Airbus SE (AIR) Earnings Call Transcript & Summary

Good day, everyone, and thanks for joining us. This is Clotilde, your operator for today's Airbus Q1 2022 results release conference call. I'd like to let you know that during the presentation, everyone will be in listen-only mode, and a question-and-answer session will follow. This call is being recorded. Once the presentation wraps up, you'll have a chance to ask a question. At this point, I'll hand the conference over to your hosts, Guillaume Faury, Dominik Asam, and Hélène Le Gorgeu. Please go ahead.

Thanks, and good evening, everyone. Appreciate you joining our Q1 2022 results call today. I'm here in Amsterdam with Dominik and Hélène to take you through the Q1 results. First, as I mentioned on the media call, let me say again that everyone at Airbus holds in their thoughts all those affected by the humanitarian crisis set off by the attack on Ukraine — with huge loss of life and millions forced to flee their homes. At Airbus, saving our people and our operations has been, as always, and continues to be, our top priority. In addition, in line with international sanctions, we halted deliveries and support services to Russian customers and operators, along with supplying spare parts to the country. Across all our activities in every division, we are applying the sanctions in place and will keep applying them. The ongoing military conflict is a reminder to our societies that peace, democracy, and freedom can never be taken for granted — they must be earned and must be defended. We expect to encounter added complexity as 2022 moves along, not only because of geopolitical tensions, but also from growing effects on global supply and logistics, and especially given the new COVID wave in China.

With that said, during Q1 we managed to hand over 142 aircraft. Apologies. That's a rise of +14% compared with a year earlier. Ramping up commercial aircraft output continues amid this challenging environment. After reviewing demand from customers worldwide and gauging how prepared the industrial ecosystem is, we are currently collaborating with our industry partners to lift A320 family production rates even higher, reaching 75 aircraft a month in 2025. Now, returning to the first quarter. Our strong financial results gained from competitiveness efforts and from the cost containment put in place during the COVID-19 crisis, which we will gradually wind down now that activity has resumed. EBIT adjusted came in at EUR 1.3 billion, while free cash flow before M&A and customer financing reached EUR 4.2 billion. Our robust Q1 EBIT adjusted also contains a non-recurring positive item of EUR 4.4 billion tied to retirement obligations, partly offset by a EUR 4.2 billion negative effect stemming from international sanctions against Russia. On today's call, Dominik and I will bring you up to date on how the business environment, more complex than anticipated, is affecting us. Regarding the fallout from international sanctions, our direct exposure to Russian customers is fairly limited throughout our product portfolio.

Looking at supply, our operations are safeguarded for both the near and medium term. That affords us time to lock in alternative solutions wherever necessary. Even so, with the environment growing more complex — particularly the deteriorating COVID situation in China — we'll keep watching the risks we face very closely, above all supply and labor, plus the inflationary pressures tied to them. Thanks to our strong Q1 results in Q1, our guidance for 2022 stays as it was, even if our overall risk profile for the rest of the year has grown more difficult. Now let's turn to our commercial environment. As I mentioned, we're dealing with a complex environment that is weighing on the global economic recovery, and the picture for global air traffic evolution looks mixed. In China, domestic air travel has worsened sharply of late and currently sits at roughly 20%-30% of its pre-COVID level in flight numbers. The country's worsening COVID situation is a worry. Near term, this could begin to affect the capacity of some of our airline customers to take delivery of certain aircraft. On top of that, the geopolitical crisis is piling on more complexity. Although airspace restrictions in Russia, Belarus and Ukraine itself touch only a small portion of global traffic, international flights being rerouted, together with rising fuel prices, have turned into a headwind for a number of our airline customers.

