Airbus SE (AIR) Earnings Call Transcript & Summary

Good day, everyone, and thanks for holding. This is the conference call for Airbus's release of results for the nine months of 2022, and I'm Mary, the operator handling it. I want to let you know that throughout the presentation, everyone attending will be able to listen only, and this call is being recorded. Once the presentation wraps up, there will be a chance for you to ask questions. Right now, I'll hand the conference over to your hosts: Guillaume Faury, Dominik Asam, and Hélène Le Gorgeu. Over to you.

Thanks, Mary, and good morning everyone. This is the conference call for Airbus’s Nine-Months 2022 Results Release. Guillaume Faury, our CEO, is with me here in Paris, and our CFO, Dominik Asam, is joining from Berlin; both will present our results and take your questions. We expect this call to run about an hour. That includes Q&A, which we’ll hold after the initial presentation. This call is being webcast as well. You can access it through our homepage, where we’ve put a special banner. A playback of this call will be available on the website, though there is no dedicated phone replay service. The supporting information package was published on our website earlier today. It contains the slides, which we’ll now walk you through, and the financial statement. During this call, we will make forward-looking statements. I ask you to refer to our safe harbor statement that appeared in the presentation slide, which applies to this call as well. Please read it carefully. Now over to Guillaume.

Thank you, Hélène, and good morning, ladies and gentlemen. I appreciate your joining us. It has been just one month since the teams and I had the great pleasure of welcoming all of you to Toulouse for our Capital Market Day, CMD. We very much valued the chance to talk with you about our growth path, the roadmap we have to decarbonize aviation, and the role we play in defense, and also to provide a thorough update on our divisions. Today, as Hélène mentioned, we are back in our quarterly reporting rhythm, presenting the results for the first nine months of 2022. As I have noted on several occasions before, and it remains true, we are still working within a complicated environment. Against that backdrop, we handed over 140 aircraft in Q3, versus 127 in Q3 of the prior year. That brings our deliveries for the year to date to 437 aircraft. EBIT Adjusted came in at EUR 3.5 billion. This strong financial showing mirrors our deliveries and our competitiveness efforts, while the return of certain pre-COVID activities is now evident in our cost base. EBIT Adjusted additionally contains a non-recurring positive item of EUR 4.4 billion tied to retirement obligations in France, which was already booked in Q1. Free cash flow before M&A and customer financing reached EUR 2.9 billion, helped by a favorable foreign exchange backdrop — chiefly the dollar — and solid working capital in a year weighted toward the back half and during a ramp-up phase.

That takes me to the 2022 guidance. Our guidance for commercial aircraft deliveries and EBIT Adjusted stays as it was, but after the strong cash performance we posted over nine months, we lifted the 2022 guidance for free cash flow before M&A and customer financing. As things stand today, the supply chain is still fragile, stemming from COVID's effects, the war in Ukraine, problems with energy supply, constraints in the labor market and other factors. We believe normalization will take at least until roughly the middle of next year. So 2023 should be another year weighted toward the back half. Let's now turn to the commercial environment. Commercial air traffic keeps recovering, with domestic and regional markets in the lead. Demand for air travel rebounded more quickly and more strongly than many had anticipated over the summer, myself included, even with fuel prices high. Every major market is continuing to recover except where travel restrictions apply, which, as you know, is still the situation in China. North America and Latin America are now trending near levels reached previously, with Europe and the Middle East following, while other markets, Asia for instance, keep progressively catching up. The outlook is positive. Airlines tell me bookings for the coming month are strong for domestic as well as international flights.

Looking at the airline industry overall, financial results are getting better. Specifically, recent figures from U.S. carriers suggest profitability will come back as early as 2022, sooner than had been anticipated. Turning to aircraft demand, we keep witnessing strong interest from customers, who show a real appetite for our newest generation of fuel-efficient planes. Allow me to recap our orders and backlog for the first nine months. We recorded 856 gross orders in total, 414 of them in Q3. That figure includes 292 aircraft for four of our Chinese airline customers. On wide body, we booked 44 orders, among them 24 freighters, and made further headway on remarketing our aircraft after COVID, which confirms growing commercial momentum on wide bodies. We recorded 209 cancellations, only 26 of which came in Q3. Those nine-month cancellations had largely been foreseen and were already reflected in our backlog valuation as of year-end 2021 — I mean the end of last year. Consequently, net orders came in positive at 647 aircraft, and our backlog in units stood at 7,294 aircraft at the end of September, including 6,115 A320 family aircraft. Our robust and diversified backlog has historically proven to deliver a strong degree of resilience in uncertain times or even in crises such as COVID.

