Airbus SE (AIR) Earnings Call Transcript & Summary

Good day, everyone, and thank you for holding. This is Sharon, and I'll be your operator for today's Airbus nine-month 2023 results release conference call. I'd like to point out that throughout the presentation, everyone will be in listen-only mode, and this call is being recorded. Following the presentation, there will be a chance for you to ask questions. At this point, I'll hand the conference over to your hosts, Guillaume Faury, Thomas Toepfer, and Hélène Le Gorgeu.

Thanks, Sharon. Good evening, everyone. This is the conference call for Airbus's 9 months 2023 results. Guillaume Faury, our CEO, and Thomas Toepfer, our CFO, will present our results and take your questions. The call is expected to run about an hour. That includes Q&A, which we'll hold after the presentation. This call is also being webcast. You can access it through our homepage by clicking the dedicated banner. A playback of this call will be available on our 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, along with the financial statement. During this call, we will be making forward-looking statements. I invite you to refer to our safe harbor statement that appears in the presentation slides, which applies to this call as well. Please read them carefully. And now, over to you, Guillaume.

Thanks, Hélène, and good morning, everyone — appreciate you being with us today for the call on our nine-month 2023 results. Thomas, our CFO, is here with me in Amsterdam; he came on board at the start of September. Once more, Thomas, a warm welcome. We've worked side by side since then, and it's a real pleasure to walk through the nine-month results alongside him today. Let me begin with a broad overview. On the operational side, we keep moving forward with our plan. I have to be honest: this has not been easy, and it still isn't, given that the global environment keeps growing more complicated. As a result, managing the supply chain stays a vital element of what we do, and although things there are steadily improving, our requirements for materials and components go on rising as the ramp-up continues. So we anticipate that the supply chain will stay difficult for some time, and we expect a handful of critical suppliers to set the pace of the ongoing ramp-up. Engines are a notable example, and there we remain in close contact with the manufacturers to lock in deliveries for the production ramp-up, along with support for the fleet.

During Q3, we handed over 172 commercial aircraft. That takes our deliveries for the year to date to 488 planes, versus 437 a year earlier, so we're tracking in line with the plan. And we kicked off Q4 the same way, as our October deliveries show, with 71 commercial airplanes in October. Our EBIT adjusted came in at EUR 3.6 billion. That figure reflects the commercial aircraft deliveries and the solid performance of our helicopter division. It also includes charges booked to reflect the reassessment of certain of our satellite development programs. Free cash flow before M&A customer financing was EUR 1 billion, largely reflecting the inventory buildup in Q3, consistent with the backloaded delivery profile and the ramp-up. On that basis, we're keeping our 2023 guidance while acknowledging that the charges recorded in our space business are putting some additional pressure on EBIT Adjusted. Let's now turn to our commercial positioning. Aircraft continued to improve in the third quarter, and forward ticket sales point to sustained growth for air travel, despite inflationary pressures and higher fuel prices. Over nine months, we booked 1,280 gross orders, including 200 in Q3. On the A220, we booked 33 gross orders in nine months. The recently announced order from Air Niugini for 6 aircraft is not yet reflected in our order book.

On the A320 family side, gross orders came to 1,087, with 149 of those in the third quarter, which puts our backlog at 6,754 aircraft. Turning to wide bodies, we had 160 gross orders through nine months, and that includes 28 A330s and 23 A350s in Q3, which confirms the wide-body market is recovering. Net orders for the nine months were 1,241 aircraft after 39 cancellations, and our backlogging units were at 7,992 aircraft at the end of September, so almost 8,000. On helicopters, we booked 191 net orders over nine months against 246 in the nine-month period of 2022. Those 191 net orders are spread nicely across programs. During the quarter, we signed an agreement with PHI Group covering 20 H175 helicopters and 8 H160s for the energy market worldwide. On top of that, the H175 obtained its type certificate in July from the CAAC, the Chinese certification authorities, so deliveries can start in China. Overall, momentum remains positive in our home countries for civil as well as military markets, and we keep making progress on some key strategic content. Last, in Defence and Space, charges on our space business hit the third quarter, and Thomas will go into that further. Even so, order momentum across our business remains good, and through nine months of 2023 the division's order intake was EUR 8.5 billion, with EUR 2.4 billion of that in the third quarter.

