Airbus SE (AIR) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for remaining on the line. This is the conference call marking the release of Airbus's results for the first half of 2023, and you are welcome to it. Sharon here, serving as operator for this call. Kindly be aware that throughout the presentation, everyone attending will be able to listen only, and a recording is being made of this conference. Once the presentation concludes, there will be a chance for you to pose questions. Right now, I would like to hand the conference over to your host, Guillaume Faury, Xavier Tardy, and Hélène Le Gorgeu.

Many thanks, Sharon, and good evening, everyone. Welcome to the conference call covering Airbus's Half Year 2023 results. Guillaume Faury, our CEO, along with Xavier Tardy, our interim CFO, will walk you through the results and take your questions. We expect this call to run for roughly an hour, and that figure includes the Q&A session, which will follow the presentation. You can also join this call as a webcast — just visit our homepage and click the dedicated banner. A playback will be available on our website; there is no separate phone replay service. Earlier today, the supporting information package went up on our website. It contains the slides we are about to take you through, plus the financial statements. During this call, forward-looking statements will be made. I'd ask you to look at the safe harbor statement on the presentation slide, since it applies to this call too. Please take the time to read it carefully. Guillaume, the floor is yours.

Thank you, Hélène. Good day, everyone, and thanks for being with us on today's call covering our H1 2023 results. Xavier, Hélène, and I are together in Amsterdam. First, I want to say how glad I was to see so many of you recently at the Paris Air Show, or shortly before it. That marked the first Paris Air Show in four years. Beyond the commercial wins, I must say it was a wonderful Le Bourget. Meeting customers, suppliers, partners, officials, and everyone who helps make our industry among the most advanced, innovative, and exciting anywhere was simply tremendous. All of us left that week feeling very energized. Personally, it once again showed me the worth of getting people together face to face and why aviation matters so much. The event also gave us a chance, during the Airbus business update, to share with you our latest views on the ramp up and where our supply chain stands. To sum up, we keep executing our plan in an environment that is still complex. The broader geopolitical and macroeconomic picture remains volatile, and on the supply side, a handful of critical suppliers continue to set the pace of our deliveries.

Regarding suppliers, I want to speak to RTX's announcement yesterday concerning the newly identified issue with the Pratt & Whitney 1100 engines, which power the A320neo. Naturally, we are aware of this matter, and quite aware of it indeed. Together with Pratt & Whitney and our customers, we are working to gain the fullest possible understanding and to help implement every inspection plan that is required, while minimizing disruption to our customers' fleets. Pratt & Whitney has told us that parts manufactured from Q4 2015 through Q3 2021 are affected; engines currently in production are not impacted, nor are those moving through the production flow for aircraft being built at present. We anticipate no effect on ongoing deliveries of our planes. Turning to deliveries, we handed over 316 commercial aircraft in H1, consistent with our plan. That is reflected in our H1 2023 financial results, with EBIT Adjusted at EUR 2.6 billion and Free Cash Flow before M&A customer financing of EUR 1.6 billion. On that basis, our 2023 guidance is maintained. Now let's turn to our commercial environment. Air traffic kept growing in Q2, with domestic traffic having fully recovered and in many regions even surpassing pre-pandemic levels.

In most regions, international traffic is at or near where it was before the pandemic, and traffic between China and Asia Pacific is steadily closing the gap, though it has not yet returned to pre-pandemic levels. Against that backdrop, as we reported at the most recent IATA AGM, the airline industry should be profitable again in 2023. We're seeing robust demand for aircraft, fueled by both growth and fleet replacement, as carriers move toward more fuel-efficient planes to meet their sustainability goals. That positive momentum was very much evident at Le Bourget, where we unveiled over 100 orders and commitments, among them two large orders covering a combined 750 aircraft. This order intake also features 85 of our wide-body aircraft. All told, in H1 we logged 1,080 gross orders and booked 36 cancellations. Net orders therefore came in positive at 1,044 aircraft, and our backlog in units hit a record 7,967 aircraft — so nearly 8,000 aircraft as of the end of June 2023, among them 6,740 A320 Family aircraft. Turning to H1, we booked 131 net orders, compared with 163 in H1 2022. Those orders are nicely distributed across programs, including 19 H160s. During this quarter, we signed a firm contract with Air Corporate for 40 light helicopters and 3 ACH 160s, corporate 160s.

