Airbus SE (AIR) Earnings Call Transcript & Summary

Good day, everyone, and thanks for holding. This is the Airbus H1 2021 results release conference call, and you're welcome to it. Clotilde here, serving as operator for the call. I'd like to point out that throughout the presentation, everyone attending will be in listen-only mode, and this conference is being recorded. Once the presentation wraps up, there will be a chance for you to ask questions. Right now, I'd like to hand the conference over to your hosts, Guillaume Faury, Dominik Asam, and Thorsten Fischer. Please go ahead.

Thanks, Clotilde. Good morning, everyone. This is the conference call on Airbus H1 2021 results. Guillaume Faury, our CEO, and Dominik Asam, our CFO, will present those results and take your questions. We expect the call to run about one hour and 15 minutes. That figure covers Q&A, which we'll hold once the initial presentation is done. A webcast of this call is also available. You can reach it through our homepage, where a special banner has been set up. A playback of this call will be accessible on the website. No dedicated phone replay service exists. The supporting information package went out to you by email earlier this morning. It contains the slides, which we'll now walk you through, along with the financial statements. During this call, we will make forward-looking statements. The package you received includes the safe harbor statement, and it applies to this call too. Please read it carefully. Guillaume, over to you.

Thanks, Thorsten. Good morning, everyone. Welcome to the call, and thanks for being with us today. Dominik and I will walk you through the H1 results. The strong delivery start we saw in Q1 carried over into the second quarter. In Q2 we handed over 172 commercial aircraft to customers, bringing our year-to-date delivery total to 297 aircraft. H1 financial performance clearly mirrors that high delivery count, yet it also shows we adapted the cost structure through the crisis and kept a sharp focus during H1 on containing costs and staying competitive. H1 EBIT adjusted came in at EUR 2.7 billion, versus minus EUR 0.1 billion a year earlier. Free cash flow before M&A customer financing for H1 2021 reached EUR 2.1 billion, including a strong positive working capital phasing effect. The many actions our teams took produced a strong H1. Based on everything we know today, at Airbus we have largely put the adaptation process behind us. As we enter the second half of 2021, we turn more of our attention toward securing the A320 ramp-up steps as planned. We will work closely with our suppliers.

We will keep collaborating closely with our suppliers, who are essential to boosting output of the world's best-selling civil aircraft. We're also continuing to reshape our commercial aircraft industrial operations by relocating fuselage assembly back to the core of the company. Project teams in France and Germany are advancing, and talks with our social partners are ongoing. Thanks to our strong H1 performance, we can raise our 2021 guidance for the full year, even though the environment remains quite unpredictable and challenging. The COVID-19 crisis is indeed still with us. We will keep focusing on managing customer deliveries. We must watch the risks stemming from new variants of the virus, especially the Delta variant. We'll address the guidance update in more detail later. Let's begin by examining our commercial environment. I want to start with a few remarks on recent developments in the WTO dispute. We welcome news of a cooperative framework between the EU and the U.S. on the WTO disputes concerning large civil aircraft, which led to tariffs being suspended for a period of five years. This will lay a foundation for a level playing field, something we have advocated since these disputes began.

Let me walk you through our commercial environment in greater depth. Based on conversations with customers and the latest macroeconomic figures, we see that recovery in the commercial aircraft market is picking up speed across key domestic markets, and that supports the underlying demand for air travel — the pent-up demand. In ASK terms, domestic China is still near pre-crisis levels. Domestic North America gained from an early and rapid vaccination rollout and is converging back toward pre-crisis air travel demand. Recent industry forecasts anticipate the U.S. domestic market will fully recover by the end of this year or in early 2022. Air travel within Europe, which had been trailing in Q1, is now showing encouraging signs of a rebound as well. As for international air traffic, we still believe recovery there will take more time. Globally, the potential impact of new variants remains a concern, and vaccination progress is a key element for sustainable resilience against the pandemic. Let me remind you of our orders and backlog in H1. We booked 165 gross orders, 158 of them single-aisle. That includes a new order in June for 70 A321neos. We saw 127 cancellations, 27 of them in Q2.

