Safran SA

PAR:SAF

Earnings Call Transcript 2020-Q1

[Operator]

Welcome to the Safran Q1 2020 Revenue Conference Call. At this time, I would like to turn the conference over to your host, Philippe Petitcolin, Safran CEO; and Bernard Delpit, Group CFO. Mr. Petitcolin, please go ahead.

[Philippe Petitcolin, CEO & Director]

Thank you very much. Good afternoon, everyone, and thank you for joining us to this Q1 2020 revenue conference. First, I hope that you and your family are in good health, and that you have not been hit by this virus, that's the most important thing. I will start the presentation with Q1 business highlights on Slide 5, a few words on the COVID-19 impact in Q1, and then I will elaborate on our actions in the second part.Q1 sales ended at EUR 5.4 billion, 6.9% less than Q1 2019 and minus 8.8% in organic way. In January and February, operations were nearly unaffected by the COVID-19 crisis. Revenue growth was in line with our initial guidance with a 1.7% organic decrease year-on-year. As a reminder, the initial guidance was adjusted revenue to decrease in the range of 0 to 5%, similar variation in organic terms, that's what we had said in February.On the OE side, Propulsion was negatively impacted by LEAP-1B production rate agreement with Boeing, 10 engines per week versus around 20 to 23 engines per week in 2019. As anticipated, Aircraft Interiors also declined. First quarter 2019 has been very strong as we caught up Zodiac delays. We've been also impacted by the suspension of the MAX production for our Cabin business. As for services, civil aftermarket grew in line with initial guidance, high single-digit growth rate. Situation changed in March with COVID-19 starting to impact most of our businesses. We faced a 20.4% organic revenue decrease year-on-year for the month of March. Services were hit with a similar 20% reduction.Slide 6, propulsion business highlights. Let me start with an update on the CFM56 and LEAP program. In Q1 2020, combined shipments for CFM56 and LEAP was 326 engines versus 577 in 2019. As for LEAP engines in Q1, we delivered 272 engines, orders and commitment amounted to 117 units and the total backlog for the LEAP engines was 15,065 engines as of March 31. Our market share on the A320neo family is 60%. In Q1, 54 CFM56 engines were delivered compared with 153 engines in Q1 last year. And our index -- civil aftermarket index decreased by 3.3% year-on-year. Bernard will give you more details.On Slide 7, business highlights, equipment, aerosystems and defense division. In nacelle business, Gulfstream's G700 went airborne with our new nacelle for large-cabin business jets. In Landing Systems, we signed several contracts, notably with for Aegean for its A320neo carbon brakes. We have also extended the previous contract signed in 2017 with easyJet to provide MRO for its A320 landing gear. Lastly, aerosystem has been awarded a maintenance contract for the U.S. Coast Guard for the emergency flotation system of the HH-65 helicopter fleet.Going on Slide 8, Aircraft Interiors. Despite the fact of the impact of the COVID-19 on Aircraft Interiors OE activities, we got new contracts signed at the beginning of the year. Cabin has been selected by a major airline to provide galleys for their future 777-9 fleet and to supply its trolleys. We have also been selected by United to retrofit the overhead bins of their A319.Regarding seats, we have been awarded for several contracts. A major Asian airline selected us to provide business class seats for A330. We will also provide to a major European airline economic class seats for A350. For passenger solutions, Safran's RAVE In-Flight Entertainment product has been selected notably for A321neo, A330-900 and A350 line fit, and for Boeing 777-300 retrofit for various airline customers. Going now to Slide 10 to give you more details about the COVID-19 impact beyond the Q1 and to update you on our first responses. We are evolving in a landscape that has completely changed in 1 month. For the first time since February, IATA downgraded its air traffic forecast on April 14, anticipating in 2020 a 48% decrease in RPK. Air traffic would be almost stuck in Q2, and IATA expects the recovery to be gradual with a 33% decrease in Q4 compared to 2019. We are in a completely uncharted territory. Our customers are facing unprecedented challenges, but 1 of the positive points is the support from governments with major programs to be implemented in most countries. Those programs will definitively support the whole industry when the air traffic enters into a recovery mode.Regarding production, order book is solid notably for the narrow-body segment, where we are the most exposed. We already faced some consolation, but most of the adaptation should come from rescheduling deliveries.Slide 11. We reacted as quick as possible in this new environment. We notably have adapted our workforce and production purchases. We implemented furlough in all countries where these measures are possible. 35% of our world workforce is under furlough, 35% in short time working in France. So 35% on the worldwide basis, including 45% in France. We decreased the level of subcontracting. We did not see new temporary workers. We stopped external service providers. We reduced permanent and limited employment contracts, hiring freeze, layoff on all the company activities, in particular, through structural adaptation. We eliminated overtime, and we will continue. Additional strong announcements will be made in the next 2 weeks. In parallel, we worked very hard on our cost structure. Bernard will come back with numbers in more detail in a few minutes.Going to Slide 12, a few words on operation. The situation is gradually normalizing. Today, we have 45 of our 250 sites still closed, mostly in North America and India. Chinese sites are fully working and European plants are restarting. 28% of our workers are on site, and we have not impacted any of our customers, no impact on our customers. Regarding production, we are in close contact with our customers and supply chain to adapt in orderly manners to have the right level of resources to do the job; no more, no less. For the LEAP-1A, our production is consistent with the last announcement made by our customer. And as of today, we assume to manufacture around 1,000 LEAP engines in 2020.Slide 13, to end my presentation. COVID-19 impact intensified in April, and we think that the rest of the quarter will be similar to what we see in April. Thanks to our balanced portfolio, some of our activities should be more resilient such as helicopter turbines activity, military activities, gathering both OE and services in propulsion as well as electronics and defense. As I mentioned earlier, we have reacted very quickly and very strongly to this new environment. It should help us to resist in this crisis and to preserve our future. In the long run, prospects remain good for Safran, notably because of its CFM56 fleet, which is a key asset. It is a young fleet that has great future, and our backlog of LEAP engines has more than 15,000 units to deliver. Moreover, I believe that the main lines of our strategy remain and our commitments to green aviation alongside our customers will bear fruit in the long term. Thank you.Now I give the floor to Bernard.

