Airbus SE

PAR:AIR

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the Airbus Q1 2019 Results Release Conference Call. I am Aurilia, the operator for this conference. [Operator Instructions] And the conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to your host, Guillaume Faury, Dominik Asam, Julie Kitcher and Thorsten Fischer.

[Julie Kitcher]

Thank you, Aurilia. Good morning, ladies and gentlemen. This is the Airbus Q1 2019 Results Release Conference Call. Guillaume Faury, our CEO; and Dominik Asam, our CFO, will be presenting our results and answering your questions. As you may have heard, after 11 years in Investor Relations, I've transitioned to a new role. It has been an absolute pleasure working with you, and I would like to thank you for the high-quality, engaging and challenging exchanges over the years. Now it's my pleasure to introduce the new Head of Investor Relations and Financial Communication, Thorsten Fischer, who many of you already know. I'm confident that Thorsten and the team will do an outstanding job to serve you under Dominik's leadership. So Thorsten, now I hand over to you and I wish you all the very best in your new role.

[Thorsten Fischer]

Thank you very much, Julie, and congratulations to you in your new role. Good morning, ladies and gentlemen. I'm happy to be back in Investor Relations. Some of you, I know already. And for those I haven't met, I look forward meeting you soon. Now on to Q1. This call is planned to last around 1 hour. This includes Q&A, which we will conduct after the initial presentation. This 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 take you through, as well as the financial statements. Throughout this call, we will be making forward-looking statements. The package you received contains the safe harbor statement, which applies to this call as well. Please read it carefully. And now Guillaume, we open with you.

[Guillaume M.J.D Faury, CEO & Executive Director]

Thank you, Thorsten. Thank you, Julie. Good morning, ladies and gentlemen, and welcome to our Q1 '19 results call. I'm very happy to be here with you today. Dominik and I are pleased to be in our new roles. Dominik has been here since the beginning of the month, bringing with him a finance, engineering and international background to serve and to help Airbus. We've been working closely together now during the last few weeks and are looking forward to exchanging with you today. Our goal is to better serve our customers, increase the Airbus competitiveness and grow Airbus in a sustainable way. To achieve this, we are building on the benefits of the integration and the work that we started years ago under Tom's leadership, and we'll put customers at the heart of our work and our decision-making. We are leveraging the digital revolution and the technologies, including in overhauling our industrial systems. We see our duty to strengthen our environmental performance and step up our efforts as Airbus in responsibility and sustainability. Now let's go through some Q1 highlights. In Q1, we have observed a more competitive and volatile environment. All in all, the commercial aircraft environment remains robust. The airline traffic growth continues in '19 with plus 5.3% passenger traffic increase and load factors at around 80% in March. Airlines forecasted profitability is expected to surpass the $30 billion mark again in 2019. Long term, our industry fundamentals remain solid with passenger traffic expected to be doubling every 15 years. On the financial side for Airbus, we saw the A320 ramp-up coming through. Our results mainly reflect this ramp-up and the 2019 delivery phasing. As I presented during the 2018 results, we target to deliver 880 to 890 aircraft in 2019. On that basis, we maintain our '19 guidance. The new management team in place and myself are now fully focused on our targets.Now let's take a closer look at the Q1 '19, starting with Commercial Aircraft. In Q1, the market situation was complex with some specific customer issues in terms of airline transformation, including fleet restructuring and some financial issues to be managed. In Airbus, we booked 62 gross orders, including 38 A350s. The Q1 net orders of minus 58 after cancellations mainly reflect the winding down of the A380 and the commercial agreement with Etihad. At the end of March, our backlog was 7,357 aircraft. It doesn't reflect the latest wide-body agreement with Emirates yet. After years of recalled orders and backlog and in the current market environment, our focus is on delivering and execution. Achieving a similar level of bookings as last year is a good ambition.On the A220, we are now 65 aircraft in operation, and we continue to see customer interest following our latest demo tour in March. On the A320 family, our backlog of more than 5,900 aircraft supports our ramp-up plans to rate 60 by midyear and beyond as we target to rate 63 in 2021. Regarding the A330, we are progressing with our engine partner and suppliers and target 50 deliveries this year. On the A350, Lufthansa increased their fleet by an additional 20 -900 aircraft, bringing their total order to 45 aircraft. Also in March, STARLUX Airlines became a customer with an order for 17 A350, including 12 -1000s. And on services, the Skywise customer base now includes more than 60 airlines, representing more than 5,000 aircraft. And we expect the number of customers to continue to grow.Now on to Helicopters. The civil and parapublic market remained soft. We continued to see good momentum in military with solid prospects. We booked 66 net orders in Q1, including 20 Super Pumas, of which 16 for Hungary. The H145 saw another strong commercial momentum with 16 orders. And we also launched an enhanced version of the product with a 5-bladed rotor. Finally, in our Defence and Space business, we had an order intake of EUR 1.1 billion. We continue to see good prospects, but the exact timing of contract awards is as always difficult to predict. Mid- to long-term market perspectives are positive, particularly in Military Aircraft with the Eurofighter and the FCAS and in unmanned aerial systems.The FCAS project passed an important milestone in Q1 with the launch of the so-called concept study. In addition, Spain committed to become an active FCAS nation, which is an encouraging sign for future European cooperation. In space, the first satellites were successfully launched by OneWeb, an important milestone to build the largest satellite constellation in the world. We also received the authorization to proceed with a third European service module for the Orion program.And now Dominik will take you through our financial performance. Dominik, I hand over to you.

