Airbus SE (AIR) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Airbus H1 2021 Results Release Conference Call. I am the operator for this conference. [Operator Instructions] And the conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to your host, Guill Faury, Dominik Asam and Thorsten Fischer. Please go ahead.

Thank you, Good morning, ladies and gentlemen. This is the Airbus H1 2021 Results Release Conference Call. Guill Faury, our CEO; Dominik Asam, our CFO, will be presenting our results and answering your questions. The call is planned to last around 1 hour and 15 minutes. This includes Q&A, which we'll conduct after the initial presentation. This call is also webcast. It can be accessed via our homepage where we have set a special tab. Playback of this call will be accessible on the website, but there is no dedicated phone replay service. The supporting information package was e-mailed to you earlier this morning. It includes the slides, which we will now take you through as well as the financial statements. Throughout this call, we will be making forward-looking statements. The package you received contains the safe harbor statement, which applies to this call as well. Please read it carefully. And now over to Guill.

Thank you, Thorsten, and good morning, ladies and gentlemen. Welcome to our call, and thank you for joining us today. Together with Dominik, we will take you through our H1 results. The good start we had with our delivery performance in Q1 continued in the second quarter. We delivered in Q2 172 commercial aircraft to our customers, which takes our year-to-date delivery number to 297 aircraft. Our financial performance in H1 clearly reflects that high number of deliveries, but it also demonstrates that we adapted our cost structure during the crisis and that we maintained in H1, a strong focus on cost containment and competitiveness. Our H1 EBIT adjusted was at EUR 2.7 billion compared to minus EUR 0.1 billion in H1 last year. H1 2021 free cash flow before M&A and customer financing was at EUR 2.1 billion and includes a strong positive phasing impact from working capital. The many actions taken by the teams have delivered a strong H1 performance. And from what we know today, we at Airbus have put our adaptation process largely behind us. Entering the second half of 2021, we'll shift our attention more towards securing the A320 ramp-up steps as planned, and we will work closely with our suppliers. We'll continue to work closely with our suppliers will play a key role in increasing the production output of the world's best-selling civil aircraft. We also continue to transform our commercial aircraft industrial operations by bringing assembly back into the heart of the company. The project teams in France and Germany are making progress while we continue to discuss with our social partners. For the full year, our strong H1 performance enables us to raise our 2021 guidance, wherefore we continue to face a rather unpredictable and difficult environment. The COVID-19 crisis is indeed not yet behind us. We'll continue to work on managing customer deliveries, and we have to monitor the risks resulting from new variants of the virus and, in particular, the Delta virus. We'll come to the guidance update more precisely later, but let's first have a look at our commercial environment. I'd like to kick it off with some comments on the recent developments of the WTO dispute. We welcome the news of a cooperative framework between the EU and the U.S. regarding the WTO disputes on the large civil aircraft, which resulted in a suspension of tariffs for a period of 5 years. This will provide the basis to create a level playing field, which we have advocated for since the start of these disputes. Now to our commercial environment in more detail. From the discussion with our customers in the most recent macroeconomic data, we observed that the market recovery in the commercial aircraft business is gaining momentum in key domestic markets, which underpins the underlying air travel demand -- pent-up demand. Measured in ASK, domestic China remains close to the pre-crisis levels. Domestic North America benefited from early and fast vaccination rollout and is converging back towards the pre-crisis demand for air travel. Recent industry forecasts expect the full recovery of the U.S. domestic market by the end of this year or early 2022. And the air travel inside Europe, which had been lagging behind in Q1, is now also showing encouraging signs of a rebound. When it comes to international air traffic, we continue to believe that the market will take more time to recover. Globally, the potential impact from new variants remain a concern, and progress on vaccination is a key element for a sustainable resilience against the pandemic. Let me remind you of our order and backlog in H1. We booked 165 gross orders, of which 158 single-aisle. It includes in June a new order for 7 A321neos. We saw 127 cancellations, of which 27 in Q2. The cancellation in H1 were largely anticipated and embedded in our backlog valuation as of year-end 2020. As a result, net orders were positive at 38 aircrafts and our backlog in units amounted to 6,925 aircrafts. It is our ambition to continuously adapt and evolve our product portfolio in line with customer needs. As, for example, we did it with the launch of the A321XLR back in 2019. I'm sure you remember. In that spirit, and following native customer feedbacks, we obtained the Board of Directors' approval for a freighter derivative of our well-established A350 platform. So based on the proven efficiency of the 350, the freighter version is planned to deliver lower fuel burn compared to freighter models of that size currently in service. For example, around 20% less fuel burn compared to twins, 30% less compared to pre jets and 40% less compared to [indiscernible] for engine planes. It will also meet the IKO 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. The entry into service is planned for year 2025. Now looking at helicopters. In H1, we booked 123 net orders versus 75 in H1 last year. In Q2, we recorded a previously announced order for France for 8 H225M, and for a second prototype of the unmanned aerial system, the VSR700, which are part of the French stimulus plan for the aeronautical industry. In 2021, we continue to see good momentum for commercial campaigns in our home countries and, in particular, in public services. Finally, in Defense & Space, in H1, our order intake was at EUR 3.5 billion. During the second quarter, orders were booked in the amount of EUR 1.5 billion. This includes in Space Systems, the authorization to proceed granted by ESA the European Space Agency to Airbus on the earth return orbiter projects. With ESA we also signed a contract for 3 additional open services modules, which are a mission-critical element for NASA's Orion spacecraft dedicated to the U.S. Artemis return to moon program. Airbus has also been awarded by ESA, the contract to design and manufacture 6 Galileo second-generation space craft. This important order is partially reflected in the order intake of the second quarter. And in unmanned ariel systems, with renewed service contract agreements for Heron 1, the U.S. system Heron. On FCAS, we continue to progress, and we welcome the validation by the Bundestag of Chairman share of the FCAS Phase 1b demonstrator, that is a key step for this strategic European program, which will also further strengthen European technological sovereignty. We are proud of the continued trust that France, Germany and Spain are placing in us in the frame of the Future Combat Air System program. On Eurodrone, we continue to make progress. And with this, now Dominik, I hand over to you. So Dominik will take us or will take you through our financials. Dominik?