The cancellations we saw in H1 had mostly been expected and were already factored into the backlog valuation we made at the end of 2020. So net orders came in positive, at 38 aircraft, and our backlog in units stood at 6,925 aircraft. Our ambition is to keep adapting and evolving the product portfolio to match what customers need. We did exactly that, for instance, when we launched the A321XLR back in 2019. I'm sure you remember. In that same spirit, after receiving positive feedback from customers, we secured approval from the board of directors for a freighter derivative of our well-established A350 platform. Building on the proven efficiency of the A350, the freighter version is planned to deliver lower fuel burn than freighter models of that size currently in service. For example, around 20% less fuel burn compared to twins, 30% less compared to tri-jets, and 40% less compared to quads, four-engine planes. It will also meet the ICAO CO2 emission standards, and it will mark another step on our way to lead the decarbonization of the aviation industry. We are convinced that the A350 freighter will provide a strong answer to our customers' needs and expectations and will introduce a healthy competition to this well-established segment.

Service entry is slated for 2025. Turning to helicopters: during H1 we logged 123 net orders, compared with 75 in the same half a year earlier. In Q2, we captured the order for France announced earlier — eight H225M helicopters plus a second prototype of the unmanned aerial system known as the VSR700 — both falling under the French aeronautical industry stimulus plan. Through 2021, commercial campaigns keep showing solid momentum across our home countries, especially in public services. And in defense and space, order intake for H1 reached EUR 3.5 billion. Bookings during the second quarter totaled EUR 1.5 billion. That figure includes, within space systems, the authorization to proceed that ESA, the European Space Agency, granted to Airbus on the Earth Return Orbiter project. Together with ESA, we likewise signed a contract covering three more European Service Modules — a mission-critical element of NASA's Orion spacecraft, which serves the U.S. Artemis return-to-Moon program. ESA has additionally awarded Airbus the contract for designing and manufacturing six Galileo second-generation spacecraft. That significant order is partly reflected in second-quarter order intake.

When it comes to unmanned aerial systems, we signed a renewed contract for services covering the Heron 1 UAS system. Regarding FCAS, we keep moving forward, and we're pleased that the Bundestag has validated Germany's portion of the FCAS phase 1B demonstrator. That marks a crucial milestone for this strategic European program, which will also further reinforce Europe's technological sovereignty. We take pride in the ongoing confidence that France, Germany, and Spain place in us within the framework of the Future Combat Air System program. On Eurodrone, progress continues to be made. With that, Dominik, I'll now turn things over to you. Dominik will walk you through our financials. Dominik?

Thanks, Guillaume, and good morning, everyone. In the first half of 2021, revenues rose to EUR 24.6 billion, a 30% increase compared with a year earlier, largely because we delivered more commercial aircraft in 2021. EBIT adjusted climbed to EUR 2.7 billion in H1 2021, compared with minus EUR 0.9 in the first half of 2020, and as you remember, that period included EUR 0.9 billion in charges from impairment and write-offs brought about by COVID-19. This sharp improvement in EBIT adjusted versus a year ago stems primarily from how many aircraft we delivered. It also shows that our cost structure was adapted through the crisis and that during H1 we kept a strong emphasis on containing costs and on competitiveness. Research and development expenses came down 10% compared with a year earlier. For the full year 2021, we still anticipate R&D expenses at a level similar to 2020, including a moderate amount of R&D spending on the freighter version of the A350. Adjusted earnings per share for H1 came to EUR 2.37, calculated on an average of 785 million shares. Free cash flow before M&A and customer financing in H1 was positive EUR 2.1 billion. That mirrors our ongoing work to contain cash, on top of a strong positive phasing effect from working capital.

Overall, during H1 we enjoyed a highly supportive mix of factors. First, commercial aircraft deliveries came in at a healthy level. Second, we concentrated on competitiveness, all while continuing to hold costs down as if in crisis mode. Third, we gained from an exchange rate that was very much in our favor. Looking ahead, we may also begin hiring selectively for key employees whose skills are needed to underpin the ramp-up of our single-aisle program, new technologies, digitalization, and decarbonizing our products. Moving now to the slide on profitability. H1 2021 EBIT as reported likewise stood at EUR 2.7 billion. Net EBIT adjustments were roughly neutral and comprised EUR 145 million tied to A380, of which plus EUR 174 was booked in Q2. We reversed the provision for impairment of the former A380 Lagardère facility that had been recognized in earlier years, since the building is now in use for the modernized A320 FAL in Toulouse. Minus EUR 170 million came from foreign exchange and balance sheet revaluation, of which only plus EUR 7 million fell in Q2. EUR 49 million positive arose from other adjustments, compliance costs among them, of which EUR 75 million positive landed in Q2, chiefly from a provision release linked to the group-wide restructuring plan.

