Safran SA

PAR:SAF

Earnings Call Analysis

Earnings Call Transcript 2022-Q2

[Operator]

Welcome to the Safran Half Year 2022 results.

At this time, I would like to turn the conference over to your host, Olivier Andries, Safran's CEO; and Pascal Bantegnie, Group CFO.

Mr. Andries, please go ahead.

[Olivier Andries, CEO]

Good morning, everyone. I'm pleased to welcome you to Safran's first half 2022 earnings call. I'm here with Pascal Bantegnie, our CFO. Let us go straight to Page 4 with a summary of our talking points today.

Air traffic recovery has been gaining momentum in Q2. In fact, after a dip in March and a stall in Q1, narrowbody capacity as a percentage of 2019 has increased sequentially by 6 points in Q2 versus Q1. The business environment remains challenging, especially in terms of supply chain stress and inflation, as we pointed out earlier this year.

Organic revenue growth was good, profitability in H1 was solid and provides confidence to achieving full year target as well as for cash flow generation supported by customer advance payments. Portfolio management is progressing at a satisfactory pace with the closing of a few deals.

Regarding the full year 2022 guidance, a stronger dollar provides tailwinds to our revenue target. We take vigorous actions to weather the loss of activity in Russia and inflation-related headwinds. Therefore, we confirm our recurring operating margin of 13% for the full year.

Amid significant customer prepayment, our free cash flow target is lifted.

I'm now on Slide 5. Starting with traffic evolution in H1 and more specifically, narrowbody traffic data. In Q2, narrowbody ASK reached 81% of 2019 level, up from 75% in Q1 2022 and in Q4 2021. The stability in Q1, I remind you, was the result of a combination of a positive momentum in most of the regions and strong dip in March in China.

In Q2, the traffic has been gradually improving in China with CFM engines flight cycles above 60% of their 2019 level at the end of June and still moving up. In Europe, CFM engines flight cycles have improved through the quarter, reaching around 87% of their 2019 level. In the rest of the world, CFM engines flight cycles stood close to their 2019 level for the full quarter, especially in North America. All in all in H1, narrowbody ASK were at 78% of 2019 compared to 71% in H2 2021.

Retirements of second-generation CFM56 powered aircraft remain low at a similar pace compared to 2020 and 2021 with 60 aircraft powered by CFM56 second-generation engine retired in the first 6 months.

Let's go to Slide 6 and our business achievements. On the left-hand side, in propulsion, total deliveries of CFM engines stood at 492 units with an increase in LEAP engine deliveries at 465 units in a context of a very fragile supply chain environment. Both CFM partners, GE and us, are currently working very hard to help and support our suppliers to restore timely delivery to airframers.

Civil aftermarket was up 47% for the first 6 months, with Q2 2022 up 41% year-on-year after an increase of 53% in Q1. We have been very pleased last week to announce at Farnborough Airshow some significant CFM commercial wins with major airlines committed to LEAP, such as Delta Airlines, easyJet, Qatar Airways, All Nippon Airways and also lessors.

In Helicopters, we have signed a support by the hour military contract with the New Zealand Defence Force to support their fleet of RTM322 engines on their NH90 helicopters. In Equipment and Defense, new contracts have been signed, both for civil markets such as wheels and brakes, and services in nacelle, but also for military applications such as the SkyNaute navigation system to equip the new H160 helicopters for the French Armed Forces.

At the Hamburg Aircraft Interiors exhibition in June, Safran seats revealed 2 new business class seat lines, VUE and UNITY, as well as a new innovation, Euphony, an innovative passenger experience solution for business and first-class seats that provide passengers with a headset-free and high-quality individual sound experience. I have to say the feedback from airlines was extremely positive.

On Slide 7, let me update you briefly on our industrial footprint expansion. In June and July, we inaugurated new sites in India with new facilities in Hyderabad and Bangalore. We have also announced the setup of our largest maintenance, repair and overhaul center for LEAP engines in Hyderabad and the creation of a major in-house IT entity to employ 1,000 people in Hyderabad and Mumbai.

