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Edited Transcript of AIR.PA earnings conference call or presentation 31-Jul-19 6:15am GMT

Half Year 2019 Airbus SE Earnings Call

1119 PR Schiphol Rijk Aug 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Airbus SE earnings conference call or presentation Wednesday, July 31, 2019 at 6:15:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Dominik Asam

Airbus SE - CFO

* Guillaume M.J.D Faury

Airbus SE - CEO & Executive Director

* Thorsten Fischer

Airbus SE - Head of IR & Financial Communication

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Conference Call Participants

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* Andrew Paul Gollan

Joh. Berenberg, Gossler & Co. KG, Research Division - Senior Analyst

* Benjamin Michael Heelan

BofA Merrill Lynch, Research Division - Analyst

* Celine Fornaro

UBS Investment Bank, Research Division - Head of EMEA Industrials Research

* Christophe Menard

Kepler Cheuvreux, Research Division - Head of Aerospace and Defense Sector

* David Howard Perry

JP Morgan Chase & Co, Research Division - Head of European Aerospace and Defense

* Douglas Stuart Harned

Sanford C. Bernstein & Co., LLC., Research Division - SVP and Senior Analyst

* Harry William Freeman Breach

MainFirst Bank AG, Research Division - Research Analyst

* Jeremy David Bragg

Redburn (Europe) Limited, Research Division - Research Analyst

* Olivier Brochet

Crédit Suisse AG, Research Division - Research Analyst

* Robert Alan Stallard

Vertical Research Partners, LLC - Partner

* Tristan Sanson

Exane BNP Paribas, Research Division - Head of Aerospace & Defence and Equities Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the Airbus Half-Year 2019 Results Release Conference Call. I am Angela, 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 hosts, Guillaume Faury, Dominik Asam and Thorsten Fischer.

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Thorsten Fischer, Airbus SE - Head of IR & Financial Communication [2]

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Thank you, Angela. Good morning, ladies and gentlemen. This is the Airbus Half-Year 2019 Results Release Conference Call. Guillaume Faury, our CEO and Dominik Asam, our CFO, will be presenting our results and answering your questions.

This call is planned to last around 90 minutes. This includes Q&A, which we will conduct after the initial presentation. This call is also webcast. It can be accessed by our homepage where we have set a special banner. Playback of this call will be accessible on our website, but there is no dedicated phone replay service.

Supporting information text was e-mailed to you earlier this morning. It includes the slides, which we will use 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.

Now over to Guillaume.

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Guillaume M.J.D Faury, Airbus SE - CEO & Executive Director [3]

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Thank you, Thorsten. Good morning, ladies and gentlemen. Welcome to the call. It's a pleasure to be with you here today, and it's been about 6 weeks since we last spoke during the Paris Air Show, and we are now back to give you our H1 2019 results.

Let's start with the H1 highlights. The sector fundamentals remain solid with healthy traffic growth, load factors higher than 80% and still robust profit forecast for the airline industry. We continue to see good demand and strong endorsements of our competitive product portfolio, as demonstrated by the [383] firm orders and commitments recorded at the Paris Air Show at Le Bourget, including for our latest member of the A321XLR. However, we continue to see a complex geopolitical environment and competitive market, particularly on widebodies.

On the financial, our H1 results mainly reflect the A320 ramp up, including the transition to neo. It also reflects further progress on the A350 financial performance and the FX as well. Our focus continues to be on the A320 ramp up, and in particular, on the A321 ACF. We decided to taper the ACF production plan, but we will still be ramping up ACF deliveries very significantly in H2, and it remains challenging.

For the year, we continue to target 880 to 890 commercial aircraft deliveries in 2019, which remains challenging. A lot remains to be done before the end of the year to fulfill our commitments. On that basis, we maintain our 2019 guidance.

Now let's take a closer look at H1 '19. As an opening comment, I want to highlight that we are increasingly concerned about the rise of protectionism and in the context of the WTO disputes, the intention of the USTR to apply tariffs on our products. Aviation is a global industry, which relies on free trade and free circulation of people. A negotiation to find a common agreement is the only solution before this escalates into an industry-wide issue.

Now starting with commercial aircraft. In H1, we booked 213 gross orders. This includes 151 firm orders announced at Le Bourget. We successfully launched the A321XLR, with 249 firm orders and commitments, which is a great endorsements of the XLR. Although in Q2, we saw 5 additional cancellations, which brings the net orders to 88 and our backlog to 7,276. Overall cancellations remain in line with historical trends as a percentage of backlog.

