Airbus SE (AIR) Earnings Call Transcript & Summary

Thanks, Aurelia, and good morning, everyone. Welcome to Airbus's conference call on the Nine-Month 2020 Results Release. Guillaume Faury, our CEO, and Dominik Asam, our CFO, are here to present the results and take your questions. We expect this call to run for roughly one hour, including Q&A, which will follow the initial presentation. The call is being webcast as well, and you can reach it through our homepage, where a special banner has been set up. A playback will be available on the website, though we do not offer a dedicated phone replay service. The supporting information package went out to you by email earlier this morning, and it contains the slides we will now walk you through, along with the financial statements. During this call, we will be making forward-looking statements. The package you received includes the safe harbor statement, which applies to this call too. Please take the time to read it carefully. Guillaume, over to you.

Thanks, Thorsten. Good morning, everyone. Welcome to the call on our results for the first nine months of 2020. We appreciate your joining us today. I truly hope all of you are doing well. Although we did see some signs of improvement in air traffic as H1 came to a close, the summer recovery turned out to be slower than we had anticipated and hoped for. The virus continues to circulate. In most parts of the world, travel restrictions are still in force. Airlines are in a tough spot. Prospects for a rebound in global air travel have worsened, which shows that this crisis is nowhere near finished. A great deal of uncertainty persists, particularly regarding how COVID-19 cases evolve around the world and how travel restrictions develop. Against this backdrop, we stay prudent and humble. Overall, our Airbus trajectory is still inside the corridor of expectations underpinning what we communicated at H1. We made further headway on containing cash and adapting the business, and those efforts remain on track. Free cash flow for the nine months, before M&A and customer financing, came in at -EUR 11.8 billion, and that figure includes payment of EUR 3.6 billion in penalties during Q1. Our EBIT adjusted stood at -EUR 0.1 billion, which includes -EUR 1 billion in charges tied to COVID-19, with -EUR 0.1 of that recognized in the third quarter. On the workforce adaptation plan, we have progressed well together with our social partners, and we recognized a EUR 1.2 billion restructuring provision in Q3, which appears in our EBIT reported.

Our solid liquidity cushion is going to back us up as we keep working on what we're doing. It also gives us room to respond if fresh difficulties arise — and fresh difficulties will arise. We're safeguarding our capacity to put money into projects, to innovate, to expand, and to deliver results once more after the crisis, so that we can get back to normal operations from a position of strength when conditions improve again. We stay in constant touch with our customers, reviewing each situation individually, to reach agreements that work for both sides. That intensive cooperation shows up in the third-quarter deliveries. In fact, 145 aircraft were handed over, and as planned, production and deliveries came together during the quarter. In line with the ambition we shared with you in H1, we also halted cash burn in Q3. Indeed, free cash flow before M&A and customer financing came in at +EUR 0.6 billion for the third quarter. Even though uncertainties remain, given the measures now in place and the visibility Q3 gave us, we're comfortable enough to provide free cash flow guidance for the fourth quarter of 2020. Next slide. Before turning to the commercial aircraft environment, I want to brief you on where two topics that matter a great deal to Airbus — the WTO disputes and Brexit — recently stand.

The WTO recently ruled that the European Union may apply close to $4 billion in yearly countermeasures. Airbus backs every step required to establish fair competition and to bring back fair competition, and it keeps supporting the EU's dedication to reaching a negotiated resolution of this dispute that has gone on for so long, so that lose-lose tariffs are avoided. Turning to Brexit, the talks are approaching their end. We are still worried about the danger of a no-deal outcome. We keep preparing for that scenario in order to further eliminate and reduce risks. We keep seeking additional clarity, especially regarding regulatory alignment, so that we can plan properly for what lies ahead. How the future relationship between the EU and the U.K. takes shape remains of critical importance to us. Let's turn to the commercial aircraft environment. Worldwide air traffic has kept climbing from the low point hit in April, yet the recovery has lost pace since the summer because of a growing count of COVID-19 cases and because of travel restrictions that are getting tighter. Domestic markets keep leading the recovery, especially in China, but the pandemic's resurgence has slowed progress across many other regions. International demand is still weak, and in many countries quarantine is still mandatory for travelers.