[Bernard-Pierre Delpit]

Thank you, Philippe, and I directly jump to Slide 16. So adjusted revenue reached EUR 5.383 billion in Q1, down 6.9%. Organic decrease was 8.8% year-on-year, mainly driven by Propulsion 11.8% down, and Aircraft Interiors 15% down. As Philippe said, January and February were in line with initial expectations, with a slight organic decrease of 1.7%. COVID impact started to materialize in March, where revenue decreased organically by 20.4%. Currency impact was positive for EUR 119 million, thanks to favorable spot rate improvements against Q1 2019. Changes in scope were almost neutral.On Slide 17, Q1 revenue per activity. Propulsion EUR 2.497 billion, down 9.9%, with OE revenue down 23.7% due to LEAP-1B production rate decrease, and CFM56 continues to ramp down as well as wide-body engines decline. Services in Propulsion were stable, and I will come back to civil aftermarket in the next slide. Equipment revenues were EUR 2.187 billion, down 0.6%, with OE revenue stable. It was supported by strong nacelle deliveries, but offset by headwinds on several wide-body programs, A330neo and A350 landing gear in wiring, A330neo nacelle 777 wiring. The MAX production out also impacted our wiring business. Services and equipment were down 1.7%, notably carbon brake business in March. Aircraft Interiors revenue down 50% organically at EUR 694 million in Q1 consistent with our initial guidance for January and February after significant organic decrease and accelerating in March, notably in OE due to retrofit business decline, while services remain flat.Revenue decrease in Q1 was attenuated by more resilient businesses. Helicopter turbine activities experienced a slight organic growth, thanks to maintenance. Military engines slightly increased in Q1 with 10 Rafale engines delivered and military engine service were also up low single digits. The former electronics and defense business now included in the equipment division was also up low single digits.The next 3 slides are dealing with 3 topics I would like to comment. First, on Slide 18, with civil aftermarket. Q1 decrease of 3.3% was due to a strong decline in March, around 20% against March 2019, with spare parts down low single and services down mid-single digits. For the full year, aftermarket could decrease significantly with a number of shop visits decreasing strongly after high single-digit decrease in Q1. The scope of shop visit could reduce to what airlines can afford. In the context, factors to be taken into consideration are the following: global air traffic recovery pattern and load factors. For Safran, I remind you that domestic RPKs matters more than international flights. Government support to airlines could be a relief for their cash, allowing for urgent maintenance when grounding Ms, balance between OE deliveries and retirement rate will be key. From this point of view, we believe Safran is well positioned. The CFM fleet is young, with approximately 57 of CFM56 below 10 years old and only 7% above 20 years old. Last, engine performance, notably reliability will be key. CFM56 fleet in service is in a good position to weather the storm.Slide 19 deals with the second topic, which is our massive savings plan. Decided late December in response to the MAX protection out, it has been widely enhanced when the COVID first impact started to materialize as announced in March. It's now being implemented across all businesses on a worldwide basis. First, the main focus will be on procurement as we purchase 50% of our costs. We have reduced our raw material parts services purchasing program since January for the MAX and also for wide-body programs where we anticipated some softness in demand. It has been very quickly cut again in March, anticipating rate evolution now announced by clients. With a limited time lag, this part of our cost will be adapted to deliveries and revenue along the year. Second, reduction in investments close to 60% compared to 2019. To illustrate, we have postponed capacity investment both in France and Malaysia for carbon brakes. Same thing for our MRO capacity plan that targeted 2 new shops over 18 months also postponed. The 60% refers to commitments and should translate into a 40% decrease in cash out for tangible and intangible investments. Three, we have set new R&D priorities to reduce by 30% our expenses compared to 2019. For instance, we decided to postpone video spending as it appears to be a low priority for our clients in the current context. Conversely, we decided to maintain roadmaps related to green aviation. Therefore, we are still working on hybrid propulsion and dropping sustainable fuel as well as additive manufacturing. Fourth, Safran will reduce its operating expenses, OpEx, by more than 20% compared to 2019. It does not refer to purchases already mentioned, but it includes R&D expenses. By targeting a 20% decrease over the next 8 months, it means a 30% run-rate on a full year basis. It covers everything, but purchases, from labor costs to all kind of overhead and sales direct costs.The third watch item is liquidity on Slide 20. Safran liquidity position is strong and sound. Free cash was positive in Q1, including in March, where we faced a 20% drop in revenue. At the end of March, cash and cash equivalents represented EUR 3.2 billion. We managed to rollover our commercial paper, even if the market has been erratic for the last 2 months. Should the CP market be disrupted for a long time, we have, at our disposal, EUR 2.5 billion revolving credit facility line available until December '22 and undrawn as of today. We also successfully managed to syndicate a new EUR 3 billion credit line. This bridge loan with a maximum maturity of 2 years has been oversubscribed, which demonstrates confidence in Safran. I anticipate no major change in our liquidity position at the end of April as we have been able to issue commercial paper. We anticipate next month to be more challenging in terms of cash, but our target is indeed to maintain a positive cash generation over the full year as our savings plan will ramp up and catch up drop in cash in. There are still a lot of uncertainties, especially when it comes to overdues, new payment terms to support our clients and inventories, which we are very confident to have the right tools and processes to deal with the situation.On Slide 21 is a wrap up of our gross and net debt situation. Net debt was reduced by almost EUR 700 million in Q1. And end of March, net debt-to-equity was 28% and net debt over EBITDA was less than 0.8x. To conclude the financial part, a few comments on our hedging portfolio, which totaled EUR 27 billion at the end of April. The annual estimated exposure is revised downwards to reflect the impact of the crisis. Assumption is taken for an exposure of EUR 8 billion in 2020 and growing by EUR 1 billion to year thereafter. It has no cash nor EBIT impact. Safran is fully hedged until '23. We will not book any new hedging instruments over the year, and the targeted hedge rates are confirmed from 116 in 2020 to a range of 110 to 112 in 2022. Thank you.