On the A220, we see good order momentum. Our backlog is now at 473 aircraft, and we're actively working on additional campaigns as we have seen. We will continue ramping up to a maximum target rate of 10 a month in Mirabel and 4 in Mobile by the mid of the next decade.

Next, on the A320 family. We booked 131 firm orders in Q2. Our backlog of 5,871 aircraft supports our ramp up, and we're preparing to move to rate 63 mid of 2021, as indicated already. We are fully booked through 2024 now. We continue to stabilize the industrial flow and to study potential further rate increase beyond 2021.

Moving to the A330. The backlog is now at 275. We saw good endorsement from key customers, as I mentioned at the Paris Air Show. We target to deliver on 50 aircraft this year, of which more than half as neos.

On the A350, we have a backlog of 605 aircraft and have stabilized production at [rate 10]. We see the A350 and A330 combined production as the right level for our widebodies.

In services, we're making good progress on extending the Skywise platform with now more than 80 airlines connected to Skywise.

Now on to Helicopters. While the civil and parapublic market remained soft, we will continue to see momentum in military and have good prospects with ongoing active campaigns. In H1, we booked 123 net orders, including 23 NH90s for Spain and 11 H145 just in Q2.

Finally, in Defence and Space, we had an order intake of EUR 4.2 billion in H1, supported by key contract wins in Q2.

On the A400M, we signed the contract amendment with OCCAR, and we are awarded contract to integrate and certify infrared countermeasure system for the German Air Force. We have also signed the so-called new A400M Global Support Step 2 contract with OCCAR.

In space, we won a satellite campaign with an innovative solution with Inmarsat for carbon satellites.

Also in May, we delivered with our partner Dassault Aviation a proposal for the first demonstrator phase of SCAF, the future combat system. Lastly, together with our partners, again, Dassault and Leonardo, we submitted a proposal to OCCAR for the initial launch contract for the Eurodrone.

Overall, we continue to see good prospects, in particular, in the military aircraft business, but the exact timing of contract awards is difficult to predict.

Now Dominik will take you through our financial performance. Dominik, I hand over to you.

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Dominik Asam, Airbus SE - CFO [4]

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Thank you, Guillaume. Revenues in the first half of the year grew to about EUR 31 billion, up 24% year-on-year, mainly driven by more deliveries in commercial aircraft as well as a favorable foreign exchange impact.

On EBIT adjusted, as a reminder, in 2019, we expect an approximately 15% increase in EBIT adjusted on a full year basis supported by the single-aisle ramp up and progress on A350 performance.

So where are we at H1? Our EBIT adjusted more than doubled year-on-year to about EUR 2.5 billion, mainly driven by the performance in commercial aircraft. The A320 ramp up and neo premium, further progress on the A350 financial performance and a EUR 0.04 improvement in ForEx in the quarter drove that jump in profitability.

We also continue to ramp up our investments in innovation and digitalization, which will accelerate in the second half. Our EPS adjusted strongly increased to EUR 2.25 per share, using an average of 776.3 million shares.

Moving to free cash flow. Our H1 free cash flow before M&A and customer financing of about minus EUR 4.0 billion reflects mainly the working capital build supporting H2 deliveries. This means we need to deliver about EUR 8 billion of free cash flow in the remaining 6 months, that is EUR 1 billion more than in the second half of 2018 on about the same number of deliveries. The remain to do on free cash flow is, therefore, challenging. We will continue to focus on execution and cash generation.

So putting all that together, we had a strong increase year-on-year. However, we still have a lot to do in the second half of the year to achieve our targets.

Now on to Page 7, and our profitability, which shows EBIT reported at around EUR 2.1 billion. The level of EBIT adjustments is a net negative of EUR 436 million and includes the following: a negative EUR 208 million related to the prolonged suspension of defense export licenses to Saudi Arabia by the German government, of which 18 million were booked in Q2 2019; a negative 136 million related to the A380 program costs, of which EUR 75 million booked in Q2 as part of our continuous assessment of assets, recoverability and quarterly review of onerous contract provision assumptions; EUR 90 million of other costs, including compliance and a small negative impact related to ForEx and balance sheet revaluation.

EPS reported includes a negative impact from finance results, mainly driven by the recognition of a loss on ForEx hedges as a result of the prolonged suspension of defense export licenses. The effective tax rate on net income is 36%, where we continue to see the impact of the aforementioned charges related to the prolonged suspension of defense export licenses as well as the reassessment of tax assets and liabilities.

The tax rate on core business is around 27%. For 2019, you should continue to assume a tax rate of around 28% on the core business result. The result in net income is about EUR 1.2 billion, with earnings per share of EUR 1.54.

