Safran SA

PAR:SAF

Earnings Call Transcript 2020-Q3

[Operator]

Welcome to the Safran Q3 2020 Revenue Conference Call.At this time, I would like to turn the conference over to your hosts, Philippe Petitcolin, Safran CEO; and Bernard Delpit, Group CFO.Mr. Petitcolin, please go ahead.

[Philippe Petitcolin, CEO & Director]

Thank you very much. And good morning, everyone. I thank you for joining us to this Q3 2020 revenue conference. First and more important, I hope that you are all safe and healthy.I will start the presentation with the Q3 business highlights, then I will talk about our recent air traffic trends and the impact on our activities. And I will end with an update on where we stand on our path to adapt Safran to this ongoing crisis. Afterwards, Bernard will go more in details on our financials. And I will conclude the presentation with our 2020 outlook.I'm now on Slide #5. In Q3, the activity is a bit better than in Q2, but we are still working at levels that are very low compared to 2019. Revenues at EUR 3.382 billion was down 42% on an organic basis compared to minus 47.5% in Q2. On an organic basis, all divisions did better than in Q2. September was better than July and August for Propulsion and Equipment but not for Aircraft Interiors. In the first 9 months, revenue decreased by 33.4% on an organic basis at EUR 12.149 billion.Turning on Slide 6, some propulsion business highlights for this quarter. In propulsion, we delivered 211 engines in Q3, including 172 LEAP engines compared to 455 in Q3 2019. Our market share on A320neo family remains at 61% as of September 30, 2020. And we delivered also 39 CFM56 compared to 69 in Q3 last year. Our civil aftermarket indicator decreased by 56.2% year-on-year in Q3, bringing it to a decrease of 41.8% for the 9 months. Bernard will give you more details on that. On helicopter turbines, the Airbus H160 helicopter equipped with our engine Arrano received its type certificate from EASA.Going to Slide 7 and the equipment, Defense, Aerosystems and interior divisions. Safran new-generation Euroflir optronic system has been chosen by the French navy for their H160 helicopters. In carbon brakes, Safran signed contracts with 2 Asian airlines for A320neo and Boeing 787-10. Even if Aircraft Interiors is the division that is the most affected by the COVID-19, Safran has been selected by a U.S. airline to provide business-class seats for its new 787 and by an Asian airline to provide economic-class seats for its future A321 and business-class seats for its new 787.Turning on Slide 9, an update on COVID-19 impacts on air traffic. The very uncertain landscape we were describing in July has evolved in different ways in different parts of the world. We see a very gradual recovery even if September has been weaker than what we expected this summer. We see encouraging signs of development of testing, but on the other hand we also see a resurgence of the COVID-19 cases in several regions of the world. The second wave of the pandemic is striking Europe. China remains the only main domestic market to have readily recovered. We are today between 95% and 98% of scheduled domestic flights, with up to 80% load factor. Last month, IATA has lowered its 2020 global RPK forecast to 66 -- to a reduction of 66% compared to 2019. It was, I'll remind you, minus 63% in July.After the steady increase in cycles for CFM that we have seen through Q2, the improvement in flight cycles has been modest for CFM56 engines through Q3. The improvement has been better for LEAP engines, which flight cycles are now down only minus 15% year-on-year on a global basis. The increase in flight cycles has been improving more steadily for GE90 and also more evenly around the world.On Slide 10, our main actions to reduce our costs. Our workforce has been downside -- is down by more than 15,000 permanent workers and by another 4,000 if you count temporary workers. The Activity Transformation agreement reached in France is valid until end of 2021 and renewable. It is getting implemented now. For instance, the long-term furlough scheme provided by the French government is in place since October 1. We estimate that this only scheme will allow Safran to maintain 6,000 jobs.At the end of September, purchasing programs are scaled down in line with the activity reduction. We have decreased raw material and supply expenses as well as subcontracting expenses by 42%. CapEx commitments are being cut by 74% in the first 9 months of 2020, above the objective of minus 60% for the full year. R&D expenses have been reduced by 33%. Finally, OpEx are decreased by more than 20% in the first 9 months of the year.Slide 11, to conclude my presentation, some key takeaways. First, we are dealing with a very uncertain environment, and the lack of visibility remains strong. We have observed a slight improvement in Q3 compared to Q2, but there is still some significant pressure on Q4. Safran's approach was quick, proactive. And the benefits of the adaptation plans are already materializing, thanks to a strong operational execution from all Safran's team worldwide. I do believe that measures that we have taken will structurally enhance the competitiveness of the group in order to benefit from the recovery. We have been profitable every single month since the month of April.As of today, a gradual recovery is still the central scenario, with air traffic expected to go back to 2019 levels by 2024. In this context, we think that civil aftermarket is likely to recover faster than OE. Safran is more exposed to narrowbody, and we see that the recovery is likely to be faster in domestic or regional routes on narrowbody. Having a young fleet as the CFM56 fleet is a key asset less likely to suffer from higher retirements [ on part of out after COVID-19 running ].As I have had the opportunity to see on several occasions, Safran is definitely committed to help resolve climate change challenge. The growing state support in 2020 and in the next couple of years will help us keep a high level of R&D activity.I now give the floor to Bernard for the financials.

