EADS announces earnings

We’ll provide analysis later today (PDT) but here is the 27 page earnings statement and accompanying presentation.

Update, 10:30 PDT: Here’s a synopsis of the EADS earnings call and our comments.

Louis Gallois, EADS CEO:

  • Backlog supports maintaining production at current rates.
  • The A400M can only be a success if we and our customers agree on a realistic contract. Customer statements encouraging but negotiations to be to the end of the year are expected to be tough.
  • We are fully committed to finding an agreement that is technically and commercially acceptable to both sides.
  • We continue to have [airliner] overbooking at Airbus through 2010.
  • Customer financing remains insignificant at the end of June.
  • Booked 90 gross orders, 68 net, in first half.
  • 254 aircraft delivered in first half with an “insignificant” level of customer financing.
  • Airbus continues focus on internationalization, with new A320 assembly line in China.

Hans Peter Ring, CFO

  • R&D is expected to ramp up to 3bn Euros by the end of the year.
  • A400M weighed on first half financials by 400m Euros.
  • Eurocopters bookings slowing, at a rate of 70% of last year.
  • Exchange rates still hurt earnings.

Q&A:

  • Ring: Savings from Power8 has helped compensate partially price deterioration and hedge rates but refused to give precise number. Range is north of 1.8bn Euro savings by end of year, more or less in line with planning.
  • Gallois: Milestone accounting on A400M: won’t have clear picture until the end of the year, after negotiation with customers.
  • Gallois: Airbus deliveries in 2010, still overbooked on A320, none on A330. On A330, we’re comforted with new orders and delays on 787. We have no plans to change production rates on A330 so far. On A320, still have overbooking in 2010 and sticking with 34/mo so far. We are fully aware of difficulties some airlines face with traffic and yield and some airlines deferred from 2010 to later years. We have a more robust set of airlines due to receive A320s in 2010 than we had at the beginning of the year. Ring adds that overbooking remains toward 2H next year, for effective management of the backlog.
  • Ring: On A400M near-term cash flow impact. It is full speed ahead with the work, working into inventories. Pre-delivery payments resumed.
  • Gallois: Not changing customer financing expectation for next year. On pricing, we are now delivering airplanes ordered 2-4 years ago. We are seeing an improvement in the trend of prices.
  • Gallois: Airplanes we are assembling in China are not cheaper than those in Hamburg or Toulouse—they are not low cost for the time being. We could improve the situation in the future with contractors around the assembly line, but for now parts are pre-assembled in Europe and shipped to China. It’s almost the same price as Hamburg or Toulouse. On A380, we are putting too much resources on each airplane and costing more than it should. The learning curve should bring cost down. There is a question mark on the costs we see on the plane today. Nothing specific beyond learning curve.
  • Ring: plan to deliver “at least 483” aircraft. PDP quality has not changed.
  • Gallois: we are on track for the time being with A350, fighting against weight, still have some technical challenges. We know the certification process will be complex and lessons learnt from our competitor we know certification authorities are tough on new technologies, but for the time being we are on track.
  • Gallois: We still have cost overruns on A380 Wave 2. We are still on the learning curve and part of the Wave 2 airplanes are on the learning curve. We feel the costs of the learning curve (on Wave 2) are too high.

Our take:

About what we expected in our earnings preview posted Monday. It’s a bit surprising that costs on Wave 2 A380s are still an issue. Although Neither Gallois nor Ring would specify the amount of the “insignificant” customer financing in 1H09, we’ll point out that Boeing reported about a half billion dollars in customer financing and still expects to do $1bn for the year. Airbus reaffirmed its earlier expectation to do 1bn Euros in customer financing this year. Update, July 29: Commercial Aviation Online reports the customer support figure is $432m (300m Euros).

The A400M, as we noted in our preview, remains an albatross around the company’s neck.

Our biggest take-away is Gallois’ twice-uttered qualifier on the A350 program that for “the time being” it is on track. This is a red flag that bears close watching.

Andrea Rothman of Bloomberg news, one of the more astute Airbus-watchers who is credible and objective, interviewed Gallois after the earnings press conference. Her report is here. Gallois reaffirmed EIS for 2013 but Richard Aboulafia of the Teal Group, who has been a skeptic of the timing even as he believes the A350 is the right product, has long held the view that EIS will slip to 2015. Rothman talked to him in the same report.

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