[Philippe Petitcolin, CEO & Director]

Thank you, Bernard. Ladies and gentlemen, we are now at your disposal, of course, if you have any questions to ask us.

[Operator]

[Operator Instructions] We have first question from Olivier Brochet from Crédit Suisse.

[Olivier Brochet, Research Analyst]

I hope you are all well. I would ask 3 questions, if I may. The first one on the shop visit content comment that you've made. By how much do you think airline can reasonably go down versus a typical level that you've seen in 2019? Second question on the 737 MAX, we are seeing some cancellation of orders. If Boeing refunds PDPs, do you have to refund prepayments on your side as well? And third question, on long-term service contracts, do you have in there clauses that we need to be aware of or have in mind that would be positive or negative in the current environment?

[Philippe Petitcolin, CEO & Director]

Olivier, thank you. I will take the first one on the shop visits. Bernard will take the one on the MAX, the PDP. And on the last one, I think I can also maybe answer that we have seen no change and there is nothing specific we could tell you on this long-term service contracts that you don't know as of today. We have no new information whatsoever regarding an impact on these contracts related to the virus and the COVID. First question on shop visits, we don't know, in fact, how far the quality of shop visits could drop compared to what in mind and what we did in 2019. We have seen already, as Bernard said, a 10% -- almost 10% reduction at the end of March. We know that April is not a good month. It will depend how fast the airlines are going to recover and start flying again. We believe that the drama that we are seeing today will be not as bad for the domestic flights and for the international flight. And as you know, the CFM engines and the LEAP today are powering the short, medium-range aircraft, which fly domestic. So we hope that the airlines will start flying again everywhere in the world as soon as possible, at least on domestic flights. And that would mean that the impact on the shop visits will be something acceptable. We -- as you know, when we talk about services, you have 3 drivers; you have the quality of shop visits, you have the cost per shop visit and you have the pricing of the spare parts. As of today, the quantity is down, but remains at an acceptable level. I don't know how long it's going to last, and I don't know how deep it's going to be. Today, we believe we can survive with what we see.

[Bernard-Pierre Delpit]

On the MAX PDPs, per contract, we have to refund the PDPs received if the order is canceled. We are not involved in discussions, negotiations between Boeing and customers. And we have already seen some cancellation with impact on our cash in March and April. That's all I can say.

