Airbus SE (AIR) Earnings Call Transcript & Summary

Good morning, everyone. You're listening to the conference call on Airbus Q1 2021 results. Guillaume Faury, our CEO, and Dominik Asam, our CFO, will present the results and take your questions. We expect this call to run roughly one hour. That covers Q&A, which we'll hold after the opening presentation. The call is being webcast as well. You can reach it through our homepage, where a special banner has been posted. A playback will be available on the website, though we don't offer a dedicated phone replay service. The supporting information package went out to you by email earlier this morning. It contains the slides we'll now walk you through, along with the financial statements. During this call, we will make forward-looking statements. The safe harbor statement is included in the package you received, and it applies to this call too. Please read it carefully. Now, I'll hand things over to Guillaume.

Thanks, Thorsten. Good morning, everyone. Welcome to the call covering our Q1 2021 results. We appreciate your joining us today. Along with Dominik, we'll walk you through the financial results. It has now been over a year since the COVID-19 pandemic first affected us, and how the overall market environment stood in Q1 makes it clear that our industry is not through this crisis yet. The global picture today differs a great deal from place to place, and the road to recovery is, as we put it, not necessarily linear. Countries worldwide, we see, are making progress with their national vaccination campaigns. They are moving at varying speeds, though, and newly emerging variants of the virus render the sanitary situation more complex and harder. Some regions, however, are showing encouraging signs that domestic air travel is coming back. Other regions, such as Europe, have kept their travel restrictions in place or even strengthened them. Travel restrictions, particularly when they are not well-coordinated between countries, and if that happens, hurt this traffic recovery. Significant uncertainties remain before us, and they produce a lack of predictability, at least in the near term. Our view is that we must keep showing our resilience. During the first quarter, we handed over 125 commercial aircraft, a good start for us in 2021.

In 2021, we don't anticipate the full delivery pattern matching what we saw before COVID-19, or naturally, matching last year either. The agreements we reached with customers during COVID times remain what's driving deliveries. Now let's turn to our financial results. Given this environment that's still uncertain, during Q1 we kept a strong emphasis on containing costs and cash while progressing on restructuring as planned. That shows up clearly in our Q1 financials along with our Q1 delivery performance. Our Q1 EBIT adjusted came in at EUR 0.7 billion versus EUR 0.3 billion in Q1 of last year. Q1 2021 free cash flow before M&A customer financing was positive EUR 1.2 billion, and it includes a strong favorable phasing impact from working capital. Our net cash position rose to positive EUR 5.6 billion as of the end of March 2021. With our full-year 2020 disclosure, so by the middle of Feb, we set a 2021 guidance to give some visibility in a complex business environment. Based on everything we see today, we're keeping that guidance unchanged. Let's examine our commercial positioning in greater detail. Global air traffic entered 2021 more weakly than industry forecasts had expected.

The decline stemmed from worsening conditions across most international markets, including mainland China, where people were asked to remain at home over the traditional Chinese New Year travel period. But since March, looking at ASK, or available seat kilometers, we're seeing varying trends by region. Mainland China has now surpassed pre-crisis levels. Encouraging recovery signals are also emerging from domestic North America. Domestic Europe, by contrast, is lagging substantially, having reached under 50% of pre-crisis levels over recent months and weeks. On top of that, international traffic worldwide is still very weak, and the latest worsening of the health situation, as in India, is a reminder of how fragile the recovery is. Amid this uneven commercial landscape, we're juggling various priorities across differing time frames. For 2021, we remain focused on handling deliveries to our customers in this unpredictable environment with restricted visibility, while keeping a close watch on the health—especially the financial health—of those customers. Looking past 2021, we can now set the right ramp-up profile for single-aisle aircraft. Our expectation of a market recovery remains, with a full recovery anticipated somewhere between 2023 and 2025, and domestic and regional markets spearheading it.