Conversely, demand for air travel is rebounding vigorously, including across every nation that has removed travel restrictions. That supports solid underlying appetite for flying. Although the worldwide picture is mixed for the upcoming quarters. Our expectation remains that commercial air traffic will return to pre-COVID levels sometime between 2023 and 2025, with domestic and regional markets in the lead. That outlook is unchanged despite the complications. Allow me to recap our orders and backlog for Q1. We logged 253 gross orders, comprising 243 single-aisle and 10 wide-body aircraft, which underscores our robust commercial momentum. Of those 10 wide-body orders, 7 were for the A350 freighter we recently launched. Cancellations came to 170, and those had mostly been foreseen and were already reflected in our backlog valuation as of the end of the year 2021. Consequently, net orders came out positive at 83 aircraft, and our backlog in units stood at 7,023 aircraft as of the end of March 2022, including 5,821 A320 family aircraft. Turning to Russia, our backlog contains 13 A350 orders for Aeroflot. On helicopters, during the first quarter we booked 56 net orders versus 40 in Q1 last year, nicely distributed across programs.

OCCAR also placed an order with us for the Tiger Mark III program — 42 helicopters destined for France and 18 for Spain. Beyond that, we keep witnessing encouraging momentum across campaigns, chiefly in our home countries. And lastly, within Defense and Space, order intake during Q1 reached EUR 3.2 billion, which works out to a book-to-bill of roughly 1.3. That figure takes in the Eurodrone global contract signed in February, spanning development plus manufacturing of 20 systems along with five years of initial in-service support for Germany, France, Italy, and Spain. With that signature, development gets underway on one of Europe's most ambitious defence programs, which from the outset will be designed and developed entirely around our DDMS. Eurodrone — the product of collaborative efforts among industry, OCCAR, and the nations — will bolster Europe's strategic autonomy and sovereignty through this program. Other orders booked during the quarter are tied mainly to military aircraft. Regarding FCAS, the Future Combat Air System, our commitment to the program is full, and its importance is sharply clear in times of crisis. We keep working toward launching phase IB later this year, the next milestone on the path to success for this crucial European defence program.

Regarding the Space business, we are keeping a close watch on how things stand across every program we run jointly with the Russian State Space Agency, working alongside our partners, customers, and suppliers. I should remind everyone that access to the Soyuz launchers is no longer available to us. Meanwhile, preparations for the 2022 Ariane 5 and Vega C launches continue to move forward in line with the plan and the schedule. Speaking of space, I'd like to express thanks to the teams for the landmark agreement that Arianespace and Amazon signed in April covering 18 Ariane 6 launches across a three-year span, which shows just how much potential this platform holds. Given the increase in defence spending and the powerful push for European strategic autonomy, we are prepared to assist European governments on that front. At this point, Dominik will walk you through our financials. Dominik.

Thanks, Guillaume, and greetings to all of you as well from my end. Revenue for Q1 2022 rose to EUR 12.0 billion, a 15% gain versus the prior year, driven chiefly by a larger count of commercial aircraft deliveries along with a favorable mix. Q1 EBIT adjusted climbed to EUR 1.3 billion, compared with EUR 4.7 billion in Q1 2021. That overall EUR 0.6 billion improvement contains a non-recurring positive item of EUR 0.4 billion tied to remeasuring past service costs within our retirement obligation. Conversely, a figure of -EUR 0.2 billion was booked in Q1 stemming from the effect of international sanctions imposed on Russia. It likewise captures our competitiveness work and the benefit of cost containment measures rolled out across the COVID-19 crisis. Q1 EPS adjusted came in at EUR 1.14 per share, calculated on an average of 786 million shares. Free cash flow for Q1, before M&A and customer financing, amounted to EUR 0.2 billion, mirroring the delivery level, competitiveness, and cost containment impact, partly offset by higher working capital, chiefly from growth in inventory. Moving to the following slide on profitability in greater depth: Q1 2022 EBIT reported was EUR 1.4 billion. EBIT adjustments came to a net positive of EUR 0.2 billion, comprising a EUR 190 million positive effect from foreign exchange mismatch and balance sheet revaluation, -EUR 11 million associated with the A380 program, and -EUR 13 million in other costs, compliance costs included.