We are also strengthening our partnership with HAL Hindustan Aerospace with the creation of a joint venture for the new Indian heavy helicopter engine. In Morocco, we have inaugurated a building extension of Safran nacelle in Casablanca. All these new facilities will meet Safran's high standards, both in terms of industrial processes, machinery and equipment, and in terms of sustainability with a significant share of the electric power needed for these sites to be provided by solar panels.

On Slide 8, a quick overview of Safran's financial performance in H1. Revenue has been growing by 24.5% year-on-year, with a more pronounced growth in Q2, plus 27%, and also supported by a stronger U.S. dollar. Recurring operating margin was up 2.6 points, representing a 60% increase in recurring operating income.

Free cash flow was €1.7 billion, €1 billion increase, driven by customer advanced payments on Rafale export contracts.

All in all, despite a challenging environment, supply chain, inflation and thanks to swift adaptation measures, we were able to benefit from the top line recovery to post significant growth in both profitability and cash.

On Slide 9, I would like to emphasize some progress on our climate strategy. The new long-term objectives disclosed early April have been recently submitted to SBTi certification. Specifically on Scope 3 for the purchase of goods and services, Safran hosted last week a supplier's day gathering 400 suppliers. This event was dedicated to the engagement of our supply chain on our decarbonization objectives.

On the CFM RISE demonstrator program, CFM and Airbus have announced at Farnborough a flight test demonstrator for an advanced open fan architecture in the second half of the decade. In electric propulsion, our ENGINeUS electric smart motor has been selected by Diamond Aircraft, which is among the leading aircraft manufacturer in general aviation; TCab Tech, which is a eVTOL aircraft company in China; CAE from Canada and Piper to equip an electrified Archer aircraft; and by VoltAero in France to equip their Cassio 330 electric-hybrid aircraft prototype. So a string of commitment for our electric smart motor. In sustainable fuels, Airbus has conducted the first-ever helicopter flight on a helicopter H225 with 100% sustainable fuel with our Makila 2 engines.

Now Pascal, the floor is yours for more details about our financial performance.

[Pascal Bantegnie, CFO]

Thank you, Olivier. Good morning, everyone. As usual, I will be commenting today the adjusted accounts for which a bridge from consolidated accounts is presented in Page 11.

Adjustments are unchanged from past publications, either relating to FX or PPA. The fair value of our FX hedge book was a negative €6.6 billion on June 30, 2022, which reflects a strong USD at close, around $1.04, compared to the average rate of our book. It represents a €5.6 billion change in fair value compared to December 31, which is what you see adjusted in financial income. It is, as you know, a purely accounting entry. There is no cash impact as our derivative instruments will hedge future USD cash inflows.

On the same topic on Slide 12, the USD was meaningfully stronger versus euro in H1 with an average spot rate of $1.09, representing a drop of $0.12 year-over-year and $0.09 since early 2022. It does provide a boost to our sales. This rally towards parity has activated a number of instruments, which combined with the new hedging, adds up to $45.1 billion hedge book covering all our needs for the next 4 years.

The strong dollar is obviously an opportunity for Safran to hedge at attractive rates for the future, and we will refresh our target in the coming quarters to reflect this new favorable currency environment.

A quick look at the income statement. Beyond sales and profits, which I will detail in a minute, we have booked noncash impairment charges for a total of €160 million related to sanctions against Russia. First, a charge of €22 million for Shannon Engine Support lease engines stranded in the country. This is accounted for in recurring operating income under propulsion. Then we have a €90 million impairment charge on many Russian programs, which are accounted under the one-off items.

And finally, we have a €48 million impairment charge for equity and loans for nonconsolidated entities, which are accounted for in financial income. So total one-off items amounted to €92 million. Apart from the impairments have just took from Russia, we also impaired the remaining intangible assets for the Ariane 6 program for €58 million as a consequence of the shift of the first launch date to 2023. And these impacts have been partially offset by a capital gain on disposal of nearly €60 million.

Tax rate comes at 27.7%, including a one-off tax on capital gains. And net income to the parent is €536 million, twice the amount we had last year.

On revenue, Page 14, adjusted revenue reached €8.6 billion, which was up 24.5% or 17.3% organic. We saw some acceleration in Q2, and it was basically driven by services all across the board.