That ramp-up profile has to factor in that certain customers will need to repair their balance sheets as they come out of the crisis. Allow me to take you back over our Q1 orders and backlog. We took 39 gross orders, 38 of which were single aisle. Cancellations came to 100, and those had for the most part already been reflected in the backlog valuation we gave you at year-end 2020. Net orders came in at minus 61 aircraft, while our backlog in units was 6,998 — extremely close to 7,000 aircraft. Turning to helicopters, during Q1 2021 we booked 40 net orders against 54 in the first quarter of last year. For 2021, we observe solid momentum for campaigns in our home countries, particularly in public services, though the commercial helicopter market is still soft. We are pleased to welcome the latest governmental orders, for instance France's order for eight more H225M plus a second prototype of the VSR700 unmanned aerial system, known as such, under the French stimulus plan for the aeronautical industry. On defense and space, our order intake in Q1 2021 reached EUR 2 billion, a Book-to-bill of roughly 0.9, which is a good result for our first quarter. In the course of the quarter, EUR 0.8 billion of orders were booked in space systems, among them the Eutelsat order to build a geostationary telecommunication satellite, the contract signed with Intelsat for two OneSat satellites, and the order from JSAT, the leading operator in Japan, which has become the first Japanese telecommunications operator to order a satellite from Europe.

Additionally, we secured orders valued at EUR 0.8 billion for military aircraft, which encompassed repeat business in military services, along with EUR 0.3 billion in connected intelligence. Regarding FCAS—the Future Combat Air System—substantial effort has been invested thus far by the states and manufacturers. Under Airbus leadership, we reached an agreement with our partners across every pillar for what is called Demonstrator Phase 1B. Talks are presently underway with the three customer nations, and our shared ambition is, and continues to be, to fully converge shortly so we can proceed toward contracting this highly significant effort—the so-called Demo Phase 1B—in a timely manner. On Eurodrone, we are gratified by the advancement achieved among industrial partners and governments, and we applaud the budget committee of the German Bundestag's decision, which represents a crucial milestone prior to securing a contract signature. All in all, solid progress in Q1. At this point Dominik will walk you through the financials. Dominik, the floor is yours.

Thank you, Guillaume, and good morning everyone. In the first quarter of 2021, our revenues held broadly steady compared with the same period a year earlier. Adjusted EBIT for Q1 rose to EUR 0.7 billion. That figure mirrors the cost containment measures we keep applying for as long as significant uncertainties in our commercial environment must be dealt with. It likewise mirrors a favorable mix as well as a positive hedging impact. Looking ahead, we intend to make our cost savings more sustainable and to support our trajectory of earnings and cash growth in periods beyond 2021. Research and development expenses fell 6% year-on-year. For the full year 2021, we still expect research and development expenses at a level similar to 2020. Adjusted earnings per share in Q1 came to EUR 0.58 per share, calculated on an average of 784 million shares. Free cash flow before M&A and customer financing in Q1 amounted to EUR 1.2 billion. That is chiefly the result of a strong positive phasing impact from working capital and mirrors our ongoing efforts on cash containment. Moving to the next slide on profitability: reported EBIT for Q1 2021 was EUR 0.5 billion. EBIT adjustments came to a negative EUR 0.2 billion in total, comprising EUR 29 million negative tied to A380 program cost, minus a EUR 177 million impact from foreign exchange mismatch and balance sheet revaluation, and minus EUR 26 million of other costs, compliance costs included.

The earnings per share figure we reported includes EUR 59 million of positive financial results. That mainly reflects revaluation of financial instruments and how the US dollar moved, plus EUR 43 million tied to Dassault Aviation, partly offset by a net interest result of minus EUR 82 million. On the core business, the tax rate sits at around 27%. The effective tax rate on net income comes to 34%, hit by impairments of deferred tax assets in certain tax jurisdictions and on certain investments. Net income as a result is €4.4 billion, and reported earnings per share is €0.46. Turning to our hedging activities. In Q1 2021, $4.5 billion of hedges matured at a rate of 116, with the associated EBIT impact versus 119 in Q1 2020. For the full year 2021, we expect an average hedge rate of 121 compared to 119 in 2020. Over the remaining nine months, we expect a negative year-on-year impact. During the quarter, we further adjusted how our hedges are phased by implementing $4.8 billion of rollovers. We also put in place $4.6 billion of forwards at a rate of 122, and $1.2 billion of hedges were disqualified. Our total hedging portfolio in US dollars stands at $79.8 billion, with an average hedge rate of 126 versus $81 billion, also at 126 in December 2020.

