Airbus SE

PAR:AIR

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the Airbus Q1 2018 Results Release Conference Call. I'm Laura, the operator of this conference. [Operator Instructions] And the conference is being recorded. After the presentation, there will be an opportunity to ask questions. At this time, I would like to turn the conference over to your hosts, Harald Wilhelm and Julie Kitcher.

[Julie Kitcher]

Good morning, ladies and gentlemen. This is the Airbus Q1 2018 Results Release Conference Call. Harald Wilhelm, our CFO, will be presenting our results and answering your questions. This call is planned to last about 1 hour. It includes Q&A, which we'll conduct after the initial presentation. The call is also webcast. It can be accessed via our homepage where we have set a special banner. Playback of this call will be accessible on the website, but there is no dedicated phone replay service. The supporting information package was e-mailed to you earlier this morning. It includes the slides, which we will now talk you through, as well as the financial statements. Throughout this call, we will be making forward-looking statements. The package you received contains a safe harbor statement, which applies to this call as well. You should read it carefully. Now to Harald Wilhelm, our CFO.

[Harald Wilhelm, Chief Financial Officer]

Thanks, Julie, and hello to everybody. So before we go into the numbers, I'm mean, very shortly, the highlights we touched base already in the media call before. First on the commercial situation, the momentum is good. We see that in the backlog, which remains very strong with 7,200 aircraft. We booked 45 aircraft net in the first quarter, but you know that is not representative for the full year, i.e., not that linear. So what matters, clearly, is the strengths of the backlog and therefore, I mean, what we are focused upon is to execute the backlog, i.e., the deliveries and the ramp-up. The backlog and the commercial momentum underpin the ramp-up plans, I mean, the current ones and gives us a platform for further growth on the 320neo to even higher rates. Looking on the Q1 financials, first as a reminder, they are all prepared under IFRS 15 and the new segment reporting, which reflects the merger of the headquarter into Airbus. The 2017 financials including the Q1 has been restated accordingly. Looking at the Q1 numbers, I think during the full year release, during the roadshow, during the AGM, I think we clearly told you that we're going to see a low quarter in terms of deliveries due to the engine situation and the absence of engines, and that's exactly what you see in the Q1 numbers as of today. So therefore, the numbers are not a surprise at all, i.e., they are impacted by the engine availability and the delivery phasing and also by the back-loading of the deliveries in the second half -- in the remainder of the year. The important thing, I would say however, the engine guys are progressing and we see that, all in all, they are on track for the plans, as we talked about 2 months ago. And on that basis, we continue the ramp-up plans, and we are getting ready for a high number of deliveries in the second half of the year, that means 800 aircraft, and it is on that basis that we confirm the guidance here today. Now let's have a look into the commercial situation a bit more in detail. So I'm on Page 5 of the deck. As I just said already, the commercial aircraft environment remains very healthy. The traffic has been growing in February at 7.6% year-on-year, load factors are above 80%. We booked 68 orders gross on the Commercial Aircraft side. That obviously includes the 20 A380s from Emirates. Net, that's 45, as the 23 cancellations and that also includes 5 conversions. With that, the backlog is at 7,189 aircraft. In single-aisle, we see the demand remaining very strong. We are sold out until 2023. That supports our ramp-up plans. We confirm our delivery target at 60 per month from mid-'19 onwards. We registered the commitment from our supply chain and this is not new. We have that since several years, namely, since 2015, at a rate 63. But this does not change our delivery outlook, i.e., this is surge capacity. On top, given the demand level in backlog and ongoing in the market, we launched a feasibility study for rate 70 or plus for surge capacity. On the wide-body side, on the 330, we continue to transition to the neo, with the first delivery expected this summer. We are working actively on campaigns for 2019 but also beyond. And based on this current program assessment, we have decided to reduce deliveries to around 50 per year in 2019 compared to approximately 60 in 2018. The -- gives me the opportunity, however, to remind you a bit the A330 history and A330 future. The 330 family is the most popular wide-body program ever, highly reliable, highly versatile, flying efficiently from 30 minutes to more than 15 hours. Around 120 customers have placed more than 1,700 A330 family orders and many campaigns are ongoing. The replacement cycle of wide bodies has not begun and when it does, we are very confident that the 330 is going to have a very substantial share of that. The A330neo has been launched to continue this great success of the most popular wide body. And since we launched the 330neo, actually, we sold more