From the start of the crisis, we have logged 4 cancellations. As I mentioned earlier, airlines are still in a tough spot, and the crisis has hit their balance sheets. We still anticipate that air traffic will return to its 2019 level somewhere between 2023 and 2025. Single-aisle markets will drive the recovery, while wide-body will trail behind. Given the agreements we have reached with customers, a second wave of the COVID-19 pandemic could mean current production levels are kept for a longer period and might affect the timing and pace of the future single-aisle ramp up. We are keeping our supply chain informed so that our industrial ecosystems will be properly ready to raise output step by step once the right conditions arrive. Where do we stand on orders and deliveries so far this year? Our backlog was 7,441 aircraft at the end of September. We took 370 gross orders, comprising 349 single-aisle and 21 wide-bodies. Net orders came to 300 aircraft, after 70 aircraft were cancelled, including three aircraft in the third quarter. Next page. Turning to helicopters. In the nine months 2020, we booked 143 net orders, compared with the 173 in nine months 2019. The 68 net orders booked in Q3 include six H160 following the certification by EASA last July.

That was clearly a big milestone for us — one H215 for Nakanihon Air. We've also just signed a firm contract to develop an upgraded version of the NH90 for the French Special Forces. And we've booked a support contract with NASA covering its fleet of H135 helicopters. We expect the civil and parapublic market to stay soft, especially in oil and gas, given that lower oil prices persist. Then in defense and space, during the nine months of 2020, order intake came to EUR 8.2 billion, up 35% compared with last year, and that includes contract wins in telecom satellites in the U.K. and the Middle East in the third quarter. We also got a firm order for an A330 MRTT from OCCAR, placed on NATO's behalf. On FCAS, the Future Combat Air System, France and Germany and Spain recently signed an agreement bringing Spain into the demonstrator phase 1A. Negotiations among the industry partners on the phase 1B proposals are still going on. We're making good progress on that very important project. On the Eurofighter, we're waiting on the replacement of the existing Tranche 1 fleet in Germany, which is also called Quadriga. Still, the exact timing of the contract award is hard to predict.

Beyond that, we see additional chances for this initiative in Germany, Spain, Switzerland and Finland. As for the Eurodrone project, talks remain in progress. Finally, we expect that European defense budgets — whether national or European — will underpin the effort to build European sovereignty, and Airbus aims to be a major player in that endeavor. Dominik, over to you now. Dominik will walk you through our financials. Dominik?

Thanks, Guillaume, and good morning, everyone. For the first nine months of 2020, our revenues fell to EUR 30.2 billion, a 35% decline compared with a year earlier. That drop was driven by the tough market conditions weighing on our commercial aircraft business, since we handed over roughly 40% fewer aircraft year-on-year, partly offset by more favorable foreign exchange hedge rates. Our nine-month EBIT adjusted came in at -EUR 0.1 billion. That figure mirrors reduced commercial aircraft deliveries along with certain idle costs. We have taken the steps needed to align our cost structure with the new production levels, and those benefits are starting to show as we carry out our plan. Nine-month EBIT adjusted also includes -EUR 1 billion of charges booked for impairments and write-offs brought about by COVID-19, with -EUR 0.1 billion of that in Q3. Q3 EBIT adjusted reached EUR 0.8 billion, largely a reflection of fewer commercial aircraft deliveries and reduced activity in the space business. Our nine-month EPS adjusted is -EUR 0.32 per share, based on an average of 783 million shares. Nine-month free cash flow before M&A and customer financing was -EUR 11.8 billion, including +EUR 0.6 billion in Q3. Free cash flow in Q3 reflects a higher level of deliveries than in the previous quarter, our cash containment efforts, and a strong emphasis on managing working capital.