The earnings per share figure we reported incorporates negative EUR 30 million in financial results. That largely mirrors a net interest result of negative EUR 172 million, along with positive EUR 79 million tied to Dassault Aviation. On the core business, the tax rate stands at roughly 27%. The effective tax rate applied to net income comes to 18%, which takes in the impact of tax risk updates and the tax effect from revaluing certain equity investments, partly offset by impairments on deferred tax assets. Net income works out to EUR 2.2 billion, and reported earnings per share is EUR 2.84. Turning to hedging activities: during H1 2021, $10.2 billion in hedges matured, with associated EBIT impacts at a rate of 1.18. That hedge rate is the same as in the equivalent period a year earlier. Across the whole of 2021, we anticipate an average hedge rate of 1.21, versus 1.19 in 2020. Over the remaining six months, we expect a negative EBIT impact stemming from a less favorable hedge rate to show up in H2, both year-on-year and when set against H1 2021. In the year's first half, we put in place EUR 10.7 billion of forwards at a rate of 1.22. During H1, we also further refined how our hedges are phased by executing EUR 4.9 billion of rollovers.

So because of that — and this includes EUR 1.2 billion of hedges that were disqualified in Q1 2021 — our total hedging portfolio in US dollars sits at $80.2 billion, with an average hedge rate of 1.26, compared with $81 billion, also at 1.26, in December 2020. Moving forward, we'll keep adjusting that portfolio so it matches our delivery profile. Now let's turn to how our cash evolved in H1 2021. Gross cash flow from operations came in at EUR 2.1 billion, which mainly reflects our EBIT adjusted and includes a EUR 0.5 billion consumption of provisions tied to the restructuring plan. Working capital went down by EUR 0.7 billion. That figure includes a positive impact from the inventory reduction in the A350 and A380 programs. It also includes a significant positive phasing impact from the timing of receipts and payments, though to a lesser extent than in Q1. Year to date, the A400M kept weighing on our free cash flow before M&A, but less so than in H1 2020. H1 CapEx was roughly €4.8 billion negative, down 14% versus H1 2020. For 2021, we now expect CapEx of around EUR 2 billion. Free cash flow reported was EUR 2 billion. M&A activities accounted for only minus EUR 8 million, and our customer financing represented an outflow of only minus EUR 31 million, staying at a very, very low level in H1.

The financing backdrop for aircraft is still healthy, and there's ample liquidity in the financial markets for our products. We also had the backing of the Export Credit Agency. Turning to free cash flow for fiscal year 2021, and especially our working capital, we anticipate the H1 phasing effect will keep diminishing as we move forward, and we expect to see impacts from the ramp on our single-aisle. By the end of June, our net cash position had risen to EUR 6.5 billion, and liquidity remains robust at EUR 33.7 billion. During H1, we redeemed a EUR 1.1 billion exchangeable bond into Dassault Aviation shares and prepaid a $1 billion bond, which was aimed at lowering gross debt and further enhancing our leverage ratios, with the goal of underpinning our solid credit rating while keeping liquidity strong. Over to Guillaume.

Thanks, Dominik. Moving now to commercial aircraft. As previously mentioned, during H1 2021 we handed over 297 aircraft to 67 customers. Looking at the H1 2021 picture by aircraft family, on the A220 we delivered 21 aircraft. Our production rate, which has been at five per month since the end of Q1 this year, is expected to rise to around rate six per month in early 2022. On the A320 family, we delivered 237 aircraft, of which 110 were A321s. In July, we raised our monthly production rate from 40 to 43 as planned, and we will increase our production rate to 45 aircraft per month in Q4 this year. We also called on suppliers to prepare for the future by securing a firm rate of 64 by Q2 2023. As Dominik already mentioned, the modernization of the A320 family in Toulouse resumed in May. It will increase our flexibility while we are ramping up. On the A321XLR, we recently started the first structural assembly in Hamburg with the rear and center fuselage, followed in early July by the structural assembly and the system equipment of the nose and front fuselage in Saint-Nazaire, which means we're moving forward on time. On wide-bodies, we delivered 39 aircraft, of which 30 A350s, seven A330s, and two A380s.