A stronger USD had a positive impact on sales of about €0.5 billion when translated into euros and mainly during the second quarter. The divestment in 2021 of EVAC and SVS Oklahoma had an impact of €37 million in revenues.

Same chart on recurring EBIT on Page 15. The margin improved by 2.6 points at 12.2% of sales. This is a very solid performance, driven by growth in services in all divisions and notably in civil aftermarket, which was up 47%. The positive currency impact reflects the $1.15 hedge rate compared to $1.16 last year.

R&D impact in P&L is increasing in absolute value, but decreasing in percentage of sales by 0.5 points of revenue, which is now 4.2% of sales. It reflects an increase in R&T self-funded expenses to address our climate change road map.

Now moving to performance by activities, starting on Slide 16 with aerospace propulsion. It shows a 1.8 points margin improvement at 17.3% of sales. It does include, as I said before, €22 million impairment charge on CFM engine stranded in Russia.

Revenue was €4.2 billion, up 20% on an organic basis, driven by a strong recovery in services, both commercial and military. OE revenue was up 10%, and deliveries, as we saw were up for LEAP engines despite late deliveries versus purchase orders from airframers. As mentioned by Olivier, together with our partner, GE, we have a catch-up plan to minimize delays.

Other deliveries, typically CFM56, high-thrust engines, helicopters, M88 were down in the semester.

Services revenue were up 27% organic, essentially driven by civil aftermarket. And let me give you some color on that.

First, we had a -- we were a bit soft on volume for CFM56 shop visits compared to our initial expectations, but we had a good surprise on the work scope and therefore, on revenue per shop visit. Could be the effect of some restocking by some third-party shops. So spare parts for CFM56 were strongly up in the semester. Then spare part sales for high-thrust engines were up as well. And as expected, services contracts were up slightly as they have been more resilient in 2020 and 2021.

Now on Equipment & Defense, which is our best performer in the semester. Sales were at €3.5 billion, up 11.5% organic. Here again, driven by good growth in services. OE was slightly up at 3% organic, thanks to higher deliveries in net sales, but we still suffer from low volumes on 787 impacting wiring and landing gear activities.

Services were strongly up 28%, strong recovery across the board, landing gear, carbon brakes, nacelles, aerosystems. In Electronics & Defense, the contribution in both revenue and recurring operating income was flattish. So the recurring operating margin is coming at 11.7% of sales in H1, which is up 2.6 points compared to last year.

Finally, Aircraft Interiors. Sales were €870 million, up 30% organic from a low comparison basis in H1 2021. We are still about 50% below H1 2019, so compared to the pre-crisis level. OE was up 24% organically with higher volumes on business class seats, galleys and lavatories. Services were up 44% with a growing business, both in Seats and Cabin. The division posted a loss of €82 million, making some progress from H1 2021.

The impact of sanctions against Russia and inflation are quite hard to mitigate in this division. On one side, Cabin is on track, benefiting from the restructuring measures that we have taken in the past quarters. But seats is facing some supply chain shortages that have hold back the growth potential in spare parts and activity that we expect to be back-end loaded this year.

Seats also faced some program cost overruns, which we need to fix, and we have a dedicated recovery action plan that has been put in place in that respect. As a consequence, our target for operating breakeven is moving from full year 2022 to H2 2022. And that target will depend on our ability to deliver the backlog in spare parts in the last month of this year.

On Slide 19, free cash flow came out at a solid €1.7 billion, which is a €1 billion improvement from last year, which is an excellent performance driven by first, a 50% growth in EBITDA, then positive cash impact from working capital. We benefited from significant customer advanced payments, notably in relation with the United Arab Emirates order for the Rafale jet fighter. We also recognized significant deferred income, about €400 million, notably on the CFM flight hour contracts. But it was partially offset by a €1.1 billion increase in inventories, which is the result of either FX, delays in deliveries or the buildup of some safety stocks in order to secure our future deliveries.

By the way, H2 free cash flow will come at a much lower level because all expected Rafale prepayments were already received in H1 and inventory will continue to grow from 2021 to secure on-time deliveries and minimize the risk of shortage.