Moving to the next page, which covers profitability. For the nine months of 2020, reported EBIT came in at -EUR 2.2 billion. EBIT adjustments amounted to a net -EUR 2.1 billion, and that figure included -EUR 1.2 billion recorded in Q3 tied to the group-wide restructuring plan. This amount factors in government support measures. It captures where negotiations with our social partners currently stand. As a result, it may be revisited. There was -EUR 358 million tied to A380 program costs, with -EUR 26 of that booked in Q3. Foreign exchange and balance sheet revaluation produced a negative impact of -EUR 374 million, of which -EUR 209 million fell in Q3, and other costs came to -EUR 128 million, compliance costs among them, with -EUR 11 in Q3. Reported EPS includes -EUR 712 million in financial results. That largely mirrors a net -EUR 291 million tied to Dassault Aviation, along with an RLI remeasurement of -EUR 236 million, stemming mainly from amendments to the French and Spanish contracts reflecting what the WTO regards as the appropriate interest rate and risk assessment benchmarks. It also takes in the impairment of the loan to OneWeb, which was recognized back in Q1. The tax rate on the core business stands at around 27%. On the net loss, the effective tax rate is 7%, shaped by impairments of deferred tax assets in certain tax jurisdictions and on certain investments.

The net loss we ended up with was -EUR 2.7 billion, and loss per share came in at -EUR 3.43. Turning now to hedging activities: during the third quarter we reworked our portfolio and rolled forward roughly $31 billion of hedges, while limiting the cash impact from hedges that would otherwise have matured in 2020. Our overall hedging portfolio denominated in US dollars is $86.8 billion, at an average hedge rate of $1.25. That move in the portfolio hedge rate to $1.25 largely mirrors the forward points tied to the longer duration of the hedge portfolio following the rollover. Across nine months 2020, we put in place $3.9 billion of forwards, including $1.4 billion during Q3, chiefly to redesignate hedges that had been disqualified from other aircraft type families. Hedges totaling $11.1 billion matured at a rate of $1.20 over the nine months, with the associated EBIT impact. During the quarter, EUR 4.1 billion of hedges matured, likewise at EUR 1.20, with the associated EBIT impact. We additionally purchased EUR 2.9 billion at EUR 1.16 in order to complete the rollover implementation begun in Q2. Beyond that, EUR 3.1 billion of hedges were disqualified across the nine months, with maturity dates falling mainly from 2022 and beyond, which produced a negative impact on financial results that was mostly recognized already in the first half of the year.

Let's now turn to how cash moved during the nine months of 2020. Gross cash flow from operations came in at EUR 1.6 billion, which mostly mirrors our adjusted EBIT, though before charges tied to COVID-19. The EUR 3.6 billion penalty was paid in Q1 2020. Working capital, penalties excluded, rose by EUR 8.7 billion, largely because of inventory build as well as the timing of cash receipts and payments. Within Q3, working capital carries a positive inventory effect, since we succeeded in cutting the count of aircraft we were unable to deliver to roughly 135, partly offset by lower trade liabilities. For the nine months year to date, A400M kept dragging on free cash flow before M&A, though to a lesser degree than in 2019. CapEx for the nine months stands at about -EUR 1.2 billion, which is EUR 0.3 billion below 2019. That reflects reduced spending in Q3 2020, consistent with our efforts to contain cash. Looking at the full year, we continue to anticipate CapEx of roughly EUR 1.9 billion. Reported free cash flow was -EUR 12.3 billion. Customer financing added approximately EUR 42 million, while M&A activities came to $500 million, chiefly connected to buying Bombardier's remaining stake in ACLP, with a cash outflow of $500 million, around $500 million, in the first quarter.

I want to provide a brief update on where our liquidity stood at the close of September. Beyond the steps we took during H1 to give our financing better long-term visibility, during July we issued a bond worth $0.7 billion, and EUR 0.2 billion of that partly pushed out the maturity of the original EUR 15 billion credit line, which as of September 30 sits at EUR 9.3 billion. All told, the adaptation work we did let us hold our liquidity position steady in Q3, and it now amounts to EUR 30.4 billion at September's end. That robust liquidity will keep helping us steer through the crisis and will put us in position to grow once conditions get better. On top of that, we brought our net debt down from EUR 0.6 billion at the close of Q2 to EUR 0.2 billion. After Q3, we made further moves to lengthen the maturities of our funding sources. During October, we refinanced with success our EUR 3 billion credit facility that matures in 2021, obtaining a fresh facility totaling EUR 6 billion, with an initial maturity of three years plus two one-year extension options. That lets us term out further the remaining special COVID EUR 9.3 billion credit line, which now sits at EUR 6.3 billion.