Regarding the A380, there are still three aircraft left to be handed over. Last week, the first A350 came out of our wide-body completion and delivery center in Tianjin, China — another step forward in broadening our global footprint and deepening the long-term strategic partnership we have with China. A330 output continues at an average monthly rate of two per month, while for the A350 we anticipate raising the production rate from five per month to six per month by fall 2022. Now let's turn to Airbus Commercial's financials for the first quarter. Revenues rose 42% year-on-year, mainly reflecting the higher deliveries as compared to 2020. That was obviously strongly impacted by COVID-19. The rise in EBIT adjusted is primarily driven by the delivery performance, but it also shows that we adapted our cost structure during the crisis and that we maintained in H1 our strong effort on cost containment and competitiveness. Let me remind you that our H1 2020 included an EUR 0.9 billion charge due to impairments and write-offs triggered by COVID-19. Looking at helicopters. In H1 2021, we delivered 115 helicopter in total, 11 aircraft more or even helicopter more than in H1 last year. Revenues increased by 11% year-on-year to EUR 2.6 billion, reflecting a growth in services as well as a higher volume in civil helicopters.

Adjusted EBIT rose over 20% compared with H1 2020, reaching EUR 183 million, thanks to services, program execution, and reduced R&D spending stemming from the completion in 2020 of certification work on the H160 and the new five-bladed H145 versions. Moving on to defense and space. Revenue is roughly flat against H1 2020. The rise in adjusted EBIT largely mirrors continuing cost containment and competitiveness initiatives, plus higher volume in space systems. On the A400M military transport aircraft, two units were handed over during the first half of 2021. Development work has carried on toward the revised capability roadmap. Retrofit work is advancing nicely, in tight coordination with the customer. Risks persist around technical capability development and related costs concerning aircraft operational reliability — power plants especially — around cost reductions, and around locking in export orders on schedule under the revised baseline. Turning to guidance. As a reminder, we released our 2021 guidance in February of this year. The environment remains fairly unpredictable. Our solid H1 results let us lift the 2021 guidance. I'll now read the updated 2021 guidance to you.

For its 2021 guidance, the company’s underlying assumption is that there will be no additional disruptions affecting the global economy, air traffic, its own internal operations, or its capacity to deliver products and services. This 2021 guidance is stated before M&A. Against that backdrop, the company has revised its 2021 guidance and now aims to reach, in 2021, approximately 600 commercial aircraft deliveries, EBIT adjusted of roughly EUR 4 billion, and free cash flow before M&A and customer financing of about EUR 2 billion. As always, I’d like to close by recapping our main priorities. We keep managing our deliveries and backlog in line with what has been agreed with our customers. That naturally includes our defense contracts. We take pride in the fact that our defense and space capabilities help support peace and security for our home nations, for our EU and NATO partners, and for UN peacekeeping missions. This defense work provides essential contributions toward a more stable and sustainable world. In our commercial aircraft business, during H2 we will direct more of our focus toward securing the A320 ramp-up as planned, and we will collaborate closely with our suppliers. We will keep working closely with our suppliers, who will be central to the single aisle production ramp-up that is now so important for us and for the market.

As far as the ramp-up goes, we anticipate gains stemming from the fact that we kept our capabilities intact all through the crisis and held our supply chain steady during that stretch. We'll keep integrating and modernizing the industrial value chain to give further backing to the ramp-up, to our competitiveness over the long term, and to our product range as it evolves. Our focus stays on innovation and on the ambition we hold to lead decarbonization within our industry. With that in mind, we welcome and back initiatives and policies that promote cutting carbon in aviation, among them ambitious targets for scaling sustainable aviation fuels and green hydrogen. Our key priority will, of course, be delivering on the updated 2021 guidance and sustaining our capacity to invest in long-term ambitions across the portfolio. Lastly, on 1st of July we put changes to our executive committee into effect, and we welcome three new members to the team. I'm convinced these executive team changes will strongly support us in the challenges ahead. I guess we're now ready to take your questions.

We're moving into the Q&A portion now. When you ask a question, kindly state your name and your company. Please keep it to 2 questions per turn, and that counts sub-questions. As always, do speak clearly and at a slower pace so that everyone on the call, and especially those of us here, can follow what you're asking. Clotilde, over to you to walk the participants through the procedure.

Thank you. Ladies and gentlemen, should you like to pose a question, you can press zero one on your telephone keypad. That's zero one on your telephone keypad. Our first question comes from Mr. Tristan Sanson of Exane BNP Paribas. Sir, go right ahead.