This covers renewing the A400M in-service support contract for Germany, and I'd like to point out the recent groundbreaking for the new Airbus A400M maintenance center in Wunstorf. In October, we signed a contract with France worth EUR 1.2 billion for capability enhancement and in-service support of the French MRTT fleet. Regarding Ariane 6, two important tests — the hot firing of the main and upper stages — were successfully completed recently, which is another key milestone on the way to the inaugural flight next year. The priority now is on successfully completing the final Ariane 6 test and securing its ramp-up to provide sovereign access to space for Europe. On that note, you may have followed the outcome of the summit held earlier this week in Seville. European member states have reconfirmed their support for the continued operational phase of Ariane 6, which is an important milestone for the future of our European launchers. On FCAS, we are working on phase one B and progressing according to plan with our partners. And, before we move on to the financials, let me give you a quick update on the transformation of Airbus Defence and Space.

Lately, conflicts around the world have in fact made the case stronger for creative solutions in space and cyber defense. At the same time, carrying out programs has grown increasingly difficult—technically, financially, and in some cases politically as well. To address this, to strengthen where we stand in defense and space, and to boost our competitiveness while meeting requirements, we introduced a transformation program designed to reshape how we work, with a focus on disciplined program execution from the bidding stage through to delivery, and that includes stronger risk assessment and mitigation suited to what the programs involve and to the changed environment. With the goal of reinforcing end-to-end business ownership, encouraging an entrepreneurial culture, and enhancing competitiveness—as I mentioned—through many measures, several of which are already producing some efficiency gains. Our plan is to put in place in early 2024 a simplified organizational structure with three business lines that are fully empowered and accountable: Air Power, which combines our existing military system and FCAS activities, Space Systems, and Connected Intelligence, all backed by strong transversal operational functions. The consultation process with our social partners regarding this organizational change is under way. Clearly, it will take time before all the initiatives reach their full potential, which is needed to meet our strategic and financial ambitions for the division.

And with that, I'll hand things over to you, Thomas. Thomas is going to walk everyone through our financials.

Thank you, Guillaume, and a very warm welcome from me as well to everyone joining the call. It's a pleasure to address you for the first time as Airbus CFO, and I'm very much looking forward to meeting as many of you as possible over the coming months. I'm also, of course, delighted to be joining Guillaume and the rest of the management team and to contribute actively to Airbus's continued success. Now, let me take you through our nine-month financial performance in a bit more detail. As you can see, revenues for the first nine months of 2023 rose to EUR 42.6 billion, an increase of 12% year-on-year, mainly reflecting the higher number of commercial aircraft deliveries. Turning to EBIT Adjusted, before we look at the 2023 figure, let me begin by recalling that the nine months of 2022 stood at EUR 3.5 billion and included a net positive impact of EUR 4.3 billion from non-recurring elements, which related to retirement obligations and to international sanctions against Russia. Now, our EBIT Adjusted for the nine months of 2023 increased slightly to EUR 3.6 billion, reflecting the higher commercial aircraft deliveries and a more favorable hedge rate versus the nine months of last year, partly offset by investments for preparing the future.

To build on what Guillaume said earlier, we booked charges within some of our satellite development programs — chiefly during this year's third quarter — and those EUR 0.4 billion in charges stem from an updated estimate at completion. That update reflects revised schedules and cost assumptions along with a fresh look at commercial risks and opportunities, which produced these revised financial estimates on a few major long-term contracts. So today we hold a sharper view of the risks across these programs than we did previously. As a reminder, during 2023 we advanced further on compliance-related matters, and that let us release provisions totaling EUR 0.1 billion in the first half of the year. Turning to R&D, spending across the first nine months of this year came to EUR 2.2 billion, compared with EUR 2.0 billion during the same nine months a year ago, and we still expect full-year R&D to edge up slightly versus 2022. As you can see, nine-month adjusted EPS came in at EUR 3.59, calculated on an average of 789 million shares, while nine-month free cash flow before M&A and customer financing reached EUR 1 billion — driven largely by the backloaded delivery profile at Airbus Commercial and helicopters, plus the inventory buildup required as we carry out our ramp up.