Beyond that, the H160 obtained its FAA type certificate during June — a major milestone for the program that lets us hand aircraft over to US customers and serve that market. Service entry for the H160 had already happened in Japan, Brazil, Saudi Arabia, and Europe. On the whole, momentum remains positive in our home countries across both civil and military markets. Last, in defense and space, order momentum continues to look good, particularly in our military assistant business. All told, order intake for H1 came to EUR 6 billion. That figure includes the Government of Canada's order for 4 newly built plus 5 converted A330 MRTT aircraft, which strengthens Canada's defense capabilities. During July, we signed a contract — a renewal with Germany covering A400M in-service support running 7.5 years, which demonstrates Germany's long-term commitment to the A400M. In space, the Airbus-built Arabsat BADR-8 telecommunication satellite launched successfully at the end of May, carrying Airbus's innovative optical communications payload, TELEO. In July, Ariane 5 completed its final flight — the 117th of a series that began in 1996 — orbiting 2 satellites, among them the SYRACUSE 4B communications satellite built by Airbus and Thales Alenia Space.

Completing development and qualification of Ariane 6, and securing a successful ramp-up, is clearly the top priority now. On SCAF, France, Germany, and Spain are fully engaged at this point in executing successfully what we refer to as a Phase 1B, and Belgium has come in as an observer, which adds to Europe's commitment to stronger strategic autonomy, defense, and security. Before turning to financials, I want to bring up the transformation we launched in this division earlier this year, aimed at making our business simpler, more agile, more competitive, and more customer-oriented. We have just hit an important milestone with the beginning of consultation with our European and national social partners. Management has also begun communicating with the leadership. This transformation is needed for resilience and competitiveness in this division. Xavier will walk you through our financials. Xavier?

Thanks, Guillaume, and good morning, everyone. Revenues for the first half of 2023 rose to EUR 27.7 billion, an increase of 11% compared with the same period a year earlier, driven largely by a greater quantity of commercial aircraft deliveries along with a bigger contribution from our helicopters division. EBIT Adjusted for H1 2023 came in broadly flat against H1 2022, at EUR 2.6 billion. That figure reflects the higher commercial aircraft deliveries and a more favorable hedge rate versus H1 2022, though these were partly offset by investments aimed at preparing the future. H1 2022 had included a net positive impact of EUR 0.3 billion from non-recurring elements tied to retirement obligations and to international sanctions against Russia. During 2023, we advanced further on our compliance-related topics, and that let us release provisions totaling EUR 0.1 billion. Turning to R&D, expenses for H1 2023 were EUR 1.4 billion, compared with EUR 1.3 billion in H1 2022. For the full year, we still expect R&D to edge up slightly relative to last year. H1 EPS Adjusted was EUR 2.47, calculated on an average of 788 million shares. H1 Free Cash Flow before M&A and Customer Financing reached EUR 1.6 billion, driven mainly by our deliveries, and also helped by a favorable phasing impact from working capital.

Moving to the following slide about profitability. For H1 2023, reported EBIT came in at EUR 1.9 billion. EBIT adjustments amounted to a net negative of EUR 0.7 billion, which included a EUR 651 million negative hit from FX mismatch and balance sheet revaluation — chiefly the mechanical effect of the gap between certain transaction dates and delivery dates — with minus EUR 291 million of that in Q2. It also contained a negative EUR 34 million tied to the aerostructures transformation, minus EUR 25 million of which fell in Q2. Finally, it included EUR 46 million in other costs, compliance costs among them, EUR 32 million of which occurred in Q2. Reported EPS includes plus EUR 102 million of financial results. That mostly mirrors a positive effect from revaluing certain equity investments, partly offset by the net interest result and negative effects from revaluation of financial instruments. The tax rate on the core business remains at roughly 27%. The effective tax rate on net income stands at 27%, including the tax effect on the revaluation of certain equity investments and deferred tax asset impairment. Net income as a result is EUR 1.5 billion, with reported earnings per share of EUR 1.94. Turning to our USD exposure coverage, during H1 2023, $9.7 billion of forwards matured, with the associated EBIT impact and euro conversions realized at a blended rate of $1.21 versus $1.22 in H1 2022.