[Philippe Petitcolin, CEO & Director]

Another question?

[Operator]

We have next question from Robert Stallard from Vertical Research.

[Robert Alan Stallard, Partner]

A quick question, first of all, on the LEAP. I was wondering if you could give us a breakdown of the LEAP-A versus the LEAP-B deliveries in the first quarter? And whether there were any spare deliveries in the quarter this year?

[Philippe Petitcolin, CEO & Director]

We -- it's an information we do not disclose, the quantity of 1A and 1B because our customers do not want us to disclose this information. The only thing I can tell you is that, yes, the quantity included some spare engines and we basically produced the LEAP-1B based on the commitments we had signed with Boeing of about 10 engines per week. With that, I believe that you can find your way.

[Robert Alan Stallard, Partner]

Right. Okay. And then secondly, on the Interiors. You noted that business class seats were down quite significantly in Q1. Was this all linked to the A380 coming to an end and other wide-body rate cuts? Or was there some negative impact from retrofits and upgrades also being delayed?

[Philippe Petitcolin, CEO & Director]

Yes. Yes, it is both. It's both. It's not only the A380, which has been delayed, it's coming from both.

[Operator]

Next question comes from George Zhao from Bernstein.

[George Zhao, VP & Research Analyst]

So back in the global financial crisis, the CFM56 spares turned negative in late 2008, and I don't believe turned positive until early 2011 as the airlines continued to postpone maintenance. So as we think about how we're going to recover from this downturn, what do you think is similar and different today and how that affects the duration of this downturn? And related to that, how are you evaluating the risks of the fleet retirement today for the older 737 classic NG and the older 320? How much of the fleet do you think will not come back into service? And what would that mean for the aftermarket recovery?

[Philippe Petitcolin, CEO & Director]

Okay. Thank you, George. Regarding the reduction of the sales of spare parts compared to what happened in 2010, 2011, what are the main differences we see. The main one is the health of the airlines. In 2010, 2011, all the airlines were really in bad shape. When you look at today, many of them were making acceptable profit. And the second main thing, which is different, is the support of the government. In 2010, 2011, they didn't receive support from their government. This time, we see everywhere governments trying to help, not only the airline, but the traffic, they want the traffic to continue. And it is something which is, in my opinion, in a way, going to help the airline to recover. That's the only main difference we see. The age of the fleets are about the same. The way they fly is about the same. So main difference is health of the airline and support from government, which, in my opinion, are going to go in the right direction compared to what we saw in 2010 or 2011.Regarding the fact that some airplanes are not going to return, yes, some airplanes are not going to return to flight, but mainly wide-bodies. We look at all these airplanes which are stored today, and we believe that the production rates, which are given today by Airbus and by Boeing, which are a lot reduced compared to what they were 6 months or 3 months ago, do not take already into consideration the fact that some airplanes will not return, some NG will not return, some ceo will not return. But the ones which are not going to return are airplanes which are already around almost 20 years old. And as you know, our business model, especially for our engines, is based on the fact that during the life of an engine, you have 3 to 4 shop visits. But we make money and we sell brand-new parts on the first 2 shop visits. So first shop visit, almost 100% of brand-new parts; the second one, almost 100% of brand-new parts. Going to the third shop visit and going to the fourth shop visit, you start to see used parts. And the last one, you have almost 80% or 90% of used parts. So the fact that the life of an engine goes from 22 or 23 years to 19, 20 will not have a main impact on us, almost no impact. And again, do not forget that if the price of oil remains in the range of what we see today, flying an old airplane is not going to be really more costly than flying a brand-new airplane. So we do not see, to make it short, a big impact on narrow-bodies coming from the fact that some airplanes may not fly again. We see that on the wide bodies, yes, for sure. You will have a lot of A340, A380 or 767, which will never fly again, for sure. But we are not really impacted by that outside of some of our Interiors business.

[Operator]

Next question comes from Ben Heelan from Bank of America.

[Benjamin Michael Heelan, Analyst]

I had 2. The first one was on supply chain stress. I mean, are you seeing areas at the moment of your suppliers that are particularly stressed? And is there any way that you can step in and support? Or are you comfortable that the government support will be there? And then secondly, working capital. Thank you for all the information you've put in the presentation, it's super helpful. But obviously, last year, you had a significant working capital drag from the MAX. This year, you've talked about inventory unwind. I'm assuming that you'll also see pressure on airline payments from the receivables side of things. So do you think you can keep the working capital drag this year broadly in line or potentially better than what you saw last year?