On Slide 20, net debt came out at €425 million. I guess, the waterfall speaks for itself. We had a positive change in working cap, which offset R&D and CapEx. We paid a dividend of €0.50 per share back in early June. And we've made an additional financial investment in noncash equivalent for €200 million. This represents a low leverage of 0.13x last 12 months EBITDA. And we continue to enjoy a strong balance sheet with a gross cash position of nearly €6.2 billion, which is up €1 billion from December.

Olivier, back to you.

[Olivier Andries, CEO]

Thank you, Pascal. So on the back of a solid performance in H1, we upgrade our revenue outlook to reflect a stronger U.S. dollar. We raise our free cash flow outlook to reflect significant customer prepayments, and we confirm our operating margin target as a demonstration of our confidence to offset the headwinds.

We have a lot on our plate, especially with the supply chain issues, but we feel confident to deliver. Thanks for your attention. Pascal and I are now ready to answer any questions you may have.

[Operator]

[Operator Instructions] So we have our first question from Robert Stallard from Vertical Research.

[Robert Stallard, Vertical Research]

Olivier and Pascal, two questions for you. First of all, Olivier, you mentioned your plan to catch up on the LEAP deliveries by the end of the year. I was wondering if you could give us some more detail and what that plan entails and what gives you confidence you can regain this situation by the end of the year? And then secondly, Pascal, you highlighted that net debt is only at €425 million now. I was wondering what your target is for the balance sheet going forward.

[Olivier Andries, CEO]

Yes, we are late on LEAP deliveries, on CFM, yes, LEAP deliveries together with our partner, GE. I think, and I'm hopeful that we have reached the trough. And that from now on, we are going to catch up on our late backlog progressively. It's a challenge considering the supply chain fragilities. But we had mentioned in February already, and that everybody is mentioning now. So we are going to progressively reduce our late backlog.

Are we going to come back by the end of the year? This is a challenge. Frankly speaking, I think the supply chain issues are going to last probably until 2023, maybe the end of 2023. So it's an every day's fight. And we expect to be back on track and back on PO, let's say, by 2023. I'm not sure we will completely be back on PO by the end of this year, but we are going to catch up on our late backlog. Pascal?

[Pascal Bantegnie, CFO]

Yes, on the leverage. Good morning, Rob. We will end up this year in a net cash position, as we already discussed, I guess, a quarter ago, which is 1 year ahead of time compared to the initial expectation we disclosed at the Capital Market Day last December. So this is good news.

We've mentioned as well that we would like to maintain leverage of, let's say, from 0 to 1x. So what we've mentioned as well because what, I guess, in your question is what about the shareholder returns. We've already mentioned that we will be back to a dividend payout ratio of 40% as soon as next year.

And the next question would be about the share buyback. We are progressing on that idea. No announcement to make today. But clearly, we are thinking about it. And hopefully, we'll communicate on that before year-end.

[Operator]

So we have another question from George Zhao from Bernstein.

[George Zhao, Bernstein]

First, on the LEAP delivery, if you don't fully make up for the H1 shortfall in H2, clearly, you will benefit in margin. So does this alleviate some of the cost savings burden you talked about last quarter to preserve the 13% target? But I suppose deliveries are pushed out to next year. How should we think about some of these headwinds for next year's margins?

And second question, regarding high inflation, has this high inflation environment, has that changed CFM's objective on the long run mix between flight out agreements versus time and material over the concern that the power by the hour might not adequately cover the risks if the high inflation persists?

[Pascal Bantegnie, CFO]

I can take the first one, if you want, Olivier. In H1 2022, it's true that the supply chain disruption leads to higher margin when OE deliveries are lower as OE engines come at a negative margin. Still, we view it as negative as it is pushing out learning curve benefits.

Now moving to H2. A return to a more typical mix of OE versus spare engines, for example, will lead to a negative mix effect. So depending on how quick we can minimize the delays to airframers, it could have a positive or negative impact on margins by year-end.

Now on the inflation I can start as well, Olivier. I saw some notes saying that during the Farnborough Airshow, some notice that we were shifting away from RPFH contracts to time and material contracts. I would say it's not a deliberate move from CFM. We do what airlines would like to have. So if they want flight by hour contracts, we are moving to flight by hour contracts. If they want time and material, we offer time and material. It's true that we are more preserved from inflation with time and materials type of contracts for sure.