Moving on to slide 7 in the deck, which covers profitability: for the first 9 months of 2023, our reported EBIT came in at EUR 2.7 billion, while EBIT adjustments netted to a negative EUR 0.9 billion. That figure includes a negative impact of -EUR 806 million stemming from FX mismatch and balance sheet revaluation. This largely mirrors the mechanical effect arising from the gap between transaction date and delivery date, and of that amount, -EUR 155 million was booked in Q3. It also contains -EUR 57 million tied to the aerostructures transformation, with -EUR 23 million of that in Q3. Third, there is -EUR 56 million in other costs, compliance costs among them, and -EUR 10 million of that landed in the third quarter. Reported EPS includes EUR 231 million of positive financial results, which mostly mirrors a favorable effect from the devaluation of certain equity investments, along with how the US dollar moved, partly offset by negative effects resulting from devaluation of financial instruments. The tax rate for the core business remains at roughly 27%. The effective tax rate, though, stands at 25%, which includes the tax effect on revaluation of certain equity investments plus a net deferred tax asset impairment.

Then, net income comes out at EUR 2.3 billion, and earnings per share were EUR 2.96. Let's turn to page 8 and examine our coverage of US dollar exposure. During the nine months of 2023, forwards totaling $15.2 billion reached maturity, bringing an associated EBIT impact, and euro conversions were realized at a blended rate of $1.20, compared with $1.22 across the nine months of 2022. Over the first nine months of this year, we additionally put in place $8.7 billion of new coverage at a blended rate of $1.11. Consequently, our overall US dollar coverage portfolio now amounts to $87.5 billion in US dollars at an average blended rate of $1.23, versus $93.9 billion at $1.224 at the close of 2022. With that, let's take a closer look at free cash flow on page nine. Free cash flow before M&A and customer financing came to EUR 1 billion over the first nine months of this year. That mirrors, first, the delivery level and, second, the mechanical inventory build-up in support of our Q4 deliveries, on both commercial aircraft and helicopters, along with the execution of our ramp up.

Part of that was offset by receipts and payments landing at favorable times, especially the strong PDP inflows tied to orders taken at Le Bourget. Free cash flow before M&A kept feeling pressure from the A400M, and CapEx for the nine months of 2023 came in near EUR -1.7 billion, compared with EUR -1.3 billion across the same nine months a year earlier. Looking ahead, we anticipate a slight rise in CapEx for 2023 to back our industrial ramp up. The EUR 0.7 billion free cash flow figure now includes EUR 58 million from M&A activities plus EUR 261 million of customer financing. Broadly, though, we'd characterize the aircraft financing landscape as still solid, with financial markets holding ample liquidity for our products. During this year's first nine months, the customer financing cash outflow was largely tied to planned fulfillment of specific contractual obligations, and further cash usage in that area could arise down the road. All told, net cash came to EUR 8.3 billion at September's close, while liquidity stays above EUR 30 billion. On that note, I'll pass things back to Guillaume.

Thanks, Thomas. Now turning to commercial aircraft. During the first nine months, we handed over 488 aircraft to 78 customers, which was in line with our plan. Looking at how things stand by aircraft family: on the A220, we delivered 41 aircraft, and we're continuing to ramp up toward reaching rate 14 in 2026. September also marked ten years since the A220's first flight. On the A320, we delivered 391 aircraft, including 222 A321s, which made up 57% of deliveries for that family. Production is moving along well toward the previously announced rate of 75 aircraft per month in 2026. We're continuing to modernize and digitalize our industrial system, as shown by the recent opening in Hamburg of the automated hangar for A321 XLR equipment installation. On the XLR, the aircraft completed its route proving campaign in September, and more recently its first passenger experience flight — two important milestones on the path to certification and entry into service, which is expected in Q2 2024. No change versus the previous situation. On wide-body, we delivered 56 aircraft, including 20 A330s and 36 A350s. We continue to target rate 4 in 2024 on the A330. On the A350, I mentioned earlier the recovery in the wide-body market, and I'm pleased to share that we've decided to raise the production rate to 10 aircraft a month in 2026.