Now on to our hedging activities. By now our hedging strategy provides significant coverage through 2021. We ramped up our hedging activities in Q2 as the euro-dollar rate was more favorable. In H1 2019, we implemented $19.6 billion of forwards at an average rate of $1.22 per euro, mainly for 2022 and 2023, while $13.1 billion of hedges matured at a rate of $1.27. We again adjusted the intra-year phasing of our hedges to better reflect our delivery profile and rolled over about $4.1 billion of hedges in total for the year. While this impacts the quarterly distribution, the full year hedge rate is virtually unchanged.

Our portfolio stands at $87.4 billion, with an average hedge rate at $1.23. 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 the first half of '19. Our gross cash from operations of about EUR 2.8 billion broadly reflects our EBIT adjusted. Working capital reflects the inventory build to support the ramp-up, the improved engine delivery streams and other changes in working capital, including payments to suppliers, as we have already highlighted post Q1. The free cash flow also includes the dilution from the A220. Recall, the A220 cash dilution is currently still largely covered by the funding arrangement, which is recognized in cash flow from financing activities and to, therefore, outside free cash flow.

The A400M continues as well to weigh on free cash flow before M&A, albeit less so than in the prior year. In the first half, cash flow from customer financing was very limited as the appetite for commercial financing remains high. At around minus EUR 0.9 billion, CapEx is broadly in line with the H1 2018 levels. On a full year basis, CapEx is still expected to be around EUR 2.7 billion.

All in all, this gives us a free cash flow reported of minus EUR 4.1 billion and a net cash position at the end of June of EUR 6.6 billion. The 2018 dividend of EUR 1.65 per share or EUR 1.3 billion in total was paid in Q2.

We also reviewed the demographic underlying assumptions of our pension obligation. This resulted in an increase in pension provisions in Q2, which reflects the global decrease in discount rates as well as the change in our estimates for the valuation of employee benefits in Germany.

As we mentioned in Q1, we still expect to continue topping up the funding level of our pensions this year, but at a lower level than last year. If, when and to what extent we're going to fund this increased deficit in the future will depend on different factors, in particular, interest rates. Our objective remains to increase the pension funding ratio to benchmark levels.

Now back to Guillaume for a closer look at our businesses.

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Guillaume M.J.D Faury, Airbus SE - CEO & Executive Director [5]

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Thank you, Dominik. Now to commercial aircraft. During H1, we delivered 389 aircraft, 86 more year-on-year. The remain to do to achieve our year-end target is 490 to 500 aircraft, the similar number to 2018 when we delivered 497 aircraft in H2. But we see challenges, mainly from the ramp-up of the ACF in H2.

On the A320 family, we delivered 294 aircraft, of which 234 neos. As I just mentioned, we have had to slow down the ACF production plan, but we will still be ramping up ACF deliveries in H2, which remains challenging. We have delivered so far more than 850 A320 family neos since entering to service with an operational reliability equivalent to the A320ceo. Given the recent commercial success of the A321 with the ACF and the XLR as the most wanted at the Paris Show, we are studying different options to increase the share of the A321 in the current A320 family production capacity.

On the A220, we delivered 21 aircraft. Remember, we target 45 deliveries this year. Production will start in Mobile in Q3 this year. We also announced performance improvement on the A220, with an increase in range and max takeoff weight available from 2020.

Moving to the A330. We delivered 17 aircraft, of which 13 neos. We are focused on the neo ramp up to secure our H2 deliveries. On the Dash-800, the flight test campaign is positioning as planned with type certification targeted by year-end.

Now on the A350. We delivered 53 aircraft in H1. That's a plus 33% versus H1 '18. We are making good progress on A350 recurring cost convergence, and we're on track to reach our breakeven target for the year. Operational reliability is as high as 99.3%.

On the A380, we delivered 4 aircraft. We are making progress on preparing the wind-down of the program and securing in-service support for the next decades.

So while 2019 is another challenging and back-loaded year, we are on track.

Now moving on to Helicopters. We have stable revenues driven by program phasing and compensated by growth in services. EBIT adjusted reflects less favorable delivery mix, partially compensated by increased contribution from the services.

Now look at the Defence and Space business. Revenue increase supported by military aircraft. The EBIT adjusted mainly reflects efforts to support ongoing campaigns. We have a lot left to do in H2, and we are focused on program execution across our program lines.

H1 '19 EBIT reported reflects a minus EUR 208 million adjustment due to the prolonged suspension of defense export licenses to Saudi Arabia by the German government, of which minus EUR 18 million, we have booked in Q2.

H1 '18 includes the net capital gain from the disposal of the Airbus Defence and Space Communications Inc. business in the U.S.