[Philippe Petitcolin, CEO & Director]

Thank you, Ben. I will take the first one, I will let Bernard answer the second question. Regarding the stress on our supply chain, we've seen during the month of March and beginning of April some of our suppliers, especially the smaller one, the smaller ones, not restarting production. They were closed and didn't want to restart production because either they didn't have the protocol, the sanitary protocol to make sure that the people would not be at risk working or the people themselves when they have 20, 50, 100 people, they don't want to come back because they were afraid of coming back. We have reduced the quantity of these suppliers which are not working to a very, very small number. Even in some countries such as China, such as Mexico, our suppliers have restarted to work. We have, nevertheless, risk that based on the reduction of our orders, some of our suppliers will have some problem, financial problem to remain open and to remain active. So we have set up a task force where we look at all our supply chain, all our suppliers, and we identify the ones which are more at risk than others. We have, just for your information, as of today, 475 suppliers that we follow on a weekly basis to see how they perform, are they still doing okay? Do they have a problem of cash? Do they have a problem of load? What's their behavior, how do they react? On this 475, 70 we believe are at risk. And on this 70, we really follow 6 of them, and I'm talking about our worldwide network of suppliers, not only the French, but worldwide suppliers, and we have identified 6 of them that we follow almost on a daily basis. So yes, there is some stress in our supply chain, but we have implemented some actions in order to know exactly where they are and when they are at risk. We look what we should be doing. Is it just a question of helping them for a month or 2? Is it a question of long-term problem? Should we push them for consolidation? Should we bring them some outside investors? So for each of them, we try to master or to tailor a specific action plan in order to support them. I will let now Bernard answer the second question about capital.

[Bernard-Pierre Delpit]

Yes. I think that's a difficult one. Of course, we don't think that we will be able to reduce working cap in 2020. And our scenario, with that working capital increase in 2020, to which extent, difficult to say as of today. I think I flagged overdues, changes in payment terms asked by clients and inventories as kind of uncertainties. But we have a plan to really cut our inventories and WIP as much as possible. But definitely, working cap will deteriorate in 2020, yes.

[Operator]

Next question comes from Tristan Sanson from Exane.

[Tristan Sanson]

Hope you are all well. And thanks for the detailed presentation, especially all the detail on the restructuring and organization initiatives you're implementing. I have 3 questions, please. The first one. So you made a helpful commitment to maintain a positive free cash flow for this year. I suspect it's extremely difficult for you at this stage to have a look at the type of volume that you may end up with. But can you give us any kind of indication of what could be a flow of operating margin that you think you should be able to reach, thanks to your adaptation plan, under any scenario, even the most difficult one, is it like, I don't know, 18% or something like that? Second question, I wonder whether you could tell us whether you can put in place any commercial initiative to incentivize airlines to keep the older aircraft in service in a longer -- over a longer period of time or try to influence their arbitrage between taking new aircraft and operating older aircraft for a longer period of time. And if you can't, is there anything you can do today to limit the flow of used parts on MRO networks by, I don't know, stepping up the purchase of old engines or anything else? And the last one is quick, but if I understand correctly, you restructured your hedge book for 2020 from $11.2 billion to $8 billion at no P&L costs and no cash impact. Can you explain a bit the mechanics or basically how you do that?

[Philippe Petitcolin, CEO & Director]

Bernard will take the first and the third question, he will try to answer both, and then I will try to answer case older -- the one on the incentives to keep older airplanes.

[Bernard-Pierre Delpit]

Okay. On the first one, you mentioned a commitment, I would prefer to say it's a target. Definitely, what we think we can achieve based on what we think is the central scenario, and it's too early to share this scenario with you because there are too many uncertainties. But we really think we will keep our cash positive. In fact, at the end of March, it's positive. And we think that in April, we won't burn much cash. So if it continues like that, I mean we are in the right direction. We think Q2 and Q3 will be very difficult in terms of cash headwinds, but we really think we can keep it positive. Now regarding the hedge book, we have just removed from -- some instruments from 2020 to 2021, 2022. And we can do so because we are dealing with options. So it has no cash impact and the kind of instrument that we move, we can organize that by mitigating the effects by using old instruments and new instruments. So I won't go into detail of how we do that. But I can tell you that mostly it's because we push some instruments that we could have used in 2020, and we will use that in '21 and '22. And as it's options, we don't have to carry the cost of instruments that are definitively used and booked for 2020. That's how it works.