Turning now to Airbus's commercial results for the nine-month period. Revenue rose 18% compared with a year earlier, largely driven by a greater quantity of deliveries. EBIT Adjusted climbed to EUR 3.2 billion, up from EUR 2.9 billion in the same nine months of 2022. That improvement mirrors the higher deliveries and a more favorable hedge rate, partly offset by investments aimed at preparing for the future, which also show up in our R&D expenses. The nine months of 2022, to repeat, contained the non-recurring positive effect from retirement obligations, partly offset by the hit from international sanctions against Russia, whereas during 2023 we released provisions of EUR 1 billion in H1 linked to compliance-related matters. Moving to helicopters, we handed over 197 helicopters in the nine months of 2023, a touch above the nine months of 2022. Revenue grew 3% year-on-year to EUR 4.7 billion, which reflects the overall performance of helicopters across programs and services. Thanks to that performance, EBIT Adjusted rose to EUR 417 million. Here too, the nine months of 2022 included net positive non-recurring items. Let's finish our nine-month review with defense and space. Revenue fell 6% year-on-year, chiefly because of a backloaded A400M delivery profile and updated estimates at completion on certain satellite development programs.

The drop in EBIT Adjusted comes from the charges tied to updating those EACs — those estimates at completion — and it was partly offset by stronger results elsewhere in the business during the period. Those charges stem from revised timelines, revised cost estimates, and a fresh look at technical and commercial risk and opportunities. Our sense is that the assessment of overall risk and opportunities is now more balanced — better balanced — though we'd note these programs introduce new technologies, and that naturally carries a certain level of risk. As a normal part of the development process, we'll keep watching our exposure on our programs closely. On the A400M, we handed over four aircraft in nine months. Development work continues toward meeting the revised capability roadmap. As you know, retrofit activities are moving forward in close alignment with the customer. In the first nine months of 2023, no further net material impact was recognized, but risks remain around qualification of technical capabilities and the associated costs, around aircraft operational reliability, around cost reduction, and around securing overall volume in line with the so-called revised baseline. And here again, let me recall that the nine months of 2022 included some net positive, non-recurring elements, as was the case for the two other divisions.

Now, if you turn to page 15, we'll move on to the guidance slide. When building its 2023 guidance, the company assumes there will be no further disruptions affecting the world economy, air traffic, the supply chain, the company's internal operations, or its capacity to deliver products and services. The company's 2023 guidance is before M&A, and on that basis, for 2023 the company is targeting roughly 720 commercial aircraft deliveries, EBIT Adjusted of approximately EUR 6 billion, and free cash flow before M&A and customer financing of about EUR 3 billion. As I mentioned earlier, we are maintaining the guidance, but even as we maintain it, we recognize that the charges recorded in our space business are placing some additional pressure on EBIT Adjusted. Now, before I wrap up, a word on our key priorities going forward. We clearly remain fully focused on serving the very strong demand for our latest generation aircraft as we continue to ramp up production across all our commercial aircraft programs. Let me briefly touch upon the upcoming evolution to our Airbus leadership team. We operate, and in fact we are ramping up, in a rapidly changing world, impacted by profound geopolitical shifts, acceleration — sorry, accelerating innovation, as well as ecological and digital transformations.

So in this context, our new organization, which goes live in January 2024, will mainly serve two objectives. The first is reinforcing our focus on our operational business. That's why we decided to set up a fully dedicated commercial aircraft management unit under Christian Scherer's leadership. Second, it will also let me focus strongly on the company's strategy and drive transformation across our group-wide businesses, as well as on international matters. Given how sustainability is growing in importance in our business, we've also decided, as part of the reorganization, to create the role of Chief Sustainability Officer. Let me mention a few highlights for the quarter on decarbonization here. We unveiled the Airbus Helicopters Pioneer Lab demonstrator to test and mature technologies aiming for a fuel reduction of up to 30%. We signed a contract with easyJet for the Airbus carbon capture offer, using direct air carbon capture and storage, so DACCS technology. And we became a strategic partner of DG Fuels for the production of sustainable aviation fuel in the US, in line with our ambition to act as a catalyst in that SAF domain. While on this topic, I'd like to say we welcome the recent adoption of the ReFuelEU aviation regulation.