Thank you, Guill, and good morning, ladies and gentlemen. Our H1 2021 revenues increased to EUR 24.6 billion, up 30% year-on-year, mainly reflecting the higher number of commercial aircraft deliveries in 2021. Our EBIT adjusted increased to EUR 2.7 billion in H1 2021, up from minus EUR 0.9 billion in the first half of 2020, which you recall included EUR 0.9 billion of charges due to impairments and write-offs triggered by COVID-19. Strong year-on-year improvement of our EBIT adjusted is mainly driven by the delivery performance. It also demonstrates that we have adapted our cost structure during the crisis and that we have maintained in H1, a strong focus on cost containment and competitiveness. Our research and development expenses decreased by 10% year-on-year. We continue to expect our 2021 full year research and development expenses to be at a similar level as in 2020, including a moderate amount of R&D expenses for the freight diversion of the A350. Our H1 earnings per share adjusted stood at EUR 2.37 per share, base average of 785 million shares. Our H1 free cash flow before M&A and customer financing was at plus EUR 2.1 billion. It reflects our continued effort on cash containment, on top, strong positive phasing impact from working capital. All in all, in H1, we benefited from a very favorable combination of elements. We saw firstly, a good number of commercial aircraft deliveries. Secondly, we focused on competitiveness. While we are still managing our cost in a crisis mode and thirdly, benefited from a very favorable exchange rate. Going forward, we also may start the selective hiring of key employees necessary to secure the required skills when it comes to supporting the ramp-up of our single-line program, new technologies, digitalization and decarbonizing our products. Now on to the slide regarding our profitability. H1 2021 EBIT reported was also EUR 2.7 billion. Net EBIT adjustments were broadly neutral and included EUR 145 million related to A380, of which plus EUR [ 134 ] million booked in Q2. We released the portion for the impairment of the former A380 Lagardère facility, recognized in prior years as we are now using the building for the modernized A320 Family in Toulouse. Minus EUR 170 million impact from foreign exchange and balance sheet revaluation, of which only plus EUR 7 million in Q2. EUR 49 million positive of other adjustments, including compliance costs, of which EUR 75 million positive in Q2, mainly from provision release related to the group-wide restructuring plan. Earnings per share reported include minus EUR 30 million of financial results, mainly reflects a net interest result of minus EUR 172 million as well as plus EUR 79 million related to [indiscernible]. The tax rate on the core business is around 27%. The effective tax rate on net income is 18%, including the effect from tax risk updates and the tax effect on the revaluation of certain equity investments, partially offset by deferred tax asset impairments. The resulting net income is EUR 2.2 billion with earnings per share reported of EUR 2.84. Now on to our hedging activities. In H1 2021, $10.2 billion of hedges matured with associated EBIT impact at the rate of $1.18. This hedge rate is unchanged compared to the same period last year. However, for the full year 2021, we expect an average hedge rate of $1.21 compared to $1.19 in 2020. As a result, for the remaining 6 months, we expect a negative EBIT impact based on a less favorable hedge rate to materialize in H2, both on a year-on-year and in comparison to H1 2021. During the first half of the year, we implemented EUR 10.7 billion of Forwards at a rate of 1.22%. In H1, we further adjusted the phasing of our hedges by implementing $4.9 billion of rollovers. As a result, including EUR 1.2 billion hedges is qualified in Q1 '21. Our total hedging portfolio in U.S. dollar stands at $80.2 billion with an average hedge rate of $1.26 versus EUR 81 billion -- 1.26% in December 2020. Going forward, we will continue to adjust our portfolio to match our delivery profile. Now let's look at our cash evolution in H1 2021. Our gross cash flow from operations of EUR 2.1 billion mainly reflects our EBIT adjusted and includes a EUR 0.5 billion provision consumption related to the restructuring plan. Our working capital has decreased by EUR 0.7 billion. It includes a positive impact from the inventory reduction in the A350 and A380 programs. It also includes a significant positive phasing impact from the time of receipts and payments or be it to a lesser extent than in Q1. Year-to-date, the [indiscernible] continued to weigh on our free cash flow before M&A, but less so than in H1 2020. H1 CapEx was around EUR 0.8 billion negative, down 14% versus H1 2020. For 2021, we now expect our CapEx to be around EUR 2 billion. Free cash flow reported was EUR 2 billion. M&A activities amounted for only minus EUR 8 million, and our customer financing represented an outflow of only minus EUR 31 million, remaining at a very, very low level in H1. The aircraft financing environment remains solid with sufficient liquidity in financial markets for our products. We also benefited from the support of Export Credit Agencies. When it comes to our fiscal year 2021 free cash flow and, in particular, looking at our working capital, we expect the H1 phasing effect to further decrease going forward and to see implications from our single rep. Our net cash position has improved to EUR 6.5 billion at the end of June, and our liquidity position remained strong and stood at EUR 33.7 billion. In H1, we have redeemed the EUR 1.1 billion exchange responded to the shares and prepaid a USD 1 billion bond in order to reduce our gross debt and further improve our leverage ratios, which reflective of supporting our product [ current ] rating, while maintaining a strong liquidity position. Now, back to Guill.