During the first half of 2023, we additionally put in place $5.5 billion of fresh coverage at a blended rate of $1.11. Our overall USD coverage portfolio now amounts to $89.7 billion, carrying an average blended rate of $1.24, versus $93.9 billion at $1.24 as of the close of 2022. Turning to a closer examination of free cash flow: our Free Cash Flow before M&A and Customer Financing came in at EUR 1.6 billion for H1. That mirrors, first, the delivery level and, second, the mechanical buildup in inventory stemming from how we are executing our ramp-up plan. It likewise captures favorable timing on receipts and payments, notably in GTF, driven by orders placed at Le Bourget, and also from our divisions. The A400M kept dragging on our free cash flow before M&A, though to a lesser degree than in H1 2022. CapEx for H1 2023 was roughly -EUR 1.1 billion, against — 0.7 billion in H1 2022. We anticipate CapEx rising slightly in 2023, in support of our industrial ramp-up. Free cash flow of EUR 1.5 billion takes in M&A activities of EUR 58 million and customer financing of EUR 42 million. The environment for aircraft financing stays solid, with adequate liquidity in the financial markets for our products.

That said, such a weak pace of customer financing may not hold up. As of the close of June, we had a net cash position of EUR 9.1 billion, and liquidity is still over EUR 30 billion. Over to you, Guillaume.

Thanks, Xavier. Moving now to commercial aircraft. During the first half, we handed over 316 aircraft to 73 customers, which was in line with our plan. If we look at the H1 2023 situation by aircraft family, starting with the A220, we delivered 25 aircraft, and we're continuing to ramp up toward reaching rate 14 in the middle of the decade. July also marked five years since the A220 became part of the Airbus family of latest generation airliners. Five years already. On the A320, we delivered 256 aircraft, including 147 A321s, which works out to 57% of deliveries for the family. Production is moving along well toward the previously announced rate of 75 aircraft per month in 2026. We'll keep making what we call tactical adjustments to our production planning as needed to hit this target rate, which is now my key reference point, or key reference point for us and for the supply chain. The recent inauguration of a new A321 capable Final Assembly Line in Toulouse is the latest concrete milestone in the development of our global industrial system, which has gone from 8 assembly lines pre-COVID to 10 to support the rate 75, all of them being A321 capable. On the XLR, the flight test program is progressing toward entry into service.

That is still anticipated to occur in Q2 2024, Q2 of next year. Regarding wide bodies, we handed over 35 aircraft, specifically 14 A330s and 21 A350s. As anticipated, wide-body handovers accelerated this quarter, totaling 24 aircraft in Q2 compared with 11 in Q1. Our targets remain rate 4 for the A330 in 2024 and rate 9 for the A350 by the end of 2025. We just marked the 10th anniversary of the A350's maiden flight, and development of the freighter version of the A350 is progressing well toward service entry, which is now slated for 2026. Turning now to Airbus commercial's financial results for H1 2023. Revenue grew 16% year-on-year, driven primarily by a greater quantity of handovers, 16%. EBIT Adjusted stayed broadly flat year-on-year at EUR 2.3 billion. The favorable impact of more deliveries, aided by a better hedge rate, is partly countered by investments aimed at preparing for the future, which also shows up in our R&D costs. H1 2022 included a non-recurring positive effect from retirement obligations, partly offset by the effect of international sanctions against Russia, whereas in H1 2023 we released provisions totaling EUR 4.1 billion related to compliance matters.