[Olivier Andries, CEO]

And on top of what you said, Pascal, I would add that we have adapted for our new offers and new contracts going forward. We have adapted our escalation formulas to take into account this inflationary environment that we see today, and that probably will last.

[George Zhao, Bernstein]

Do you have the split of the time material versus the flight agreement on LEAP today?

[Pascal Bantegnie, CFO]

What we disclosed at the CMD '21 was RPFH was accounting for 45%, I guess, of the total fleet, and it is moving up. We say that at some point in time, it could reach 65% to 70% of the total contracts. But at this point in time, I would say it's more or less balanced, 50-50, between RPFH and time and material.

[Operator]

So we have another question from Andrew Humphrey from Morgan Stanley.

[Andrew Humphrey, Morgan Stanley]

I wanted to ask about engine mix again. Apologies for kind of continuing to focus on this. The -- my question is it's clear that, that there's a supply chain challenge that is causing a delay to OE, and then we're seeing a kind of higher proportion of spare engines as a result. Is there anything in particular kind of thinking about the engines that are coming off weighing the operating fleet that is leading airlines to require maybe a higher number of spare engines than they would normally require at this stage of an engine's life cycle? That's my first question.

My second question is, clearly, we're seeing high levels of inflation, as you've highlighted. I wanted to ask, you normally see some quite enthusiastic prebuying of spare parts in the second half of the year or in Q4 in particular. Do current inflationary trends mean that you're expecting that to be a bigger factor this year than in a normal year?

And finally, a third question, if I may. The -- you just mentioned adapting escalation formulas to reflect the current inflationary environment. Can you talk about that a bit more? Can you talk about the proportion of current aftermarket agreements that maybe you have been able to make some changes to, to reflect the inflationary environment you're seeing?

[Olivier Andries, CEO]

On spare engines, airlines basically, it's in their interest to buy spare engines because especially depending on the environment where you are, sometimes you need to remove some engines to do some work on those engines, and so you need spare engine to continue to fly. So having a certain percentage of spare engine is normal practice for the airlines just because their goal is flying.

And the percentage of spares depends on the environment. If you operate in harsh environment, you need more spare engines than if you operate in a milder environment. So this is what's going on. And we see this dynamic developing.

So yes, spare engines have been, let's say, an opportunity, I would say, and a tailwind in H1 of this year. On escalation formula, I will not comment further. I will not give further details on that, but we are just adapting our escalation formula. And there was another question on inflation for second half of this year?

[Andrew Humphrey, Morgan Stanley]

Yes. On -- just on the spare part prebuying that you'd normally see in Q4, yes.

[Olivier Andries, CEO]

Yes. Yes, we have seen this impact. We have seen this impact last year. We will soon communicate on our catalog price increase that is planned for November of this year. So you will be updated in due time. But you can expect it's going to be up compared to what we have basically done in the previous years considering the inflation. So in the later years, we were around [6.5]. You can expect it's going to be up that number. And yes, indeed, we should expect in Q4 the same kind of phenomena as we had experienced last year and, in the years, before.

[Operator]

So we have another question from Ben Heelan from Bank of America.

[Ben Heelan, Bank of America]

I wanted to follow on from Rob's question around supply chain and I'm going into in a little more detail about how you're managing labor tightness and whether that's the bottleneck you're seeing, how you're seeing titanium. Obviously, there was a big focus in the first half where are you now? So just a little bit more in detail of some of those supply chain bottlenecks and how you're dealing with them.

And then secondly, maybe one for Pascal around FX. I was really surprised to see the 2026 hedges coming in at like a target rate of [$1.14 to $1.16], given where rates are. Just maybe you can explain that a little bit.

[Olivier Andries, CEO]

So Ben, I will answer on the supply chain. As I had the opportunity to mention, supply chain fragilities are specifically acute in the U.S., where during the COVID crisis, most of the, let's say, companies are to adapt swiftly to the situation to reduce capacity, to reduce headcount.