than 400 A330 family aircraft. And that means, actually, an average of about 100 aircraft per year. So clearly, we see a great potential for the A330neo moving forward. On the A350, we ramp up to the rate 10, that's perfectly on track. You'll also see it in the Q1 delivery profile. That's supported by the backlog. We saw that American, in view of their fleet simplification strategy, recently decided to cancel their A350 order but at the same time, clearly acknowledging, very openly and transparently, the excellent credentials of the A350 aircraft. All in all, this does not change our ramp-up plans to the rate 10, as I commented already before. On the 380, we firmed up the MOU with Emirates for 20 aircraft, with 16 options to be confirmed at a later date. You also heard, I think, pretty encouraging statements from the CEO on these options recently. As you know, this protects the baseline of 6 aircraft per year, which allows us to pursue further sales campaigns. Helicopters, we saw a solid first quarter, with 104 net orders at EUR 1.3 billion. That clearly endorses our products and product positioning in a softer civil and public market environment. We also continued to see momentum in the Military segment. All in all, the book-to-bill is at 2 in units and [ 1.3 ] in value, which I think is a very good achievement for the first quarter. That includes the first H160 orders, with Babcock as a launch customer; and also 51 additional Lakota LUH for the U.S. Army, which makes the total orders for that program in the U.S. 463. That highlights both the good performance and customer satisfaction on this program. In Defence and Space, we made progress in Military Aircraft, with a firm order from Belgium for another MRTT NATO tanker, which brings the total NATO fleet to 8. In Military Aircraft, we see good prospects on the fighter side in the medium and the long term, which we could see with the recent announcements made during [ ILA ] Airshow. Now let's have a look on the financial performance of the first quarter a bit more in detail on Page 6. Revenues are at EUR 10 billion. That obviously reflects the lower Commercial Aircraft deliveries, also then in Helicopters, we have the perimeter impact of about EUR 300 million, that is from the divestments. And the dollar in the first quarter '18 was softer than in the Q1 '17. On the EBIT adjusted, let me remind you that on the full year basis, we expect and we target a very meaningful increase in EBIT adjusted on the full year basis, as we ramp up to 800 deliveries. And that is also supported mainly by the volume increase, but at the same time, the improvement on the A350. Well, obviously, with 121 aircraft delivered in the Q1, that cannot show up in the Q1 numbers. And therefore, this explains fully why we see an EBIT adjusted of EUR 14 million. So where are we? EBIT adjusted is EUR 14 million. This, I think I mentioned it already a few times, reflects the phasing of the engine deliveries, i.e., the absence of engines in the first quarter, and hence, the absence of aircraft deliveries. But clearly, I'd like to emphasize the good progress on the A350, where we can see very clearly now the A350 improvements, in particular on the cost reduction, on the RC reduction and the learning curve coming through. We also see investment in innovation and digital activities coming through in the first quarter. The tangible benefits we experienced in 2017 in the business, be it on the ramp-up, be it on services, will position us for the future. Our EPS adjusted is at -- now it's become a bit difficult, minus EUR 0.06 per share, using an average 774 million shares outstanding. Our FCF before M&A and customer finance of minus EUR 3.8 billion reflects the back-loaded delivery profile and the continuous ramp-up. I have to say, it almost has to, as we carry on with the ramp-up but don't deliver the aircraft, I mean, in the first quarter, as said before. The EPS reported includes a capital gain from the Airbus Defence and Space Communications business, the 911 business in the U.S., which we divested in the first quarter. On the reported profitability side, Page 7, the EBIT reported is at about EUR 200 million. The level of adjustment is a net of EUR 185 million that includes chiefly the net capital gain of EUR 159 million from the divestment in the U.S. I just mentioned already. It also includes a positive impact from FX and balance sheet revaluation, and as well the cost related to compliance and M&A for EUR 20 million. The EPS reported includes a positive net impact mainly from the revaluation of certain equity investments now under IFRS 9 and the revaluation of financial instruments. The tax rate on the core business is around 28%. The effective tax rate of minus 19% reflects the earnings before tax on the core business. For 2018, you should continue to assume a tax rate of around 29% on the core business results. The resulting net income is EUR 283 million, with EPS of EUR 0.37 per share, which is clearly under proportional to the year-end expectations. So short zoom on the hedging side. Thanks to the hedging strategy, we have a very significant coverage through 2020. Given the continuing prohibitive forward rates, we have continued to slow down the implementation of new hedges with a too-long horizon, I mean, out in the future. In Q1 '18, we implemented, therefore, EUR 400 million of forwards at an average rate of $1.34, where at the same time, $6.5 billion of hedges matured at $1.31. We also adjusted the intra-year phasing of our hedges to better reflect our delivery profile, with $1.1 billion rolled over from Q2 to Q4, and we have continued this activity with another $1.9 billion rolled forward in April, also into the Q4. Our portfolio is now at $83 billion, with an average rate of $1.23, unchanged versus the year-end 2017. So we remain well-protected and have the capacity to take hedges when we want, in line with our policy. On the cash evolution, Page 9, the cash flow from operations of EUR 206 million is roughly in line with our EBIT adjusted. The working capital reflects the investments into inventory for the continued ramp-up, the engine availability for the 320neo, back-loaded deliveries, as well as the timing on freight liabilities, partly offset by PDP inflow. The A400M continues to weigh heavily on the free cash flow before M&A, with EUR 400 million already in the Q1, but with the profile decreasing in terms of cash burn for the remaining of the year. In Q1 '18, cash flow for aircraft financing is very limited. The ECA cover resumed in the first quarter, and we anticipate ECA cover for a limited number of transactions in 2018, as the appetite for commercial financing remains very high, but we are happy that the instrument is available and back again. At around EUR 400 million, the Capex was slightly below the Q1 '17 level. On the full year basis, CapEx should be around EUR 2.6 billion, in line with last year. The free cash flow reported all-in of minus EUR 3.7 billion includes EUR 200 million of proceeds from the divestments. And all in all, therefore, I mean, our net cash position at the end of March was around EUR 10 billion. The 2017 dividend of EUR 1.50 per share was approved by the AGM and will be paid in Q2. I hope this is already done in April, I think it should. Furthermore, we expect to top up the funding level of our pensions in the coming months. The free cash flow development this year will clearly depend on the progress on the 320neo engine and the aircraft deliveries. Now if we look at Airbus and when you see Airbus here, that means the former Commercial Aircraft segment and the former headquarter, ex the CTO, DTO transversal. Anybody who has a question on that, please come back to me or the team. So we delivered 121 aircraft in the first quarter. We had 17 A350, very well on track. We had the first A350-1000 for Qatar in there as well. Inside the 95 A320s which we delivered, 30 of them were neos. Obviously, we see the impact of the delivery phasing, which on a year-on-year basis, is compensated by the 350. I said already before, here we see really very nice improvement, both in unit cost and in unit price. Under the new IFRS 15 standard, the 350 margin improvement is even more visible, as we recognize the actual margin of the units delivered rather than the average contract margin for the launch customer [ envelope. ] On the 350, we continued our progress on the ramp-up to the rate 10 for the year-end '18. And as you can see in the numbers, we are focused on further recurring cost reductions, to bring the program to the breakeven and then make it margin and cash positive as soon as we can. We also continue to evolve the A350 product family, so that's what you can see with the first flight of the A350-900 Ultra Long Range, which just had taken place earlier this week. On the 320, we started to receive new engines from Pratt, with the knife edge seal fix, and deliveries have resumed. So that's what we said in February. You see, I mean, the plan is on track for that and so the engines are coming back and can be mounted, and can be resumed, the delivery. So in line with our projection in February and this is underpinning our perspective also for the full year 2018. We are also working closely with CFM. They are working to catch up on production delays, I mean, they have encountered. And we monitor and chase that, obviously, very closely. We registered the confidence of the engine manufacturers to honor their commitments on the full-year basis and that means to deliver enough engines at quality, meaning on time, so that all of the preparations we have to do to put the engines on the wing can be fulfilled within the time envelope projected. That means a lot remains to be done for the remainder of the year, with a lot of back-loading of deliveries. But these plans on the engine side, on our side, are compatible with the delivery objective of 800 aircraft for the full year. Page 12, on the Helicopters, probably is going to be very short. The revenues and the EBIT adjusted reflect the lower deliveries and the Vector Aerospace deconsolidation and divestment. The EBIT adjusted, on a year-on-year basis, is stable, supported by the transformation efforts compensating the market softness. On the Defence and Space side, Page 13, the revenues and the EBIT adjusted are in line with the previous year. The revenues reflect slightly the divestment of the Electronics, which we did in February 2017. On the EBIT reported side in Defence and Space, we see the capital gain from the 911 business, of EUR 159 million. On the A400M, we delivered 4 aircraft in the first quarter. We're