[Bernard-Pierre Delpit]

Thank you, Philippe.And I'd like to jump to Slide 14, on FX. The average spot rate was $1.17 in Q3. It was $1.11 last year's Q3, and it creates a negative translation effect on revenues. Year-to-date, the average spot rate is now $1.12. And the accumulated impact of currency was a positive [ 53 ]. Under current spot conditions, the impact of currencies should turn negative for the full year at the end of Q4. Hedge rate is $1.16 in Q3, no change here, improved by $0.02 versus 2019.Still on hedging, a few comments on Slide 15 with regard to our hedge book. It totaled $24.9 billion as of October 15, up $3.3 billion from what we disclosed in July. For the period 2021, 2023, the average net exposure is revised downwards from $8 billion in 2020 to $10 billion in 2023, it was $11 billion before, to reflect a more cautious view on future dollar flows as lack of visibility remains strong. With the weakening of the dollar in the summer, some KO barriers have been triggered, leading to this activate some options for 2022 and 2023. New options have already been put in place to replace knock-out options within the targeted range of hedge rates. KO barriers have also been moved and are now between $1.21 and $1.27. And we closely monitor the situation, as volatility may be a risk for the hedge book, and the targeted hedge rate in case of sudden and significant weakening of the USD against euro in the next weeks.On Slide 17 (sic) [ 16 ], adjusted revenue for Q3. It reached EUR 3.382 billion in Q3 2020, down 44.5%. It is exactly the same amount of revenue as in Q2. Organic decrease was 42%, with a lesser deterioration for all the businesses compared to Q2 but still very heterogeneous. As I mentioned before, currency impact was negative during the quarter, and change in scope was almost neutral.On Slide 17, details on the revenue per activity in Q3.Our propulsion revenue were EUR 1.559 billion, down 47.8%, or 45.9% on an organic basis. OE revenue was down 48.8% due to LEAP production decrease and CFM56 continuous run-down. Services revenue in propulsion are down 47%. Civil aftermarket is down 52% (sic) [ 56.2% ]. This decrease is somehow not as strong as we expected, with spare parts sales for high-thrust engines, notably GE90, and services contracts better than anticipated, but as planned, M88 engine deliveries were down and amounted to 6 units in Q3 compared with 20 last year.Equipment revenues were EUR 1.461 billion, down 36.4%, or 33.6% on an organic basis. OE revenue for equipment was down 34.2%, mainly driven by lower volumes of nacelles; as well as wiring and power distribution activities; and to a lesser extent, by landing gears. Services within the equipment division were also down 41.1%, driven by carbon brakes; landing gears MRO; nacelle aftermarket; and to a lesser extent, by Aerosystems.Aircraft Interiors revenue were EUR 357 million, down 55.7%, or 51.8% on an organic basis. OE revenue within the division dropped by 51.9%. Sales were strongly impacted in cabins due to lower volumes for lavatories, galleys as well as catering. Seats programs, mainly business-class seats, were strongly impacted by delivery reschedulings. And within Passenger Solutions activities, connected cabin, air management and custom cabin interior activities were all impacted. Services revenue within Aircraft Interiors decreased by 64.9% mainly due to Seats aftermarket as well as Cabin spare parts sales.On the other hand, revenue decrease in Q3 were attenuated by more resilient businesses. Helicopter turbines activities improved, low double-digit increase compared to 2019. And within Defense activities, sighting and navigation system were flat compared to the year ago period.I will not comment here to-date sales on Slide 18. On Slide 19, I will only repeat that the 13 -- the 37.3% decrease in propulsion takes into account 41.8% decrease on civil aftermarket. I'll remind you that, in Q1, it was 3.3% negative. In Q2, it was 66%, and in Q3 it was 56.2%.Last words on liquidity. Safran liquidity position is strong and sound. The refinancing of the EUR 3 billion bridge facility is still going on, with a tap issue of EUR 200 million of convertible bonds in October on top of the EUR 800 million we issued in May 2020. And now more than the -- 50% of the bridge facility has already been refinanced. I'll remind you that on top of that we have a EUR 2.5 billion available RCF in case of dysfunctional commercial paper market.And now I'll leave the floor to Philippe on the final words on our annual guidance.