Now let me turn things over to Guillaume.

Thank you, Dominik. Turning to commercial aircraft, across the nine months we handed over 341 planes to 75 customers — that's 230 fewer than a year earlier, or -40% in percentage terms. During September, 57 aircraft were delivered, which helped bring down the count of undelivered planes. Looking at the nine-month picture by aircraft family, on the A220 we delivered 18 aircraft. Last week came delivery of the first U.S.-built A220 out of Mobile, Alabama. In October, we also introduced the ACJ220 business jet. It will serve a new market segment — the extra large business jet. Entry into service is targeted for early 2023. Six aircraft have already been ordered. On the A320, 282 aircraft were delivered, of which 272 neo. This month brought a significant milestone with delivery of the MSN 10,000 to Middle East Airlines. What a milestone. On A330, nine aircraft were delivered, and in September we delivered the 1,500 A330. On the A350, 32 aircraft were delivered. Let's look at Airbus commercial financials across the nine months. Revenues mainly reflect lower deliveries, with a decrease of 230 aircraft year-on-year, as I said, of which -155 single aisle and -75 wide bodies. R&D decreased by 3.5% and by around 10%, excluding the impact from Covid-19 related charges.

The adjusted EBIT is primarily a reflection of reduced deliveries and weaker cost efficiency. It also takes in the EUR 1 billion in charges tied to COVID-19. Turning to helicopters: during the first nine months of 2020 we handed over 169 helicopters, versus 209 across the same period in 2019. Revenue held broadly flat, which mirrors those smaller delivery numbers while being partly offset by stronger services. The adjusted EBIT captures a favorable mix, growth in services, and a positive input from program execution, along with reduced R&D stemming from the completion of the EASA certification efforts for both the H160 and the new five-bladed H145. During Q3, following EASA's certification in Q2, we handed the first of those five-bladed H145 aircraft to the Norwegian Air Ambulance Foundation. Moving now to defense and space. Revenue largely mirrors reduced volume in space and on the A400M, plus the effect of COVID-19 on business planning. Adjusted EBIT mostly shows the smaller space volume — particularly within the launcher business — because of the COVID-19 impact, partly balanced by cost-cutting actions in the division. On the A400M, 5 aircraft were handed over during the nine months, and Luxembourg became a new operator of that aircraft. The restructuring plan that was updated in the first half of this year is now in progress.

Talks with our social partners continue to move forward. That associated provision has been booked within Q3 in EBIT reported. Moving to the guidance slide. As I mentioned, in spite of the uncertainties that remain around the measures we have put in place and the visibility we obtained during the third quarter, we feel comfortable enough to provide a free cash flow guidance, and I would like to read it out to you now. Back in March, the company withdrew its full year 2020 guidance. With COVID-19 still affecting the business and the risks that go with it, we are issuing no new guidance on commercial aircraft deliveries or on EBIT. Based on its Q4 2020 guidance for free cash flow before M&A customer financing, the company assumes there will be no further disruptions to the world economy, to air traffic, to Airbus internal operations, and to its ability to deliver products and services. On that basis, the company is targeting at least break-even free cash flow before M&A customer financing during the fourth quarter of 2020. So what are our key priorities? Well, since our H1 disclosure they have not fundamentally changed. The traffic outlook has worsened. In the current market environment, we believe the measures taken are the right response to protect our strong competitive position throughout the crisis and when the market recovers.

We're constantly testing our measures to ensure they mirror the current environment. So we concentrate on executing our plan and making solid progress on our priorities. As was said earlier, we'll keep delivering the aircraft in line with the agreements we've reached with our customers. We'll also stay strongly focused on cash containment and, naturally, on hitting our free cash flow before M&A customer financing guidance in the fourth quarter. Fully implementing our adaptation plan is a key milestone for addressing our long-term cost structure and for establishing our new financial balance in a sustainable way. We've also kept a strong liquidity position, as Dominik has explained, which will support us along the recovery path. It matters a great deal to us: we will invest in decarbonized technologies, and we aim to develop the first climate neutral zero-emission passenger aircraft. We're ready to take your questions.