[Philippe Petitcolin, CEO & Director]

So Tristan, regarding your question on the incentives to keep older airplanes, we cannot really influence the airline, it is their decision. They will run their own cash, and they will have to decide if they can still run and make money with an older airplane or if they need a younger one to be profitable. We believe, again, that it does not make for us a lot of difference if an airplane goes on retirement after 18, 19 years or 20, 21 or 22 years. We lose a little bit of services, but it's really minimum. In terms of engines and you're talking about used parts, we use used parts only on engines, and all the other parts of the airplanes when they've a need for a spare part, they buy new ones. If you talk about a seat, if you talk about cabin, if you talk about the light, you don't buy used parts. On engines, we are one of the main provider of used parts. We have CFM Materials, which is a JV at 50-50 with our partner, General Electric. And we buy old engines, we clean them and we take from these engines, the parts which still have some potential, and we resell the used parts. So we are one of the main providers of this business. So for us, we are not really impacted. Again, don't think that an earlier retirement saying 18 or 19 years instead of 22 will have a big impact on Safran. It will have a small impact. But on the other hand, don't forget that we sell the brand-new airplanes. And our business model will be reinforced by selling new airplanes with our new parts, with our new engines, with our new seats. So all in all, it's really a plus. And when we look at the future, talking about the greener aircraft and the greener industry, it makes sense to really look at airplanes which consume less fuel than the previous generation. So all in all, I believe that it does not impact us at all to see some airplanes going on retirement with a few years earlier than what we were expecting.

[Tristan Sanson]

Okay. So if I may, I think you smartly dodged the question about the minimal level of operating margin. Is it too early for you to look at it this way or...

[Bernard-Pierre Delpit]

Yes. Because it would mean to give you our -- the way we see revenues. And again, it's clearly too early to share that.

[Operator]

Next question comes from [ Antoine Loidreau ] from [ One Square ].

[Unknown Analyst]

Just an answer on April. You said that the Q2 activity would be similar to what you saw in April. So could you give us maybe some figure or estimate?

[Philippe Petitcolin, CEO & Director]

On the sales, Antoine, or on...

[Unknown Analyst]

Yes. Yes. On the -- yes, on the sales. I mean, I think you said that Q2 would be similar. You expect the Q2 to be similar to what you saw in April. So I was just wondering how did you see April.

[Bernard-Pierre Delpit]

April is lower than what we were expecting. Of course, the month is not yet finished. And in the last days are days where we invoice a lot and we sell a lot. So I cannot give you today, the value of our sales for the month of April. But talking, all in all, it's in the direction of something in the range of 40% to 50% compared to last year.

[Operator]

Next question comes from Christophe Menard from Kepler Cheuvreux.

[Christophe Menard, Head of Aerospace and Defense Sector]

I hope you are doing very well. Two questions on my side. OpEx, you mentioned that you were in a position over 12 months to reduce OpEx by 30%. My question is more on 2021, can you continue that trend? Have you already identified further room for OpEx reduction on top of what you can do in 2020? Quite obviously, you can do the 2-month, I would suspect in those -- well, no more than 2 months, actually, 4 months. But what about the rest of the year? And for free cash flow in this year, I was trying also to understand, we talked about working cap. We talked about -- I mean, you mentioned CapEx. I was thinking the cash inflow you're getting from the engine service per hour, the ESPH, which is seen as a tailwind. Is it something that has come to an end in 2020? Or is it still coming in? And should we still see this as a tailwind that will support your free cash flow target?

[Philippe Petitcolin, CEO & Director]

Bernard will answer your questions.

[Bernard-Pierre Delpit]

Yes. On OpEx on 2020, the magnitude of the effort will depend on what we will have in terms of revenues. I mean, if we think that we have more revenue than in 2020, the kind of effort that we will continue will be different from the one we have initiated in 2020. I mean, the 20% reduction in 2020, over 8 months is already a lot. And that's already something, so we will see. Again, it's too early to tell. On the cash in coming from long-term contracts, I'll remind you that ESPH was only a small proportion of our LEAP contracts. Most of them were -- are ESPO, so we don't get a lot of cash from flying hours. But definitely, as almost all aircraft powered by LEAP are grounded today, I suspect that we won't have much cash in, in Q2, and it will depend on flying hours in Q3 and Q4. But again, it's a really limited part of the cash in from our LEAP engines today.

[Philippe Petitcolin, CEO & Director]

If I may just try to complete the answer of Bernard on the OpEx, Christophe. We are, in a way, pushing very hard in order to reduce our fixed costs, and we are lowering our breakeven point. So for the future, and the future will come, and we all know that it's going to recover. At that time, our breakeven point will be a lot lower than what it is today. And I think it's a very positive point. Another example I can give you, we have decided already to close some plants and some more will be announced in the next coming weeks. But we have been pushed by this crisis. The savings until now was quite marginal. And we're saying, okay, we know we have to do it, but we may wait a little bit. Today, we don't ask ourselves anymore this question. We do it because we have no other choice. So by working on all of this fixed cost, in a way, we are preparing our company and our businesses to be even better when the recovery will be on.

[Operator]

Next question comes from Jeremy Bragg from Redburn.

[Jeremy David Bragg, Research Analyst]

Can you hear me, okay?

[Philippe Petitcolin, CEO & Director]

Yes, we do, Jeremy.