Yes, good morning, everyone. This is Tristan from Exane. Thank you for taking my question. The first one is going to be about the EBIT guidance for this year and the new conversion of deliveries into EBIT. Obviously, there are two parts in the increase of the EBIT guidance for this year. One is the increase of the underlying level of deliveries you calculated from at this level to 600. And then the way these deliveries are converted to EBIT. And if I make a simple calculation, I have the impression that you have an underlying increase of several deliveries of about EUR 1.5 billion to the EBIT guidance. Can you explain a bit where it's coming from, how you identified your progress and cost saving compared to plan, and how you quantified it for us to get a bit better feel of how this guidance is being built? The second question will be on the margin ambition beyond 2021. I don't know what you want to communicate at this stage. In the early stage of the crisis, you mentioned that your ambition for commercial aircraft was to bring back, over time, profitability to pre-crisis level at around 10%. When we reach pre-crisis level of deliveries, you reach almost 17% in Q2.

What's the right way for us to think about that trajectory as we look ahead? Thank you very much.

Oh, yes, Dominik — that one's too difficult for me, so I'll hand it over to you. Thanks, Tristan, for the question.

Tristan, yes, you're correct. When you adjust for the flexing tied to volumes, the underlying performance is really strong, and I'd describe it as a somewhat picture-perfect quarter in which every factor aligned. As I noted in my opening comments, we've essentially still been operating the business in crisis mode. We kept cash to a minimum, and we achieved quite solid progress on the restructuring, as you'd put it. You've seen the headcount figures drop considerably. Forex was quite favorable. Looking at our disclosure, you'll notice that across the full year we see a rate substantially above the 118 recorded in the first half. A fairly large Forex swing still remains to be worked through. That said, we are currently ramping, and we've now had multiple consecutive quarters in which things have gone very smoothly, with no major continued-support efforts, none of the costs we typically incur, and no liquidated damages. We must expect that as we speed the system up, the cost base will rise. On top of that, there are quite intentional choices, such as those regarding research and development expenses, where we'll need to snap back somewhat. Some items were deferred to the right.

Part of that involves phasing that has to be made up during the second half and afterward. That’s the reason extrapolating straight from H1 isn’t really advisable.

Just so I’m clear, since you brought up positive Forex — but it’s fair to say the ending came in roughly as planned overall, and R&D is only a small variance, with a somewhat stronger tailwind than expected, though it isn’t a major driver — the total EUR 1.5 billion increase in full-year guidance doesn’t come from FX and R&D. Where exactly is it coming from?

It also stems from a really robust gross margin, thanks to the manufacturing process running very smoothly. Honestly, yes—our forecast ended up being conservative and prudent on that front. If you look at where it originates, it's genuinely across the board. We've been through a very sharp decrease in rates. We've readjusted, and naturally, recalibrating where you stand isn't easy. Then the following discussion is phasing versus truly sustainable events. I have to say, we've postponed a fair number of projects that we need to revive, and that will result in higher costs in the second half and beyond. Again, that's why I'd view this as a kind of picture perfect quarter, but not a solid base from which to extrapolate.

Does that make sense? And what about the margin goal past 2021?

On the longer-term outlook, I wouldn’t revise that statement at all. We have consistently said our aspiration is to return to the 2019 margin performance as we ramp back up to the 2019 rates, which, as you remember, were 863, and we still believe that remains a very solid target to aim for.

Alright, thanks.

Appreciate that. Our following question comes from Mr. Benjamin Heelan at Bank of America. Go right ahead, sir.

Morning, everyone. Good to hear you're all doing well. I'd like to return to Tristan's question, since the guidance you provided seems to imply a huge drop in EBIT for the second half of the year, correct? It doesn't seem like it's only costs returning. When I quickly crunched the numbers, it appeared EBIT would fall by more than 50% in commercial, in the second half of 2021 compared with the second half of 2020. So, is there anything else specific we're overlooking there? That's my first question. Then regarding the A350 freighter, you obviously announced it today. Could we get some sense of the development cost, meaning the non-recurring costs, and how we should think about your expectations for production rates on that program? Thank you.