base-lining the program to 8 aircraft delivery per year from 2020, and obviously, we're focused on export orders. You could see, I think, some very affirmative statements over the recent weeks, and are very focused, I mean, on achieving the military capabilities, the new delivery plan, the retrofit plan, as agreed with the nations. So we signed the DOI earlier this year in February, and we're working very hard to get that into a final contract amendment within 2018. Over to the guidance, Page 15. So as I said before, we reviewed the engine situation, we register the commitments from the engine manufacturers, we are preparing, on our side, for a very high delivery rate per month. That means we have put dedicated resources into place, some are planned, and that is being tracked, obviously, on a day-by-day and week-by-week basis. And that all together confirms the feasibility of our target to deliver 800 aircraft. So this being said, therefore, the former guidance as of 2018 is reconfirmed. I read that quickly here. As a basis for its 2018 guidance, Airbus expects the world economy and air traffic to grow in line with prevailing independent forecasts, which assume no major disruptions. Airbus 2018 earnings and FCF guidance is based on a constant perimeter before M&A. This means any consolidation effect on the C Series is not included in this guidance. Airbus expects to deliver around 800 commercial aircraft, which depends on engine manufacturers meeting their commitments. Based on around 800 deliveries, compared to 2017 EBIT adjusted of EUR 4.3 billion as reported, pre-IFRS 15, Airbus expects before M&A, an increase in EBIT adjusted of approximately 20%. IFRS 15 is expected to further increase EBIT adjusted by an estimated EUR 100 million. Therefore, Airbus expects to report EBIT adjusted of approximately EUR 5.2 billion, prepared under IFRS 15 in 2018. I would suggest that from here on, maybe we earmark EUR 5.2 billion as the guidance, and as we adjusted now everything under IFRS 15, we just keep it simple, so the guidance is EUR 5.2 billion on the EBIT adjusted. For the free cash flow, 2017 free cash flow before M&A and customer finance was EUR 2.9 billion. For 2018, free cash flow is expected to be at a similar level before M&A and customer finance. A word on the C Series, we are progressing very well. And as you could hear in the last days, we could potentially accelerate the closing towards midyear. The financial impact will depend on the exact timing of the closing, and then obviously, also on the finalization of the purchase price allocation exercise. So now let's wrap it up. So what are the priorities for us in 2018 -- remainder of 2018? On Page 16. Well, I mean, number one, I think I stressed it, deliver 800 aircraft. That means a lot remains to do, but we know what we have to do, and we are clearly committed to deliver these 800 aircraft. Furthermore, on the single-aisle, the focus is to get ready for the rate 60 deliveries by mid-2019, and certainly, to push hard on the feasibility study for a rate 70 or 70-plus on the A320 moving forward. Second key point, we feel extremely good about our competitive aircraft portfolio. The one we have today, the one we're going to amend soon with the C Series. So that gives us a full range, from the 100-seat up to 600-seat, with the most state-of-the-art product portfolio; the C Series being clearly, the state-of-the-art product, I mean, in the lower segment. I'm not going each and every product, as I'm sure you are going to buy many of them is you want, but not here as a salesman, but very confident and very proud on the 321. The Long Range, which will come into service, that offers new market opportunities to airlines and that is an ideal entry point into medium-haul operations. I stressed the A330 efficiency, its track record, which is being continued into the future, and it's a great prospect, given the economics and the competitiveness in terms of the capital cost of the 330. And if you combine the 2, the A321 and the 330, clearly, we have the most competitive products, I mean, in this market space, and not on paper, but ready to service. And therefore, we look very much with confidence into the future for that segment, 321, also A330neo. 350, I think very well-positioned on the industrial side, also in the market side, you can see the progress on the recurring cost. That means we are on track for the breakeven we're talking about, but now what matters is to make it margin positive and cash positive, but very well on track for that. And also certainly, ready to grab a good share of the wide-body replacement coming in the next decade. Third point is the A400M, to deliver in line with the commitments, the deliveries, the military capabilities, the retrofit and to complete the contract amendment and very encouraging to see the mid- and the long-term prospects for the combat aircraft business in the future. Fourth, you see the step-up also in the innovation and digital efforts, and we carry on, on this, as we clearly start to see the benefits of the investments coming through, which will position us very well for the future. And rest assured, this does not compromise the potential for EPS and FCF goals, on which we are committed to deliver. This being said, we're happy to take your questions now. Thank you.