[Philippe Petitcolin, CEO & Director]

Thank you. Thank you, Bernard.On Slide 22, let me have a word on our 2020 guidance. Despite remaining uncertainties regarding the pace of air traffic's recovery, Safran is confident to meet its fiscal year 2020 outlook, with adjusted revenue to decrease by approximately 35%, recurring operating margin around 10% of sales and generation of positive free cash flow in H2.This is the end of our presentations. Bernard and I are now ready for any questions you may have.Thank you.

[Operator]

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

[Olivier Brochet, Research Analyst]

I would have two, please. The first one, on civil aftermarket, if you could give us some elements of color around the breakdowns between services, spares, the content; number of shop visits; and so on. And the second question is in H1 you mentioned in -- a second half headwind from payments to certain airframer. Is there any remaining such headwind in Q4, please?

[Philippe Petitcolin, CEO & Director]

Thank you, Olivier. I will start with the first question. I will let Bernard to maybe get a bit more color and details on the civil aftermarket question. And I will let him answer the question on cash coming from airframers. In terms of civil aftermarket, as you could see, we -- in Q3, we do better than in Q2. That was expected. Nevertheless, when we look at the color of this index for the rest of the year and the beginning even of 2021, there is a reduction in the quantity of shop visits, especially for the CFM56 engines. Basically we are around 50% reduction in quantity of shop visits compared to what we got last year. We didn't see a reduction of value per shop visit. It's always a kind of questions that people have. Do you see a huge reduction or a big reduction in the value of shop visits? Not really. There is a small reduction in some of them, but it's not really material. The improvement, as we said in the presentation, compared to Q2, in Q3 is coming mainly from services and widebody engine, especially the GE90 which is doing a lot better because GE90 is flying a lot more than what we were expecting. Don't forget that the 777 is today the airplane of choice for freighters. And they use the GE90 a lot for freighters. So we do a lot better in GE90 on services. We do better on -- generally speaking in services. And in terms of CFM, we are in line with what we were expecting. Bernard?

[Bernard-Pierre Delpit]

Yes, some more color. As Philippe said, the volume of shop visits is approximately the same profile as the total aftermarket sales. So it's approximately 50% down at the end of September. And we have more shop visits in Q3 as in Q2. That's the rebound that we have seen. If I try to break down the civil aftermarket, the 56% in Q3, it's more or less 66% for spare parts but 34% [ only ] for contracts. So parts are always -- are still depressed, I will say, but contracts have improved in Q3. And year-to-date, the 41.8% decrease, it's 48% on parts and 26% on contracts. For Q4, we expect that for parts -- I mean for CFM56 parts we see some improvement in Q4. I expect that for high-thrust engines the good trends that we've seen in Q3 will remain. For contracts, it's a bit early to tell. It might have some negative impacts of what we do every end of year in terms of regulations -- regularization for some contracts, but then we believe that Q4 will be okay for aftermarket, still on the trend, positive trends, that we've seen in Q3.Now for the cash, yes, I still consider that we'll have some negative or, let's say, some headwinds in terms of working cap in the next months and for the reasons that I gave when making comments for the H1 results. We have some agreements with airframers to flow to them some of our concessions back in a given number of days. That's what we have decided with the airframers, and this will be a headwind in Q4. And that's why we still are very cautious on the free cash generation in Q4, but we are confident we can keep it positive.

[Olivier Brochet, Research Analyst]

Just to come back 1 second on the Q4 on aftermarket. I'm not sure if I understand correctly because you suggest that there is an improvement, but at the same time you should -- you say that it is on the same trend as Q3 and which was pretty much down. So...

[Bernard-Pierre Delpit]

It's pretty much down, but it's less down than in Q2. That's what I [ suggested ]...

[Olivier Brochet, Research Analyst]

[ So in Q2 ]. It's compared to Q2, yes.

[Bernard-Pierre Delpit]

Yes.

[Philippe Petitcolin, CEO & Director]

Yes. Q3 is better than Q2, and Q4 should be better than Q3. That what he said.

[Operator]

Next question, from Ben Heelan from Bank of America.