Now let's turn to helicopters. During the first half of 2023, we handed over 145 helicopters — that's 30 more than we delivered in the opening six months of 2022. Growth came primarily from the light segments. Revenue rose 16% compared with the same period a year earlier, reaching EUR 3.2 billion, largely reflecting strong results across both programs and services. Thanks to that performance, EBIT Adjusted climbed to EUR 274 million. And here as well, H1 2022 contained net positive non-recurring items, for reference. Let's wrap up our look at the first half of 2023 with Defense and Space. Revenue fell 8% versus a year ago, driven chiefly by delays in space systems and by the phasing of deliveries in military assistance. The drop in EBIT Adjusted likewise reflects revised assumptions on certain long-term contracts, in line with the challenging conditions in our space business. H1 2022 also benefited from net positive non-recurring elements. On the A400M, we handed over three aircraft during the first half of the year. We're continuing development work aimed at meeting the revised capability roadmap. Retrofit work is moving forward in close coordination with the customers. Risk remains regarding qualification of technical capabilities and the related costs tied to aircraft operational reliability, on achieving cost reductions, and on locking in overall volume in line with the revised baseline. Moving to guidance: as the foundation for its 2023 guidance, the company assumes there will be no further disruptions to the global economy, air traffic, the supply chain, the company's internal operations, or its capacity to deliver products and services.

For 2023, our guidance excludes M&A. With that in mind, the targets we're aiming for this year are roughly 720 commercial aircraft deliveries, EBIT Adjusted of about EUR 6 billion, and Free Cash Flow before M&A and Customer Financing of approximately EUR 3 billion. The guidance we put out in February 2023 stands. Now let me wrap up with our key priorities. During the second half of the year, we stay focused on hitting our delivery goal of around 720 commercial aircraft and, at the same time, on ramping up production across all our commercial aircraft programs. How fast that ramp-up goes will keep depending on our supply chain and its ability to perform. Our teams keep working closely with our suppliers so that together we can anticipate, present, and mitigate any potential disruptions. As I pointed out during our recent business update, expanding and upgrading our global industrial system is going well. Here, I just mentioned our new filing tools. At the same time, we are well on track to hit our 2023 recruitment targets — even slightly ahead of the plan, I would say. These recruitments are instrumental both for our ramp-up and for the long-term transformation of our company, particularly for acquiring new competencies to support our ambitions in digitalization, automation, and decarbonization.

Digitalization is boosting our efficiency right now, and it will be truly indispensable when it comes to designing, building, and supporting the next generation of Airbus products. As an example, moving toward rolling out a completely digital end-to-end approach, we recently revealed the first immersive remote collaboration solution for customizing aircraft interiors. This new concept is going to transform and enhance how Airbus defines aircraft cabins, because it lets customers interact with us live and remotely through what we call mixed reality. Quite impressive. Turning to decarbonization, we are partnering with LanzaJet to increase output of sustainable aviation fuel, or SAF. Via this expanding partnership, we will help speed up scale-up of the Alcohol-to-Jet SAF production pathway, drawing on LanzaJet's proven technology to make drop-in fuel that is fully compatible with aircraft and infrastructure already in service. Beginning this summer, our customers will be offered an option to have 5% pure SAF on board for their ferry flights out of Toulouse and Hamburg, and that option is already available from Tianjin and Mobile. I also want to take this chance to welcome the political agreement reached at European level on ReFuelEU Aviation, which sends a strong signal for SAF deployment in air transport. We are advancing in maturing the technologies we will require for our future hydrogen-powered aircraft.

Just recently, we rolled out the high-power demonstrator. Through substituting a hydrogen fuel cell for the conventional APU—auxiliary power unit—our goal is to show that this fuel cell can operate steadily during flight. Our specialist teams over at the E-Aircraft Systems House also hit a thrilling milestone lately: they got our hydrogen fuel cell engine concept running at full power, producing 1.2 megawatts. Separately, in May, ArianeGroup came through with a successful test of its hydrogen conditioning system concept—one that can feed an aeronautical gas turbine while reusing hardware originally built for space purposes. That's a nice illustration of crossover and synergies across divisions. So, as you can tell, we remain quite busy getting our future ready. One last thing before we open it up to your questions: Thomas Toepfer comes aboard as our new Chief Financial Officer on the first of September. With 1 month still remaining, I want to use this chance to thank Xavier very sincerely for his efforts as our interim CFO, on top of heading finance in our Defense and Space division. Xavier, my heartfelt thanks. That wraps up my remarks.