We're moving into the Q&A portion now. When you ask a question, please say who you are and which company you're with. Kindly keep it to 2 questions per turn, and that counts sub-questions as well. And as always, please do speak plainly and at a measured pace so that everyone on the call, ourselves very much included, can follow what you're asking. Aurelia, would you go ahead and walk the participants through how the process works.

Thank you. Ladies and gentlemen, we are now starting the question-and-answer portion. Anybody who would like to pose a question can press zero and one on their touchtone phone. Should you want to take yourself out of the question queue, press zero and two. We ask that participants use only handsets when asking a question. Anyone with a question may press zero and one at this time. Our first question comes from Ben Heelan at Bank of America. Your line is now open. Please go ahead.

Yes. Good morning, Guillaume, Dominik, and Thorsten. Thanks for taking my question, and I hope all of you are doing well. I wanted to talk about and ask you regarding the news reports we saw last week that you had requested the supply chain to protect it to rate 47 for the second half of 2021. Could you help us understand a little what you actually mean by protect? Are you asking the supply chain to be able to deliver to you at a rate of 47, but the actual rate might be lower by the time you get to the second half of 2021? I'm thinking here, if I'm a supplier, I'm being asked to essentially invest for a high teen increase in production in eight months time. I'm looking at the news, COVID cases are increasing exponentially. What is the risk that I start putting my capital to work, investing for that higher level of production, and it just doesn't materialize? Thank you.

Hi, Ben. Yes, we’re doing well, I believe, and I hope you’re doing well too. It’s been a while. Well, that’s a significant question, so perhaps I should take a little time on it. We continue to update the production planning very regularly, and an active supply plan is always shared with our suppliers. That was true in previous years, right before the pandemic struck the industry. At the start, at the onset of the crisis, we revised that production supply plan by ramping down and adjusting to rate 40 for the single aisle for the foreseeable future. We have enhanced our supply plan. Before summer, we were at rate 40 through the end of the first quarter of 2021, with a modest but progressive ramp-up beginning at the start of Q2. That was the active, valid supply plan for all our suppliers. Before summer, or for the one currently in place—the one now in place, by the way—it relies on rate 40 through the end of the first half of 2021, with ramp-up starting at the beginning of Q3 2021 from rate 40 to rate 47 for the second half of 2021.

Of course, all of this is supported by our backlog and by the contracts we hold with customers—it isn’t speculative; it’s robust. We also have to consider the situation. It’s highly dynamic, and we continue working with customers to adapt to their circumstances, to reach agreements that reflect Airbus’s ability and our customers’ ability to navigate this crisis, and it may still change. What we believe is, first, that rate 40 is robust. The way we’re managing at the moment is by shifting that point—the ramp-up point—from rate 40 to a higher rate. Naturally, with the deterioration in the traffic outlook, it has shifted to the right, so from the beginning of Q2 to the beginning of Q3. This is robust. It isn’t speculation. It genuinely reflects today’s situation as well as we can see it, and we believe we owe our suppliers transparency and visibility regarding how it should unfold. It’s also very important that the entire supply chain is prepared for when the recovery arrives, because that is the weakest link that would determine the speed of recovery. We ensure everyone is informed, everyone is aligned, and everyone has transparency on the situation.

As you've seen, moving from the start of Q2 to the start of Q3 2021 for when the ramp-up begins isn't a huge shift, but it does mirror what I've mentioned previously — namely, that we're facing a lower-for-longer situation regarding the aviation downturn. At this point, we genuinely expect our suppliers to be prepared for that ramp-up. They must be committed to it. That's what we're asking of them. It's nine months away from now, so there's ample time to keep reviewing and updating. What we believe we owe the supply chain is sufficient anticipation so that, in the near term, they aren't caught off guard or forced into actions they haven't prepared for. We want them to have time to get ready, and that's what we're striving to do as best we can in a highly volatile environment with many things occurring that are unpredicted. That's how we attempt to handle it. Sorry, my response is really long, but I can see that many questions revolve around that one.

This isn't some fresh ask that we've handed to the supply chain. What it is, is refreshing the supply plan that the supply chain keeps running at all times.

Alright, that's excellent. Thanks for the added detail.