[Dominik Asam, Chief Financial Officer]

Thank you, Guillaume, for the kind introduction, and good morning, ladies and gentlemen. It's my pleasure to speak with you for the first time ever as Airbus CFO. And I look forward to meeting as many of you as I can over the coming months. I'm delighted to join Guillaume and the rest of the management team and to actively contribute to the continued success of Airbus around the globe. Now I'll walk you through our Q1 financial performance in a bit more detail. On revenues, Q1 was at EUR 12.5 billion, which mainly reflects higher deliveries in Commercial Aircraft as we continue to ramp up. Revenues also include the A220, which has been consolidated into Airbus since July 1, 2018. On EBIT adjusted, let me remind you that in 2019, we expect an approximately 15% increase on a full fiscal year basis supported by single-aisle ramp-up and progress on A350 margins. So where are we in Q1? Our Q1 EBIT adjusted was about EUR 0.5 billion, a strong improvement year-on-year. It mainly reflects A320 ramp-up and neo premium as well as further progress on A350 financial performance.At Airbus Helicopters, we see higher contribution from support and services. And in Defence and Space, it is stable performance. We also continue to invest in innovation to prepare for the digital transformation of the company, modernize the production system and expand our digital services offering. Our EPS adjusted strongly increased to EUR 0.47 per share using an average of 775.7 million shares.Moving to free cash flow. Our Q1 free cash flow before M&A and Customer Financing of around minus EUR 4.3 billion mainly reflects inventory increases and other changes in working capital. We understand the cash flow is consistent with the delivery phasing as we've seen in years before. But I'm not satisfied with the current intra-year volatility. This will be a key focus area for us going forward. Now on to Page 7 and our profitability, which shows EBIT reported of around EUR 200 million. The level of EBIT adjustment is a net negative of EUR 368 million and includes the following elements: a negative EUR 190 million as a consequence of the prolonged suspension of defense export licenses to Saudi Arabia by the German government; a negative impact from FX to balance sheet revaluation; minus EUR 61 million related to the A380 program cost; and minus EUR 34 million of other cost, including compliance. EPS reported includes a financial loss of EUR 107 million on FX hedges for the contracts affected by the prolonged suspension of defense export licenses. The effective tax rate on net income is 68% as no deferred tax assets could be recognized on any charges related to the prolonged suspension of defense export licenses. The tax rate on the core business is around 27%. For 2019, you should continue to assume a tax rate of around 28% on the core business result. The resulting net income is about EUR 40 million with EPS of EUR 0.05 per share. Now on to our hedging activities. Our hedging strategy provides significant coverage through 2021. In Q1 2019, we implemented $6.7 billion of forwards at an average exchange rate of $1.20 per EUR 1 mainly for 2021, '22 and '23 while $6.3 billion of hedges matured at a rate of $1.32. We also adjusted the intra-year phasing of our hedges to better reflect our delivery profile and rolled over $3.3 billion of hedges in total for the year. Whilst this impacts the quarterly distribution, the full year hedge rate is virtually unchanged. Our portfolio stands at $81.8 billion with an average hedge rate of $1.23 per EUR 1. We remain well protected. And we will implement new hedges based on the overall foreign exchange environment in line with our policy. Now let's look at our cash evolution in Q1 '19. Let me start with a short comment on IFRS 16. On January 1, 2019, we adopted IFRS 16 leases. Most operating leases must now be recorded on the balance sheet and the corresponding commitments are booked as financing liabilities. As these, by definition, are part of net cash, our net cash position was reduced by around EUR 1.4 billion because of first-time adoption of the new standard.Now on to the gross cash flow from operations, which was EUR 0.7 billion. Working capital reflects the inventory builds to support the ramp-up, the improved engine delivery stream and other changes in working capital, including payments to suppliers. The A400M continues to weigh on our free cash flow before M&A. In Q1 '19, cash flow from aircraft financing was very limited. The appetite for commercial financing remains high. At around EUR 0.5 billion, CapEx was slightly above the Q1 2018 level. On a full year basis, CapEx should be around EUR 2.7 billion. A220 impact on free cash flow was limited. All in all, this gives us a free cash flow reported of around minus EUR 4.4 billion and a net cash position at the end of March of around EUR 7.5 billion. The dividend for 2018 of EUR 1.65 per share was approved at the AGM and was paid earlier this month, resulting in a cash-out of about EUR 1.3 billion. Furthermore, we expect to continue topping up the funding level of our pensions this year, albeit at lower levels than last year. Now back to Guillaume for a closer look at our businesses.