We're going to begin the question-and-answer portion now. When you ask a question, please state your name and your company. Kindly keep to 2 questions per turn, sub-questions included. And as always, do remember to speak clearly and at a slow pace so that everyone on the line, especially those of us here, can follow what you're asking. Sharon, please go ahead and walk the participants through the procedures.

Thank you. We're going to start the question-and-answer portion now. Should you wish to pose a question, kindly hit star one one on your phone's keypad. That's star one and one on your telephone keypad. We'll move along to your first question now. Just one moment, please. The first question is coming from Benjamin Heelan, who is with Bank of America.

Yeah, good evening, and thanks, guys, for taking the question. The first one I had, Guillaume, was about these Geared Turbofan issues. When we look at the statement, it's pretty noticeable that the sentence around Rate 65 in 2024 has been removed. How should we think about the issues the Geared Turbofan is having and the impact that that is gonna have on 2024 and 2025 production? Thank you.

Yes. Dropping Rate 65 has zero connection to yesterday's RTX announcement regarding the GTF and the quality escape — I want that to be very clear. What it comes down to is this: we had been using Rate 65 ever since Covid hit, since 65 was approximately the level we were at at the start of 2020, and it served as the benchmark for when we would return to pre-Covid, pre-pandemic levels. Since then, things have shifted quite substantially, because we've chosen to ramp up to Rate 75, as our guidance shows, and to bring the supply chain along with us to Rate 75. That is the benchmark I want everyone to be crystal clear about — it's what we're working against. That's also what we do throughout our own production system, including with the Final Assembly Lines. Before Covid, we were delivering Rate 65 with 8 Final Assembly Lines, and only 4 of those could handle the A321. Now we're heading toward a situation with 10 Final Assembly Lines for the single aisle, for the A320 Family, and every one of them will be A321 capable. You've seen that in H1, 57% of the planes we delivered in the A320 Family were A321s.

We have shifted so far beyond that pre-Covid reference point that we decided — and I decided — to go straight to Rate 75, which is what, a few days ago, yesterday, the Pratt & Whitney team... laid out, the situation with the GTF stemming from a major quality escape, or a quality escape with major consequences. Those two matters are entirely separate and have nothing to do with one another. As for rate 65 itself, well, in fact, we're now midway through 2023. We are reaffirming our guidance for this year. Long lead time items have already been placed for 2024 production. A portion of rate 65 has already been ordered from the supply chain as of today. That's why it makes little sense for me to keep commenting on rate 65. As we get near or nearer to rate 65, it's good to keep our eyes on rate 75. That is the target we want everyone to focus on. Again, the short answer is that yesterday's GTF announcement and what we'll have to deal with regarding engine recalls and inspections, which will have a great deal of impact on in-service planes, is unrelated to what we're doing on the production rate and how we want to direct our energy toward rate 75.

All right, all right, thanks. That is very clear. Just one quick follow-up: could you say a bit about how A320 output went during the first half of the year? Are the production increases showing progress roughly as you had expected, and how did the bottlenecks change over that first half?

Yes. In H1 we handed over the quantity of aircraft we had targeted, and we are exactly where our plan says we should be. That is very good. The third quarter looks solid to us, and confidence going forward is also at a good level, which is why we are keeping this year's guidance unchanged. That covers the solid progress on the A320 Family as well. Again, solid progress there. I believe that was essentially what you asked, correct? Have I left anything out? I don't think so. We are on track.

No.

We're on schedule on the-.

Alright, great. Thanks a lot.

Thanks. Now we'll move on to the following question. That question is from Robert Stallard, who is with Vertical Research. Go right ahead.

Thanks a lot. Good evening.

Hello there, good evening. How are you doing?