Thank you, Dominik. Now on to commercial aircraft. As already said, in H1 2021, we delivered 297 aircraft to 67 customers. When we look at the H1 '21 situation by aircraft family: on the A220, we delivered 21 aircrafts. Our production rate currently at 5 per month since the end of Q1 this year, is expected to increase to around rate 6 per month in early 2022. On A320 Family, we delivered 237 aircraft, of which 110 were A321. 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 file in Toulouse resumed in May. It will increase our flexibility while we are ramping up. On the A321XLR, we recently started the first fuselage 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, which means we're moving forward on time. On wide bodies, we delivered 39 aircraft, of which 30 A350s, 7 A330s and 2 A380s. On the A380s, 3 aircraft remain to be delivered. Lastly, the increase in EBIT adjusted is mainly driven by the delivery performance, which also demonstrates that we adapted our cost structure during the crisis and that we maintained in H1, our strong efforts 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 '21, we delivered 115 helicopters in total, 11 aircraft more, 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. EBIT adjusted increased by more than 20% versus H1 2020 to EUR 183 million, driven by services, program execution and lower spending on R&D due to the end of the certification process for the H150 and the new 5-bladed versions of the H145 in 2020. Now on to Defense and Space. Revenues are broadly stable compared to H1 2020. The increase in EBIT adjusted mainly reflects the ongoing cost containment and competitiveness efforts as well as increased volume in Space Systems. For the A400M military transport aircraft, we delivered 2 aircraft in the first half of 2021. We have continued with development activities towards achieving the revised capability road map. Retrofit activities are progressing well and in close alignment with the customer. Risks remain on the development of technical capabilities and associated costs on aircraft operational reliability, in particular, with regard to power plants on cost reductions and on securing export orders in time as per the revised baseline. Coming to guidance, let me remind you that we issued our 2021 guidance in February this year. Also, we continue to face a rather than predictable environment. Our strong H1 performance enables us to raise our 2021 guidance. Let me read our updated 2021 guidance to you. As the basis for its 2021 guidance, the company assumes no further disruptions to the world's economy, air traffic, the company's internal operations and its ability to deliver products and services. The company's 2021 guidance is before M&A. Now on that basis, the company has updated its 2021 guidance and now target to achieve, in 2021, around 600 commercial aircraft deliveries, EBIT adjusted around EUR 4 billion and the free cash flow before M&A and customer financing of around EUR 2 billion. As usual, I want to conclude by summarizing our key priorities. Obviously, we'll continue to manage our deliveries and backlog as agreed with our customers. This is, of course, including our Defense contracts. It makes us proud that our Defense and Space capabilities contribute to the peace and security of our home nations, our EU and NATO partners, as well as to UN peacekeeping missions. Ultimately, these defense activity make vital contributions to a more stable and sustainable world. In our commercial aircraft business, will shift in H2, our attention to a greater extent towards securing the A320 ramp-up as planned, and we will work closely with our suppliers. We continue to work closely with our suppliers, who will play a key role in -- and from having maintained the stability of our supply chain in that period. We will continue to integrate and modernize our industrial value chain to further support our ramp-up, our long-term competitiveness as well as our evolving range of products. And we remain focused on innovation and on our ambition to lead the decarbonization of our industry. In this context, we welcome and support initiatives and policies which encouraged the carbon reduction in aviation, including ambitious targets to scale sustainable editions and green hydrogen. Our key priority will, of course, be to deliver on our updated 2021 guidance, and to sustain our ability to invest in our long-term ambitions across the portfolio. And finally, on 1st of July, we implemented changes to our Executive Committee, and we welcomed 3 new members to the team. I'm convinced that these changes to our executive team will bring a strong support for the challenges ahead. And I guess now we are ready to take your questions.