Turning to helicopters, we booked 246 net orders during the nine months, versus 185 in the same period of 2021. Those orders are distributed nicely across programs and include 14 Super Pumas. In the civil market, we're seeing a robust rebound in the light segment, along with encouraging signals from oil and gas, which we expect to strengthen over the mid-term given today's market conditions. We're also seeing solid momentum in the military market, backed by our grow platform strategy. Lastly, in defense and space, order intake for the nine months of 2022 came in at EUR 8 billion, equating to a book-to-bill marginally above one. In the third quarter, we booked orders totaling EUR 1.5 billion, mostly tied to services spanning the portfolio. That figure also includes the contract to supply 42 satellite platforms and services to Northrop Grumman on behalf of the U.S. Space Development Agency. This effort will underpin a vital U.S. national security program, and we're honored to serve as partners. That said, the prevailing economic and geopolitical climate keeps weighing on the space sector in Europe. On the military aircraft front, we're proud to note that the Airbus A330 MRTT has earned the distinction of being the first tanker worldwide certified for automatic air-to-air refueling boom operations in daylight.

So that means the receiving aircraft doesn't need any extra equipment, which makes things safer and lets missions run more efficiently to support air superiority. On SCAS, we're still fully committed to the program and are continuing to push toward kicking off phase Ib later this year. At this point, Dominik Asam will walk you through our financials. Dominik Asam, over to you.

Okay, thank you so much, Guillaume, and good morning everyone. Revenue for the first nine months of 2022 rose to EUR 38.1 billion, an increase of 8.4% compared with a year earlier, driven primarily by a greater quantity of commercial aircraft deliveries, together with a favorable mix, larger contributions from our divisions, and appreciation of the U.S. dollar. Our EBIT Adjusted for those nine months edged up to EUR 3.5 billion, from EUR 3.4 billion during the same period of 2021. That figure takes in the non-recurring positive element of EUR 4.4 billion tied to retirement obligations booked in Q1, partly offset by the EUR 4.1 billion negative impact stemming from international sanctions against Russia. The net positive effect of those two non-recurring items was partly offset by a hedge rate that was less favorable than in the nine months of 2021. Although we keep gaining from our competitiveness work, progress on the ramp up and on preparing for the future is now showing up in our cost base, particularly during Q3. Research and development expenses for the nine months of 2022 came in at EUR 2 billion, compared with EUR 1.9 billion in the nine months of 2021. Adjusted earnings per share for the nine months was EUR 3.17 per share, calculated on an average of 787 million shares.

For the first nine months, free cash flow before M&A and customer financing came in at EUR 2.9 billion, with working capital holding steady and helped along by the big rise in the U.S. dollar. Now let me shed some light on what's left to accomplish in Q4. Our goal for Q4 is to hand over 260 commercial aircraft. Beyond that, the EBIT Adjusted contribution for the full year from Airbus Helicopters and Airbus Defence and Space is going to be significantly back-end loaded. Conversely, R&D expenses ought to reach their peak during Q4, and the hedge rate is likely to be less favorable than what we saw across the first nine months of the year. We will also book roughly EUR 4.2 billion in Q4 for charges tied to an exceptional premium granted to our employees amid elevated inflation. Taking everything together, as Guillaume said, we keep targeting EUR 5.5 billion — approximately EUR 5.5 billion of EBIT Adjusted — for the full year. When it comes to free cash flow before M&A and customer financing, roughly EUR 4.5 billion remains to be done against the updated guidance. That mirrors the back-end loaded shape of Airbus Commercial, and of our divisions as well. It ought to gain as well from the stronger U.S.