The earnings per share figure we reported incorporates a positive EUR 166 million in financial results. That's largely driven by the favorable net effect of revaluing some equity investments, partly offset by revaluation of financial instruments, plus net interest results of -EUR 76 million. On the core business, the tax rate sits at roughly 27%. Net income carries an effective tax rate of 25%, which takes in the tax impact from revaluing certain equity investments, partly offset by impairment of deferred tax assets. Net income comes out at EUR 1.2 billion, and reported earnings per share is EUR 1.55. Overall, fiscal year 2022 got off to a really strong start. Turning to hedging, in Q1 2022, $4.4 billion of hedges matured, with the associated EBIT impact at a rate of 1.21, compared with 1.16 in Q1 2021. In the quarter, we put in place $2.5 billion of rollovers, mostly to fine-tune the intra-year phasing of our hedges for 2022. We also executed $3.5 billion of forwards at a rate of 1.18, primarily for 2024 and 2025. Hedges totaling $4.3 billion were disqualified to reflect the effect of international sanctions against Russia, which had a negative impact on financial results.

So because of that, our overall hedging portfolio denominated in U.S. dollars is now at $87.1 billion, and the average hedge rate is 1.25, which is the same as December 2021. Now let's turn to how our cash moved in Q1 2022. Gross cash from operations came in at EUR 1.2 billion, and that mostly mirrors our adjusted EBIT along with positive phasing of tax payments. The working capital increase of EUR 4.7 billion is largely a reflection of the inventory build supporting the A320 family ramp up, partly offset by favorable timing of cash receipts and payments. Year-to-date, the A400M kept dragging on our free cash flow before M&A and customer financing. CapEx in Q1 2022 was roughly -EUR 4.3 billion, compared with EUR 4.5 billion in Q1 2021. Keep in mind that the prior year's quarter included the acquisition of real estate assets in the U.K. For 2022, we expect CapEx of about -EUR 2.4 billion. Free cash flow reported came to EUR 4.2 billion. M&A activities were -EUR 6 million, while customer financing was an outflow of -EUR 46 million. The aircraft financing environment is still solid, with enough liquidity in financial markets for our products. Looking ahead, a further cash in as in recent years will not be sustainable, since we anticipate some usage of cash in this and the coming years.

As of the end of March, our net cash position holds steady at EUR 7.7 billion, while liquidity remains solid, coming in at EUR 28.8 billion. During Q1 2022, both Moody's and S&P reaffirmed Airbus' credit ratings — A2 and A-, respectively — and lifted the negative outlook, a reflection of how strongly we are performing financially and operationally. Looking ahead, we will keep taking an active approach to managing liquidity, with the goal of preserving our strong credit ratings. Now, over to Guillaume.

Thank you, Dominik. That's very clear. Moving on now to Commercial Aircraft. During Q1, we handed over 142 aircraft to 48 customers. Our net year-to-date delivery figure of 140 mirrors a decrease of two aircraft that had previously been booked as sold in December 2021, since the transfer could not take place because of the international sanctions that were imposed. Now, looking at how Q1 2022 played out across the aircraft families: for the A220, 11 aircraft were delivered. We're still ramping up and remain on track to reach rate 14, which is what we had envisioned for the middle of the decade. On the A320, we delivered 109 aircraft, 58 of them A321 — so more than 50%, as you can work out for yourself. Our production is advancing toward rate 65 by the summer of 2023, in an environment that is complex. As I said earlier, we are currently collaborating with our suppliers and partners so that a monthly production rate of 75 can be achieved in 2025. Airbus will reach that higher production rate by adding capacity at our existing industrial sites and expanding the industrial footprint in Mobile in the U.S. with FAL, while also investing to make sure every assembly site is A321 capable. Regarding the A321XLR, we're continuing to push toward a first flight by the end of Q2 2022.

Originally scheduled for the close of next year, unfortunately, service entry is now anticipated in early 2024. As I mentioned on the prior call, we are working diligently alongside our customers to try to lessen the effect of that circumstance. On the widebody side, we handed over 22 aircraft, comprising 16 A350s and six A330s. As was announced earlier, our goal is to raise the A330 monthly build rate to nearly three by the close of 2022. Regarding the A350, we still anticipate lifting the monthly output rate to roughly six aircraft in early 2023. In March, I'm very pleased to report that the inaugural A380 flight powered by 100% sustainable aviation fuel took place. This makes it the third Airbus aircraft type to fly with at least one engine running on 100% SAF, following an Airbus A350 in March of last year. That was last year, in March 2021, and an A319neo in October of last year as well. Now let's turn to Airbus commercial financials for Q1. The financials reflect the net delivery of the 140 aircraft. The 142 I referenced earlier, again, was trimmed by the two deliveries under, let's call it international sanctions. Revenues rose by 17% year-on-year, mainly reflecting the greater number of deliveries as well as a favorable mix.