[Guillaume M.J.D Faury, CEO & Executive Director]

Thank you, Dominik. Now on to Commercial Aircraft. In Q1, we delivered 162 aircraft to our customers, 59 customers, which is a significant increase year-on-year. On the A220, we delivered 8 aircraft in the quarter. And we plan to deliver around 45 aircraft this year.And moving to the A320 family. We delivered 126 aircraft, of which 96 neos. The Airbus Cabin-Flex ramp-up continued in Q1 but remains challenging. We're working to improve execution in our internal industrial systems and monitor engine performance. Overall, we are on track to reach the 60 aircraft per month by midyear. And we are preparing for rate 63 in 2021.Now to the A330. We delivered 5 aircraft in Q1, including 3 neos. neo deliveries continued to ramp up, and we are working closely with our engine partner and suppliers to deliver in line with customer commitments. The -900 ETOPS certification beyond 180 minutes was granted by EASA. And the flight test campaign for the -800 is progressing. A350. The deliveries increased by roughly 30% year-on-year with 22 aircraft delivered in the quarter, of which 3 -1000s. Overall, we are stabilizing production at current rates, including the -1000 ramp-up, where we continue to improve performance of the program and progress along the learning curve and the cost curve. On the A380, we delivered 1 aircraft to ANA, which is becoming the 15th A380 operator. Moving on to Helicopters. The performance is in line with the expected trajectory for '19. The revenues and EBIT adjusted reflects higher volume in services. And for the year, we expect some top line support from military deliveries and support and services to offset the soft civil and parapublic market.Moving to the Defence and Space. Revenues and EBIT adjusted reflect overall stable business performance. Q1 '18 includes the net capital gain from the disposal of Airbus DS Communications, Inc. business in the U.S. In Q1 '19, EBIT reported reflects a EUR 190 million adjustment due to the prolonged suspension of defense export licenses to Saudi Arabia by the German government. It is the border security contract. Now on to the A400M. We delivered 1 aircraft in Q1, bringing the in-service fleet to 75 aircraft. I'd like to say that an additional 2 aircraft have been delivered in April. We continue with our development activities as agreed in the revised so-called capability road map and successfully completed certification flights for the Cargo Hold Tanks refueling unit in Q1. The retrofit activities are advancing in line with the customer-agreed plan. And the approval process towards the contract amendment is progressing.Guidance. As the basis for its 2019 guidance, Airbus expects the world economy and air traffic to grow in line with prevailing independent forecasts, which assume no major disruptions. For example, we pay particular attention to Brexit and the growing trade tensions. The Airbus '19 earnings and free cash flow guidance is before M&A. Airbus targets 880 to 890 commercial aircraft deliveries in '19. On that basis, Airbus expects to deliver an increase in EBIT adjusted of approximately plus 15%, 1-5, compared to 2018 and free cash flow before M&A and Customer Financing of approximately EUR 4 billion.Key priorities, basically no change. It is still that we have a lot to do to deliver our guidance. And the team in place and myself are fully committed. Our single-aisle ramp-up is coming through. And we will be at rate 60 by midyear. We will continue to ramp up ACF deliveries, as I said earlier, but it remains challenging. The A350 is doing well, and we'll reach breakeven this year and we will improve margins beyond. Dominik and I, we've been spending time in the Defence and Space business, together with Dirk, as far as Dominik and myself are concerned to learn and, with Dirk, to understand and position this business to take advantage of our product portfolio and capture opportunities both in the short term and in the long term in space or with EuroMALE and FCAS. More broadly, digital and innovation are key levers as we invest in our tools and industrial systems to improve the way we design, manufacture and service our aircraft and customers. To do this, we are leveraging automation, robotization, the use of data, artificial intelligence, a lot of very exciting technologies to improve performance. And to conclude, our goal is to better serve our customers, to increase the Airbus competitiveness and grow Airbus in a sustainable way to deliver our earnings and cash growth potential. Now thank you for listening, and let's turn to your questions.