Alright, thanks. I’ve got just a couple of questions. First, I don’t want to keep going over the Geared Turbofan situation, but some people have suggested Pratt & Whitney might choose to focus on selling spare engines or placing them into that MRO pool instead of sending them to you. If you could, I’d like to hear your thoughts on that. Second, regarding the A321XLR, there are reports again suggesting the range on that aircraft might not be quite as long as you had hoped, and I was wondering whether you could give us an update on where things stand. Thank you.

Thank you. Regarding the manufacturing of A320s equipped with the GTF, the Pratt & Whitney powerplant, the pipeline has not changed, and the production flow reaching Airbus from Pratt for deliveries has not changed either. It remains the same as the recent plan. I would just like to remind everybody that at the end of last year, and on several occasions previously, we adjusted our production planning and our demand to Pratt & Whitney in order to free up some capacity to support the fleet. Together with Pratt & Whitney we have done considerable work to strike the right balance between fresh production — I mean the line fleet — and the ability to support the fleet, recognizing that the level of AOG tied to the engine's durability issue was a critical one for our customers. Here we are dealing with a different situation, namely a quality escape that will require engines to be removed from the wing, sent to an MRO shop, inspected and analyzed, particularly with respect to the disk itself. Further details on this will come from Pratt & Whitney, through an FAA procedure or SB. I don't know exactly what form it will take — that is for Pratt to comment on.

Those engines are going to be inspected, and then they'll return to the fleet. This is a very different kind of situation compared with the durability problem and the choices we've made together with Pratt to strike the best balance. What we're dealing with here is a different issue, and my expectation is that it won't directly affect how many engines Pratt & Whitney ships to Airbus. As for the indirect fallout from the extra burden placed on Pratt & Whitney's teams and system, that is something we'll need to talk through with Pratt & Whitney so we can better grasp, going forward, how far it could generate disruptions and added difficulties for Pratt. That's what I'd term the indirect impact, and it's the kind of thing that would most probably, potentially, if there is any impact at all, affect 2024 and probably 2025 as well. That's something we have to discuss. That's something we need to understand better. Again, in my view, based on what I know today, this would be indirect impact rather than direct impact. I hope. Regarding the XLR, EASA and the certification authorities have imposed additional requirements, safety requirements, on how the tank is certified.

The tank — the large one located in the fuselage at the rear of the aircraft. Stabilizing it took time at first: the regulation itself, the fresh requirements, and how to answer those requirements. That's now behind us. Our design is frozen. We're industrializing the solution. We're at the stage of flight testing the plane. The flight test campaign is progressing very well. From a weight perspective, how we've answered the requirements is a headwind. It adds extra weight. We also have some other opportunities and reasons to believe we can partially, if not completely, offset the impact of the additional tank. Within the flight test phase, we're working to fully identify the performance that will feed the flight manual and the final certification. The XLR will stay an incredible aircraft with a very long range that will come close to — if not meet — our customers' expectations, the initial expectations. That's something still a bit outstanding, and we want to make further progress on the upcoming flight test to arrive at something final. That's obviously something we're discussing with our customers.

The key point is this: it isn’t changing, or it isn’t changing by any meaningful degree — the outstanding performance and the new capabilities that the XLR is delivering to the market, as a long-range plane in a single aisle, within a single-aisle aircraft. That mix of long range with single-aisle capacity.

That's really useful. Thanks.

Thanks. We'll move on to the following question now. The next one is from Daniela Costa at Goldman Sachs. Go right ahead.

Good afternoon, and thanks so much for taking our questions — same to you as well. For the first one, I was just hoping you could help us understand the cash movements you're expecting in the second half, since you had a very strong first half and you're not changing the guidance. What headwinds should we be watching for? It'll be a pretty big down year-on-year. I know there are probably some comparability issues there, so if you could help us with that. On the second question, I think you've mentioned a few times at events, including around the air show, that you're overstaffed — obviously to get to rate 75. Can you help us understand how much of a headwind that was in these results? How much of a head- and until when will that be a headwind, and how should we think about it in terms of margin progression headwind from here when it comes to that over-hiring? Thank you.

Thanks a lot. Over to Xavier.

Yes, thanks.