[Julie Kitcher]

Thank you, Harald. Ladies and gentlemen, we'll now start our Q&A time. [Operator Instructions] So Laura, please go ahead and explain the procedure for the participants.

[Operator]

[Operator Instructions] The first question is from Devi (sic) [ Olivier ] Brochet from Crédit Suisse.

[Olivier Brochet, Research Analyst]

Yes, Julie, Harald. Olivier Brochet with Crédit Suisse. So 2 questions for me. On the -- the first one is on rate 63 surge. Safran said something to the effect that they will be unable to increase production for the time being. What would be the consequences such as going -- more volume going to Pratt or penalties for Safran if they cannot get to 63? Or is this not the topic? And the second question is on the U.S. dollar environment and the production increase. Can you just update us on what exactly the policy is going forward?

[Harald Wilhelm, Chief Financial Officer]

Olivier, so it seems the story around the 63 creates a big hype. I hope to clarify. So we said very clearly, I think that we're going for deliveries rate 60 by mid-2019, and in order to get to rate 60 by '19, we requested commitments from the supply chain as early as mid-2015 for rate 63. And the delta in between, you can call surge capacity, okay? The commitment, therefore, of the supply chain, not only the engine guys, everybody, but engine guys included, is rate 63. Now based on the commercial demand in the backlog, ongoing momentum, we see very clearly the case to go higher than 60, 63 for the future and that's why we launched the study to check the feasibility of that. What does it mean, by when can it be done? I think we were very clear in the full year release and the roadshow, that commercially, this is a no-brainer. So whoever wants to be convinced of that, I mean, we're happy to give that. In terms of the strength of the backlog, the strength of the product positioning, the strength of the continued momentum, and this is not been a case which will only be the case for a year or 2. We see that as very well sustainable at a higher rate. So there shouldn't be any doubt on the commercial viability of a higher rate at 70 or 70-plus. So it's all about the industrial feasibility that has to be studied, so let's not conclude on this, and I said before, I would not enter into commercial negotiations over a call here. But the opportunity, I think, for everybody, all market participants, is extremely clear. So let's not argue about it. Let's see how we can make it. Second point on the dollar and production environment. Well, I mean, we see a spot rate, right, I mean, which is $1.23, $1.22, which, all in all, yes, it's a bit -- it's worse than 12 months ago, but it's still, I think, a healthy environment. What is not very healthy in these days, I would say, is, are the forward rates with -- due to the swap points. That's what you see in a more remote hedging activity and speed. So I'm therefore not too concerned, as we have a good protection on the hedge book. But you're absolutely right, in the context of going to higher rates, not only, I mean, for FX purposes, but also to expand our industrial footprint further, we could very well imagine that further capacity expansion is being done across the globe. And I think we said that in case we confirm to go to rate 70 or above, part of that capacity step-up could also be done in our U.S. operations in the FAL in Mobile, Alabama.

[Operator]

The next question is from Robert Stallard of Vertical Research.

[Robert Alan Stallard, Partner]

Harald, I thought I'd ask you a couple of quick questions. First of all, on the A330 and the rate cut there, I was wondering if you can comment on the demand environment there and what you're see with regard to pricing. And then secondly, on the A400M, assuming you get this deal sorted out, this new road map, what does that mean for cash flow going forward?

[Harald Wilhelm, Chief Financial Officer]

Yes, A330 demand, we are working on quite a number of interesting campaigns. Well, I have to say, I mean, it is a very competitive market environment, but given the strength of the 330 and in particular the 330neo, we feel well-positioned with the product, and therefore, see very good opportunities to materialize these campaigns. So we have to take the decision we announced today to go to 50 deliveries. I will not speculate about the longer-term perspective, but if we look into the wide body replacement needs, if I look into the A330 value proposition to customers in terms of its reliability, its competitiveness, in terms of cost of capital, and we will keep them sharp, it's very competitive unit cost. And certainly, now the efficiency, thanks to the re-engining and other improvements on the aircraft, we really see good potential. So that might require some commercial efforts, as I said before, the space is pretty competitive in these days. On the A400M, we're fully on track in line with what we said during the full year. This year, we should have a cash burn all in all of about EUR 1 billion. The cash burn on the program remain to go, including 2018, a bit more than the EUR 1 billion we said, i.e., chiefly the 2018 slice, still a bit in '19 and then turning cash positive. So no news on that. The Q1 phasing is a bit over-proportionate in terms of cash consumption, but will be under-proportional in the remainder of the year. And once we sign the contract amendment, on which, I mean, for which I see no reason to deviate from what we signed in the DOI, based on the discussions as they are ongoing right now, we should stay fully on track on that.

[Operator]

The next question is from Douglas Harned of Bernstein.

[Douglas Stuart Harned, Senior Vice President and Senior Analyst]

First, where do you stand now in terms of the number of undelivered aircraft in inventory and that's with or without engines? And how do you expect it to ramp down over the year? And then second, you've described the A350 as now on track with respect to cost and schedule. And so what is the current status of the supply chain issues, particularly related to the interior, on the A350?