Yeah. On the elements, let me just go over them again. When you consider the move and what's still left to do against the EUR 118 in H1, that comes to roughly half a billion or so. For the negative variance, you can apply the same logic. Take the first half, multiply it by two, then look at the puts and takes — the big first block is ForEx, as mentioned. The second one is really the deferral discussions around cost, where the phasing got pushed to the right; the fact that the cost hasn't been incurred in H1 doesn't mean it isn't coming, and it might even come in stronger. Adding all these elements together, plus the ambiguity we still see in the market and the challenges with the ramp and the cost that might be tied to really securing it, is what led us to the guidance you have. Whether we get lucky again with a picture perfect environment in the second half, we'll have to see, but I think it's also important not to get carried away given the environment we're currently facing.

Morning, Ben. Good to talk with you. Regarding the A350 freighter — no, we don't plan to disclose the non-recurring costs associated with that program. It's derived from an existing program, or really from two existing products, primarily. We're drawing on the building blocks from what we've already done on the A350 to 1000, mainly but not exclusively, along with the lessons, tools, and ways of working we've recently developed through the BelugaXL — the aircraft we built for ourselves to transport wings across Europe. As for production rates, the nice thing about this program is that it will sit within the A350 production system. There's no need for us to plan separate rates for the freighter. Given its commonality with the -900 and -1000, we're placing it inside the Final Assembly Lines, and the rates will hinge on how commercially successful the program turns out to be at a later stage.

Alright, great.

Answering that question in a really precise way would be premature at this point.

Alright, thanks. That's fine.

Thanks, Ben.

Much appreciated. Thanks, sir. We now have a question from Celine Fornaro at UBS. Ma'am, the floor is yours.

Good morning, gentlemen, and thanks for taking my question. My first one concerns the outlook — though probably more the delivery side to begin with — and then free cash flow, if I may. When it comes to deliveries, and perhaps this explains part of the caution around EBIT, is there a specific region that worries you regarding your H2 delivery expectations? Is H2 a bit more Asia-PAC focused than H1 was? Even the 600 guidance, which implies you'll deliver the same amount in H2 as in H1, where hopefully we'd also expect an inventory drawdown on the build planes — I see a degree of conservatism in there. It's early days, and free cash is always very volatile at your end, but low cash generation in the second half — could you please provide a little bit of color on how we should think about that? Thank you.

Hi Celine, it's good to talk with you too. It's been a while. Yes, you're raising a key issue — namely how things balance out between H1 and H2. In my view, H1 has come in as a very strong first half of the year relative to earlier years. For us, that's somewhat unusual. 300 planes, or 297, really sat at the upper limit of what we could have hoped for. I think Dominik was right to note that this was also made possible by the 15 months of stability we've had on the production system. That's something of a positive to come out of the COVID-19 situation. Now we're ramping up, but because H1 was so strong, we also face plenty of uncertainties in H2. That's roughly the backdrop, and we're being prudent, since the 300 of H1 are completed, while around 300 in H2 remain to be proven in a fairly challenging environment. To give you more detail on free cash flow, I'll pass things over to Dominik.

When it comes to free cash flow, I think it's genuinely worth taking a closer look at how the balance sheet moved in H1. Two main line items deserve your attention. First, trade liabilities — you can see a substantial lift there, driven by a reduction — sorry, an increase in trade liabilities, and naturally that's a cash inflow for us. That was one of the favorable items. The other significant drag sits in how contract assets and liabilities developed, which essentially reflects the net of PDP inflows against PDP usage from deliveries. What you can observe is that we actually saw a fair amount of cash go out on that front. This is the effect we flagged earlier: since last year, we renegotiated essentially all of the backlog. Pretty much the entire backlog — we moved aircraft to the right while firmly holding the line on keeping the PDPs. Customers are somewhat ahead of the schedules, which leaves us with several quarters in which PDP payments run lower. I should stress that customers are very much in compliance with PDP payments at this moment. There are essentially three big items here. Operational performance, very strong; the headwind created by COVID-19; and the PDPs, because we deferred aircraft to the right without deferring the PDPs to the right.

And finally, on trade liabilities — those won't come back. The headwind from the PDP adjustment, so to speak, stemming from the COVID-19 deferral, is going to persist through the second half. That's the reason we expect free cash flow to be fairly moderate in the second half, based on what we see today. Then, naturally, there's the matter of deliveries — deliveries could shift that quite significantly. And last but not least, the ramp. Some working capital will also be absorbed by the ramp, which is why I think we've been prudent on free cash flow for the second half.