Now on to the A400M, we delivered 7 aircraft in H1 '19, bringing the in-service fleet in 81 aircraft. As I mentioned, we signed the A400M contract amendment with OCCAR. This contract signature concludes the discussion between both sides on the so-called global rebaselining of the A400M product. With this contract amendments, we have agreed on a new capability development plan. The new production delivery schedule and a new retrofit delivery schedule and new financial charts. The anticipated impact of the global rebaselining was reflected in our 2018 results. Thank you.

And on the 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. But of course, we are paying particular attention to Brexit and the growing trade tensions. Airbus 2019 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% compared to 2018 and free cash flow before M&A and customer financing of approximately EUR 4 billion.

And now a few words on our key priorities to wrap up. I hope that based on what you heard from us today, it confirms that management and all our teams are focused on delivering our 2019 objectives. We have a lot to do with concrete plans to get there. We've done it before, but it's a greater challenge this time with ACF in front of us. The focus is clearly on the A320 family ramp up, and we are setting further rate increases beyond 2021.

On the A350, rate trend is stabilized, and we are continuing our journey towards cost convergence. We are focusing on program execution across the business. On the A330, we are focused on the neo ramp-up. We're continuing A220 integration with focus on commercial momentum, production ramp up and cost reduction.

In Defence and Space, the key priority remains on the A400M program execution and securing exports. And in Helicopters, the focus is on improving competitiveness and pursuing transformation efforts.

Our services priorities are to expand current businesses worldwide, explore new services and expand Skywise and the customer base.

Finally, in digital and innovation, we have long-term ambitions in leveraging digital and accelerating innovation within Airbus. We are progressing step-by-step in deploying solutions on current and incremental developments as well as new platforms.

Now let's turn to your questions. Thank you for your attention.

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Questions and Answers

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Operator [1]

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Thank you very much. Then we will now begin our question-and-answer session. (Operator Instructions) We've received the first question. It is from Doug Harned of Bernstein.

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Douglas Stuart Harned, Sanford C. Bernstein & Co., LLC., Research Division - SVP and Senior Analyst [2]

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2 questions. First, on the A321 neo ACF, can you talk about the supply chain and the time line over which you expect to be able to resolve the issues around delivery delays there?

And then second question, also on the neo. When you -- you said that you're going to look at H2 -- in H2 to make a decision on single-aisle rate increases above 63 a month. Can you talk about what's involved in that? Are engines the major decision point there? And when do you expect to finish up A320ceo deliveries?

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Guillaume M.J.D Faury, Airbus SE - CEO & Executive Director [3]

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Okay. Thank you for the questions. I'll try to answer as best as I can, putting perspective different topics, which are different but connected.

The first one is the ramp-up. We are in a ramp-up in numbers for the A320 family. And in this overall ramp up, we have a specific so-called Airbus Cabin Flex, which is the new configuration of the A321, that supports as well the LR. And the ramp-up of the ACF is very complex. And this is where we have our challenges and difficulties. That's one topic. And the ramp up is mainly on H2. That's the challenge of H2.

The second topic, which is the mix. We see more and more of the bookings coming from the 321, where historically, it was dominated largely by A320 and not A321. So we need to be able to increase the mix of A321, more A321 in the overall A320 volume.

And when we come to that volume, we are limited by a number of bottlenecks in the ramp-up, especially coming from the supply chain. We have made a supply chain assessment last year that led to the rate that you know, which basically says we go up to rate 63 by mid of 2021. And for the moment, then we are stable beyond 2021 at rate 63, which we are committing again this year, another assessment of the supply chain to see what we can do beyond 2021 to support the very strong demand we see on this family of products. Where are the bottlenecks, where there's a number of small bottlenecks here and there on the suppliers, but the most challenging one last year was the feedback from the engine manufacturers that clearly expressed the fact that they were not ready to commit and to ramp up beyond 2021 to the volumes, to volumes that are consistent with [60]. So I hope I'm clear with the different perspective on the A320 family.

Now there was a question on when we will end up the production of the ceos, Dominik, please take...

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Dominik Asam, Airbus SE - CFO [4]

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I cannot precisely answer the question. I think I can give you a useful hint in what that means. And we have delivered 60 ceos, which is only 20% of the single-aisle seat in the first half. So it was already a very small share of it. And for the backlog, they are only about 2% or a little bit more than 100 aircraft left. So if you think about us kind of delivering 60.5 a year and there is only 100 left, it means that, that will be kind of true very soon.

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Douglas Stuart Harned, Sanford C. Bernstein & Co., LLC., Research Division - SVP and Senior Analyst [5]

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And if I can, on the engine. When you talk with the engine manufacturers, have you seen progress there in terms of their ability to think about going up to rates beyond the 63?