Now let's examine how cash moved during Q1 2021. Gross cash flow from operations came in at €8.6 billion, which chiefly mirrors our EBIT adjusted and takes in a €4.3 billion provision consumption tied to the restructuring plan. Working capital fell by €1 billion, and that figure reflects a significant phasing impact from working capital, in our divisions as well. So far this year, the A400M went on weighing on free cash flow before M&A, though to a lesser degree than during Q1 2020. CapEx for Q1 stood at roughly minus €4.5 billion, unchanged from Q1 2020. Looking at 2021, we anticipate CapEx will land at a level comparable to 2020. Reported free cash flow was €1.2 billion. M&A activities came to just minus EUR 7 million, while customer financing amounted to an outflow of merely minus EUR 31 million. Such a low level of customer financing might not be sustainable as we move ahead. We plan to offset the cash consumption impact through external financing sources, with backing from export credit agencies. By the end of March, our net cash position had risen to EUR 5.6 billion, and liquidity remains solid at EUR 34.8 billion. We pushed out the maturity of our supplemental liquidity line by six months, preserving a high degree of flexibility amid the uncertain conditions brought about by COVID-19.

Over to you, Guillaume.

Thanks, Dominik. Moving to commercial aircraft. In Q1 2021, as mentioned, we handed over 125 aircraft to 44 customers. Following a sluggish beginning to the year, we delivered 72 aircraft in March. Looking at the Q1 2021 picture by aircraft family, on A220 we delivered nine aircraft. As previously announced, our production rate went up from four to five per month as of the end of Q1 2021. The A220 continues to demonstrate high utilization rates throughout the pandemic thanks to low operating cost, and it is expected to emerge as one of the strongest post-crisis solutions. On A320, we delivered 105 aircraft, 46 of which were A321s. As planned, we will gradually raise our A320 production rate to 43 in Q3 and 45 in Q4. The A321XLR — development of the XLR remains on track. Let's move to wide bodies. We delivered 11 aircraft, of which 10 A350s and one A330neo. On March 18, the first A350 test flight with 100% sustainable aviation fuel took off, a very visible demonstration of our ambition to lead the decarbonization of the aviation industry and a demonstration that it's possible. Now let's look at Airbus commercial financials for the first quarter.

Sales came in 4% lower than a year earlier, largely because services volumes were weaker. The rise in adjusted EBIT is chiefly a reflection of our efforts to contain costs, along with a favorable mix. It also takes in a positive contribution from hedging. Turning to helicopters, during Q1 2021 we handed over 39 aircraft, or helicopters, altogether. That is 8 fewer helicopters than in the first quarter of 2020. The main reason is the anticipated drop in H145 deliveries during Q1 that followed the launch of the new version — the five-bladed version of the 145, as it is called. Sales mirror that reduced volume in commercial helicopters, partly offset by growth in services. Adjusted EBIT climbed to EUR 62 million, propelled by services, program execution, and reduced R&D spending after the certifications in 2020 — that is, last year — of the H160 and the new five-bladed version of the H145. Moving now to defense and space. Sales are flat versus Q1 2020. The gain in adjusted EBIT chiefly reflects continued cost containment and the positive phasing in the first quarter. On the A400M, 1 delivery to the French customer was completed in Q1. We will carry on with development work aimed at reaching the revised capability roadmap. Retrofit work is moving forward in close alignment with our customers.

There are still certain risks around building out technical capabilities and the related expenses tied to aircraft operational reliability — especially where power plants are concerned — as well as around reducing costs and around locking in export orders on schedule under the revised baseline. I'd like to take you back to the guidance we put out in February. In setting its 2021 guidance, the company is assuming there will be no additional disruptions affecting the world economy, air traffic, the company's internal operations, or its capacity to deliver products and services. The company's 2021 guidance is pre-M&A. On that basis, for 2021 the company is targeting at minimum the same commercial aircraft delivery count as 2020, EBIT adjusted of EUR 2 billion, and free cash flow before M&A and customer financing at break-even. On this last slide, I'll recap our key priorities, which clearly are unchanged from our full-year disclosure. Having gotten off to a good start in the first quarter, we'll keep concentrating on handing over aircraft as agreed with our customers and managing the backlog, completing the rollout of our restructuring, and getting the single-aisle ramp-up ready for the point when the market recovers. That point is arriving sooner now. Clearly, our priorities extend past 2021. We intend to become more resilient to unexpected changes, which will inevitably occur from time to time in this complex and fast-moving world, to allow more complex and more innovative products to ramp up far faster than previously, and to boost our competitiveness by consolidating and simplifying our industrial setup, which today remains partially fragmented across the company, our subsidiaries, and suppliers.