[Benjamin Michael Heelan, Analyst]

I wanted to ask. We saw kind of the headlines on Airbus and on Airbus' call this week that they'd asked the supply chain to ramp -- to be prepared and to protect to ramp A320 to rate 47. I was wondering. What are the implications of that for you in terms of CapEx, staffing, inventory as you head into 2021? And then a second question, on Boeing and the ramp of the MAX. Do you see a decent ramp-up of 737 MAX deliveries of LEAP-1B next year? Or do you think it will be relatively slow?

[Philippe Petitcolin, CEO & Director]

Thank you for these questions, Ben. Regarding A320, we are in discussions, of course, with Airbus in order to meet their requirements. And we are in a negotiation which is in my opinion extremely good. And I believe that we should be in line with the requirement of our customers in the next coming days or weeks. So I do not foresee a problem with Airbus, as long, of course, as the requirements materialize. We want to be sure that it's not only a wish list but it's something where there are some commitments. Do not forget that we have stopped for a long period of time some parts of our supply chain. For example, the big forging, the big casting suppliers, they didn't want to stop their deliveries during the first phase of the crisis. And we had to buy a lot of parts that we didn't need on a short-time basis, so now we have to use all these inventory. And at the time we relaunch the supply chain, we want to be sure it is so good. It's not something which is going to last a couple of months and then drop again. We -- in our business, we don't like sharp movements. We like soft movements. So if it's a sharp increase, okay, as long as we are not, yes, 2 months or 3 months later with a sharp decline. So in terms of CapEx and in terms of workforce, we are fine. Don't forget that we set up a production system on the LEAP engines in order to be able to build 2,300 engines. So we are talking in 2020 of something 800-plus LEAPs to be produced, and next year should be broadly in the same vein. So we have plenty of investments to do what is requested today by Airbus, so no problem. In terms of workforce, by the same thing, we will have a lot of people in furlough that we are going to bring back to full-time work. So we do not expect any problem on this side. The only question is, is it real or not?For the MAX, the ramp-up in 2021 will be slow. That's the way I see it. We expect now a return to service, a green light coming from the authorities, especially the North American authorities, in the next coming weeks. And from there, the production which has already restarted at Boeing will continue to grow, but don't forget that they have more than 450 airplanes on the tarmac sitting, and they will have to take that into consideration before thinking about increasing their production rates. So we are in line with what Boeing said that, by the beginning of 2022, they would be somewhere at -- in the range of 31 airplanes a month. So we are in line with that, but do not expect in 2021 a huge impact of the ramping up of the MAX on our engines. I hope it answers your question, Ben.

[Benjamin Michael Heelan, Analyst]

Yes, no, that's great, Philippe.

[Operator]

Next question, from George Zhao from Bernstein.

[George Zhao, Research Analyst]

If we contrast the engine aftermarket versus the equipment aftermarket, in which one are operators incorporating higher utilization of used service materials today? And how do you see that going forward? And I guess, related to that, across the different products within your equipment business, so nacelles, landing systems, wheels and brakes, et cetera, I guess, how would you contrast or rank them in terms of the inclination for operators to turn to USM?

[Philippe Petitcolin, CEO & Director]

Thank you, George, for this question. In fact, we do not see really a great use of used parts in equipment. It happens, but usually we don't have a lot of used parts, and this is not the kind of thing we see. If you talk about carbon brakes, for example, used carbon brakes do not exist. You have to -- as soon as they have been used, you have to reinforce and put more carbon in them before sending them to the airlines. So it doesn't happen. In interiors, we see a few used parts could be used on seats, but generally speaking the percentage of used parts in equipment and interiors is extremely low, by essence because of the products do not like to use used parts and by the fact that there is not really a huge network which has been developed around this kind of opportunity. In engines, of course, we all know that used parts is a common factor of the competitiveness of a shop visit, but we do not see a lot of retirements of CFM engines airplanes. We didn't see since the beginning of 2020 an increase in terms of retirements of the airplanes. So there you don't see a huge amount of available spare parts, used spare parts. So again more, generally speaking, in engines than in equipment, but we do not have a trend where we would see a lot more used parts available on the market.

[Operator]

Next question, from Robert Stallard from Vertical Research.

[Robert Alan Stallard, Partner]

Philippe, a couple of the U.S. aerospace companies were talking about using this downturn as an opportunity to take out structural floor space. I was wondering if you have some similar opportunities at Safran as this downturn continues. That's the first question. And then secondly, on interiors. As you noted, it's got a bit worse in Q3. When do you expect this part of your business to trough out?