We’ll now take the next question, and it comes from Celine Fornaro at UBS. Your line is open at this point. Please go ahead, ma'am.

Morning, everyone, and thanks for taking my question. If I may, I'd like to ask two questions. First, on the planes in inventory: Dominik, you mentioned that you stood at 135 at the close of Q3 versus 145 at H1. Could you share your thinking on the assumptions behind Q4 and the pace for 2021, since as you said earlier, you aim to bring down that larger number of planes in inventory by the end of 2021 — and has that also slipped to the right, given the softness in the market recently? And what that implies for free cash flow in 2021. Second, any thoughts on the footprint? You've now moved your restructuring discussions forward. You've booked a charge, and you've stated that 13,000 full-time employees will be cut at Airbus. Any thoughts on reducing footprint? We've heard Boeing, Raytheon, RTX talk about 20, 30% reduction potentially. How would you view that from an office reduction standpoint? Thank you.

Dominik, would you like to handle that question?

Okay, perhaps I'll begin with the question about communicating vessels — deliveries, reducing the finished goods inventory, and free cash flow. Yes, during the nine months we have improved, and naturally we intend to keep gradually drawing down those inventories as time goes on. The bigger portion of it is single-aisle, and we would also like to see additional progress, particularly on the single-aisle, in 2021. I believe it is too early at this point to get into specifics, since that would more or less amount to giving guidance on deliveries, considering that on the rate side we have been fairly explicit about where we intend to be with rates, and the gap is, naturally, the movement in the finished goods inventory. Regarding free cash flow, naturally there are numerous puts and takes. I don't wish to comment on 2021 in terms of numbers at this stage, but there are puts and takes. If you examine the cash flow statement for the nine months, you can see that inventories have, naturally, accounted for the lion's share of cash absorbed. The other negative item was the decrease in trade payables resulting from lower supplies from our suppliers. The financing, so to speak — the payment terms from our suppliers — while staying constant in terms of days, declines in volume.

We also had good news regarding contract assets and liabilities, where we saw a couple of billion. When you look at the balance sheet change, you'll notice it's positive, and that will reverse at some point because we've also discussed arrangements with customers such as advanced PDPs, promissory notes, and these kinds of instruments. That's precisely why we've been willing to provide guidance on free cash flow, since we believe we have certain rephased customer commitments for Q4. We're fully aware of all the imponderabilities and uncertainties surrounding delivery, because some aircraft will arrive very late in the year and could slip into the new year. On the cash side, we believe there's more leverage we can pull to secure at least that free cash flow before M&A and customer financing of break even for Q4. I'm sorry to be so vague, but being more detailed right now would truly be premature given the high degree of uncertainties we face in the market.

Thanks, Dominik.

Thanks, Celine. I hope you’re doing well.

And what about the site?

Regarding site, on the prior call we mentioned that our expectation was for site to reach a positive adjusted EBITDA run rate as we exited the fourth quarter. We still anticipate that happening, though it will likely come toward the end of the quarter instead of right at the start. So site remains on track to hit positive adjusted EBITDA on a run-rate basis as we close out Q4.

So, we’re in the middle of an adaptation plan, and we’re negotiating that plan with our social partners. Our industrial setup is pretty much the same as it was 10 years ago, when production levels were similar to what we’re seeing in 2020. We believe there will be a ramp-up again at some later point. I’m not saying we aren’t looking at optimization and things we’d have done regardless. We are not undertaking a massive initiative that adds complexity on top of the complexity we already see today through major site closures. That’s not how we entered the crisis. There’s nothing major I can share beyond this: we are working very strictly on the cost side of the equation, and our so-called cash containment plan is delivering what we expected. We are within the corridor of expectation we set for ourselves, given the measures we’ve decided so far and that have been shared.

Thanks, Guillaume.

Our next question comes from Charles Armitage at Citi. Your line is open now. Go ahead, please.

Morning, everyone — hope you’re doing well. Just a couple of quick things. First, my apologies: the line dropped at a key point while you were answering Ben’s question. The rate increase you mentioned — does that apply when it goes into the FAL, or when it comes out of the FAL? That’s my first question. And on Q3, which you brought up: is that ramping up, or is it delivery — output or input, I suppose.