And yes, indeed, our U.S. suppliers and partners have difficulties to recruit back and to get back the competencies and the talents they need for supply chain management, for capacity, for engineering support and all that. So this is a struggle. Labor is a struggle.

And in some specific areas, and I would mention as a pacing item. And once again, I talk for CFM. So it's a combination of Safran and GE. Structural casting is typically the pacing item. So there are complex parts that require highly qualified people, especially welders. Those people have gone, and our structural casting suppliers have difficulties to get them back. That's what's happening.

And this is typically the main bottleneck that we see today. And this is, I think, impacting all engine suppliers, I would say. On titanium, we have made significant progress since we talked. We have bridged the gap, meaning that now we have in place, the alternative sources. We still get supplies from our VSMPO source as VSMPO is not within the perimeter of the sanctions.

So we still receive titanium from our Russian sources, but we have now managed to get alternative sources. So we have bridged the gap. We are protected. So titanium is not going to be an issue anymore.

[Pascal Bantegnie, CFO]

Ben, on the FX. You may have noticed that the hedge book is now $45 billion, which is an increase of more than $10 billion compared to the last time we communicated on that. So indeed, we have added hedges at very favorable rates in our book.

What I didn't do for this publication is to refresh the hedge rate targets. But as I mentioned before, we'll maybe next quarter refresh the targets for the coming years, and you would expect to have much better rates than the [$1.14, $1.16] that we have kept all along the past up to 2026. It's clear that we will benefit from the current spot rate situation, which is again very favorable for the group. So I will update these targets next quarter.

[Ben Heelan, Bank of America]

Okay. That's clear. And just a quick follow-up on that. So we should expect those changes more to be in '25 and '26 because that's where the open exposure was at the end of Q1 rather than the '23, '24?

[Pascal Bantegnie, CFO]

Exactly because our policy is to hedge 3 to 4 years in advance. So we have already fully booked hedges in the past years up to mid of '25 or end of '25. So we know what the hedge rate will be. So all the benefits we will have will be for '26 and beyond.

[Operator]

So we have another question from Tristan Sanson from BNP Paribas.

[Tristan Sanson, BNP Paribas]

The first one will be again on supply chain. I'm sorry. I wanted to understand in your view how supply chain constraints are today impacting your aftermarket activities in terms of availability of parts, repair capabilities or access to skilled labor in MRO networks. Put in another way, do you think that aftermarket is delivering at its potential today? Or is it [cleared] by a lack of resource just like we see on the OE activity?

The second question, I wanted to get your feeling about the on-time delivery performance in Aircraft Interiors and equipment. We heard about the connectors difficulties impacting the 737. Overall, what type of issues are you facing in this division? And should we consider any risk of liability? I don't have any specific topic in mind here, but as we're talking about potentially many small parts of the -- keen to know if there's any specific issue we should know about. And the third one is very quick, is I wondered if you had an actual target for LEAP deliveries to communicate for this year?

[Olivier Andries, CEO]

First question, any impact of supply chain issues on aftermarket, the answer is no. We don't see any impact. I mean, when you look at aftermarket, it's LLP parts. And here, we don't see an impact. We don't see an impact. So that's good news, I would say. We don't see an impact on our repair capabilities.

Now this being said, we know that we have a big ramp-up in front of us on the LEAP maintenance and repair and overall. So we have to build up capacity fast. And this is why we have announced our new shop in India.

But no, we -- you should not fear supply chain issues impacting our aftermarket performance on the engine side. It could a little bit on the seat activity, as has been mentioned by Pascal. So reaching breakeven in H2 on Aircraft Interiors basically is going to be dependent on our ability to deliver all the spare parts that have been ordered on seats. So this is where the supply chain could potentially impact our aftermarket performance, but not on the engine. That's good news.

On on-time delivery, as a consequence of the overall supply chain issues, I would say our on-time delivery on the span of our equipment and products are deteriorated for sure. But it's only in the engine that we are pacing the aircraft deliveries. We are not pacing aircraft deliveries on our equipment division, which has been quite resilient. So we should not expect any liabilities in our equipment division.

On the engine, we may face some claims or yes, penalties coming from the airframers because this is a consequence of our contracts. This is why it could counterbalance the positive impact of delivering less LEAP. So this is why we have to be cautious here. But no liabilities on equipment.