We now start our Q&A time. [Operator Instructions] So please go ahead and explain the procedure for the participants.

[Operator Instructions] We have our first question from Mr. Tristan Sanson from Exane BNP bank.

It's Tristan from Exane. The first one will be a question on the EBIT guidance for this year and the new conversion of deliveries to EBIT. Obviously, you have 2 parts in the increase of the EBIT guidance for this year. One is the increase of the underlying level of deliveries to calculate it from, at this table 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 stable deliveries about EUR 1.5 billion to the EBIT guidance. Can you explain a bit where it's coming from? How you identified your progress on cost saving compared to plan? How you quantify that for us to get a bit better feel of how this guidance is built? And the second question will be on the margin and ambitions beyond 2021. I don't know whether you want to communicate at this stage, but in the early stage of the [release] 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 reached almost 17% in Q2. So how should we consider that trajectory going forward?

Yes. Dominik, the question is too difficult for me. So I hand over to you.

Okay. Tristan, yes, you're right, our underlying performance adjusted for flexing for the volumes is very strong and has been, I would say, a little bit of a picture perfect quarter and where all these factors came together. I mentioned in my introductory remarks that we have been really still running the company in crisis mode. So minimizing the cash, we made very good progress on the, what do you say, restructuring. You've seen the headcount numbers come down significantly. The ForEx was very positive. If you look at our disclosure, you see that for the full year, we see a significantly higher rate than the 18% in the first half. So we remain to do is a quite a big win on ForEx. And yes, we are in the process of ramping. And we have now several quarters in a row where we have been sailing very smoothly without big efforts on continued support, all the cost to normalcy, no liquidated damages. We have to assume that when we accelerate the system, the cost base will increase. And then there are also very deliberate decisions like on research and development expenses where we will need to set back to some degree. So there were some deferrals to the right. Some of that will be phasing which need to be caught up in the second half and beyond. And this is why it's not advisable to just extrapolate from H1.

If I may, just to be clear because the ForEx, you mentioned positive ForEx, but it's earning roughly as planned overall. And the R&D is a small balance, a bit stronger tailwind than expected, but it's not a big driver. So the total of EUR 1.5 billion of increase in full guidance, doesn't come from FX and R&D. So where is it exactly coming from?

It also comes from a very strong gross margin because of the very smooth manufacturing process. Frankly, yes, our forecast turned out to be conservative and prudent in that regard. If you look at where it comes from, it's really throughout. I mean, we have gone through a very stark reduction in rates. We readjusted. And of course, it's not easy to recalibrate the way it stands. And then the next discussion is phasing versus really sustainable event, that I must say we have deferred quite some projects which we need to resuscitate and that will lead to cost increase in the second half and beyond. And again, this is why I would see this is kind of a picture perfect quarter, but not a good base to extrapolate from.

That's clear. And on the margin ambition beyond 2021?

The longer term. The longer term, I wouldn't change anything to that statement. We've always said that our aspiration is to come back to the 2019 margin performance as we ramp back to the rates of 2019, which you recall were 863, and we think that's still a very good target to inspire.

Your next question is from Mr. Benjamin Heelan from Bank of America.

I wanted to come back a little bit on Tristan's question because, I guess, the guidance that you've given implies a massive reduction in EBIT in the second half of the year, right? It doesn't feel like there's just cost coming back. I mean it sounds when I run the numbers quickly, it sounded also EBIT was going to be down over 50% in commercial and in the second half of '21 versus the second half of '20. So again, is there anything else in particular that we're missing there? That would be my first question. And then on the A350 freighter, obviously, you've announced that today. Can we get a bit of a view in terms of the cost of developing that, so the nonrecurring cost? And how we should think about your expectations for production rates on that program?

Yes. So I think the elements I can just reiterate, if you think about the move and we remain to do versus the 118 in H1, that's good for kind of $0.5 billion or so negative variance. I mean, you could apply the logic. You take the first half EBIT, multiplied by 2 and then you look at the puts and takes. So the big first block is the ForEx, as I mentioned. The second one is really the deferral discussions of costs where the phasing was pushed to the right and then the fact that the costs have not been incurred in H1 doesn't mean that coming, but it may come stronger. And if you add all these elements together, plus still the ambiguity we see in the market and the challenges we see with the rents and the cost that might be associated to really secure it, let us to the guidance you have. But I mean, should we be lucky again with a picture perfect environment in the second half, we have to see, but I think it's also important not to get carried away in the environment we are currently facing.

