Updated with analyst reports.
By Bjorn Fehrm
27 July 2016, ©. Leeham Co: Airbus Group presented its first half year results today, posting strong results in the face of delivery troubles with the A320neo and A350; and more charges on the ailing A400M. It has been a troubled start to 2016 with deliveries in key programs (A320, A350, A400M, Super Puma H225) being far behind targets. In total only the space segment is going well in Airbus Group at the moment.
The key commercial aircraft segment is still enjoying a vast backlog (6,700 aircraft) and sales which point to a book to bill of one for the year. But deliveries are not going well. Twenty A320neo “gliders” are just now getting their first engines and the A350 delivery problems are dragging on.
On top of that, the A400M program has hit new problems in the engine area where the propeller gearbox needs a redesign. An interim fix is needed to keep customers flying.
Airbus helicopter side has also hit trouble. The large Super Puma H225 helicopter suffered a fatal off-shore area crash in April and is still grounded as the investigation to what broke in the helicopter is taking time.
The financial results for the Airbus Group for the first half of 2016 (1H 2015) were revenue €28.8b (€28.9b) with net profit €1.8b (€1.5b). These figures includes €1.9b in write offs (A400m €1b, A350 €0.4, Currency €0.5b) and €2.1b in capital gain one offs (Launchers JV valuation €1.1b, Dassault shares €0.9b, Divestitures €0.1b). This means that one time effects kept the result up for 1H 2016 but these will not be there the next quarters should the troubles continue. Airbus Group maintains 2016 guidance for Revenue, EBIT and Free Cash Flow.
Here the details of the Airbus Group divisions results for first half 2016:
The Airbus commercial aircraft division delivered 298 (304) aircraft with revenues of €21,061m (€211,081m) and EBIT €421m (€1,424m).
Order intake for the first half was at a low level with 183 (348) net orders. Orders have picked up for Q3, with over 270 orders and commitments booked at the July Farnborough Air Show. Target is a book to bill of one for the year, which seems plausible based on a still strong A320 market.
The order book is at a record 6,716 aircraft and deferrals and cancellations are still at a low level. The order situation for the larger aircraft is weakening with the first major deferrals being made for the A350 program (American Airlines pushing their deliveries out two years).
Here the performance of the different aircraft programs:
Airbus Helicopters delivered 163 (152) helicopters with revenues €2,687m (€2,950m) and EBIT €144m (€152m).
The market for helicopters is continually depressed although Airbus helicopters is gaining market share in a down market. What is worrying right now is that the largest helicopter program, H225 Super Puma, is in a major crisis. A H225 crashed fatally in the Norwegian off-shore area end of April and the world-wide fleet has been grounded since. Fatigue issues in the rotor gearbox seems to be the cause but there are no definite fixes defined nor when the fleet starts flying again.
The divisions results of only a slight decline in revenue and profits is a good performance under the circumstances.
Defence and Space division
Airbus Defence and Space had revenues of €5,440m (€5,531m) and EBIT before one offs of €325m (€267m).
The A400M program continues to generate trouble. There are serious problems with the GE Avio produced Propeller Gear Boxes. A temporary fix enables the fleet to fly with 650 hours inspection periods, a final fix is not yet defined. Together with slower production ramp and slower than planned progress in the final military capabilities deliveries, a program charge of €1,060m was defined and taken for the quarter.
Airbus pointed out that this does not include any customer related charges that will come out of settling the aggregated A400M delays in aircraft deliveries and when these get the agreed military functionality. How large these charges can be “cannot be reliably estimated,” according to Airbus. Enders pointed out that the customers really need the capabilities the aircraft have once delivered, so outright cancellations are not a likely outcome.
The rest of the division is performing well, causing revenue to stay almost flat. The EBIT improvement before one offs reflect the good performance in general and in space activities in particular.
Some analyst take:
Bernstein Research (Outperform)
Airbus reported EPS before one-off of €0.90, on revenues of €16.6 bn. The result was in line with consensus and our estimates on revenue and 15% ahead on EPS. EBIT before one-off for the period was €1.2bn, slightly ahead of consensus and our estimates of €1.1bn. The Airbus Commercial division EBIT before one-off margin was 7.0%, which was 40bps ahead of consensus and 30bps above our estimates. Free cash flow for Q2 was -€250m, which was better than consensus (-€796m) estimates. A350 took a charge of took a charge of €385m for increased LMC provisions. Cabin fit issues remain and have driven delivery delays and out-of-sequence work. A320neo deliveries are expected to ramp through H2, as upgraded GTF engines are delivered. The first customer CFMI LEAP engine A320neo was also delivered in July. A400M booked a charge of €1.0bn, from additional costs and schedule overruns relating to engine and other issues. The company noted negotiations with customer nations around other capability delays in the programme are ongoing, and potential financial impacts “could be significant”.
Valuation: Shares trade on a FY16E PE of 17.4x (FY17E: 13.9x) and adjusted EV/EBITA 16E of 11.1x (FY17E: 9.4x).
Raymond James (Strong Buy)
Airbus’ 2Q figures were materially better-than expected, with a margin-driven beat, relatively good cash flow and charges that were broadly in-line with consensus. Guidance was unchanged excluding M&A (with M&A implying a ~6% cut for FY 2016), although consensus appears to have reflected this already, so we expect it to be largely unmoved today. In all, we view the underlying performance as supportive of the thesis behind our Strong Buy rating. Airbus Group shares were up +5% at 11:00am UK time (vs. the CAC 40 index up +1.42%).
We found that the tone of the call and management’s confidence level had both incrementally improved since 1Q. Mr. Tom Enders, the CEO, noted that Airbus has >400 orders as of now, and that it sees a book-to-bill of at least 1x for 2016 as being “[A]bsolutely do-able”. The transition to the A320neo is seen as making good progress now, with Pratt & Whitney having delivered the first, “Golden Engine” that has normal start-up times, and the first LEAP-engined A320neo being delivered last week, such that >20 A320neos that await engines should be delivered. On the A350, whilst bottlenecks still exist with suppliers of cabin interiors and progress in lowering recurring costs has been slower than expected, once cabin products are delivered, the assembly and delivery process is “[E]xtremely smooth and rapid”, and Airbus re-iterated its prior projections for at least 50 deliveries in 2016 (it delivered 12 in 1H 2016 and 3 so far in July) and for a breakeven by the end of the decade. On cancellations and deferral activity, Mr. Enders noted that there was “[N]othing abnormal here”. On the A380 production rate cut to a delivery total of 12 in 2018, he saw any losses as being marginal, and he commented that Airbus would be working hard to get the rate back up again “[I]n a couple of years”. On the customer financing side, Airbus expects that the suspension of Export Credit Agency (“ECA”) financing should be lifted in 4Q 2016, but so far in 2016, it has only financed 1% of its deliveries, compared to the 6% that the ECAs financed in 2015, thus showing the liquidity and attractive rates available in the commercial financing market.