[Harald Wilhelm, Chief Financial Officer]

Well, in terms of undelivered aircraft, pretty obvious, if you come and see us in Toulouse and Hamburg, you will see a lot of them and that explains the cash situation and the cash burn in the first quarter, i.e., the aircraft sitting in inventory. So we are, I mean, if you go around and make the count, I'm pretty sure you will see 60-plus aircraft, and maybe still increasing a bit all in all in the second quarter. So yes, parking becomes a problem. But again, we know what we're doing, so we are consciously ramping up as the engines are coming back, and then we'll deliver them. When we say 800 aircraft for 2018, that obviously, we need to manage, I mean, a pile of aircraft slightly on top of it, as you have, I mean, last-minute issues. Some could be technical, some could be commercial. And therefore, we have to take some protection in order to make sure that we can deliver 800, that's what we did in the previous years as well. But I will not quantify right now, how many, so to say, excess that we have and we carry, and this is a moving thing as by the day. But I think it's just been a good management practice, I mean, to have some buffer here in order to make sure that we can deliver the 800. Second question on the 350. In terms of the supply chain, I think globally, I would say the supply chain, external supply chain as well as internal supply chain, is in good shape on the A350. Actually, they are running at a rate 10, as when we say rate 10 in '18, that means delivery rate. So the industrial side of things, given the lead time, is at a rate 10 today. Delivers, so very seamless, so I think that's a fantastic achievement which has been done by the teams over the last years. That's what you saw already in '17. We expect nothing else for '18. Interior still remains an area of focus and emphasis with regards to quality, but I don't want to overemphasize, or I don't want to use this as a blame point here. So quality needs to step up further, but globally, industrial supply chain is in a very good spot.

[Operator]

The next question is from Celine Fornaro of UBS.

[Celine Fornaro]

Yes, Harald, Julie, I have one question, please. And this one would be going back at the wide bodies. So when you look at the A330 rates that you're bringing down, but there is no increase from an A350 perspective. So I was just wondering, if we should think that maybe there is a loss of market share here, as there is nothing offsetting the 330 rate. And you think the products are great, so do you think it's really mainly just pricing? We clearly see the Boeing profitability is not going down. It only seems to be only going up. So how do you think about countering that?

[Harald Wilhelm, Chief Financial Officer]

Celine, thanks for only one question and a nice one. Clearly, I mean, what we describe is a situation in terms of delivery [ for the ] 330 for 2019. I think I said it earlier, we see good prospects for 330 as well as for 350 for the replacements, which is more I think 2021, so the beginning of the next decade. So both products very well-positioned on this side. We are ready to be very competitive here. We want to protect margins, but we're also ready, I mean, to be competitive. There's no point, I think, to keep the rate going at too high levels and with too many bookings open, and then go over a cliff. That's why this is a practice you know since quite some years, we adjust when we think we have to adjust, but that should not be necessarily representative for the future. On your comment in terms of the profits of other people, I mean, I understand this is a result of deliveries done. Here we are talking orders and backlog to come and well, let's see where that is going. As I said before, answering, I mean, the -- one of the previous questions, I can clearly say, from Robert, it is a competitive environment and that refers not only to our product side, but also to the one of others. But I think I cannot go further than this.

[Celine Fornaro]

And Harald, you had open positions on the A350, a few open slots on '19, 2020. Could you just provide an update on those, please?

[Harald Wilhelm, Chief Financial Officer]

I think you could see that in the first quarter. We didn't have any new A350, therefore, that's the same situation. Lead time still allows, I mean, to fill. We have campaigns working on that. So all of that is compatible, I mean, with rate 10 for 2019, full year.

[Operator]

The next question is from Tristan Sanson of Exane BNP Paribas.

[Tristan Marie Raphael Yvan Sanson]

Julie, Harald. Tristan from Exane. The first question is a quick clarification, one is a bit longer. Just on the first one, I'm a bit confused on the rate 63 versus rate 60, and how we should bring that into a focus. Do we understand that if you can get all the engines that the engine makers are committed to deliver to you, you can deliver 63 aircraft per month in 2020? So have a small increase in rate after the 60 per month in mid-2019? That's the first question. And the second is on the C Series program. So you said that discussions are getting -- going a bit faster than expected. Can you tell us a bit about the road map that you have for, let's say, the first 6 months after closing, for cost reduction, marketing of the program and especially production control?

