(Adds CEO, analyst comments; combines stories)
By Tim Hepher
PARIS, July 31 French aerospace group Safran
raised its profit target on the back of
higher-than-expected first-half earnings on Thursday, pushing
its shares higher despite slower services growth and rising R&D
The maker of jet engines, optical sensors and security
detection equipment said its adjusted recurring operating profit
- a measure of underlying performance - rose 16.5 percent to 981
million euros ($1.31 billion) in the half-year.
The results featured a sharp increase in margins at its core
aerospace propulsion unit, almost touching 20 percent, while
group revenue rose 4.4 percent to 7.208 billion euros.
Safran became the latest aerospace company to take issue
with recent investor concerns that the aviation market has
reached the top of its business cycle after a prolonged spending
spree by airlines that want to save fuel.
"Aerospace activities are still on a very good trend," Chief
Executive Jean-Paul Herteman told reporters.
Shares in the company rose 2.5 percent to 45.995 euros in
Safran upgraded its full-year forecast for growth in
recurring profit to a percentage "approaching the mid-teens,"
rather than the low double digits seen previously. It left its
"mid-single-digit" revenue growth target intact.
However, Safran said its widely watched civil aftermarket
rose 9.4 percent in the first half, or 6.5 percent in the second
quarter, a slowdown from the 12.4 percent seen in the first
three months of the year.
Executives said they were confident they could still hit a
full-year target of "low- to mid-teens" percentage growth after
an unfavourable comparison with last year's second quarter.
"Safran's target for the aftermarket this year looks
ambitious, especially given the very tough third-quarter
comparison," RBC Capital markets analysts said in a note.
Safran co-produces the engine for the Boeing 737 and some
Airbus A320s with General Electric through its CFM
venture, which celebrates its 40th anniversary this year.
It has sold 7,500 of the latest version of the engine, known
as LEAP, but has to invest in its supply chain to ensure it is
ready to keep up with further increases in jet production.
Based on the higher investments in LEAP and other new
engines, as well as uncertainty over the timing of payments from
government customers, Safran lowered its ambitions for
converting profits into cash this year.
It said its 2014 free cashflow would now represent 35
percent of recurring income, instead of close to 40 percent.
Herteman said one reason was that Boeing had asked for
faster development of the LEAP-1B engine for the next version of
its 737, although this did not necessarily mean an earlier entry
"The client has asked us to accelerate things which is a
good sign, but it also drags a little on cashflow," he said.
Britain's Rolls-Royce also said on Thursday it was
investing in new capacity and restructuring facilities as the
result of a large order backlog.
Safran said it would spend more money this year to
strengthen its supply chain, but was not interested in buying
any of its suppliers outright. R&D costs and capital spending
would accordingly rise in 2014, but fall in 2015/16, it said.
Safran meanwhile expects some impact on its Sagem defence
business as a result of new European Union and U.S. sanctions on
Russia, but said this would not affect the parent group.
"Our defence activities are 10 percent of the group total,
and Russia is not by any means the largest customer, so you are
talking about something barely material at the Safran level,"
Herteman told reporters on a conference call.
He did not elaborate on the Sagem technology that would be
(1 US dollar = 0.7467 euro)
(Editing by James Regan)