Keep in mind my earlier comments about wide-body deliveries. The rise in EBIT adjusted also shows the competitiveness work and our cost-containment efforts. It also takes in the non-recurring favorable effect from retirement obligations that Dominik described, partly offset by the hit from international sanctions. Turning to helicopters, we handed over 39 units in Q1, matching Q1 of 2021. Revenues rose year-on-year, chiefly driven by growth in services and a favorable program mix. EBIT adjusted likewise reflects non-recurring items, among them the positive retirement-obligation effect mentioned above. That completes our Q1 2022 review with Defence and Space. Revenues were up year-on-year, mainly powered by the military aircraft business and by the Eurodrone contract signed in February. EBIT adjusted also captures the retirement-obligation impact, again partly offset by the effects of international sanctions on the space business. On the A400M, one aircraft was delivered in Q1 — the last of 10 ordered by the Turkish Air Force. We are carrying on with development work toward the revised capability roadmap. Retrofit work is advancing in close coordination with the customers. Risks persist around qualification of technical capabilities and the related costs, as well as operational reliability — particularly concerning power plants, cost reductions, and securing export orders on time under the revised baseline.

Turning now to guidance. I want to walk you back through what we have said. Its 2022 guidance is built on the assumption that there are no additional disruptions affecting the global economy, air traffic, the company's own operations, or its capacity to deliver products and services. That 2022 guidance is stated before M&A, and on that basis the company is targeting roughly 720 commercial aircraft deliveries in 2022, EUR 5.5 billion of EBIT adjusted, and EUR 3.5 billion of free cash flow before M&A and customer financing. This outlook captures the growth path we expect and the investments we are making to get ready for our future. Following a solid start in Q1, as we have told you, we are seeing a less favorable evolution in our risk profile for the rest of 2022. The general state of the supply chain, the COVID situation in China, and the Russian invasion of Ukraine are all making the path toward a global recovery harder. Once more we find ourselves in a story of significant uncertainty, volatility, and complexity, which leads me to our key priorities. Next page. So, first of all, delivering on our guidance stays the top priority for 2022. We will work hard to mitigate the risks and to capitalize on our opportunities throughout our businesses.

Beyond that, we'll keep strengthening our resilience by drawing on how varied our activities are, the solid backlog of orders from customers, tight cooperation with our supply chain, and our ability to transform and innovate. Regarding that backlog, our focus stays on filling the skyline for commercial business in the out years. We're seeing strong demand for our single-aisle program. Opportunities also exist in the wide-body segment, particularly during the decade's second half, given rising fuel prices and aviation's need to decarbonize. On the Military side, war's return to Europe makes plain that robust defence capabilities are essential to preserving peace and security. The Strategic Compass, endorsed by the European Council in March, rightly stresses how important it is to reinforce European defence by stimulating innovation and investment. Let me quote here: "Measures should be taken by the end of 2022 to promote and facilitate access to private funding for the defence industry, also by making best use of the possibilities offered by the European Investment Bank." That ends the quote. We welcome how clear this decision is. At Airbus, with our long history of European cooperation, we obviously stand ready to support our governments and to contribute to the strength of Europe's and NATO's armed forces.