[Harald Wilhelm, Chief Financial Officer]

Tristan, so yes, on first on rate 60, 63, I'll try again. So deliveries in mid-'19, supply chain committed 63, so if everything is coming together as planned, obviously, there is a potential, I mean, for some remaining of '19 and for 2020, to have instead of 60, 63, okay? I think that's what it says, but having a surge capacity in between is, I think, also the right thing to have. I hope that answers this point once and forever. If not, come back to us and we're happy to take you through it. Second, on the C Series, thanks for the question. All in all, really, I think, I mean, great progress has been made on this. The regulatory environment advanced very nicely and very well, which should allow us, I mean, to close much faster than what we assumed, i.e., around midyear, detailed timing TBD. But obviously, at the same time, we have teams that work on Bombardier side, on our side, to prepare for the day 1 and the time after closing. We cannot -- I mean, before formally closing, I mean, obviously, engage in any commercial actions or we cannot engage really on supply chain, but we are ready, the day we close, to hit the market on -- in this segment with the C Series, with the combined force, leveraging the Airbus sales force, and as well on the supply chain, on the procurement side, obviously, combining the forces in order to bring the recurring cost of the product down and sell it in big volumes. So we're very confident about that. We can do it only in upon closing, but we are, so to say, standby to hit the road on that. So that makes us feel very good about it. On the financial side, as I said earlier, we need to see the detailed timing. We need to see, therefore, then when is the opening balance sheet and the purchase price allocation. So I mean, let me guess, so that probably in the H1 call, we are giving you an update, what it means in terms of the impact for 2018, the remainder of 2018, in terms of EBIT and free cash flow, and then also how we see the profile for 2019 and beyond. But I cannot do that, obviously, before the closing.

[Operator]

The next question is from Andrew Humphrey of Morgan Stanley.

[Andrew Edward Humphrey, Vice President]

It's Andrew Humphrey, Morgan Stanley. Just a couple of questions for me. One is on supply chain outside of engines. You've obviously talked about feasibility studies ongoing with supply chain partners. I wanted to ask about your initial, kind of, feelings from those studies. Where else could you see bottlenecks if we were talking about potential production increases in narrow body in the future? And the other is on A330. With the step-down in rates from 2019, would you expect any material impact on production economics or lower fixed cost absorption as a result of that?

[Harald Wilhelm, Chief Financial Officer]

Yes, Andrew, well, I think it's a bit too early to make any preliminary conclusions on that. Certainly, long lead-time items [ for things ], I mean, are in the spot of the study where, so to say, maybe the supply could go wire engine and aerostructure or similar type of long lead-time items. But at this stage, no particular bottleneck has been -- have been coming back, at least I'm not aware of, so the discussion is probably very much centered around the engine side. And I mean, on -- we have to make also about a mind, I mean, ourselves, we're talking supply chain all the time, looking at higher rates, 70 or 70-plus. We need to see at our end as well, what we're doing in terms of where do we put additional capacity, in the FALs which we have, but also at the MCA level. I think it's also good opportunity to do some modification, some enhancement to the industrial setup. I mean, nothing specific I can say right now, but looking into the production rate increase, we consider that as a stress, which I understand. At the same time, I think it's also, again, an opportunity to improve efficiency moving forward. On the 330, no, I mean, going now to 50, I would say that given the track record of the team to keep the recurring cost stable, when coming from significantly higher rates, that they will take the challenge also to compensate lower fixed cost absorption from the slightly adjusted rate. Yes, we're talking 60 to 50, but that is not a drama. All of the confidence in my friend Eric Zanin, the head of 380 and A330 program. That, I mean, the same fixed cost reduction as it has been achieved and is ongoing on the 380 can also be pushed into the 330 adjustment here. And therefore, we see a volume impact for '19, but on the outside, we're going for the [ upper ] on 320s and 350s in '19. Well, I will not guide here on '19, but I think, all in all, we should not be too concerned about the impact for '19.

[Operator]

The next question is from Phil Buller of Barclays.

[Philip John Buller]

Phil Buller from Barclays. I have 2, please. The first one, it seems as though the engine guys on the 320 program are now in pretty reasonable shape. Obviously, there's another engine guy who is having some in-service issues in the 787 program. So I'm just curious what your views are on the read across, if there is any, on the perception from the airlines on the XWB and the Trent 7000 engines, please? And the second question is on Defence. There's a lot of press about your potential involvement in the new fighter program. I was just wondering how we should think about the potential cash investment for such a program, i.e., would expect this to be largely front-loaded and funded by customers, which I know used to be the case? Or is this something we should be thinking about from a reinvestment perspective that's not currently being modeled?