[Thorsten Fischer]

We now start our Q&A time. [Operator Instructions] So Aurilia, please go ahead and explain the procedure for the participants.

[Operator]

[Operator Instructions] First question is from Doug Harned, Bernstein.

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

First question, I wanted to understand a little more on the A320neo. And if you could give us a little more insight into the production challenges that you're having and engine deliveries as well just in terms of understanding how you're going to be up at 60 per month in midyear, how you're going to make that progression. And then as a second question, the A400M is -- the negotiations have taken quite some time. And it would be very helpful to understand more about how those are proceeding and what that means for expectations for cash flow over the next 2 to 3 years.

[Guillaume M.J.D Faury, CEO & Executive Director]

Okay. So I start with the A220. First, I'd like to say that the Q1 deliveries reflects all the efforts we have made in 2018 to recover from the very difficult situation we were in, in H1. You remember we had around 100 planes plus so-called gliders without engines part and we had to put them back into the production system and organize a specific way of completing the planes and delivering them to reach the 800 overall volume we had in '18, which basically focused a lot of resources for the 2018 Q4 deliveries and therefore a start which is a bit slower than what we would have liked for Q1 '19 on the A320 family. This being said, it is a strong ramp-up compared -- and a strong improvement compared to Q1 '18. So we are accelerating in '19. The Q2 will be stronger than Q1. And on that basis, as we said before, we maintain the guidance for 880 to 890 aircraft overall in '19. When it comes to engine deliveries, where basically we are receiving engines on time and we have a significant engine inventory, by the way, as we had a slow start compared to a linear production rate in Q1. So that's basically where we are and moving forward on trajectory. When it comes to A400M, well, it's a negotiation to come to the final agreement with a number of countries, with different countries. We are moving ahead. We are moving forward to come to an agreement, which is targeted by midyear. When it comes to cash flows on the A400M, Dominik?

[Dominik Asam, Chief Financial Officer]

Sure. You recall we have booked a net provision of EUR 436 million at the end of last year. And I think in that communication, we also stated there's probably about EUR 1 billion of outflow still coming for the entire program for the entire charge. As previously in 2018, we booked EUR 1 billion, we also said that for 2019, there would be about half of that hitting our cash flow statement. And this is still the case and then the remainder would kind of trickle out, so to speak, over the next couple of years afterwards.

[Operator]

The next question is from Robert Stallard, Vertical Research.

[Robert Alan Stallard, Partner]

You mentioned in your commentary about the first quarter competitive environment for large aircraft being challenging. I was wondering if you could give some more color on what's going on there and whether you expect this to persist through the year.

[Guillaume M.J.D Faury, CEO & Executive Director]

So first of all, the comment was on the market in general. We see a competitive and volatile environment. As you have seen a couple of airlines are in difficulties or have been in difficulties. And we have had to record cancellations. And we've not been the only ones in the industry to record cancellation. So this is what I was suggesting. Now on the wide-bodies, it's been competitive situation with Boeing. And we expect this to continue.

[Robert Alan Stallard, Partner]

Okay. Then just as a follow-up, mostly Boeing's 737 MAX is grounded at the moment. Have you seen any customers changing their conversation with you about potentially switching over to the A320?

[Guillaume M.J.D Faury, CEO & Executive Director]

The A320 is the A320 and the MAX is the MAX. We are having conversations with our customers based on their current fleet, their backlog, the deliveries of the A320. As you know, we are limited by production for the next years. And therefore, there's not much more I can say. We are having discussions. We see a strong demand for the A320. It was the case before the event. It continues to be the case, linked to the growth of the market in general, linked to the appetite for the A320 itself, a product which is very well-received with the neo, with the ACF, with the LR and more. So we see a good case for continuous growth and continuous performance of the A320 family in Airbus. That's what I can say.

[Operator]

Next from Celine Fornaro, UBS.

[Celine Fornaro, Head of EMEA Industrials Research]

My first question would be regarding so this demand environment, especially for the narrow-bodies, which, Guillaume, you characterized as pretty active. And I know you tried to test the supply chain and you came to the conclusion of a rate of 63 in 2021. I was wondering when you're going to run again the exercise of testing the supply chain as some of your suppliers seem to think in February that there wasn't enough or sustained market demand out there. So if you could share your thoughts on that. And how quickly you could ramp-up beyond this 63 compared to history, given the increased digitalization, robotization and all these tools that you're investing in, which should bear fruit by then.