[Philippe Petitcolin, CEO & Director]

Thank you for these questions, Robert. Regarding the floor space, you have 2 kinds of floor space. You have the one for production, and you have the one for all the support functions. So with the -- what we are doing every day in order to remain competitive and reduce our costs, yes, we are going and we have already started to get rid of some plants. We are closing -- we have closed a plant in Thailand. We have closed 2 plants in the U.S. We have closed plants in the U.K. And of course, we try to take advantage of this reduction in terms of recurring costs for the future. So yes, but it is directly related to the consolidation of our business and the consolidation of our operations. The second part of floor space is related to people in engineering, people in support functions, where today there is really a push from governments for them to work from home. We have not yet factored an improvement in terms of costs coming from this part of our company. I am not a huge pro of working from home. Don't forget that we use very big computers. We use big systems, and especially in R&D you need the people to work together. So in engineering, yes for working from home but not full time, and same thing for the support functions. We think that it is nice but not what -- not at 100%. I believe that the company is made of people; and the people have to meet, have to discuss, have to work together. And by definition, working from home is not really a catalyst for this support and this competitiveness coming from working together. So we have today at Safran a system where people work from home for support functions 2 to 3 days a week, and I would like to try to keep that on the future. And for engineering functions, they are part of the business. They are part. I cannot imagine production people working alone in a plant and all the support being from home. You need to work together. That's the reason I think that engineering should mostly be done from the company, but for support function, I would agree with you. We still have some improvement to make and cost reduction coming from a reduction of floor space for support function.Interiors, question on interiors on how are they doing. Yes, as you just said, they have been hit more than others by the crisis just because they depend a lot directly from airlines. And airlines today do not cancel but delay, push on the right all their orders. So in terms of recovery for our interior business, I do not see it in 2021. I think that 2021 should be a year where we would be at breakeven. I mean the objectives for 2021 is a good breakeven, is a nice breakeven, but the recovery of interiors should come in 2022.

[Operator]

Next question, from Jeremy Bragg from Redburn.

[Jeremy David Bragg, Research Analyst]

Two questions, please. And another one on 737 MAX and a slightly different angle on this. So Boeing have got 450 aircraft. They've admitted that they need to reconfigure and remarket quite a number of those, so put it another way, they've got quite a number of white tails. And quite a number of those aircraft were originally destined for China, where it might take a bit longer to get approval for the aircraft to fly again. So what I really wanted to understand is how that kind of impacts you in terms of pricing on the engine and your sort of views on pricing on the LEAP-1B generally going forward. And then the second thing, please, Philippe, is could you give us, say, an update on the supply chain and the health of that. Because that's something that's really hard for us to see outside the company.

[Philippe Petitcolin, CEO & Director]

Well, these are difficult questions, Jeremy, but I will try to answer them. Regarding the MAX, you're right. When you look at these 450-plus airplanes which have to be delivered, I believe that today there is a percentage of them which have to be reconfigured. I'm not talking about white tails. White tail is a plane that you build without a defined customer. The 450 airplanes which are sitting today at Boeing, they have customers. They may have lost their customers because bankrolled, because contractual disclosure, but when they built these airplanes, they have customers. So we think that it's a Boeing problem. And we are not directly involved in this situation because the situation is coming from the grounding, and Boeing now has to find customers to reconfigure these airplanes. For the future of the LEAP-1B, it's a different story. We are a risk-sharing partner of Boeing. And of course, we are a 100% risk-sharing partner, so if Boeing has to make some marketing effort in order to sell new airplanes, of course, we'll be next to Boeing and work with Boeing.Regarding our supply chain, of course, it is something that we are really looking in details, especially now. We have a kind of watch tower where we follow today about 620 suppliers. So these 620 suppliers are really screened on a regular basis by our people. And from there, you have about 440 which are French, so mainly coming from France. We found that on these 620 you have about 100 which are critical. We cannot let them down. And so we really are behind them, helping them as much as we can. And as you know, we are part of a kind of equity fund, and Bernard may give you a little bit of color on this equity fund, that is supposed and will support these suppliers that we really need for the future, either by bringing them some cash or by acquiring them if necessary. Bernard?