It's good to speak to you. On the A350 freighter, well, no, we don't intend to communicate on the nonrecurring expenses of the program. it's a derivative of an existing program or basically from 2 existing products mainly, and we use the building blocks of what we've done on the A350-1000 mainly, but not only, and also the learnings and the tools and ways of working that we've developed recently with the Beluga, the plane that we have developed for ourselves to carry wings across Europe. On the production rates, what the beauty of that program is that it will be embedded in the A350 production system. So we don't need to plan for individual rates of the freighter, a commonality with the -900 and -1000 that we put it inside the final assembly lines, and the production rates will depend on the commercial success of the program at the data stage. Bit too early to answer your question in a very specific manner.

A next question from Madame Celine Fornaro from UBS.

My first question would be related to the outlook, but probably more so on the delivery outlook to start with and then on the free cash flow, if I may. So looking at the deliveries, and maybe that explains some of the caution on the EBIT. But is there a particular region that maybe you're concerned about in terms of your H2 delivery expectations? Is it a bit more Asia Pac focused in H2 than in H1? Because even the 600 guidance, which means you're going to deliver the same amount in H2 versus H1 where, hopefully, we would expect an inventory drawdown as well on the build planes. I see a degree of conservatives in there. And also on your free cash flow, 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 think about that?

Hello, Celine, good to speak to you as well. Yes, you're touching an important point, which is the balance between H1 and H2. I think H1 comes as a very strong half year, first half year compared to previous years. That's a bit unusual for us. 300 planes was really -- 297 was really at the top end of what we would have expected. And I think Dominik rightly said it is a ton on H2, as we did such a strong H1. So that's a bit the background, and we are prudent because the 300 of H1 are done and around 300 of H2 are still to be demonstrated in a rather difficult environment. So maybe to give more color on the free cash flow, I hand over to Dominik.

I think in the context of the free cash flow, it's really worthwhile looking at the balance sheet development in H1 in more detail. There are 2 major positions you should analyze which is the trade liabilities, where you see there's a big boost coming from a reduction or an increase in trade liabilities which is, of course, giving us cash, that was one of the positives. And the other big negative is on the kind of development of contract assets and liabilities, which is basically the net of PDP inflows and usage of PDPs by delivery. And what you see there is that we have quite some cash out actually on that front. And this is the effect we've already highlighted before that as we last year, we negotiated all the backlog basically -- largely all the backlog, and we pushed aircraft to the right while really insisting on preserving the PDPs, the customers are kind of in advance of the schedules, and that gives us several quarters where there is a lower kind of PDP payment, I have to underline that the customers are very much compliant with PDP payments. So we have basically 3 big things that the operational performance is very strong. The headwind caused by COVID-19 and the PDPs because we have deferred aircraft to the right without deferring the PDPs to the right. And then lastly, the trade liabilities. The trade liabilities will not reoccur, but the headwind from the PDP adjustments, so to speakout COVID-19 deferral will continue in the second half. And this is explained why we'll see a relatively moderate performance of free cash flow in the second half of our perspective to date. And then there, of course, the question of deliveries. Deliveries might move us very strongly and last not least, the rent. The rent will also absorb some working capital, and this is why we've been prudent, I think, in the second half on the free cash flow.

Thank you, Dominik and Guill. I think, still puzzled all of us, given how well you manage the way down that we're not going to manage as well the way up. My personal view.

Next question is from Mr. Robert Stallard from Vertical Research.

I've got a couple of questions for you. First of all, Guillaume, as you announced the other month your plans on the A320 ramp-up and your long-term target of 75 per month. Some of your suppliers have expressed some skepticism as to whether that's a realistic target relative to the demand that could be out there. So I was wondering if you could give your explanation on that? And then also on the narrowbodies. On the A321, could you get to over 60% of A320 Family production being the A321? Will you have enough capacity to hit that number?

Yes. Thank you, Robert. So we have a backlog of A320 that is coming close to 6,000 planes. At rate 40, it would be 15 years. If we go up to rate 60, it will be 10 years or more than 10 years. And obviously, you can imagine that the customers which have an A320 or A321 in the backlog today, they don't want to wait for 12 or 15 years. So actually, if you just do the math, it's obvious that we need to go significantly above rate 60 to serve the backlog. So I'm ready to do the math with the suppliers and partners, which are challenging the need for going above rate 60, but we see it as a fact in our backlog. And Dominik mentioned that the customers at the moment are current on PDPs, which is signaling to us that they really want to take delivery of their planes on time. So the reason why we've been very transparent and clear to our supply chain and to our partners on our rates is because we really want them to get ready, and I'm really disappointed to see that some usual partners are still challenging the rates. They were challenging the rate 40 a year ago. We've managed to stick to the rate 40, and we really want to manage the ramp-up, the re-ramp-up as we call it, on the A320, that has started already in July this year. Question on the A321. Indeed, we want to be able to serve more than 60% of deliveries being A321, I mean the A320 Family. don't know if the 60% mark that you mentioned is the right one, but we will be significantly ahead of 60% or we will be capable up significantly more than the 60%. That's also why we are replacing an A320 file in to lose by a modern flexible line that will be capable of both A320 and A321, and we'll continue to increase the capacity and the flexibility of the A320 Family production system to be flexible on the A321, and that will be particularly important 2023 onwards when the XLR will join the family. As you know, XLR is an A321. So yes, the rate -- the 60% mark is probably not too wrong. I've not done the math and to -- if and when we go to 60%. But we know that we are with a very strong demand for the 321 moving forward, and we want to serve that demand.