Turning to the A320 family ramp-up — that is, of course, still among our highest priorities. Given everything we went through together over the last two years, I'm glad that we're now in a position to raise our rate to 75, which once more will benefit the whole global value chain and will help support employment, particularly in our home countries and in the U.S. Next, I'd like to bring your attention to some meaningful strides in our sustainability efforts, which sit at the heart of our company's purpose. During Q1, we engaged with the SBTi, the Science Based Targets Initiative, and committed to establishing science-based carbon reduction targets, including for our Scope 3 Use of Sold Products emissions. We also formally kicked off a ZEROe demonstrator program aimed at testing a range of hydrogen technologies, on the ground as well as in the air. The central element of this multi-year program, the hydrogen combustion engine, will be developed by our partner, CFM International. The ZEROe demonstrator will represent an important milestone on our roadmap toward delivering the world's first zero-emission aircraft by 2035. Airbus' four sustainability commitments also encompass respecting human rights and fostering inclusion. On that subject, I'd like to call out the publication of our human rights policy, which sets out our approach to human rights and serves as the backbone of how we progressively embed respect for human rights across our organization and supply chain.

So as my remarks wrap up, I realize Hélène really ought to have opened the call — particularly with the safe harbor statement. I likely got a little too excited and began a touch too quickly. Hélène, shall I pass those along to you? Today brings yet another innovation — finishing with the safe harbor statement, or not?

Absolutely. The supporting information package went out to you by email earlier. It contains the slides that we walked you through, along with the financial statements. Throughout this call, we've been making forward-looking statements, and within the package you got is the safe harbor statement, which covers this call too — the whole of it. Kindly read that carefully.

The ex-post safe harbor is applicable too.

Sure thing, Guillaume. We’re moving into the Q&A portion now. When you ask a question, please state your name and your company. Kindly keep it to 2 questions per turn, sub-questions included. And as always, please remember to speak clearly and at a slower pace so that everyone on the call—especially those of us here—can follow your questions. Clotilde, please go ahead and walk the participants through the procedure.

Ladies and gentlemen, if you'd like to ask a question, please press zero one on your telephone keypad. Should you wish to take yourself out of the queue, please press zero two on your telephone keypad. We ask that participants use only handsets while asking questions. Anyone who wishes to ask a question, please press zero one on your telephone keypad. Our first question comes from Mr. Ben Heelan from Bank of America.

Morning, guys. Thanks for taking my questions. First one's about the production rate increase. Could you speak a bit to what gives you the conviction that the supply chain can meet these high rates? Over the past couple of months, we've heard about supply chain pressures all the way down different tiers of the supply chain. What's giving you the conviction that the supply chain can manage those production rate increases beyond next year? That'll be the first one. Then secondly, on the XLR, is there any color that you can give around exactly what the challenges are that you faced around the certification? And how should we think about extra costs and risks of penalties now that that entry into service has been delayed? Thank you.

Thanks, Ben. I hope you're doing well. Regarding rate 75, there's the demand side and the supply side. On demand, I'd say it's very strong, and everything we're seeing supports that. Your question, I believe, is more about supply. What gives us confidence? Well, that's the assessment we've done with a very large number of suppliers — and the most important ones — to establish whether this ramp beyond 65 was feasible, when, and at what pace. The feedback we received indicates that it is possible. Of course, ramping beyond a given number is always possible, but within a certain timeframe. From rate 65, which we plan to hit in the middle of next year, and 2025, that leaves enough time for a ramp-up speed consistent with what the supply chain can deliver. In fact, in the near term we see many challenges, and we've tried to share them with you. It's also tied to the fact that we're gradually coming out of the COVID crisis itself. Emerging from COVID created this complexity in the supply chain.

On top of that, we also have the consequences—or the implications—of what is happening in Ukraine and the sanctions. Beyond the short term, and even the medium term and the long term, that is what we have assessed together with the supply chain, and we feel comfortable enough to launch that rate increase with sufficient anticipation. You may recall that I said we wanted to decide around the middle of the year. In fact, we have accelerated, because we had indicators telling us it was the right moment, and we had the conditions in place for launching that rate increase. XLR—well, basically it takes more time, and unfortunately that is not entirely uncommon when developing new versions of planes. A bit more time. We are getting close to the first flight. We are now well into the development phase. We have begun certification, and we are obviously working with the certification authorities to go through the certification process, and we see that it is going to go a bit beyond the end of 2023. That is what we are sharing today. When it comes to negotiation, it is customer by customer, and each situation is different, so I don't want to comment on this one, because I think I am not capable of commenting and giving a detailed color on that one—just to be honest in answering your questions.