That's a key move toward getting sustainable aviation fuels moving across Europe. With that said, I believe we're... I'll get you set up, Hélène, so you can ask your questions. Thank you.

Thanks, Guillaume. Thanks, Thomas. We're going to begin the Q&A portion now. When you ask a question, please state your name and your company. Keep it to 2 questions at a time, sub-questions included. And as always, please do remember to speak clearly and slowly so that all participants — especially us — can follow your question. So, Sharon, please go ahead and walk the participants through the procedure.

Thanks. We’re moving into the Q&A portion now. If you’d like to ask something, press star one and one on your phone, then hang on until your name is called. If you want to pull your question, just hit star one and one once more. We’re going to the first question now—give us a moment, please. And that first question is from Ben Heelan at Bank of America. Go right ahead.

Thank you. Good afternoon, good evening. Thomas, it's a pleasure to talk with you for the first time. My first question concerns deliveries, specifically the GTF. Guillaume, could you provide any detail at this point on how we ought to view production and delivery growth as we head into 2024? And in particular, when we consider the mix of A320 deliveries from an engine standpoint, has that shifted between LEAP and GTF compared with what you were thinking perhaps four months ago?

Thank you, Ben, for those questions. So, some color on GTF. I want to say this won't have an impact on 2023, and that's the reason we confirmed the guidance. I mean, no more than what we agreed with Pratt & Whitney at the end of 2022, at the start of 2023, when we sized the ramp-up for this year, factoring in the time-on-wing challenges and the need to better support the fleet at that point. As for 2024, and as Pratt & Whitney and RTX have reconfirmed, they will honor their commitments to Airbus for our ramp-up. But obviously, we're also watching the situation in the fleet very closely, and the many, many planes that will be AOG for some time as a result of the recall campaign for the metal powder issue. So you could expect the mix to be slightly more in favor of the LEAP and a bit less in favor of the GTF than would have been the case without the recall campaign on the GTF.

Understood, that’s clear. Thanks.

Thanks. Now we’ll move on to the following question. Our next question is from Milene Kerner at Barclays. Please go ahead.

Good evening, Hélène, Guillaume, and welcome, Thomas. This is Milene Kerner from Barclays, and I have two questions, please. The first one concerns headcount at Airbus. At the close of September, Airbus Commercial had more than 88,000 employees, which is 7,000 above the figure for 2019. I realize productivity differs, but could you try to quantify the delivery number your current labor is sized for? My second question is about inventory. As you noted, it rose EUR 1 billion versus Q2 and over EUR 4 billion versus last year. I was wondering whether some of that increase is tied to buffer inventory, given the supply chain constraints, and if so, whether you could quantify how much these are. Thank you.

All right, and thank you, Milene, for those questions. On the second one, yes is the answer, though I'll perhaps let Thomas decide whether he wants to add some color there — I'm not certain about that one. Yeah, so on the headcounts. So as you correctly pointed out, productivity is not at the level it was in 2019. We're bringing back a lot of people and training them. We have employees who train the newcomers. Disruptions in the supply chain are hitting us hard, and that produces a fairly inefficient environment that, in our view, we'll keep having to deal with. On top of that, and as we prepared with Thomas and Thierry Baril, our head of HR, for that — for the board we had earlier and for these calls — on the headcount side, we also have some change of scope, change of scope of business, and more consolidation of entities, which means part of the additional headcount versus before also comes from change of scope. We've also re-internalized or internalized a number of activities, because we believe it's more efficient to have Airbus employees, to have an Airbus workforce, rather than subcontractors or third parties. And with no impact on cost — actually with a slightly positive impact on cost.

So that direct comparison with 2022 requires those explanations, and it gets even more complicated when we go back to 2019 and just try to answer this question as best I can. Now, regarding inventory and the first item, Thomas, do you want to try to give some color on where we stand?