We aim to use today's reduced production rates as a chance to get the Airbus industrial system of the future fully ready. With that in mind, we've chosen to make fuselage aerostructured assembly central to our Airbus production system, and we plan to set up two new aerostructures entities — one in France and one in Germany — plus a third entity based in Germany that will be a strong global player for detailed parts. Our view is that now is the right moment to turn our industrial system into a single digital design and production stream, which also gets us ready for the next generation aircraft, likely to have an architecture different from today's. This will also back and add to our ambition to lead the decarbonization of our industry. That ambition rests on Airbus being the first aircraft manufacturer to have disclosed its so-called Scope three use of sold goods emissions, so there's a firm reference point against which improvements will be measured. Meanwhile, we've put money into innovation and into transforming our company to deliver on our long-term ambitions across the portfolio. Thorsten, I think, looking at you now, we're ready for your questions. Thorsten?

Sure. We’re moving into the Q&A portion now. When you ask a question, please give your name and your company. Kindly keep it to 2 questions at once, and that counts sub-questions too. As always, please also speak clearly and at a slower pace so that everyone on the call—especially those of us here—can follow what you’re asking. Go ahead and walk the participants through how this will work.

Thank you, sir. Ladies and gentlemen, the question and answer session now starts. Anyone who would like to ask a question can press zero one on your telephone keypad, and if you want to take yourself out of the question and answer section queue, you can press zero two on your telephone keypad. Participants are requested to use only a handset when asking a question. Once again, anyone who has a question can press zero one on your telephone keypad. We have one first question from Madam Céline Fornaro from UBS. Madam, please go ahead.

Good morning. Thanks for taking my question. It's a really solid start to the year, Guillaume and Dominik Asam and the rest of the team. Could you share your thinking on what comes next, in terms of how we should think about the quarterly cadence, or at least first half versus second half views on, for example, cash, since you appear able to hold break even as long as production stays low. Do we perhaps need to begin considering a potential cash headwind in the final quarter as you fund the future ramp-up for next year? And also, how are you thinking about cash when it comes to rebalancing it, which was a challenge over the last years given how much H2 weighting there was? Do you see this year as a somewhat unusual profile, or does it also let you say, "Okay, we've rebased, and now we won't return to that massive H2 skew again, for the better and to make this company more resilient," as Guillaume said? Thank you.

Thank you, Céline. It's always a pleasure to kick off the Q&A with your questions. Yes, indeed, Q1 is a good start when it comes to deliveries, and on the financial side as well. I mentioned that we'll keep working hard to make progress over the course of the year. The Q1 start was weak. You'll recall that deliveries in January and February were weak. We recovered very significantly in March. I guess Q2 will also not be very linear, and we see that the environment is a complex one. In April, we had new lockdowns and new restrictions in Germany and in France, which have made our life a bit more difficult. I want to remain prudent, but we want to believe the situation will improve, probably in the second half of the year, with the good progress of the vaccination campaigns. Again, we don't have that much visibility on the short term, but we think we are gaining visibility on the more midterm, and that's probably what's driving the fact that we maintain our provisions to start the ramp-up of single-aisle in Q3 and Q4 modestly. That's an important point for us. That's a reference point, and that's a bit the inflection point. Now, if I may, free cash flow is too serious for a CEO, so I will hand over to my CFO to answer your questions on that topic.

I'll leave the rocket science to Guillaume and focus on the pluses and minuses of free cash flow. Yes, we did have a very exceptional Q1 in a certain way compared to prior years. I believe 2011 was the last time we had positive free cash flow, but I think it's always worthwhile to dive into the balance sheet to really see where it came from. The biggest item changing is really on trade liabilities. It's really a question of the phasing of when we receive goods for our production system and when we pay for them. That was an increase of EUR 2.5 billion. The other noteworthy topic is that we still have, because of certain customer discussions, some advanced PDPs. That's a situation where the customer gives us the cash for the delivery but doesn't take delivery. That's, of course, better for us than not taking it. The last topic, and that was positive for Q1 as well, and you can even, if you look very carefully, see that a little bit in current liabilities, current contract liabilities, that they go up. A liability going up is cash in. Then the last point is really the overall picture on the cash phasing related to the PDPs.