[Guillaume M.J.D Faury, CEO & Executive Director]

Yes. And thank you for the consistency of your questions. Well, yes, we will be running these supply chain assessments in mid of '19 as we did mid of '18 to understand the capacity of the supply chain to go beyond the rate 63 2022 onwards. This being said, we have decided the rates for '19, '20, '21 and communicated about it. We are not unhappy to have that situation in front of us to better distribute the deliveries in the quarters. As you see, Q1 is not as strong as the average that we should have for quarters in '19. It's a back-loaded year. And we want to use '19, '20, '21 to significantly rebalance the year. Then it will be time to further ramp up. Now moving on to your other question, I think I addressed it. So how quickly, it's fixed, it's defined for '19, '20, '21. And then the rates for the outer years are not yet decided. And it will be based on our own ability and appetite to ramp up and -- but as well as the capacity of the supply chain to do a reasonable ramp-up. We want to focus on our ability to deliver on time, on quality to the airlines. And that's basically one of the drivers moving forward.

[Operator]

Question is from Ben Heelan, Bank of America Merrill Lynch.

[Benjamin Michael Heelan, Analyst]

I had two. You alluded to it a little bit, Guillaume. But you made up around 50% of the increase in deliveries at A220 that you're guiding for in Q1. So you said that Q2 will be stronger. But how should we think about Q3 and Q4 in terms of delivery phasing this year? And then a question on how that will impact cash flow, a fairly sizable drag from inventories in Q1. Can you give us an idea on how this will phase through the year with the expected delivery profile? And assuming we can get a more stable delivery profile, how should we think about the cash flow phasing in 2020?

[Guillaume M.J.D Faury, CEO & Executive Director]

Yes, thank you, very good questions. It's a bit work in progress, I have to say. So it will be a bit difficult for Dominik, I suppose, at that stage to be specific on the 2020 cash flow profile. Basically, Q2 will be significantly stronger than Q1 deliveries. I don't want to be specific at that stage. We will be disclosing our deliveries for airplane in a couple of days. And it will be an indication or confirmation that we are moving forward in the right direction. But unfortunately, it will still be a back-loaded year with a guidance around 880 and 890. It's very likely that the second half of the year will be back-loaded compared to the first half. This is what I can say at that stage. But it was not coming as a surprise. So we are executing 2019 as we expect. We are not in the situation of 2018, where we had major supply chain issues. As you remember, a couple of weeks ago, I was a bit worried about the potential consequences of a no-deal Brexit. This is now off the table for Q1. That's good news. We don't know yet what's going to happen by end of the year. But based on today's understanding of the supply chain capacity to follow us, we should have a stronger Q2 than Q1. Cash flows, what does it mean for cash flows for 2019, Dominik?

[Dominik Asam, Chief Financial Officer]

I mean the most important statement is obviously that we maintain our free cash flow guidance of EUR 4 billion, which leaves a pretty significant amount of free cash flow to be generated in the remaining 9 months. I agree with that. So what are the key drivers that will bring us up? And the first and most important one is, of course, the deliveries because there's a significant payment upon delivery, which will boost the free cash flow. We've also highlighted that it's quite a healthy engine situation, so we have to also make sure that we manage our working capital there but, of course, always without jeopardizing the ramp itself. Then there is also some positive impacts looming both on earnings and on free cash flow with regards to the hedging rates. You've seen in the back in the appendix that we had a pretty high hedge ratio in Q1. And that is getting much better in Q3 -- Q2, Q3 and Q4. And we have been rolling quite some hedges which, of course, has also generated some negative cash flow in the March quarter. And we will benefit then from higher cash flow in the outer 9 months. Now how exactly that phases into the quarters, I think we've never commented on that and I don't want to do that either. But I think the main message is here, we have a clear view as to how we want to manage the free cash flow over the residual 9 months of the year.

[Operator]

The next question comes from Olivier Brochet, Crédit Suisse.

[Olivier Brochet, Research Analyst]

Olivier Brochet with Crédit Suisse. I have two questions, if I may. The first one is on the export ban, would like to understand what can change on the year on that front, if this can be reversed and what the impact is on cash flow, please? And the second question is on the A330neo for an update on the engine situation there, please?

[Guillaume M.J.D Faury, CEO & Executive Director]

So the export ban for the moment is impacting the Saudi Arabia contract for border security. And more specific on the cash flow, Dominik, what can you say?