That dollar figure will be partly offset by how costs are phased and by capital expenditure of approximately EUR 1 billion during the final quarter. Moving now to the slide on profitability. For the first nine months of 2022, reported EBIT came in at EUR 30.6 billion. EBIT Adjustments amounted to a net positive of EUR 0.1 billion. That includes a positive impact of EUR 349 million from foreign exchange mismatch and balance sheet revaluation, with EUR 123 million of it in Q3. EUR 33 million was tied to the A380 program, including EUR 40 million in Q3; -EUR 219 million was tied to the A400M, essentially flat compared with H1; -EUR 48 million was tied to the aerostructures transformation in France and Germany, with -EUR 15 million of that in Q3; and -EUR 44 million came from other costs, compliance costs among them, with -EUR 10 million of that in Q3. Reported earnings per share includes -EUR 306 million of financial results. That mainly mirrors -EUR 166 million of net interest results, plus a negative impact from revaluation of financial instruments, partly offset by the evolution of the U.S. dollar and the revaluation of certain equity investments. The tax rate on the core business stands at around 27%. The effective tax rate on net income is 24%, including a net release of deferred tax asset impairments.

Net income came in at EUR 2.6 billion, and earnings per share were EUR 3.26. Now, turning to our coverage of U.S. dollar exposure. From here on, the hedge ratio — made up of forwards plus the euro conversion — will be shown together, covering both volumes and the rates attached to them. Mark-to-market figures relate solely to the forward instruments. No mark-to-market applies to the euro conversion portfolio. During the nine months of 2022, forwards totaling $14.1 billion matured, carrying an associated EBIT impact, and euro conversion was realized at a blended rate of 1.22, compared with 1.20 in the nine months of 2021. That volume takes in $4.9 billion during the third quarter at a blended rate of 1.21. Over the nine months of 2022, we additionally put in place $12.9 billion of new coverage at a blended rate of 1.19. Consequently, our total U.S. dollar coverage portfolio, measured in U.S. Dollar, is $96.6 billion at an average blended rate of 1.24, versus $98.3 billion at 1.25 at the close of 2021. Let's turn to how our cash moved during the nine months of 2022. Gross cash from operations of EUR 3.7 billion largely mirrors our EBIT Adjustments. Even with the sizable inventory build tied to the ramp up and the delivery profile, including within the divisions, working capital stayed broadly stable, helped by a positive impact from cash receipts and payments.

The A400M kept dragging on our free cash flow before M&A, though not as much as it did during the nine months of 2021. During that stretch, cash flows from customer financing came in at -EUR 290 million, and going forward we could see further cash usage. All in all, the environment for aircraft financing is still solid, and there's enough liquidity in the financial markets for our products. CapEx for the nine months of 2022 came to roughly -EUR 1.3 billion, compared with EUR 1.2 billion across the nine months of the previous year. For 2022, we're expecting CapEx of about EUR 2.4 billion. Reported free cash flow of EUR 2.5 billion takes in M&A activities of -EUR 107 million. The 2021 dividends, at EUR 1.50 per share, or EUR 1.2 billion in total, were paid out in Q2. Turning to pensions, we put half a billion EUR in during the nine months of 2022. As of September 2022, the net pension deficit was EUR 2.7 billion, and it has clearly gained from rising interest rates. Still, inflation risks remain. At the end of September, our net cash position was EUR 8 billion. Our liquidity position got even stronger, reaching EUR 30.5 billion. Now I'll hand it back to Guillaume.

Thanks, Dominik. Turning now to commercial aircraft. Across the nine months, 437 aircraft went to 66 customers, and two of those were operating leases with no revenue recognition at delivery. The net year-to-date delivery figure of 435 shows a decrease of two aircraft that had been recorded as sold in December 2021, since a transfer proved impossible because of international sanctions. Let's look at the nine months 2022 picture by aircraft family. For the A220, we handed over 34 aircraft, among them the number 220 A220 in July. We're still ramping up and remain on track for rate 14, which we continue to expect by the middle of the decade. For the A320, 340 aircraft were delivered, 169 of them A321s. Production is moving toward a monthly rate of 65 aircraft in early 2024 and 75 in 2025. No change there. We're carrying on the groundwork to secure rate 75 across all our sites and to adapt to the higher share of A321 in the backlog, making sure all A321 files become A321 capable. Preparations for upgrading the second A325 in Toulouse are underway. On the XLR, all three test aircraft have now flown, and entry into service is expected in Q2 2024.