As we mentioned at the close of last year, we had already postponed delivery of numerous aircraft while retaining the PDPs. We stated that 2021 would present a challenging situation, with a considerable adverse effect on the overall balance, and that is still expected to materialize during this year. The weight of it will fall more heavily on the later quarters. Just to give you a sense of why multiplying Q1 by four isn't a sensible approach — that wouldn't be the correct way to frame it. Indeed, you're right that the cash challenge lies much further ahead of us. Regarding the linearity of free cash flow, yes, it has gotten better in certain respects thanks to the production system. It's not truly the production side, but rather the commercial interaction with customers and the fine-tuning across the supply chain, where we must ensure we are genuinely synchronized.

Sorry, Dominik — just following up on that point: with regard to the cash linearity, do you believe that could hold up?

On the production side, I'd say yes — we're in a more sustainable position. Again, don't expect a very strong positive free cash flow in Q1. What we saw this quarter, I think, was a little unusual.

Yes. Without a doubt. Thanks.

If I could just come in on that, Celine — actually, we'd already begun seeing improved linearity in free cash flow back in Q1 2020, but then the pandemic hit us in China in the middle of March, at the start of March, and in the end it didn't show up in our Q1 results; had the pandemic not happened, though, we would have started to see that better linearity versus prior years. Right now everything swings up and down, and long-term trends are hard to pin down, but we think we're performing considerably better, and we'll perform considerably better on that front going forward.

That's great. Thanks so much.

Thanks, madam. Our following question comes from Mr. Tristan Sanson of Exane BNP Paribas. Kindly proceed.

Yes. Good morning, Guillaume, Dominik, and Thorsten. Thank you for taking my question. The first one concerns the commercial relationships that you currently have with airlines. Could you provide some detail on the kind of feedback you're getting from carriers, both by region and by carrier type — for example, flagship carrier as opposed to low cost? Which ones are looking to defer, and which ones want to accelerate, particularly in light of your remark that you have to factor in that certain customers will need to repair their balance sheets during the recovery phase of the crisis? That would be useful. The second question is a theoretical one about the margin trajectory. You delivered fairly solid cost management in Q1, as you pointed out, since you remain in cost control mode. On the whole, you're in a position where fixed cost absorption is low, and you mentioned that you were willing to be overstaffed in the short term so that a smooth ramp-up can happen down the road. I don't know whether your staffing is sized for 50 or 55 A320 a month, but it is definitely more than 40. If that's the case, it means margin progression going forward ought not to be linear and should be quite front-loaded during the recovery phase.

Is that the correct approach when it comes to developing margin? Thank you.

All right, I'll handle the first one, and perhaps Dominique and I can split the second question. Commercial relationships — they're actually quite varied, and that ties closely to what I said about the very different market conditions we're seeing. China has improved considerably and is viewing the coming months and years positively. That's one situation. The U.S. is also rather bullish and anticipating a very strong summer. The airlines are getting themselves prepared and ready, and we're also seeing that they're willing to begin thinking about accelerating. A few carriers are prudently looking at speeding up aircraft deliveries for 2023 and 2024, but that's a good start. Conversely, in Europe we're seeing a recovery scenario that's far worse than the airlines had anticipated, which creates very difficult circumstances for them and, in turn, for us. I'd describe it as an enormous variety of situations, and I try to capture that variety by noting that on average, for us, it remains consistent with what we told you a couple of months back at the full year results. Once you examine the details, it looks different. I term it volatility and uncertainty, since in the near term it could rise or fall — it's very hard to judge.

Turning to your question about readiness for the ramp up: yes, at Airbus we are preparing ourselves for the single-aisle ramp up that's coming later this year. In fact, we already have the staff required for the start of that ramp up. On the other staffing you mentioned, I'd like to add some more detail. It doesn't concern the wide-bodies. Where the wide-bodies are concerned, we've taken the view that we'll be at low rates for an extended period, so we are adapting fully to that new situation, and the priority there is to get back to breakeven as quickly as we can. With the single aisle it's different. We believe — and I think we were right to believe — that we'd see a big dip followed by a ramp up, and we want to be sure we can deliver on that ramp up, both internally and from the supply chain side. The other staffing is financed to a large extent by our governments through what's called Kurzarbeit, APLD in France — furlough schemes that are fairly short term. Most of them will expire by the end of this year. That's the moment when we begin to see the ramp up.