[Jeremy David Bragg, Research Analyst]

Okay. So couple of questions on the aftermarket, please. So I know you're going to have fewer shop visits and airlines are going to defer everything that's not discretionary. But my understanding of scope is that if an airline kind of defers work, it might cost them more in the long term. Therefore, doesn't that just make me feel comfortable about recovery in 2021 and 2022. And then the next question is really on the kind of level of recovery. I mean, Airbus and Boeing reported today, as you know, most of them have talked about 2019 levels getting recovered in 3 to 5 years. I mean, same question for your aftermarket. Do you think you could get back to 2019 aftermarket levels in 2023, for example?

[Philippe Petitcolin, CEO & Director]

Jeremy, aftermarket shop visits, I think that we are going to recover faster. Regarding your first question, the -- each engine has a potential of flying hours based on where it flies, and it's not the same one if you fly in Sweden or if you fly in India. But at the end of the day, when you have done and used all your potential, you have to go to a shop visit. So you can cut it in pieces. But at the end of the day, if you cut it in pieces, it's going to cost you 20% or 30% more than if you can do it at once. And if you cut it in pieces, you are going to do a full shop visit over a period of 18 months, 2 years, but you will have to do it. So an engine is not something that you cannot push and not do a shop visit. When it's time, it's time, and nobody plays with that. So regarding your question of deferral from 2020 to 2021 or 2022, yes, it's possible. Some of the shop visits that will not be done in 2020, guaranteed, except if they retire the plane. But if they keep using the plane, they will be done in 2021 or 2022. They will be done at once, a big shop visit, or they -- it will be done in 2 or 3 pieces if it cannot be done in -- at once. Your second part of the question, are we going to recover at the same speed as the recovery of the activity? No, we are going to go a lot faster because when you talk about Airbus and Boeing, they talk about brand-new product. They talk about new engines. They talk about new airplanes and new airplanes. Yes, it will take 3 to 5 years according to them to come back to the level of activity we all enjoyed in 2019. But the day the airplanes fly again, the quantity of shop visits, the recovery of all the activity of the existing airplanes is going to come very quickly. So we will come back to the level of 2019 a lot faster than 3 to 5 years because we are talking about existing airplanes and not about new airplanes. Was it clear, Jeremy?

[Jeremy David Bragg, Research Analyst]

That was really clear. Thank you. That's great.

[Operator]

Next question comes from Harry Breach from MainFirst.

[Harry William Freeman Breach, Research Analyst]

Philippe and Bernard, I hope you and the whole Safran team are in good form or recovering if they've been unfortunate and had the virus. I just had sort of 3 questions that I hope are easy. Maybe just to start on Aircraft Interiors. Please, can you give us some idea for the refurbishment revenue stream at Aircraft Interiors, what kind of lead time or visibility do you have for those contracts? I'm trying to get a feeling for when that refurbishment revenue stream might start to decline? And can you just remind us of the rough level of annual revenues at the refurbishment stream is for Interiors? Second question, and forgive me, please, I think you did answer Olivier on this at the beginning, Philippe, just in terms of the number of shop visits, the reduction. Did you say that there was a 10% reduction in the month of March compared to the prior year? And also, did you have any comment on shop visit sort of scheduling that you might have any visibility on looking forward into the second quarter and beyond? And then the last question, and this might just portray my ignorance, so please excuse me. When we think about CFM parts, what I wonder is sort of how many of those are sold directly to airlines and MRO shops compared with large distributors? And particularly whether you think with the distributors, could there be a destocking effect that might be significant, say, this quarter or next? Or do you think they run pretty lean inventory, so we won't see a big destocking effect?

[Philippe Petitcolin, CEO & Director]

Thank you, Harry. I will try to answer the first and the third question, and I will let Bernard answer the question on shop visits because he is the one who mentioned it in the presentation. On Interiors, in fact, when we talk about Interiors, you have to split seats and cabin; cabin is 50% SFE, 50% BFE. SFE means supplier furnished equipment. We sell directly to the OEM; BFE is buyer furnished equipment we sell to the airlines. When seats is almost 100% BFE, we sell directly to the airline. Between the time when you book an order for a business class seat and today you deliver the first shipped set, it's a minimum of -- if it's not a product that you have already in store, if it's a brand-new product that you have to develop, it's a minimum of 18 months. So we are today negotiating, we are still booking new orders. But these orders that we are booking today will create some sales and cash in 18 months from now. Sometimes, if it's a very complex product, a first-class suite, for example, you may go until 24 or 30 months between the time you sign your contract and the time you deliver your product. The engineering phase is a very, very long phase because it has to be accepted by the airline, but it is also under the responsibility of the OEM because you are going to put your seat inside of the airplane. So it's quite complex, and we cannot really expect orders and new sales on a short-term basis, except if it's a me-too product, if it's a product that you have already made for an airline. So we are chasing today airlines which are going to retrofit existing airplanes because we know already the product they need, and we can produce it in less than 6 months. But these airlines are not a lot today because most of the airlines, they are postponing, they are not canceling, but they are postponing most of their retrofit. This is the answer to your first question.On your third question, when you talk about CFM spare parts or part, if you are talking about brand-new parts, most of them are sold directly by CFM to MRO shops. As you may know, on the CFM family, Safran, we do about 10% of the total shop visits; our partner GE does about 30% and the remaining 60% are done either by legacy airlines, so Delta TechOps, Air France Industries, Lufthansa Technik, Singapore Engineering, or they are done by some of our competitors or they are done by private shops. So we sell directly to them. We don't do anything through large distributors except for the part of the older engine. And for example, we work a lot with Aviall, a part of Boeing, for the old CFM56-2, for example, which are -- -5A or -5C, which are very old products. So we work with distributors. But for the ones such as the 5B and 7B, what we call the second-generation of engines, we work directly with the shops. I will let now Bernard answer the question of reduction of shop visits.

