European Aeronautic Defence and Space NV Exec Insights: A380 and Cost Improvement

On Wednesday, European Aeronautic Defence and Space NV (AMEX:EAD) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

A380

Rupinder Vig – Morgan Stanley: It’s Rupi Vig from Morgan Stanley. Hans Peter, perhaps given it’s your last time, two questions for you. First one, just around the A380, when do you expect to get a certification for the permanent fix that you’ve now identified and kind of just leading on from that, can you give us an idea of how much of the installed base now needs to have a permanent fix put in place and what is the status there in terms of when will this happen, what are the timings around this, etc. Then second question just around the working capital buildup we saw in 1Q. Could you just give us an idea of what exactly this relates to? Is it specifically 380, 350 just (a scale) of what’s happening there please?

Hans-Peter Rings – CFO: Now coming to the first one, I am afraid I am not yet at this point exhaustive on my answer and probably fully satisfactory for you. We have just within the last few days finalized the definition of the repair solution and the final fix for the A380 wing crack issue. This is now under discussion with certification authorities as you may imagine, and we are conducting the necessary discussions with our customers and only after that we will probably, not probably but certainly give you more flavor on what it exactly means. From our point of view we think this is the solution, so the Airbus teams are pretty sure that we have understood the root causes and that we have now defined something which is I would say the best way we can deal with that problem in, I would say, the context of our customer relationship. So, this is going to take a couple of, I would say, more weeks until you will get a more technical briefing, and until then, I do not want to disclose too many things. Obviously, we know what we want to do, but again, we need to get the feedback of the customers and we need to get first feedback of EASA, and then we can tell you when we expect the certification of that, first of all, and when we have the repair kits available for the final repair solution, and until then obviously we are dealing with the fleet based on what we’ve done so far. So, if necessary exchange brackets. So, that’s the current status, Rupi. On working capital, you’ve seen, indeed, there is a sizable deterioration. If we compare it in the quarters, it is linked to inventory increases, it is linked to phasing of the A400M profile to supplier payment phasing to some extent, and also a little bit of CapEx increase which you can read in the disclosure somewhere. If we start with the end of last year, there are two – there is one major issue which I mentioned in the speech. It is clearly inventories which are driving that; inventories which are linked to single-aisle ramp-up, inventories linked a little bit also to A330 and to A380 deliveries, which as I said before, are going to be back-loaded into the year. So, there are a number of issues which impact Q1. I mean we’ve seen these kind of fluctuations already in quarters in the last years from time to time, so it’s not a total surprise, but obviously minus 1.2 billion is a significant number.

Rupinder Vig – Morgan Stanley: And Hans, can I just perhaps I guess follow-up just on the first question. I mean, the charge you’ve taken – like, I’m assuming that still includes – excludes, sorry, any potential conversation with customers, is that right, this year?

Hans-Peter Rings – CFO: It includes what we are obliged to do under our contracts, which means to repair the wings and then obviously to deliver the ultimate solution to that. So, it is linked to repair costs for the wings.

Cost Improvement

Ben Fidler – Deutsche Bank AG: The first question I had is – I’m afraid, one further follow-up on the A380. If you can help to scope out how you now see the rate of cost improvement on the A380 changing in 2012 and 2013 versus your original expectations, and I suppose what still gives you the confidence why you can reach breakeven in 2015. I mean now, obviously you’re seeing things slip out a little bit? And the second question is, I know obviously this is progress after the end of the first quarter, but how is the final assembly progressing so far on the A350 static test aircraft, if you can give us a discussion on if you’ve run into, how smoothly it’s going, your sense and your feelings of how that’s progressing.

Hans-Peter Rings – CFO: Okay, Ben, since Harald is here and since I said he is available for Q&A, I can make my life a little bit easier, so Harald I think you probably could take both question.

Harald Wilhelm – New CFO, EADS; CFO, Airbus: Thanks Ben for the question. On 380, I mean if we put aside the wing crack issue, we’re making the progress as we scheduled. However, there are some interruption caused by that. I mean you could see that we had to take the rate down on a temporary basis from 2.7 to 2.3. We will come back up again. This is causing some headwind in terms of the continuous cost improvement and there’s also some cost going with design activities of the final repair solution. That what we mean when saying there’s some headwind on the year-on-year improvement in 2012. 2013 I think it’s too early to say at this stage. However, we need to work very closely and this is a process which started with customer to find the embodiment of the final repair solution and that’s why we cautioned on the 2013 progress regarding year on year improvement. However, all in all we consider that (indiscernible) the activity of the wing repair is 2012-2013 activity, hence it should not jeopardize 2014 and 2015 progress. As we said during the speech before, however the 2015 breakeven is on the rate assumption of 35 to 40 aircraft. To your second question A350 progress, yes, static aircraft in the FAL. As you know, the sections came together in April, including section 1521 and also the (antenna) section. So now really FAL activity could start and we’re very pleased with the geometry of the aircraft. So the FAL process itself is working in line with expectation. However, the focus on all of the components on ES and also then on the subsequent aircraft to come (in as one, three and four) is very challenging. As we said already in March, and for sure, I mean issues and problems encounter every day, and needs to be managed down to stick to our schedule and our timeline. So, it remains challenging, however in the FAL process, I mean, as you asked for that one, we are pretty comfortable.

Ben Fidler – Deutsche Bank AG: Maybe if I could just one follow-up on the A380 points on the cost side, will you be taking a further provision to account for the retrofit costs on the aircraft to components that are inbuilt at the moment, or is that going to be absorbed just within the ongoing operational numbers?

Harald Wilhelm – New CFO, EADS; CFO, Airbus: The provision of 158 refers to aircrafts that are being delivered, 71 by the end of Q1 2012, and as long as margins are positive for aircrafts to be delivered in the future, we do not need to provide for the repair cost for aircraft to come, i.e., that means that in the future for the aircrafts which will still be delivered with retrofit solution to be embodied later on, we will need to provide for it. So, this will be reported separately now as we went to the – before one-off concept on the basis of the full year targeted deliveries of 30 aircrafts. We could scope the impact including the Q1 provisioning impact of 158 to be 260. So, there is an increase until the end of the year for the 30 to be targeted deliveries.

Ben Fidler – Deutsche Bank AG: And will that be taken on an aircraft-by-aircraft basis, or do you think in Q2 you just recognize a charge that covers all of those 30 aircraft for the full year?

Hans-Peter Rings – CFO: Aircraft-by-aircraft basis.