Regarding wide-body aircraft, we handed over 63 units — 21 of those were A330s and 42 were A350s — and that figure includes our 500th A350, which arrived in September. For the A330, we're on the verge of hitting a pace of roughly three per month. As for the A350, we're getting ready to move to a pace of approximately six aircraft in early 2023, up from a rate of five during this year. Alongside our suppliers, we're examining whether additional rate hikes are feasible so we can satisfy rising market demand as international air travel bounces back. Now let's turn to Airbus Commercial's financials for the nine months. Revenues rose 8% year-on-year, driven mainly by a greater number of deliveries, which included a favorable mix as well as the strengthening of the U.S. dollar. EBIT Adjusted climbed to EUR 2.9 billion, up from EUR 2.7 billion in the nine months of 2021, even with a less favorable hedge rate than in 2021, as Dominik explained earlier. Keep in mind that EBIT Adjusted contains the non-recurring positive impact from retirement obligations in France booked in Q1, partly offset by the impact of international sanctions. Turning to helicopters: during the nine months, we delivered 193 helicopters, unchanged versus the nine months of last year. Revenues were up 9% year-on-year, largely reflecting growth in services and a favorable mix across our programs.

EBIT Adjusted also takes in non-recurring items, among them the favorable effect tied to those retirement obligations I brought up earlier as well. Now let's wrap up the review with Defense and Space. Over the nine months, revenues rose 10% year-on-year, largely on the back of military aircraft and the signing of the Eurodrone contract. The drop in EBIT Adjusted mostly mirrors the impairment tied to Ariane 6 delays, the pressure from rising inflation in some of our long-term contracts across the divisions portfolio, and the fallout from international sanctions — all of that partly offset by the favorable effect related to the same retirement obligations booked in Q1 and by the Eurodrone. On the A400M, seven aircraft were delivered during the nine months. We are continuing development activities aimed at reaching the revised capability roadmap. Retrofit work is moving forward in close alignment with our customers, yet risks remain around qualification of technical capabilities and the associated costs on aircraft operational reliability, around cost reductions, and around securing export orders in time as per the so-called revised baseline. Let me read our guidance: as the basis for its 2022 guidance, the company assumes no further disruptions to the world economy, air traffic, the company's internal operations, and its ability to deliver products and services.

For 2022, our guidance excludes M&A. With that in mind, we're keeping our targets of roughly 700 commercial aircraft deliveries and about EUR 5.5 billion in EBIT Adjusted for 2022. We now aim for approximately EUR 4.5 billion of free cash flow before M&A and customer financing in 2022. That leads me to our priorities, and honestly they haven't shifted since last quarter. First, to honor what we've promised customers by delivering on the ramp-up. For the A320 family, that means rate 65 in early 2024 and rate 75 in 2025. We'll also keep transforming the company and supporting the ramp-up, while preparing for what's ahead. Our focus is on our products, our industrial systems, our people, and finally what I'd call the ecosystem, since the transformation we've undertaken involves the entire sector, especially when it comes to energy. This transformation matters for our long-term ambitions and for continuing to advance on our roadmap to decarbonize aviation. On that point, there was very encouraging news at last month's 41st International Civil Aviation Organization, the ICAO, assembly. At Airbus, we welcome the adoption of the aviation sector's long-term aspiration goals, the LTAG, to reach net zero carbon emissions by 2050.

This is the sectoral goal we've been working hard to achieve — one that matches our ambition for sustainable aerospace. Coherent strategies and action plans will become possible thanks to this agreement, and it will speed up investments. The assembly also committed strongly to CORSIA — the Carbon Offsetting and Reduction Scheme for International Civil Aviation, as it's known. That will let the sector make progress in managing its carbon footprint, moving toward carbon neutral growth in the short term. It's a very important level playing field — a system that the ICAO Assembly has adopted. Lastly, for me this is also a chance to point out that the Airbus Summit 2022, happening on the 13th November and the 1st December, will gather business leaders, partners and industry experts to review the progress achieved across our group wide decarbonization journey since last year's summit, through concrete projects, concrete actions and partnerships. Be sure to tune in. On that positive note — from my perspective, at least — we're now ready to take your questions.