[Bernard-Pierre Delpit]

Yes, Harry. Just to clarify, the 10% drop in the number of shop visits is related to the Q1 figures. So it was down in Q1, and we expect it will deteriorate going forward in Q2. And for the full year, it will be well below the assumption that we took initially, so it will be down. And on top of that, we might have also a reduction in the scope of shop visits. So that is a driver of the civil aftermarket. And of course, it will be negative in 2020. How much? Difficult to tell for the moment. I think when we will have Q2 figures, it will be easier to make an assumption for the rest of the year. But it will be down double-digit for the rest of the year for sure.

[Philippe Petitcolin, CEO & Director]

Last question?

[Operator]

Yes. Last question comes from Nick Cunningham from Agency Partners.

[Nick Cunningham, Managing Partner]

I hope you don't mind me using the opportunity for the last question to congratulate you on being so proactive in your response. I think you stand in contrast to most of the rest of the industry. Two questions, I think, relatively easy. First of all, take-or-pay arrangements. Are you subject to any from your suppliers, i.e., things like castings and so on, in other words, getting more than you actually want this year? Secondly, are you, in any way, likely to benefit from a take-or-pay arrangement between you and the customer? And then final question, coming back to working capital. Notionally, on lower revenues, working capital should be lower. Obviously, that's very difficult this year just getting customers to accept delivery and so on. However, as we look into '21, should we see that unwind and should working capital become a tailwind and eventually end up lower than it was, let's say, in December of 2019.

[Philippe Petitcolin, CEO & Director]

If I correctly understood the first question, Nick, take-or-pay, it's negotiation we have with suppliers and with customers. With suppliers, we can help the supply chain, and we need our supply chain to remain active for the time being and for the future, of course. And it is difficult to have them accept that we are not in a short-term crisis. The short-term is going to be deep and it's going to be long. So we have to make them understand and accept the fact that it's not a question of having a firm period, where they can supply parts or not the same period, but we are in a long-term period where we will have to work together. So if they really want to have me take some product that I don't need before 6 months or 9 months, if I have a contract, at the end of the day, I will take it. But for a very long period of time, they will not deliver anything to me. So instead of blocking and stopping the supply chain for some time, 6 months, 1 year without any production, we really try to make them understand that it's better if they work at a lower rate and keep working during all this period where we know it's going to be difficult. We all know we will have a nice recovery. But for the time being, we are not talking about recovery. We are talking about crisis, which is, again, deep and long. So take-or-pay is something we try to adjust the best we can with our supply chain and same thing with our customers. We understand our customers, we understand how they are. We want to remain a good supplier. Sometimes we can accept things they want, sometimes we negotiate in order to help ourselves.

[Bernard-Pierre Delpit]

On working capital, it's the same crystal ball question. But you get it right. Under normal circumstances, when revenues are down, then working cap should also go down. But we are not under those normal circumstances, and that's why it's difficult to tell. What we think is that our working capital has increased a lot in 2019. So we are entering the crisis with a high working capital. So our plan is definitely to reduce our inventories and WIP as much as possible. And to do so, we have kept procurement very quickly and very strongly since the beginning of the year. We -- in fact, we started to reduce our inventories and -- to make the efforts in order to reduce our inventory starting in Q2, and we did that since the very beginning of the year. So we are not, let's say, caught off our guard in terms of inventories reduction. What will be difficult to tell is how overdues and new payment terms that we have to offer to our customers will increase the working capital. That is, I think, the difficult part to forecast as of today. That's why I'm a little bit cautious when I try to model how our working capital will go along the year. I said it will deteriorate because conditions are difficult, but not that much because the starting point was already high.

[Philippe Petitcolin, CEO & Director]

Thank you. Thank you, everybody, for attending this conference call, and have a nice evening. And be careful, take care of yourself. Thank you very much.

[Operator]

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