Thanks, Dominik and Guillaume. I think all of us are still puzzled — given how well you handled the descent, it seems odd that you won't handle the ascent just as well. That's my own take.

I appreciate that.

Thanks.

Thanks, madam. Our next question comes from Mr. Robert Stallard at Vertical Research. Please go ahead.

Thank you very much, and good morning, everyone.

Morning — how’s it going?

Good, thanks. I have a few questions for you. First, Guillaume, you clearly announced several weeks ago your plans regarding the A320 ramp-up, along with your long-term goal of 75 per month. Certain suppliers have voiced doubts about whether that target is realistic given the demand that might exist out there. I was hoping you could explain your thinking on that. Also, on the narrow bodies, regarding the A321, is it possible to reach a point where more than 60% of A320 family production is the A321? Will you have sufficient capacity to achieve that figure? Thank you.

Yes. Thank you, Robert. Our A320 backlog stands at nearly 6,000 aircraft. Producing at rate 40 would take 15 years to clear it. Should we raise output to rate 60, that becomes 10 years, or even beyond 10 years. Obviously, you can picture that customers holding an A320 or an A321 in today's backlog don't want to sit waiting 12 or 15 years. In fact, running the numbers makes it clear we must move considerably beyond rate 60 in order to serve that backlog. I am prepared to work through those numbers alongside the suppliers and partners who keep questioning whether going above rate 60 is necessary. To us, it is a fact reflected in our backlog, and Dominik noted that customers right now are current on PDPs, which tells us they genuinely want their planes delivered on schedule. The reason we have been so transparent and clear with our supply chain and our partners about our rate is that we truly want them to be ready, and I am genuinely disappointed that certain usual partners continue to challenge the rates. A year ago, they were challenging rate 40.

We've been able to hold at that rate of 40, and we're really focused on controlling what we now refer to as the re-ramp-up on the A320, which already got underway in July of this year. A question about the A321. Yes, we want to get to the point where more than 50% of deliveries are A321s. I mean the A320 family. Whether the 60% figure you brought up is the correct one, I'm not sure, but we'll be well past 50, or at least able to do considerably more than 50%. That's another reason we're swapping out an A320 FAL in Toulouse for a modern, flexible line capable of building both the A320 and the A321, and it will keep boosting the capacity and the flexibility of the A320 family production system so we can be flexible on the A321, and that becomes especially important from 2023 onward, when the XLR joins the family. As you know, the XLR is an A321. Yes, the 60% figure is probably not far off. I haven't run the numbers on if and when we get to 60%, but we know demand for the 321 going forward is very strong, and we intend to serve that demand.

At this moment, backlog stands at 63.

Backlog is 63. Thanks, Dominik.

That is quite useful. Many thanks.

Appreciate it, sir. Our following question comes from Jeremy Bragg of Redburn. The floor is yours.

Morning, guys. For the first question, please, it would be about PDPs and Boeing yesterday discussing a material headwind in PDPs during the second half of the year and heading into 2022. Second question, please, and sorry to revisit it, the near-term free cash flow outlook raised by EUR 2 billion, EBIT guidance raised by EUR 2 billion. Fine, you're clearly expecting more aircraft out of inventory to be delivered, and the CapEx guidance is lower as far as I can see. Again, just sort of struggling if I look at it that way as well. Thank you.

Regarding the PDPs, I can only restate my earlier point. I’d rather not discuss what difficulties Boeing is facing. A headwind on PDPs is indeed ahead for multiple quarters, since the deferrals have now been carried out. We believed it was important to make sure those deferrals are supported by PDPs. We have held back from returning PDPs to customers because we judged that to be the prudent course. On second-half free cash flow guidance, once again it comes down to the puts and takes I referenced. A very strong tailwind came from trade liabilities, and that will not happen again in the second half. Then there is cash absorption tied to the ramp, which I believe was somewhat absent from your remarks. Some efforts will be made, not just in CapEx but also to some degree in inventory. We won’t necessarily get support from that area, because we genuinely want to be ready for the ramp and ensure we can deliver a steep increase. You’ve heard the rate. I don’t want to restate the rate profile we have guided. It reflects a very steep ramp, and that has to be provided for.

Alright, that's great. Thanks a lot.

Much appreciated, sir. Our following question comes from Mr. Douglas Harned at Bernstein. Sir, the floor is yours.