[Pascal Bantegnie, CFO]

On your last question on the LEAP deliveries for '22, you remember that we have been cautious enough not to provide the guidance for this year. So we'll stick to --

[Olivier Andries, CEO]

We'll stick to that, yes.

[Tristan Sanson, BNP Paribas]

Okay. That's quite helpful. I'm a bit surprised by your initial comment, but I think your partner, GE, commented about a sizable headwind to their commercial services from supply chain as well. But I'll follow up to clarify.

[Operator]

So we have another question from Christophe Menard from Deutsche Bank. So we are going to pass to another question from Harry Breach from Stifel.

[Harry Breach, Stifel]

Yes. Good morning, Olivier, Pascal, and everyone. Can I please just ask, I think at the beginning of the quarter, Olivier, you talked a little bit about aftermarket in terms of CFM spares. You talked a little bit about potential restocking by, I don't know whether it was MRO shops or distributors. Just wondering if you can give us any sort of -- any feeling, any better idea about particularly restocking after the last couple of years when presumably distributors and shops would have sought to save cash by quite a lot of parts destocking.

And secondly, maybe more for Pascal. And Pascal, sorry, this is just going to expose my ignorance. But in the hedging portfolio, my naive understanding was that the barrier options had knock out floors and caps. And I was just wondering if the sort of current spot rate meant that any of them was starting to get knocked out at the lower end and if that gives you the opportunity to replace them with more favorably priced options at all?

And then final question was really on margins at equipment and defense, which were really strong in the half, 11.7%. Was there anything unusual in there? Or was it just really about the dynamics of OE and aftermarket mix and low 787 volumes? Then should we be thinking maybe for the full year? Could it stay at around that sort of level?

[Olivier Andries, CEO]

I will take the first one on inventory. Pascal mentioned that -- he mentioned on the volume of shop visits and revenue per shop visiting alluded to that. So on the number of -- the volume of shop visits, basically, what we see today is we will be slightly down compared to what we expected at the beginning of this year. We will be slightly down, so we will be below our initial assumptions because of what happened in China, there has been less shop visit in China because of the dip in air traffic in China and also because we are not going to benefit from any shop visits in Russia anymore.

And I remind you that Russia accounts for something like 3% to 4% of the global air traffic. So we are not going to get any benefits at all from any work that could potentially be done on the Russian fleet. That's one.

But this is compensated in fact by a good surprise on revenue per shop visit where we will be up compared to our initial assumption. So this is why, at the end of the day, we are going to be, let's say, mostly in line. And we keep our 25% to 30% range of growth compared to 2021 for our range in services.

Why are we going to be up on revenue per shop visit? We see 2 drivers to that. One is that we enjoy, let's say, a slightly larger work scope for the shop visit that we have seen since the start of this year. That's one impact.

And the second one, as you mentioned, is that remember, during the crisis, everybody was looking for cash and trying to preserve cash. So all the spare parts inventories in all those shops have been depleted in fact. And now it's time because air traffic is coming back. So there's going to be more work in other shops. So time has come to, let's say, replenish their inventory.

[Pascal Bantegnie, CFO]

On the hedge book, I know you are not ignorant on that. We have a $45 billion hedge book. Most of our derivative instruments are options. Most of them have what we call a knockout barrier. That will be triggered in case the euro dollar comes up, meaning that if we go beyond $1.18, $1.20, in that case, we would lose part of our hedging.

When there is a rally towards parity, we are not at risk at all to have any crossing of KO barriers. On the other hand, we have what we call knock-in, KI barriers, which activate a number of options, which were not in our books before. So that's why we have this effect in our hedge book in -- at the end of June.

So the new hedges that we have put in place in H1 and not replacing older hedges, which would have been placed in the past. So it's new hedges on top of the current book.

Now your question on margins in Equipment & Defense, which were up by 2.6 points at 11.7%. It's a strong performance. Nothing unusual in this performance. It is a good performance because it's only almost 1 point below what we had in H1 2019.

2019, we were at 12.9%. And today, we are at 11.7%. So strong performance. Thanks to a very good mix with a strong recovery in services, I said up 28% and more or less across the board, landing gear, nacelles aerosystems and so on. So good mix. I'm very happy with the performance in Equipment & Defense.