[Dominik Asam, Chief Financial Officer]

I think there's not much we can say because obviously now that we are kind of handcuffed because of the export ban and cannot complete the contract as planned. We have to talk to the customers. And obviously, we are not going to disclose details. But my expectation is this is not something that will happen quickly but will take its time.

[Guillaume M.J.D Faury, CEO & Executive Director]

On A330neo, after a slow start end of '18, we are accelerating. So as I said before, we expect to be delivering around 50 airplanes, including the neos on the 330 program in 2019. And there will be a significant acceleration of deliveries as soon as Q2.

[Operator]

The next question is from Tristan Sanson, Exane.

[Tristan Sanson]

The first question is on the FX hedging phasing. It's a bit technical, but I would be keen to understand a bit better how the rollover of these hedges work and that you rolled over $3.3 billion, I think, of hedges from Q1 to later quarters. That's about 1/3 of what you have for Q1. And you improved your achieved hedge rate -- or sorry, you reiterated your achieved hedge rate versus target for Q1 by EUR 0.05, which seems a very big impact. So if you could explain the mechanics, that would help. And the second is on your communication strategy. Now that you have, Guillaume, a full team in place, when do you think Dominik and you will be able to provide visibility on the market on the mid-term -- on your mid-term ambitions? So when should we expect to have a gathering with a set of mid-term targets provided to The Street?

[Guillaume M.J.D Faury, CEO & Executive Director]

Thank you. I hand it directly to you, Dominik, on the technicalities of the hedge.

[Dominik Asam, Chief Financial Officer]

I mean, of course, the ForEx is something I have looked into in my first months a lot. And for Q1, I think the story is quite simple. The hedges that have been, yes, maturing in Q1, they were too many of them and because there was a different planning in the phasing and that meant we had to roll over quite some hedges. That means that the negative exchange rates will materialize through the P&L for also stuff that's coming basically now in later quarters. And that gave us the deterioration you alluded to. But as I also mentioned and if you look at Page 18 of our deck, you see that we're catching up on this one pretty much for the full year because we implied hedge rates are then dramatically improved to $1.23 in Q2, $1.17 in Q3 and $1.20 in Q4. So it's more a timing phasing issue as opposed to really negatively weighing on us. And that means that gives us good kind of leg-up in EBIT and also cash flow for the remaining 9 months.

[Guillaume M.J.D Faury, CEO & Executive Director]

Thank you, Dominik. So on the second part of the question when it comes to, I think you called it long-term EBIT guidance, well, I take the risk to disappoint you at least for today. I think the building blocks are known. And they're clear and we are focusing on delivering our earnings and free cash flow growth potential while preparing the foundations for the future. And you saw in the discussion on the rate of the A320, for instance, that there's more to be decided at later stage. So I would like to stay focused on our '19 and short-term objectives which are, I mean, important for going along that path.

[Operator]

The next question is from Andrew Humphrey, Morgan Stanley.

[Andrew Edward Humphrey, Vice President]

I've got a couple, please, on similar subjects. The first is I think this is the second quarter in a row that you've highlighted the A320neo premium in your press release. And this is obviously an area we've been discussing for a while. Is that a sign that you're getting more confident on that? And I guess kind of what is the extent of the improvement we've still got ahead of us on that compared to what's already been seen? And the second question is around the A321 on Cabin Flex. Clearly, expectations at the moment are for XLR to be launched at some point this year. I wonder, should we be kind of thinking about any potential knock-on effects on future iterations of that platform?

[Guillaume M.J.D Faury, CEO & Executive Director]

Okay. Thank you, Andrew, for the questions. I think on the neo premium, what we are indicating is that with the ramp-up of the neo, we see the premium going on the backlog to the deliveries. And I think this is what is meant. Maybe if you want to give more color?

[Dominik Asam, Chief Financial Officer]

But the neo penetration is already very high. So of course, that's kind of layering in of more neos. And also it's then kind of tapering off to some degree I'd say. But...

[Guillaume M.J.D Faury, CEO & Executive Director]

It's not supposed to indicate changes, but simply the fact that it's confirming the neo premium going into the revenues and EBIT and free cash flow. When it comes to ACF, well, basically it's the year of ramp-up in numbers for the ACF and numbers of so-called [ head-up ] versions. We have a very significant number of ACF to deliver in the second half of the year. That's why I take the precaution to indicate that the ramp-up on this version is important. When it comes to further versions of the long range of the A321neo, well, this is something that we are preparing. And we will be more specific later this year, especially at the Paris Air Show. And at that stage, it's not indicating other upgrades or versions of the A320 family. So there's going to be a lot on our plate with a very strong backlog. And we are[Audio Gap]

[Operator]

The next question is from Jeremy Bragg, Redburn.