[Harald Wilhelm, Chief Financial Officer]

Phil, so first on the engine situation, Rolls-Royce and A330neo. That's the point you want to make here. No, I'm not aware that -- I mean, there is commonality of a problem with, between 78 and the A330neo engine. So it's separate. I mean, one thing, however, I mean, it provides a lot of workload, I think, on Rolls-Royce side to address all of the issues. But rest assured that we send reminder, not only to the 320 engine guys, but also to the wide-body engine guys, to be on spot and that means in the case, obviously, of the 330, to be on spot for an entry into service in 2018. On the Defence side, thanks for the question. I think really great perspectives, so that really demonstrates, I think, the recognition of stepping up in equipment is there, also in Europe, that the budgets will be made available. I think in terms of when is that going to hit, any bottom line numbers, probably we need to be a bit more cautious on that one. The more medium term, I mean, the Tornado replacement in Germany is more the medium term, so that might not be that far away. However, I mean, any of the new future combat air systems, I mean, that's quite some time out there. One thing is for sure, and I think here we are completely aligned between Dassault and ourselves, that is clearly pure military field and that means that, that has to be funded by customers, where we will enter, certainly, very exciting territory, but the territory, which has to follow the military principles, which means funding by customers. I would be very surprised if our partner Dassault in there would have a different perspective.

[Operator]

The next question is from David Perry of JPMorgan.

[David Howard Perry, Head of European Aerospace and Defense]

Julie, Harald, 2 super quick questions from me, both on ceo, neo issues. On the A330, could you just remind us how many neos will be delivered in '18 and '19, please? And then the second question, if you do, do the 63 per month on the A320, is the additional 3 per month all going to be neos?

[Harald Wilhelm, Chief Financial Officer]

David, so let's be quick. 2018, we have entered into service, but I would be cautious with the number of neos. So we said all in all, it is about 60 deliveries. I will not give a detailed split, but the vast majority is going to be ceos. I mean, that's very clear. 2019, we will certainly ramp up, I mean, neos. Now with a lower level, the share is certainly going up, so I would say in excess of 50% 2019 deliveries should be neos, from today's standpoint. On 320, rate 63, yes, I think that should be neos.

[Operator]

The last question is from Jeremy Bragg of Redburn.

[Jeremy D. Bragg, Research Analyst]

So on the A320 rate increase to 63 and then potentially 70 or 70-plus, could you just give an indication -- I'm sorry if I'm being stupid here, but could you give us an indication of timing of when you're considering the 70 or 70-plus? Are we talking about like early 2020s, or before or later? And then the second question, please, was on capital allocation. I just want to understand or hear again the criteria of what needs to happen for you to do a buyback and whether that is influenced by a new CEO coming before May and being announced, obviously, before then.

[Harald Wilhelm, Chief Financial Officer]

Jeremy, yes, so on the 320, the favorite one, 63, I think I alluded to, that could be a bit of a benefit in '19 if everything works. And then that could favor, certainly, 2020 and rate 70 or 70-plus, I mean, we don't have a conclusion, but certainly, we will shoot for as early as possible. And that would suggest that it should come in, in 2021, probably, or maybe not full rate, and then hit maybe 2022. But again, and this is to be determined depending on the feedback, which we get as we continue discussions throughout 2018. On capital allocation, well, I think I told you guys during the roadshow, that there are times where we're still having quite a high level of volatility, engines but also delivery profiles throughout the year, and Q1 is just another demonstration of it. We need to be focused on delivery and working capital management. Clearly, I mean, we target the engine issues need to be behind us after '18. We also need to work at our end to smooth some of the delivery profile at a more sustainable cash generation. The underlying ingredients, I think, are the same as before, which means the cash generation as such, certainly, is going to pick up '19 and '20. That means based on the healthy balance sheet, even considering some of the capital allocation we are doing and we're planning to do this year, the dividend, pension, I mentioned, that leaves, I think, flexibility in the future. To think about, I mean, further capital allocation, you know that I said as well, that I mean, this should come basically from the cash generated, not necessarily maybe from the balance sheet, but again, we'll have a flexibility on that. Well, as you say, that also depends on maybe a new CEO call. I have my views on that. Let's see whether the new CEO likes my perspective. Let's see whether I like any new CEO's perspective. And what my conclusion is going to be in terms of recommendation, I will do either to CEO or board in the future.

[Julie Kitcher]

Okay. Thank you. Thank you, Harald. This now closes our conference call for this time. If you have any further questions, please send an e-mail to Mohamed or myself, and we'll get back to you as soon as possible. And I introduced to you by e-mail to Nicolas Chretien, who will also be answering questions very shortly, and we look forward to introducing you to him soon. Thank you.

[Operator]

Ladies and gentlemen, the conference has now concluded. You may disconnect your telephone lines. Thank you for joining, and have a pleasant day. Goodbye.