On that question, the way I’d think about it is that if you look at our free cash flow statement, you’ll see that during the first nine months of the year, we built up EUR 4.3 billion of inventory. First of all, I’d say this is fully consistent with our plan for achieving the ramp-up that lies ahead of us for the remainder of the year. And of course, to your question, it also reflects that we want to take some precaution because the supply chain remains very challenging, so I’m not sure I’d call it a buffer, but of course, some kind of elevated inventory level is included in this, simply because the supply chain is pretty much disrupted. That said, however, since we aren’t expecting the situation to improve significantly in the short term, and also in 2024, we’ll probably have to deal with some challenges, I’d just state that you shouldn’t expect this to be reversed very quickly, but it’s some, probably some, issues that we’ll have to deal with and continue to deal with over the course of the next quarters to come.

Right, that is certainly a topic the operations team and I have been going over in detail. We’re holding a fairly substantial initial stock of intermediary inventory, which we see as required — with the current landscape and the highly volatile supply chain — so we can safeguard the ramp-up even if crises keep emerging here and there; that’s just the character of the environment right now. So I completely back what Thomas said a moment ago.

Thanks.

Thanks. We’re moving on to the following question. Our next question is from Victor Allard at Goldman Sachs. You have the floor.

Good evening, and thanks for taking my question. Would you be able to give us some color on the main moving parts that are baked into your implied 4Q guidance at a bit? I guess it goes without saying that VNS is clearly tracking below the expectation we had when we formulated the guidance in February. So I was curious to hear what has performed better than expected elsewhere in the business and beyond effects. And also, should we assume that the views you shared with us earlier this year regarding inflation, which I think was roughly a EUR 200 million headwind for the full year, still hold today? Thank you.

Okay, so on that topic, essentially, if you look at Q4, I would say the most telling thing is the comparison with last year. So we're not assuming a major uplift, but just a slight uplift relative to last year. That is coming from the deliveries on the one side, that should be helpful and provide some tailwind. And secondly, it should come from a little bit of tailwind from our FX rate, which also should be helpful. And against that, you mentioned some headwinds that we might face. Overall, the Q4 that we're expecting is slightly above what we had last year, and I think with the delivery trajectory that we currently have, this is also what we deem fully realistic. But those are the major moving parts in there. I think there's nothing, really big that, other than that, you should have on the agenda.

Much appreciated.

Thanks. We’ll move on to the next question now. Our next question is from Robert Stallard at Vertical Research.

Much appreciated, and good evening to everyone.

Hello there, and good evening.

Guillaume, I just wanted to circle back to what Ben asked at the beginning of the Q&A about engines. We spent a lot of time discussing the GTF problems, but CFM has also cut its growth target for its ramp up lately. So I was wondering whether those two things together are delaying your plans for the A320 ramp in 2024, even though you're still sticking with your longer-term goal of 75 a month?

Okay, so CFM has made comments about their business as a whole, but I wouldn't treat those remarks as applying to Airbus. They've confirmed they'll honor their commitments to us — I want to state that very plainly. And when it comes to Pratt & Whitney, the same holds true for 2024. So 2024 is going to be a year of ramping up. We're not yet at the stage of giving specifics on that, but once again it will concern ramping up on the 220, on the 320 — particularly given the complicated engine situation with Pratt & Whitney — and on our wide bodies. That's the position we're in, and we continue moving in that direction. Clearly, the Pratt & Whitney circumstances are adding a great deal of extra complexity for us, for aircraft, and to a lesser degree for customers. Yet despite those challenges, we've identified ways to handle the situation together with Pratt & Whitney. They have commitments to us that they've reconfirmed on multiple occasions — that they plan to stick to them.

All right.

When it comes to 2024, it's once more a matter of ramping up.

Yeah. And then, on the supply chain side as well, we've discussed engines quite a bit, but is anything else proving especially difficult right now?

That's a fair question. What we're seeing now is that more and more of these situations tie back to particular equipment, a specific part, or a supply item, instead of to suppliers as a whole. So a handful of suppliers are what we call the pacing ones, and beyond those we have a range of specific cases to handle involving, yes, again, critical suppliers — but not in their role as suppliers. Rather, because they provide a certain number of equipment pieces and parts, and on some of those, occasionally just one, they're running into difficulties. So the landscape looks somewhat different from the one we faced last year. Among those that are difficult and challenging as suppliers, we clearly have Pratt & Whitney, and we also have Spirit, which is publicly known. That's essentially the best way I can respond to your question. It's more specific-