[Jeremy David Bragg, Research Analyst]

Two quick questions. Firstly, one for you, Dominik. At the start of the call, you said that you weren't happy with the quarterly volatility on free cash flow. So my question is how are you going to fix that, please? And what does it mean for capital allocation? Because one of the reasons that you've had to sit on such a big net cash balance sheet is because of this quarterly volatility. And then the second question, please, on how are you feeling about NMA? Because if Boeing delayed the release of it, does that take a bit of pressure off you to do an A321XLR or any other kind of updates on R&D in a world where the NMA comes later, please?

[Dominik Asam, Chief Financial Officer]

I think on the free cash flow phasing, Guillaume already said that we are going to really work harder trying to linearize more over the next couple of years. And this is exactly what I referred to that we tried to really become more linear the way we've been operating so far. We had always a very tricky March quarter and then a very strong December quarter. And I think that's more than what this comment from Guillaume was, which I then basically wanted to reflect on the free cash flow side. And also of course, our strong commitment to work hard in the current fiscal year to make sure we hit the EUR 4 billion target. And with regards to the capital allocation, please bear with us for a little bit more. Guillaume and I, I think, really have to dive into the details of the balance sheet of the risks and opportunities to make sure that we understand it inside out before being more granular on that question.

[Guillaume M.J.D Faury, CEO & Executive Director]

Thank you, Dominik. Jeremy, on the NMA question, well, I'd like to say that we are moving forward with what we think is appropriate for the A320, A321 products, trying to anticipate and answer the customers' expectations and the market needs and we keep doing this. We have as well the 330neo with a -800. And that's in the certification phase. The -900, that is now on the market. So we think on the other side, we have the right products to address the middle of the market. And I don't see changes on that way of doing things on our side. As you know, on the others' perspective, we think the space for Boeing to launch an NMA is rather small. And it's on them to decide if and when they launch a product and how the product looks like. So I would like to say it's on them to decide what they want to do. On our side, we are moving forward with 2 strong products. And that's the plan for '19 and beyond.

[Operator]

The next question is from Christophe Menard, Kepler Cheuvreux.

[Christophe Menard, Head of Aerospace and Defense Sector]

I have two questions. The first one is on Skywise. You continue to highlight the progress you are making on that solution. And I was wondering if it had not any positive impact you could quantify on EBIT. Because Q1 EBIT was actually quite good on the Airbus Commercial. And I was wondering whether there was not something material around this. So any kind of clarification would be helpful here. The second one is on the German export ban. You mentioned the border security contract. What about Eurofighter? Do you have any issues with the supply of parts to Eurofighter, especially in services?

[Guillaume M.J.D Faury, CEO & Executive Director]

Okay. Thank you, Christophe. On Skywise, basically, I say the end of last year, beginning of this year, that the priority for '19 is to continue to increase the customer base and with the targets to be around 100 airlines with us on the platform by end of this year. Q1 shows that we are on trajectory to reach or to come close to this objective, which we see then as a strong basis for developing the services and the activity around the Skywise potential. The EBIT in Q1 is not reflecting a strong and fast development of the Skywise platform and the relationship with customers. I think this is going to come much later. I indicated already that the detailed business model of the new digital services is still in the making, and we are discovering what it means moving forward and learning with the airlines. When it comes to the ban, well, what we have in the Q1 results is linked to the border security contract. We have not given indication of any other consequences of the ban on other programs or products. I'm not aware of impact on spare parts. But maybe, Dominik, you have a bit more color on this one?

[Dominik Asam, Chief Financial Officer]

I have no color on that one.

[Guillaume M.J.D Faury, CEO & Executive Director]

So it is a recent ban. It has been extended by 6 months. We are working with our teams and customers to fully understand the consequences. It's obviously a headwind that we have to face. And the development of this situation is not positive for us. It's something we're working on with our customers.

[Operator]

The next question is from Sandy Morris, Jeffries.

[Sandy Morris, Equity Analyst]

I'm afraid I'm going to come over as Mr. Nasty. I've tried to phrase this carefully. But my feeling is that the first quarter free cash flow and the movement in inventories reflects the fact, to a degree, that we moved heaven and earth to reach our deliveries target for 2018. I mean I know how important that was. But inventories isn't typical and shouldn't repeat. Could you add anything to that statement?

