
Higher working capital (WC) WC R&D**
(0.1) CAPEX
Lower capitalized R&D and CAPEX
after 2016 R&D**
CFO* CAPEX
(6.6)
FCF conversion rate: FCF
10.2
• above 40% in 2016 Dividend paid
(2011-2015)
• to average 50% over 2016-2020 FCF
3.5 (2.1)
More FCF generation offering increased
headroom Net debt: (0) Net debt: (0.7)
Dec 31, 2010 Dec 31, 2015
* Including expensed R&D ** Capitalized R&D
CMD’16 | March 14, 2016 12
This document and the information therein are the property of Safran. They must not be copied or communicated to a third party without the prior written authorization of Safran.FINANCIAL AMBITION
MAIN ASSUMPTIONS 2016-2020 VIEW
Scope Steady organic revenue growth…
• 2016 outlook is applicable to the Group’s structure as • Aerospace: OE production ramp-up (narrowbody &
of December 31, 2015 and does not take into account widebody, military, helicopters), growth in services
the impact in 2016 of the finalisation of ASL • Defence: executing on contract wins (Rafale, Patroller,
• For the 2017-2020 period, ASL is expected to be Paseo…)
consolidated using the equity method (50%)
• Security: strong organic growth based on existing
FX contracts and new products
• By convention, average spot rate of EUR/USD spot
rate of 1.11 in 2016, 1.12 for 2017-2020
Providing strong base for progress in
profitability
• Including benefits of medium-term FX hedging policy
• Transitory pressure on Propulsion profitability
Accounting • Steadily increasing contributions of Aircraft Equipment,
• Safran’s outlook is based on the Group’s current Defence and Security
accounting practices
• No anticipation of IFRS 15 potential impacts
CMD’16 | March 14, 2016 13
This document and the information therein are the property of Safran. They must not be copied or communicated to a third party without the prior written authorization of Safran.FINANCIAL AMBITION
CFM56 / LEAP OE contribution Cost of production:
to gross margin Learning curve of LEAP
CFM56
LEAP - 40%
CFM56+LEAP
Standard cost of production
2015 2016e 2017e 2018e 2019e 2020+ 2016e 2017e 2018e 2019e 2020e
Gradual reduction of CFM56 contribution Initial production costs > standard cost
of production (double sourcing; volumes)
Transitory losses on Leap OE
Targeting a 40% reduction in production
Break-even on LEAP OE production
by end of decade cost by 2020 (double sourcing; learning curve)
CMD’16 | March 14, 2016 14
This document and the information therein are the property of Safran. They must not be copied or communicated to a third party without the prior written authorization of Safran.FINANCIAL AMBITION
Aircraft Equipment Defence Security
15% 15% 15%
10% 10% 10%
5% 5% 5%
0% 0% 0%
2015 2016e 2017e
2015 2017 2018e 2019e
2019 2020e 2015 2016e 2017e
2015 2017 2018e 2019e
2019 2020e 2015 2016e 2017e
2015 2017 2018e 2019e
2019 2020e
Growth in services Push export sales Existing contracts profitability
New programs contribution Dual use technologies New products
Productivity gains and cost control measures across all businesses
CMD’16 | March 14, 2016 15
This document and the information therein are the property of Safran. They must not be copied or communicated to a third party without the prior written authorization of Safran.FINANCIAL AMBITION
Temporary headwind from LEAP transition Indicative profile of Group gross margin
and expensed R&D
Offsetting factors: growing contribution
of civil aftermarket and other businesses OE CFM56 & LEAP
Tailwind from FX
Other OE
Propulsion margin to remain in the mid SERVICES
to high teens during transition
Group margin consistent with the record set
in 2015 during transition and trending above 2015 2016e 2017e* 2018e 2019e 2020e
15% when transition is completed
* Starting 2017, excluding the contribution of assets contributed to ASL.
For 2017-2020, ASL is expected to be consolidated under the equity method.
CMD’16 | March 14, 2016 16
This document and the information therein are the property of Safran. They must not be copied or communicated to a third party without the prior written authorization of Safran.2016-2020 AMBITION
Revenue target above €21 billion in 2020
• Assuming average spot rate of USD 1.11 to the Euro in 2016 and 1.12 over 2017-2020
Recurring operating margin trending above 15% in 2020
• Including benefits of medium-term FX hedging policy
EBIT to Free Cash Flow conversion averaging 50% over 2016-2020
• Subject to customary elements of uncertainty on the timing of downpayments and the rhythm
of payments by certain state customers
• Future opportunities will be evaluated on their merits and investments decided as appropriate
CMD’16 | March 14, 2016 17
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