[Bernard-Pierre Delpit]

Yes. There are many ways to support our supply chain, and the first one is the one that is activated by the government and by banks. In France, we have specific loans that have been granted to the supply chain. So sometimes, for small suppliers, we help them having access to those loans. And the second way of supporting supply chain is the equity fund that Philippe just mentioned. It's something that we already talked about in July. We have invested EUR 58 million in an equity fund that is now EUR 630 million funded by the French government; by the main aerospace -- French aerospace company with Airbus, Thales, Dassault and ourselves; and lastly, by Tikehau, a PE firm. So -- and I think that they will continue to raise fund in order to get from EUR 630 million to EUR 1 billion, which is the target. And this fund is now completely operating. And they have announced a first transaction, I think it was 2 days ago, for a small supplier in France. So we think we have the tools. We have the structure in terms of watch tower in order to be sure and to coordinate actions within all the big aerospace company in France. So we know it's critical. It's a key issue in order to keep the -- our whole business healthy. And as Philippe said, we have 100 suppliers that we follow to be sure that, once we ramp up, they are there to follow up the efforts.

[Jeremy David Bragg, Research Analyst]

Could I just ask a quick follow-up one on the pricing on LEAP-1B? Would you be mostly talking about working with Boeing and standing beside them as a risk-sharing partner on the OE pricing? And I'm guessing you'd be far less inclined to discount pricing on spares or any long-term agreements on those -- on the aftermarket on those engines, please.

[Philippe Petitcolin, CEO & Director]

Well, it's both, in fact, Jeremy. We -- when you're a partner, you're a partner for the total life of a product. So of course, we will support Boeing, and it is contractual. We will support Boeing for the OE sales. And if we need to help also on the service side, we'll do our best. Our objective is, of course, to be sure that Boeing wins new contracts and we'll do our share of the work.

[Operator]

Next question, from Nick Cunningham from Agency Partners.

[Nick Cunningham, Managing Partner]

Yes. Boeing said several times that it expects the oldest tranche of aircraft, perhaps the oldest 5 years worth, which I think is about 16% of the fleet, have to retire very quickly. And they said on Wednesday that they thought that would have a sort of multiyear recession impact on their aftermarket services business. So the question is, does that apply to Safran? And if so, in what way? I'm guessing it's much more equipment and propulsion for those, let's say, 1990s aircrafts. And the second one is, do you expect...

[Philippe Petitcolin, CEO & Director]

Could you come back on the first question, Nick? I didn't really understand the first question.

[Nick Cunningham, Managing Partner]

Yes. Well, the first question is, if the oldest 5 years worth of aircraft retires and so therefore you end up with a much younger fleet -- so that's what -- Boeing seems to be saying that, that will impact on their Boeing Global Services Business going forward...

[Philippe Petitcolin, CEO & Director]

Okay, understood, yes. I understood the question. Okay, all right. Second question?

[Nick Cunningham, Managing Partner]

And [indiscernible] -- yes. And the second question is practically closely linked, which is that if you have that younger fleet, will that impact on the replacement element of OE demand over the next, I don't know, 5 years, decade or whatever as we get into recovery.

[Philippe Petitcolin, CEO & Director]

Well, that's, okay, 2 big questions. In terms of aging of the airplane and the implementation of this in terms of influence on services, it's different from if you talk about propulsion and if you talk about equipment. For propulsion, as we said already many times, during the life of an engine, you have 3, 4 shop visits. The first 2 shop visits, which happen after 6, 7, 8 years for the first one, according to the number of cycles the engine fly and where they fly -- second one, 12, 14 years; third one, 17, 18; and the fourth one, if there is any, 20, 21, 22 years after entering to service. We really make our money in terms of selling new spare parts in the first 2 shop visits. Starting on the third one, you see more and more used parts. So when you talk about the last shop visit, if you do a shop visit after 18 years, for example, you have 90% of used parts in the engine, so only 10% of new parts. So the influence of the aging of an airplane on our propulsion business is very limited because, again, we make our money for the first 15 years of services of an airplane. For equipment it's different because some MRO are done, for example, after so many years. You don't care if -- like for landing gear, for example, the [ revision ] of the landing gear has to be done after, for example, 10 years, every 10 years. It doesn't matter if the airplane flies 10 times a day or only 2 times a day. You have to do it after so many years, 8 years or 10 years. So in this one, of course, the age of the airplane has some importance, but it is factored already in all our business plans. And I do not see really a big impact if these 25 years could drop to 20 years. Very limited impact, if any, on our products.Then the second question is on OE. If there are more OE, is it a problem for us in terms of services? Not really. We have a match. As you know, our business is down at, in propulsion, 45% OE, 55% services. In equipment is 70% -- 65%, 70%, between 65% and 70% OE; 30% to 35% in services. And for interiors, it's even less in terms of services. So it's a mix of both. And you are healthy if you do not depend only of services and if you have a good mix between OE and services. So that's what we want to keep. And so far, when we look at the fleet which are flying today and we look at what the airframers are saying in terms of new airplanes, we believe that we have a good split of businesses both for propulsion and equipment between what we do in OE and what we do in services.