We're moving into the Q&A portion now. When you ask a question, state your name and your company. Kindly keep it to 2 questions per turn, sub-questions included. And as always, please speak slowly and clearly so that everyone on the call, especially those of us here, can follow what you're asking. Mary, over to you to walk the participants through the procedure.

Thanks, Hélène. At this point we'll move into the question-and-answer portion. To ask a question, you can press zero one on your phone's keypad. Should you prefer to drop out of the queue, press zero two. We ask that participants use only their handsets when posing a question. If you have a question, please press zero one now. Our first question comes from Daniela Costa at Goldman Sachs. Ma'am, the line is yours.

Morning, and thanks for taking my questions. I'll ask two, as you suggested. First, I wanted to check on the buyback and cash returned to shareholders. I believe you're sitting at EUR 8 billion in cash now. There's EUR 1.6 billion remaining in your free cash flow guidance. Historically, I think you spoke about the EUR 10 billion level. Since we're likely to come in slightly below that, does it increasingly become another item weighted toward the back end? If you could comment on that. Second, it sounds like hiring in Q3 was perhaps a bit higher than in the first half. Could you speak to whether that carried any margin headwind? And maybe following on from that, what are your expectations for wage growth and ramp-up costs into 2023? How might that shape how we think about the bridge? Thank you so much.

Dominik, I believe you’re handling the questions.

Yeah, yeah, sure. I mean, regarding the share buyback topic, there's really nothing new compared with what we communicated on the Capital Market Day, which is that once we exceed that EUR 10 billion number, we will intensify discussions about that. I mean, of course, the earlier the better. We like cash flow as you like cash flow, but let's be cautious also in terms of imponderabilities like U.S. dollar volatility on the cash balance and stuff like that. Let's cross that bridge when we get there.

When it comes to hiring and what the effect would be, Dominik?

I can take that one too. In fact, it's fair to say hiring picked up pace across those three months, and there will be additional OpEx roll-on. You've already begun to see that in Q3. When you look at Q3 versus the prior year on OpEx — meaning research and development expenses and selling, general and administrative expenses — the increase is visible. That trend will carry on.

Appreciate it.

Much appreciated. We now have a question from Tristan Sanson of BNP Paribas Exane. Tristan, the floor is yours.

Yes, good morning, Guillaume, Dominik, and Hélène. Thank you for taking my question. The first one is going to be fairly obvious, but I was hoping you could give us a bit more color regarding how achievable the 700 deliveries target is for this year. You mentioned that 260 deliveries are needed in Q4. November is starting off looking decent, though not sold out either, which means there will be a very heavy workload to handle across November and December. Could you comment on how you are preparing to ensure that all the flight testing and the readiness of the aircraft can be guaranteed across a very high number of aircraft during these two months? The second question concerns the civil aircraft margin performance in Q3. I recall, Dominik Asam, that you said at the Capital Market Day that a number of costs would be backloaded this year in H2. R&D was not up so much year-over-year in Q3 in commercial aircraft. Still, when you consider the fact that you have an effect of wind by €0.02 on the hedge rate, that was not expected. The margin was not necessarily impressive this quarter. I wonder whether you could tell us whether there have been any other headwind that you could comment from, I don't know, either rework out of sequence or step up in some ramp up costs that could explain a slightly softer margin in Q3 than what we expected.

Thank you very much.

Thanks, Tristan. I'll handle the first question, and I'd propose that Dominik Asam field the second one. Regarding the 700, yes, Q3 delivery performance was indeed somewhat weak, but perhaps that's partly the answer to the second question as well, which leaves us with close to 270 aircraft still to be delivered — as best I recall, or a bit fewer, 265 planes for Q4, which is a demanding target. We think it's achievable, and that's precisely why we're keeping the guidance unchanged, though we recognize the situation is tough. The team and I went through where things stand earlier this week. We also visited Hamburg, and plenty of work is underway to ensure the planes move through the production cycle into flight test with the right skills, quantities and qualities, including the support we require from our suppliers during this phase. Once again, much like in 2018 and 2019, we have a significantly backloaded finish to the year. That's not how we'd prefer it. A more normalized, linear year is what we'd like. That's the position we're in. We've kept the guidance because we believe we can get there, but we're aware it won't be easy.