[Olivier Andries, CEO]

Yes. Harry, I would like to stress that. I mean the Equipment division has been extremely resilient indeed, including during COVID crisis. And I mean, the dynamic on the aftermarket business and equipment is strong. It's a good surprise for us. It's very strong.

[Harry Breach, Stifel]

And Olivier, do -- should we think about the second half of equipment is possibly being even better than that first half margin? Or are there reasons why it might be lower?

[Pascal Bantegnie, CFO]

Year-over-year, Harry, we will see a good improvements in margin in equipment as expected. So we don't see so far, an upside. It's true that we are maybe on the upper side of what we thought.

[Operator]

So we have another question from Christophe Menard from Deutsche Bank.

[Christophe Menard, Deutsche Bank]

Yes. Apologies earlier. My phone is not as reliable as the CFM56, I guess. The first question was on the spare engine momentum. I was wondering whether, I mean, you need to deliver more OE engines. Is there an arbitrage to be done between OE volumes and spare engine volumes in H2, i.e., would you deliver fewer spare engine to privilege, so to say, or to give priority to the OE volumes and to Airbus and Boeing?

And the second question is the performance of the Aircraft Interior division. I mean you mentioned that you will be breaking even in H2 on some conditions. If you could repeat them, actually, it would be of interest. And my question was more about the disposal plan. I mean since it is probably performing a bit behind your expectations or below, would you extend the disposals you have in mind in those activities? Or you are focused on fixing what's not working at the moment on what's left?

[Olivier Andries, CEO]

Christophe, I will take the first one on spare engines. We have contracts, and we have to deliver on those contracts. So when we have 2 clients, 2 type of clients, we have the airframers on one side, and we have the airlines on the other side. So there can be sometimes adjustments in order to optimize the overall customer satisfaction, but you should not expect big swing to favor one over the other.

Remember, for us and for our airframers clients as well, it is essential to ensure that the airlines can keep flying, okay? So delivering spare engines to the airlines is absolutely key to help them keep flying.

[Pascal Bantegnie, CFO]

Christophe, on Aircraft Interiors. What we said is that we were moving the target to achieve the operating breakeven from the full year of 2022 to the second half of '22.

On one side, cabin is on track to the initial plan, so no change. But on the other hand, on seats activity, we have been constrained notably by the supply chain to deliver spare parts to our customers. So the fact that we will reach H2 operating breakeven is subject to, I will say, an easing in the supply chain in order for us to deliver and then invoice good spare part sales in the last months of the year.

[Olivier Andries, CEO]

In fact, we have accumulated, let's say, a late backlog on spare parts and our recovery, I mean, our breakeven target in H2 is totally dependent on our recovery of our late backlog of spare parts for seats.

[Pascal Bantegnie, CFO]

Then on the disposal plan, I don't think we are late with our plan. We closed a number of deals in the past semester. We've closed the disposal of arresting system. We've closed the disposal of our parachute business. We closed the acquisition of Orolia in navigation and timing. We are in the process of divesting other entities that we have not yet announced, but the process is ongoing and moving as per plan. So no change.

[Christophe Menard, Deutsche Bank]

I was not thinking about you being late, I was just thinking about you doing more of -- more divestments or are you sticking to the plan of 30%?

[Olivier Andries, CEO]

Yes. We are sticking to the plan. We are sticking to the plan. We said that 70% of the business is core and 30% is under review. We have to act timely. So for some of the assets that basically, we are basically within the span of the disposals and are basically in a profitable state, we can move for some of the assets, for some of the activities that are not in a profitable state, yet we need to fix it. It just makes sense. We are in a better shape to launch a disposal process after having fixed, let's say, the business.

[Operator]

So we have no further questions, gentlemen.

[Pascal Bantegnie, CFO]

Thank you.

[Olivier Andries, CEO]

Thank you.

[Pascal Bantegnie, CFO]

Thank you for your questions, and have a good summer break.

[Olivier Andries, CEO]

Yes. Enjoy your summer break, if you have one. Thank you.

[Operator]

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.