[Guillaume M.J.D Faury, CEO & Executive Director]

Thank you, Sandy. Well, basically, I don't disagree. We had a very specific situation to manage in '18. We did everything we could at that moment to both fulfill our customers' obligations to deliver planes in spite of the deep issues we had with engines. This was very consistent with the targets that we had given ourselves in terms of aircraft deliveries. But the main priority for us was to recover a situation with airlines expecting the planes in '18. This has come with consequences on the speed of start in '19, I mean, unfavorable consequences. We are in that situation. We have again a 2019 that is back-loaded due to that situation last year. And I think it will take 2 or 3 years to come back to a more linear and appropriate situation on the 320. But please don't neglect the fact that last year, on top of the engine issues in Q1, it was a year of transition from the ceo to the neo. It was the year of ramp-up from 50 to 60. It was the year of the introduction of the ACF, of the LR. So we had a lot on our plate last year. And it didn't come without some consequences for the start of '19. I don't like this situation. But what you say is fair. And it's top of our priorities to have a better '20 and targeting a 2021 that should be as linear as possible and therefore having a free cash flow execution in the year much better than what we have in '18 and in '19.

[Sandy Morris, Equity Analyst]

Okay, that's great. And then just in passing, is there anything going on from the rather dreadful events involving with the FAA and certification that causes you any concern that you and EASA or whoever may need to sit down and also have to think about it going forward?

[Guillaume M.J.D Faury, CEO & Executive Director]

Well, it's a bit early to draw conclusions. Basically, we see that the events are creating a lot of tensions, of questions. And we see growing concerns on many topics and more scrutiny coming from all around the place. So that's a fact of life we have to face. Now what we have as a very important set of conditions in aviation and in airline industry is the alignment of the FAA and the EASA. It has been a very strong basis of our industry. And we hope that these events will not create disalignment or not create mid-term or long-term disalignment between the 2 main authorities in this industry. But it's a bit -- it's a concern at that stage. It's too early to draw conclusions. And we are basically more observers at the moment than anything else.

[Operator]

The next question is from Harry Breach, MainFirst.

[Harry William Freeman Breach, Research Analyst]

Can I just ask my two questions slightly differently? Guillaume, can you give us any more sense now about what you would do differently running the firm in terms of your priorities? And then a completely different topic, the regulatory investigations, I guess, have been a feature of the -- a feature for the last 3 years or so. Can you give us any feeling about whether you think they're moving into a concluding phase yet? Any sort of sense you can impart to us about where we are with those and the negotiations?

[Guillaume M.J.D Faury, CEO & Executive Director]

Yes. So what I would do different, basically we have a team in place now and I think the results are team results. Basically, I gave a bit of indication of the directions I believe are important to take in this 21st century and for the decades to come. One is the move from a product-driven company, and we have had fantastic products with a huge success on the market, to product and production system that something I consider a key enabler for the continuous growth in terms of quantity and quality of what we do and profitability moving forward. This is going to be based on digital. Tom launched the digital initiatives in others very successfully. It goes in many directions. And this will come as well with the introduction of 3D across the board and end-to-end digital, from product to production systems to support and services. This is what we call DDMS. And this has been a very strong focus of myself and will continue to be the case in the future. I believe we have growing pressures and challenges on environment. And I think environment is not nice to have, is going to become for this industry a key driver of performance and sustainability. And generally speaking, I think Airbus is more than a company. And we see our role in sustainability, responsibility and working with communities around the world very important. I'm very proud of the foundation, but I think we can do more. And there is more which is expected. And you cannot have a strong brand for a global business like Airbus in the future without this larger impact. And this is what we will be focusing on. So I can elaborate a bit if you want. But these are some directions which I believe are important. They're not necessarily completely new. But I believe they are very important. And we'll be working hard on this topic. Compliance, yes, well, basically, always a bit difficult for us to comment. We are not in charge. Investigations are ongoing. We are fully cooperating. I'd like to say it's making progress. But I cannot say much more because I don't know when things will come to an end. I don't know what will be the conclusions. And therefore, there's not much more I can say than what we have shared a couple of weeks ago.

[Thorsten Fischer]

This closes our conference call for this time. If you have any further questions, please send an e-mail to Mohamed, Nicolas or myself. And we will get back to you as soon as possible. Thank you, and I look forward to speaking to you again soon.

[Guillaume M.J.D Faury, CEO & Executive Director]

Thank you. Have a nice day. Bye-bye. Thank you, Thorsten.

[Operator]

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephones. Thank you for joining, and have a pleasant day. Good-bye.