Dominik, could you take the second part?

Sure. Regarding Q3's quarterly EBIT performance, it genuinely was a tough quarter, as noted earlier, with ongoing difficulties on the supplier front that also drove additional cost, and, as we've said on many occasions, the ramp-up of certain research and development activities plus some work in other functions that needs to be revived. You actually now have the benefit of quarterly guidance for Q4, since you subtract the full-year guidance from what we've already delivered, and then you can look at it, and that figure is the one to bear in mind. Naturally, we feel confident in that number — if we didn't, we would not be keeping the EUR 5.5 billion EBIT Adjusted guidance in place.

Thanks. We have Ben Heelan from Bank of America with the next question. Ben, the floor is yours.

Good morning, and thanks for the question. The first thing I'd point to is cash, which is clearly quite strong. If you compare what you expected at the start of the year with where we are now, what would you call the main positive surprise? And how should we think about those trends as we head into 2023? Second, on the supply chain, it sounds as though things have settled down. Labor was the big issue, I believe, and it has remained the big issue. When you talk with the suppliers — and I know you follow them very closely — do you get the sense that the labor constraints have begun to loosen and that those suppliers are now making progress? Thank you.

Dominik, I'd recommend that you go ahead and take that one.

Yes, of course.

Grab the first one, then move on to the second.

Okay, so on the cash side, I'd point to what I'd call two main drivers. First, the appreciation of the U.S. dollar is genuinely giving us a big assist there, since we hedge P&L, so variances arise against that, and as you're aware, that shows up in the adjustments, among other places, and you can see a strongly positive figure there. So with the dollar having moved well under parity for a few days and now, I believe, sitting at parity as we speak, that was a tailwind. Clearly, we also saw a very favorable, a very favorable development in order intake from certain deals we closed, large deals, with book-to-bill well above one in commercial, and that gave us a big lift as well, so we now have sufficient visibility to raise the guidance. I'd just like to flag a note of caution on that, and there shouldn't be too much read into it. Our North Star, so to speak, is cash conversion of one across the five years, beginning in 2022. We believe we're on a very good trajectory, but at the same time, money doesn't grow on trees, and quite often it's financing topics that cause that figure to swing widely, which is why it's notoriously hard to predict.

The main thing to hold onto is that cash conversion of one—I believe we can show it's genuinely built into the business model here, so to speak.

Hi, Ben. I’ll take the supply chain question. What we’re telling people is that conditions have deteriorated during the past 12 months, and it looks as though the worsening has halted—which means things are bad. We’re seeing indications that conditions could perhaps improve. That has to become real, and given where we stand, we expect it will take a long time. That’s the reason I said it will take until at least the middle of next year. This covers labor-market constraints, which remain under heavy strain. At Airbus, we’ve been able to secure the people we need fairly well on the blue-collar side. On the white-collar side, it’s tougher. It requires more time than normal. For the sector as a whole, conditions remain very hard. Some mid-size and smaller firms in other parts of the world keep facing major difficulty recruiting both in volume and in particular skills. That will remain a headwind for the ramp-up. Again, I believe time will be needed before things improve, particularly in the labor market.

Thanks. Our next question comes from David Perry at JPMorgan. Go ahead, please.

Yes, thank you, and good morning, gentlemen. I have two questions, please. My first concerns FX hedging. If I understand correctly — and I hope that's the case — it appears you did practically no hedging during Q3. Please correct me if that's not accurate, but what's your approach in this area? Given how attractive the rates are, I would have expected you to be doing a substantial amount of hedging. My second question relates to a story that I believe appeared on Reuters over the past few days regarding a possible strike in Spain. Should it go ahead, could you explain what risk it presents for your deliveries and your production ramp, and perhaps also comment on labor engagement throughout the entire group in light of the pay negotiations? Thank you.

Dominik, you take the—

Absolutely.

That covers the hedging point, and I'll take the question about the workforce.