We believe, up to this point, that the choice to retain thousands of people with us — with a large portion of that funded by governments so we can ramp up — is a good deal for governments, for employees, and for us. So we think that will be of help to us in the ramp up. When it comes to the long-term ramp up, we'll return to traditional situations for hiring, training, and so on. Did I miss anything in the question?

Nope?

Alright.

Perhaps that's simply the case.

That's everything. Thanks so much.

Right.

Thanks very much, sir. The next question comes from Mr. Benjamin Heelan at Bank of America. Please go ahead.

Yes. Good morning, everyone. Thank you for taking my question. I had a question about 2022 production and when you expect to make a decision. In your prepared remarks, you mentioned that you still see demand improving in 2022. I'm just eager to understand when we might think about a decision being made at that point. Then, a second question regarding the aerostructures announcement. You discussed it a bit in your prepared remarks, and I'm wondering if you could elaborate on that a little more. What does it mean for the group? Are there any cost savings we should be thinking about? I suppose why has that decision been made now rather than five years ago? Thank you.

Good morning, Ben. It's a pleasure to speak with you. Well, regarding production rates for 2020, we're in the planning stage right now, and for the single aisle, we'll keep ramping up. You can see 43 in Q3, 45 in Q4, and the ramp will continue into 2022. We've already provided indications to our supply chain, though that falls outside what we refer to as the firm horizon. Once we enter the firm horizon, we'll solidify those figures and communicate them at a later stage. For the single aisle, 2022 and 2023 bring a steep ramp up. Aero structures. Why wasn't this decision made five years ago? I don't know. I believe a couple of triggers exist today. One is the progress achieved on the project known as DDMS, which serves as the company's digital backbone. We now have greater visibility into our plans for the next generation of products, along with a better grasp of how deep the architecture changes go, and hence the core nature of aerostructure assemblies, so as to enable digital design and production of these airplanes and their production systems. Also, the fact that COVID-19 and the low level of production are giving us a window of opportunity to speed up change.

So going forward, that's going to give us a great deal of capacity for bringing modern products into service far more efficiently. At that moment, it will bring down the cost base. In the near term, I wouldn't expect any major revolution, other than the fact that it sets up the conditions for success once that arrives, and lets us concentrate our investments on aero structure assemblies while giving a life to our detailed parts. It offers a chance to grow and to attract investment, though not as a core activity of Airbus, given that this isn't the priority for our investment. There's so much on our plate — the technologies, the future products, the digital systems — that we want to concentrate on this.

So is the intention to eventually divest that detailed parts business at some future point?

That’s one of the scenarios we’ll look into with our partners going forward, but the project has only just begun, and it will be one of the scenarios taken into consideration.

All right, that's excellent. Thanks a lot.

Thanks very much. Our following question comes from Chris Hallam at Goldman Sachs.

Good morning, everyone. On the full-year call, you said that deliveries for this year would hinge on the industry hitting a tipping point in commercial demand. So I'd like to ask: is it too early to call the March delivery figures that tipping point? Second, you noted that you now have a clearer picture of the right pace for ramping up beyond 2021. Could you share some guidance on the ramp-up pace that's achievable from a supply chain standpoint and from a demand standpoint? Should we expect a pace similar to what you're doing this year, meaning A320 rates rising by five every six months? Thank you.

I can confirm that, from where we sit, it's too early to say we've reached the tipping point. We may be getting nearer, and I'd like to be there by the end of Q2. We'll see. We will be just ahead of the summer or in the summer, and it's not unlikely that we have that visibility, to call it the tipping point. End of March, beginning of April, that's really too early. What's the fastest possible ramp-up? That's a very important question, and we are currently doing the work with our supply chain to give an answer to that question. That's why I said it's premature to give figures for 2022. We have indicated scenarios to the supply chain. We are working with the supply chain to see what's reasonably possible, and this will be one of the drivers for when we give visibility on 2022 and the pace of recovery and of ramp-up of the single aisle that we will be targeting. Sorry to be not more explicit, but that's slightly premature. We'll probably be able to say more next quarter.

Appreciate that.