That fits into how we work with our customers, and it will keep moving ahead. What we're announcing today, I mean, doesn't alter the overall picture for the XLR program.

Thanks, sir. Our following question comes from David Perry at JPMorgan. Please go ahead.

Hi, Dominik. Here's my first question. Well, I suppose every one of us — analysts and investors alike — is looking at pretty similar spreadsheets. Once I enter those production rates and put in an FX rate of 1.05, some rather intriguing figures come out. I mean, I'm kind of heading toward EUR 10 billion of EBIT in 2025 in civil alone. I guess I'd simply like to hand Dominik the chance to tell me, you know, everything I'm not taking into account — you know, ramp-up costs, inflation, or whatever else might temper my excitement, perhaps. Then the second question is a far simpler one. Could you just comment on the titanium situation? I don't believe you mentioned anything, or maybe I missed it. Thank you both.

Thanks, David. I’ll handle the simpler one, titanium, since there’s essentially nothing new to report there. Looking ahead, we’re building out secondary sources. As you’re aware, we have protection over the short and medium term, so that’s essentially where things stand going forward, and at this point there’s no particular alert or color we can offer. That part is straightforward. Dominik, are you eager to take the chance to respond to the question?

Absolutely. I mean, you're correct about the U.S. dollar. That's actually pretty interesting in our case, though not really over the short term, since as you're aware, we follow a sort of rolling hedging approach in which we aim to soften the impact of swings in the U.S. dollar-euro exchange rate by forward selling future revenue, so to speak. There's a slide in the deck that I've discussed, showing that across 2022 through 2024, we hold roughly a EUR 20 billion per annum hedge portfolio against the exposure. So for 2023 and 2024, that doesn't cover the exposure in full, but it does to a substantial degree. You brought up 2025, and we disclose EUR 13.3 billion in forward sales as of March 2022. A meaningful portion is hedged, and the rate still stands at 1.25. Yes, as we get closer to 2025, and should rates hold at such a strong dollar level, we'd be in a position to hedge at more favorable rates. That could be a decent offset to some of the negatives we're confronting on the inflation front. I think it remains to be seen how these two forces play against each other. I think it's fair to flag both of them as a key point.

Beyond that, regarding everything we've laid out for 2025 guidance, we've been steering the year the way we said we would. That said, it's fair to note that this ramp-up opens up chances to push margins up considerably more.

Thanks, Dominik.

The following question comes from Mr. Tristan Sanson of Exane BNP Paribas.

Good afternoon, everyone. This is Tristan calling from BNP Paribas, and I appreciate you taking my question. There will be two follow-ups concerning the subjects we've just covered. First, regarding inflationary pressure at Airbus, and also in the supply chain: could you explain your approach to this issue? Specifically, how do you handle the situation when your own suppliers are facing considerable pressure from raw materials and labor, while at the same time being asked to support a continuous rise in production rates? My next question concerns quality costs, or non-quality costs. Could you attempt to quantify for us, or at least characterize, the level of non-quality costs in A320 production versus pre-crisis? What is performing significantly better, and is Airbus able to put a number on that efficiency level relative to pre-crisis? Many thanks.

Dominik, you handle the first inflation question, and I'll handle the second one.

All right, sure. Regarding inflation, the first thing I'd like to point out is that the big jumps in energy prices and similar items have now eased. Those created major headwinds for us in the 2021 to 2022 bridge, but I believe that's been handled. I don't anticipate any dramatic surges there, since the purchasing, if you will, for 2022 is now fairly well locked in. What matters with inflation is how it compounds across many years. The near term isn't really the concern, but should this extremely high inflation continue for several years running, then naturally it compounds and creates pressure on us. Naturally, our backlog has prices fixed into it. We do have certain escalation mechanisms, though those have their limits. It's also true that our suppliers would feel pressure, and we'll need to look at each case individually to determine how we handle it. I'd say that's somewhat speculative, because no one today can say whether we'll see inflation running really high, well past the central banks' targets, for an extended period. The cost of quality, I think, is one thing.