Backlog is the 63% right now.

Backlog is 63%. Thank you, Dominik.

The next question is from Mr. Jeremy Bragg from Redburn.

So first question, please, would be on PDPs and Boeing yesterday talking about material headwind in PDPs in the second half of the year and going into 2022. So I wonder if there's anything specific there for them or whether you are also going to experience that? And then second question, please, and sorry to come back on it, but outlook for free cash flow in the near term raised by EUR 2 billion, EBIT guidance raised by EUR 2 billion Fine, but you're clearly expecting more inventory -- aircraft out of inventory to be delivered and also the CapEx guidance is lower, as far as I can see. So again, just sort of struggling if I look at it that way as well?

Okay. On the PDP, I can only reiterate what I said already. I don't want to comment on what Boeing's challenges are, but we do have a headwind on PDPs for several quarters to come because the deferrals have been performed, and we felt it's important to insure that the growth are underpinned by PDP. So we have not been forthcoming in terms of returning PDPs to customers because we felt that's prudent to do that. On the free cash flow guidance for the second half, again, it's the puts and takes I mentioned. There was a very strong tailwind from trade liabilities, which will not reoccur in the second half. And then there is a cash absorption for the rental, which I think is a little bit in what you commented. There will be some different efforts, not only on the CapEx side, but also some on the inventory side. We will not necessarily see support from there because we really want to prepare for the ramp-up and make sure that we can deliver a steep increase. You've heard the rate, I don't want to reiterate the rate profile we just guided. It shows a very deep plan, which needs to be catered for.

Next question is from Mr. Douglas Harned from Bernstein.

As a first question, I want to go back to the longer-term rate plans that you talked about going to 64 months in Q2 2023 and 75 a month into 2025. We've heard the same skepticism from many suppliers. This is still a ways out. And what I was interested in is what commitments have suppliers actually made on this such as interim rate increases before that 2023 point? And the second question is, historically, Airbus and Boeing have split the Chinese market. Now given the challenges that currently exist in U.S.-China relations, does this create more opportunities for Airbus there? Do you believe you could take a larger share of the Chinese market at this stage?

So thank you for the questions. When it comes to rates, I mean, we have given some rates until 2023 to the supply chain. So we expect the supply chain to be up to our orders, and that's what we've seen so far. So that's the point. Now when it comes to beyond the rate 64, that's more assessment of the capacity of the supply chain and exploring at what speed and what would be required to go to rate up to 75. So it's more uncharted territory. But at 64, I mean we were going to 64. We're close to 64 just before being hit by the pandemic. The production system is in place for that, and we expect the supply chain to be able to ramp up at a much faster pace for the re-ramp-up than it was the case for the initial ramp-up of the family. The trajectory to between now and rate 64 in Q2 2023 is rather linear, more or less linear and all the tails in mind that it looks like something that is rather progressive to give the chance to the supply chain to adapt. It goes by steps, which is something necessary to have some stability in the quarter, as we like to do it. So the linear growth. And that's basically what we see ahead of us. So anticipating, doing the right things on revising with the skills, the onboarding the people, checking on time the readiness of the physical production system, so the ramp-up can happen as it was the case just before the...

And then on China?

Yes. Sorry. China, well, I don't really know the situation for the other guys. We see a good number of deliveries for Airbus. We continue to deliver around 20% of our delivery numbers to the Chinese airlines. We've not seen a large order as well for Airbus now for quite a while. So we see that the COVID-19 situation is leading to some procrastination and wait-and-see attitude a bit in this region of the world. And we would expect things to start to ramp up again to make progress moving forward. So I think COVID-19 is playing a role in the bit of the wait-and-see attitude in general, at least, that's the way I see it for Airbus. And I cannot comment for our competitors. I don't know.

Next question is from Mr. Andrew Gollan from Berenberg.

Two from me. First one is on widebody profitability. Can you just give us an update there where you are at current rates in terms of gross margin really? And how you see that evolving over the next couple of years, say, particularly with the slight increase in A350? And secondly, on the aerostructures reorganization, can you just give us an update there, again, really? And just outline the changes that are being posed, where the progress is on that and kind of expected timing on what benefits you expect Airbus to derive from that in terms of operational improvement?

Dominik, can you take this one?

On profitability of our widebody programs, no change, I would say to what we've previously communicated, which is that even at these low rate levels, we want them to bring them back to a breakeven level that's not a contribution margin, but in the EBIT breakeven level. There is, of course, with the advent of the freighter for the A350 program, a little bit of a headwind created, but it's not too massive, and we still want to bring that program back to a breakeven position in the not-too-distant future. I'm not sure it can happen already next year because of the ramping in our Cs on freight but still in the middle of forecast in. So we roughly I think we can turn the program around to breakeven and similar time line on A330.