[Operator]

Next question, from Zafar Khan from Societe Generale.,

[Zafar Khan, Equity Analyst]

Bernard, I like your Slide 15, the currency one. It's always very helpful. And what I find particularly interesting this time is how you've adjusted the net exposure requirements going forward. And you've downgraded, revised down the 2023 from $11 billion to $10 billion. And then I assume, hopefully, we get back to $11 billion in 2024. Is this a good proxy for how you see the sales volumes in the civil business? In other words, from this can I interpret that maybe we get back to the 2019 levels of sales volume by about 2024?

[Bernard-Pierre Delpit]

Okay. In fact, there are 2 questions. The first one is how we measure our exposure for our hedging policy, and the second one is when do we see the level of activity coming back to 2019 levels. And I think we should deal with both questions and not trying to use our dollar exposure as a proxy for the business. Yes, we have revised down our exposure because of activity but also because we don't want to be trapped by averaging. So we need to be more conservative when we do our hedging policy than for just planning reasons. So we -- I don't know if we are too conservative when we look at 2023, but I prefer to have conservative views on that rather than still thinking that we have to hedge a lot of volumes that may not happen. Now the question is, when do we see our activity back to 2019 levels? I think that, first, we have to remind that 2019 was a record year for Safran in terms of everything, including in terms of organic sales. And for example, for military services, for spare engines, 2019 was a very strong year. Now we see our activity back to 2019, I would say, in '24 or '23 or '25. It depends on which kind of activity. For example, for LEAP volumes, I think that's in '24, but it will depend on the ramp-up of the MAX. We could come back to the volumes that we delivered in 2019. For CFM56 aftermarket, we think that '23 could be the year that we would recover 2019 level. And for other OE and equipment, that could be between '24 and '25, so it's a mix of a lot of things and you shouldn't take our exposure as a proxy for planning activity.

[Zafar Khan, Equity Analyst]

That's a very comprehensive answer. Could I please just ask a little simple one where I'm struggling slightly, the Rolls-Royce hedging? And because they had to cut that from $36 billion to $26 billion. It's costing GBP 1.4 billion in cash. How is your hedging different to the sort of thing that Rolls were doing? Is this revising down was going to cost you very much? Or is that already in the option prices when you bought the hedging?

[Bernard-Pierre Delpit]

In fact, the big difference between some players and ourselves is that we use options. And by hedging through options, we have more flexibility because, when you get forward sales, you have to deliver the volume of hedging that you have bought within the transaction with the banks. With options, and it depends on the how it works, you have some flexibility to move an option from 1 year to another year. This is why we -- I don't think we are exposed to the same kind of issues that you've just mentioned. This is not a reason to overshoot in terms of hedging, of course, but that's a big difference between some players and ourselves, options. It has some risks because of KO barrier that we explain every quarter, but it has some merits because we don't pay for swap points. And we have some flexibility in terms of volumes of dollars, in our case, we have to deliver every year.

[Operator]

Next question, from Andrew Humphrey from Morgan Stanley.

[Andrew Edward Humphrey, Vice President]

Just a couple from me. The first one is you've clearly made some very good progress on cost containment and cost reductions during the year. Could you quantify, to the extent it's relevant and -- what the numbers that you've given would have been, I guess, kind of ex the government support you've received? Just so we can have an idea of what the kind of underlying cost reductions have been. And the second point is -- or the second question, rather, is a broader question following up on something Nick asked. I wanted to ask if you could kind of characterize current discussions with airlines. You've obviously said that most of the aftermarket value that you generate in spares comes in the first or second shop visits. I wanted to ask to what extent you're having discussions around those second shop visits at the moment; when and whether airlines might be thinking about what to do with engines when they get towards, I don't know, 15 years and a second D check; and how you -- whether you see a kind of significant increase in risk around early retirement of those engines.

[Philippe Petitcolin, CEO & Director]

Bernard, maybe you can take the first one.

[Bernard-Pierre Delpit]

The first one, yes. I don't want to break down our [ cost effort ] between what we self help and what we'll get from the government, but I will say that the vast majority of savings will come from self help. And the target in terms of amount is roughly 2 billion of cost-out.

[Philippe Petitcolin, CEO & Director]

Yes. And when we look at what we do on the entire national side and what we do on our French side, of course, we are not using the same tools to bring this level of reduction. We are forced by some countries to lay off people, to close plants. In France, the support program coming from the government is very generous and let us keep the people. Even if they stay home, they are paid partially by the government. So this is a system which, at the end of the day, as we have about 50% of our staffs, workforce in France and 50% international, we come to the same kind of effort requested by the 2 sides. So all in all, I mean, what we are doing in France and what we are doing abroad is similar in terms of cost reduction. As Bernard said, we -- today, we come to a total number of around 2 billion...

