Safran Q3 sales disappoint, shares lower

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French aerospace group Safran announced slower growth in its engine parts business as it posted lower-than-expected third-quarter revenue, sending its shares sharply lower.

The maker of jet engines, infra-red army goggles and biometric scanning equipment posted a 5.2 percent rise in third-quarter revenue after a major acquisition in the security business compensated for lower defence sales.

But underlying security revenue fell and Safran lost momentum in the profitable area of spare parts sales for the CFM aircraft engine, co-produced with General Electric, Reuters reports.
“From a mix perspective this is bad because security is the fastest-growing business and civil spares is the highest margin business,” Espirito Santo Investment Bank told investors in Europe’s second-largest engine maker after Rolls-Royce .

Third-quarter group revenue rose to some 2.73 billion euros, implying a like-for-like increase of 4.2 percent. Analysts had been expecting total revenue of around 2.8 billion euros.

Shares in Safran fell more than 8 percent after the update, which analysts said raised concerns over two pillars for growth as the company expands to become a world leader in biometrics while relying on profits from engine sales and repairs.

Security revenue rose more than 13 percent on the recently completed purchase of L-1 Identity Solutions, but Safran said that underlying sales fell 2.9 percent.

Spare parts sales for the world’s most popular CFM engines, which power Boeing and Airbus short-range jets, rose 4.3 percent in dollar terms, much lower than the 13.4 percent annual growth recorded in the first half.

At 1039 GMT Safran shares were down 7.56 percent at 22.30 euros in their worst performance since joining the CAC40 index of leading French shares in September.

The after-sales market for the CFM, co-produced with General Electric, is a bellwether for the industry and is sensitive to changes in traffic and the world economy.

Chief Executive Jean-Paul Herteman said this activity had returned towards normal after a surge in the third quarter last year, caused by a backlog of work from the weak first half.

Airlines usually do not carry out major maintenance work in the northern hemisphere summer, which is their busiest period.
“The aerospace market remained very well positioned in the last few weeks and months, and we have not seen a reversal of that trend,” Herteman told reporters on a conference call.

Airbus and Boeing are ramping up production of narrowbody jets powered by GE and Safran to record levels, but some airlines have started to trim operations due to the latest wave of concern about the global economy.

NOT SIMPLE

For 2011, Safran still targets 2011 revenue growth of 6-9 percent and recurring operating income up 25-30 percent, with free cash flow at a third of its recurring operating profit.

It said in late July it had completed the $1 billion purchase of U.S. face-recognition software maker L-1 Identity Solutions, making it world leader in biometric identification.

L-1, whose products are used by border security agencies and financial institutions, joined Safran’s existing Morpho security business and was renamed Morpho Trust.

Safran, meanwhile, appeared to dampen expectations of a rapid end to the long-running saga of talks with French defence company Thales over a swap of defence assets.

The French government wants the two state-controlled companies to exchange overlapping assets in optronics and avionics estimated to be worth around half a billion dollars in order to avoid taxpayers funding the same research twice.
“The discussions are taking place in a positive atmosphere but the subject is not a simple one. It is about creating a new development in critical defence technology,” Herteman said.

Asked whether the talks, which resumed several months ago after breaking down last year, had got stuck on valuation, Herteman said: “Before talking about valuation, you have to be clear on the industrial logic.”



Sources familiar with the discussions denied a media report last week that the two sides were on the point of announcing an agreement. The chief executive of Thales was quoted at the weekend as saying the value of a deal still had to be agreed.