On aerostructures, I don't know if I shall go through the rationale again, I will try to make a simplified version for you. We are today with 2 subsidiaries, Telia on the French side and the Premium AEROTEC that we call PG as well in Germany. That's all in charge of front fuselage and hull of fuselage mainly. They are an independent organization. And this has led to a rather simplified way of operating the production system for Airbus. So we like the fact that we have a stand-alone entities managing a large part of the production system and simplifying the interface with Airbus. Now moving forward, we want to drive simplification. We want to drive better efficiency and going a bit more in that direction. But removing the transactional relationship we have with those organizations as they were carved out -- sort of carved out a decade ago with the idea that the fuselage, the airframe would be commoditized. This has not really happened in the meantime. And when we look forward, we see that the decarbonization of aviation will lead to very different architectures, where it will probably no longer be about a fuselage, a simple fuselage, but the airframe will be also the place where the energy management part of the production system and a lot of complexity will be directly embedded. And therefore, we really believe that this will be core moving forward that there will be a lot of complexity. That's why we are rolling out what we call DDMS, which is the Digital Design and Manufacturing Digital Platform that will connect end-to-end the product, the production system and the services. And this has to go into the future airframe design and manufacturing. That's why we consider it core. That's why we want to bring it closer to Airbus, but managing the simplified way of dealing with the production system. Therefore, the model we have developed, which we think fits very much with our needs. We call them the AXA, the aerostructure assembly organizers. There will be one in France combining some of our today's Airbus plant and Australia. And similarly in Germany with the more complexity on the German side, but we still have a rather significant detailed part activity in Germany, that we think is a bit subcritical that we don't see a score moving forward and for which we want to find a positive future. So we are working how, with the social partners to define the best way forward for this part of the activity of the today's so-called Premium AEROTEC. So we do it as well in terms of lower production rates. It's a good time to transform. We want to be ready on time for when our DDMS platform will be -- fully available and running, and for the times where we will have to start designing future products, decarbonized products. So it's now or never, and we do it now.

Can I just follow up there. Is it possible to scale the parts business within Premium AEROTEC? Or is it too early to say?

Yes. We think it's important to give it a bigger scale to combine it with other detailed part activities to increase the competitiveness. That's why I think the option to divest and combine it with the business of other industrials to be able to address other customers that are with us in aerospace or other sectors is a good way forward for the detailed part. So that's one of the options. We are also looking at other options to restructure and make sure we have a good business of detail parts moving forward, whatever, we keep it or we divest it.

Yes. Sorry, for the confusion. I mean to scale it in terms of how large is it in terms of revenues, for example.

[indiscernible] high triple-digit millions. [ 2,500 ]

Next question is from Mr. Chris Hallam from Goldman Sachs.

As you ramp up production and as A320 accounts for a larger portion of deliveries, as you mentioned. And then with the recent narrow-body orders, particularly on 737, are you noticing any changes to price levels you're seeing in competition? That's my first question. And then secondly, with the better cash for the EUR 1 billion-ish Dassault stake which could be monetized. So with all of that, how do you think about when to restart the dividend and at what level?

Thank you, Chris. Good questions. Dominik, what do you think about it?

So we start with the cash and -- it's true that our net cash performance is coming in quite nicely. We were more cautious previously because we were still hearing some more vendor financing would be required, but not only do we do better on operating performance, but also basically no vendor financing to end that discussion, but I would not rule it out that we work to a conservative. we have a dividend policy in place, which is basically 30% to 40% of our net income or tax effected EBIT. And from that point of view, I would not see that we're aggressive on that, but the discussion level on orders, but it's delivered on the backlog and the prices are in the backlog. So there's no pressure there. Of course, in other programs where we need new orders, there is a lot of supply in the market and every order is fiercely contended, and that means there is price pressure on programs like A220 is well protected by the backlog, and we are not desperate for new orders on that front.

Next question is from Mr. Aymeric Poulain of Kepler Cheuvreux.

Average for the 2023 margin target. Given the margin you have right now and the fact that you will be using your capacity 40% more in 2 years' time based on your delivery schedule. What kind of operating leverage should we get around your growth rate beyond '23? And the production rate going to 75 a month for H225M in '25. What kind of assumption do you take for the replacement cycle? And is there any interest in acceleration of the replacement cycle due to the recent EU carbon tax in EMEA that may be an incentive to go for more fuel-efficient plane? Or -- and also what are your estimates or assumptions for market share relative to Boeing and Comac in particular?

Dominik, do you want to take that...

property and leverage is very much related to the question of the margin aspiration we have. So at the point in time where we snap back to the 2019 deliveries, we want to be back at the margin levels of 2019. In that context, it's worthwhile mentioning that we want to be at a similar research and development expense level as in 2019. So that shows you there is some resuscitation. And yes, we have put a lot of breaks on cost on initiatives that EBIT margin level and that the absolute euro R&D is at a similar level, probably, I mean, at that point in time, we went back to what I mean 2019. That's, of course, a headwind for operating leverage because we increased the research and development expenses.