[Bernard-Pierre Delpit]

Yes, versus 2019, yes.

[Philippe Petitcolin, CEO & Director]

So second question, Andrew, is related to airlines. In fact, to be totally honest with you, we don't have a lot of discussions with airlines. We talk with airlines when they are really a requirement; when there is a need; or when they want specific systems or conditions given to them, especially in terms of postponing some orders, asking for longer terms of payment. This is the kind of thing we discuss today with airlines, yes. They are really looking at their capacity to remain alive in the next 6 months. And again, they don't spend really too much time looking at what they should be doing in a year, 2 years or 5 years from now. So sorry to give you this kind of answer, but it is the truth. We do not have a lot of long-term discussions on the future of airlines. They really, in my opinion, today are more in a survival mode than in a long-term investment mode. Last questions?

[Operator]

Yes. Last question, from Tristan Sanson from Exane.

[Tristan Sanson]

So it's going to be 2 quick ones. The first one is on your full year trajectory. So your cost-saving plan is a bit ahead of schedule. The aftermarket for this year is clearly ahead of schedule. If you have Q4 organic growth similar to Q3, you're more on a pace of minus 45%, 46% [ than ] minus 50%. There are only 2 months to go left to the end of the year. What are the key elements of uncertainties that prevents you today to be a bit more optimistic on your full year trajectory? That will be the first one. And the second question would be on the R&D spending trajectory. You're aiming at a quite strong decrease in R&D spending this year. How sustainable is that R&D spending cut? And how long can you fund your strategic development priorities with that? That will be my second question.

[Bernard-Pierre Delpit]

Okay, [ well done ], Tristan. I will take the first one. You have it right. I mean the kind of Q4 that we are monitoring or looking at is not exactly the one that implies going to 50% decrease when you look at where we are at the end of Q3. We've not changed the guidance because there is -- there are 2 months to go now and there are still some uncertainty. That's why refining the 50% for 100 or 200 basis points is not really what matters today. And what is key is to know if some shops will anticipate '21 for some purchasings in December. We don't know exactly. That's why keeping the same assumption, I think, was the right way to look at that, but it could be better. That's true. The 50% is maybe too pessimistic, but -- and we didn't change it. That's right. And...

[Philippe Petitcolin, CEO & Director]

It's not pessimistic, Bernard. It's conservative.

[Bernard-Pierre Delpit]

It's conservative. You're -- this is right. So that's how we see Q4.

[Philippe Petitcolin, CEO & Director]

Okay. The last part of your question, Tristan, regarding R&D. In fact, when you look at R&D, this is the R&D that is in our costs. We have not really touched any single element of our innovation picture and map for the future. We have delayed a little bit some things, but we have concerned nothing, especially regarding the climate change and what we have to do for the next generation of engine. We have cut absolutely nothing. We have -- at the end of the day, when you look on our midterm plan, we have about 3/4 delayed on average on everything we do, but we have concerned nothing. And do not forget that, in addition to what you see in our numbers, there are a lot coming -- funding coming from governments, especially from the French government. As you know, they have doubled the spending for innovation, going from roughly EUR 150 million a year for the total industry, not only to us -- but we usually take 30% to 40% of that. They are going in 2020 from EUR 150 million to EUR 300 million. And for 2021 and 2022, they are already committed to EUR 600 million. So we believe that this support of government -- and in addition to that, we should get -- I hope. We should get some funding also coming from Europe, but as you know, the budget has not been negotiated and we are still waiting. And we are not expecting really a lot of support from Europe before 2022, but it's going to be also, I hope, quite massive. So all in all, we keep our trajectory. We keep our map in terms of innovation. We are working on all the things, especially the decarbonation of our industry. And at the end of the day, when you compare apple and apple, we lost basically 3/4 but nothing...

[Tristan Sanson]

Okay, that's very clear. If I may, as I'm the last one: I think, Philippe, it's your last conference call as CEO of Safran, so I just wanted to take 30 seconds to thank you so much for your incredible contributions for that company and tell you best wishes for the future.

[Philippe Petitcolin, CEO & Director]

Thank you, Tristan. That's very nice of you.Thank you all for attending this session. I wish you a good health; and a good weekend, if you are in a country where you are allowed to move. Thank you very much. See you.

[Operator]

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