Victory to rate 64 is a plan and to 75. We are assessing the capacity of the supply chain. So we are reviewing what it would take when and obviously, we would target 2025. That's what we've given to the supply chain as a question, and we will evaluate the results and the -- whether it's relevant to go there at what pace, a bit later. And it has to do indeed with your question on the market. As I said earlier on the call, on the previous call, we will update the GMF, the Global Market Forecast, coming from the acceleration of the -- and the reinforcement of regulations on carbon emissions. So there's a lot of moving parts, and we want to come with the picture that will be as good as possible a bit later in the year. There are tendencies that tend to go in different directions, and we need to wait them and combine them in something that is as much as possible, likely to happen. But obviously, we see that the new products will be in demand. That's for sure. we can see it, as Dominik explained, through the PDP that customers will probably be limited again by production capacities, and we won't be able to serve all the demand at least on the short term for the single line.

Next question is from Mr. Christophe Menard from Deutsche Bank.

I had 2 questions. The first one is on the EBIT adjusted Airbus Commercial in H1. It's a very strong performance. And I was wondering whether things already in H1? And what is -- I mean, if there are some efficiencies already materializing, would it be fair to think that your margin aspiration by 2023, as you just mentioned, could be higher than 2019 -- bond that is deemed on Dassault. Is the plan to remain a shareholder of Dassault? Or do you have other aspiration going forward?

So on the efficiency on H1, yes, despite the fact that you run lower and we basically are running at 80 in a steady mode. And that's a super efficient operating point. And once we restart the ramp, there will be some incremental effort required, it also costs money. The margin aspiration on 2019, and I don't want to get into 2019. They did deliver in absolute euros to aircraft, a pretty healthy contribution margin. When we talk about breakeven in 2019 on the A350, that's fully loaded EBIT. It's not the contribution margin. Contribution margin is significantly positive. And of course, we sell much less of that. And for lesser words, if you have a contribution margin on the product in a market where there's a lot of supply that contribution margin will be under pressure on the pricing side. And last but not least U.S. dollar. So for all these reasons, I would be cautious to try to go beyond what we've achieved in 2019 on that term has expired, we got the shares back, and we currently don't see any emerging interactions, we think we should, at that point in time, keep them and we don't see any activity.

Harry Breach from Stifel.

I just wanted to ask a couple of questions. Maybe when we think about the current level of have picked up in recent months. Can you give us your feeling for the level of sales activity at the moment and how that's going forward? And then in a related idea, can you give us a feeling of the sort of balance of your -- in terms of some of the headcount reduction and the furlough benefit dynamics. So are we now fully achieving the benefits from headcount reduction? Were there still further benefit payments benefit in EBIT in the second quarter? And then just on PDP about when you're going to be -- maybe 50% of normal flows or back to total normality just so we can have a sense of how that headwind gets back to normal, please?

I'll take the first part. So our early discussions for new orders. So I would anticipate around the end of the year or at least in the second half of the year that we would see the order speed in the early years when it's about large orders for many, many years. As you might have seen from at least 1 previous big order. We are not able to completely cope with the request for short-term deliveries. So obviously, and I think there will be many coming starting this year, probably more next year there will be some next year. And there have been some this year already, by the way.

Headcount reductions for those schemes and you've seen the headcount come down from the peak in March 2020 to end of June. And in terms of furlough schemes, they are gradually unbound because we are ramping. But the end of full year or there are still some furlough schemes in place. And of course, the full year effect of the head count reductions will only come to bear next year because we are gradually from variable compensation, it's not only executive bonuses, but also very broadly applied profit and success sharing mechanisms, which depend on the profitability in absolute terms of the group. So as we recover profitability, the big numbers we saved last year on the front we gradually eroded because of the deferral topic I was describing before, a little bit more than that is coming. So we have a very significant headwind in the half year. I'd say that's maybe not a bad, just to speak as a kind of order of magnitude we could see in the next coming 2, 3.5 years. But by the end of next year, I think we should be through on, which is always a target -- Of course, you still have the AMD to 20 topics to overcome in the cash conversion aspiration, but the PDP issue itself will be definitely digested before the end of 2020.

Before handing over to Thorsten, I'd like to share with you that, that was the last quarterly call for Thorsten, at least in that role, obviously. Thorsten has been so successful in managing a good second quarter that we are now actually his last presence in our custody call, I wanted to thank Thorsten, to tell you that we've been very happy to have Thorsten for a couple of years with us, at least, its almost 3 years now, and wish him all the best for later when you will transition to your new role as we really continue to be as successful on managing or helping us managing the ramp-up of the single line as you've been successful on delivering last quarter as Head of Investor Relationship. So I hand over to you.

Thank you very much. If you have any further questions, please send an e-mail to Philippe Gusta and still myself, and we will get back to you as soon as possible. Thank you, and I look forward to speaking to you again. And I think I can say soon.

You can now disconnect.