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Guillaume M.J.D Faury, Airbus SE - CEO & Executive Director [6]

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We've seen some progress, not at the speed we would like.

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Operator [7]

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We've received another question. It is from Ben Heelan of Bank of America Merrill Lynch.

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Benjamin Michael Heelan, BofA Merrill Lynch, Research Division - Analyst [8]

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I wanted to ask first on the guidance because you've obviously had a very strong start to the year. You've done almost EUR 1.4 billion of EBIT improvement in the first half of the year, and the guidance implies a little bit less than 900. So I wanted to understand why the guidance has been capped? And why it implies quite a dramatic reduction in the second half?

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Guillaume M.J.D Faury, Airbus SE - CEO & Executive Director [9]

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Maybe I answer that. So first of all, just putting the guidance into context, if you compare it to last year, yes, there was an increase, but also we need a significant increase in the full year guidance. So basically, on the remain to do, if you take the second half of last year and would add that to the current EBIT, you would get that, I think, EUR 7.2 billion or something. But then the question is, of course, what is the exact impact on different factors in the calculation. And there is always the imponderability to the aircraft delivery. You see, we said 880 to 890 and 10 aircraft, make a difference, of course, on EBIT, which, I mean, it's a low double-digit number. And it's kind of a mid-double-digit number for free cash flow. And these 2 sensitivities cannot provide the caution in our guidance because depending on where exactly we want to end up here, it will be a different impact.

And the impact is, of course, much stronger in terms of the sensitivity to the free cash flow than it is to the evidence. This is also why we highlighted that the free cash flow guidance is actually more challenging.

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Benjamin Michael Heelan, BofA Merrill Lynch, Research Division - Analyst [10]

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If I could just follow-up on that. My understanding was that we should expect further progress on the A350 in the second half of the year. We could still have some mix benefits on the A320 and a little bit more pricing tailwind in the third quarter. So if 500 million kind of reverse in the second half of the year, it just seems like a very significant number on the EBIT side of things? I understand on the cash flow side of things. So I just wanted to understand, is there anything I've missed that I should be thinking about when considering why we could see this reversal of EBIT in the second half of the year.

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Guillaume M.J.D Faury, Airbus SE - CEO & Executive Director [11]

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Yes. Maybe you should highlight still the kind of ramp costs for ACF. I've already even talked about, this is a burden on the second half, still. There's also a little bit of a front-end loading in the improvement we achieved on A350 and profitability improvement. So the first half was quite successful.

There is still some A220s dilution coming. I mean, A220 is ramping, as was discussed. But in general, I have to confess, yes, we are certainly more comfortable in terms of the EBIT guidance than on the free cash flow, precisely on the reason I gave before, which is the sensitivity to any changes in delivery.

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Operator [12]

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The next question is from Celine Fornaro of UBS.

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Celine Fornaro, UBS Investment Bank, Research Division - Head of EMEA Industrials Research [13]

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My question would actually be on the free cash flow bridge to the year. And basically, as you highlighted, Dominik, so you have less volume benefit in the second half. But you potentially have a tailwind from the A350 because maybe you have some inventories that you're releasing, and similarly, on the A380. So I was wondering if you could help us frame how you get to this EUR 8 billion, which last year were very challenging when you have a headwind from prepayments, as you've highlighted as well at the air show.

And my second point would be on the pension contribution, just trying to understand at the moment the pension on the funding seems to be 60% funded. So maybe you need to be at least at 70%, which would mean another EUR 1 billion of top up on pension. Is that a reasonable assumption?

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Dominik Asam, Airbus SE - CFO [14]

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Okay. So on the free cash flow rate, putting it into context, as you've done with last year. Last year, we had to generate about EUR 7 billion in the second half. This year, it's $8 billion, and this makes it, indeed, more challenging.

I mean, the exact timing of the PDP net flows is not so transparent for the half year, second half year. So this is not a big moving part I think it was very much affecting also the first half of the year already. It's really what you already alluded to, which is inventories, and also there is a little bit of a better structure in the business because we have more higher cash flow products. Because when we get the payment upon delivery, while the margin impact might not be so big between A320, A321 and ACFs, on the delivered payment, of course, it's significant. So really working on the working capital, making sure that we ship all these aircraft is the key imponderability. So there, we are focused -- we have the full focus of delivering that because any aircraft that is slipping into the first quarter is a mid-double-digit million loss EBITDA single aisle. You know that the challenge is on single aisle. So it's basically the same topics we have been working on last year.

On the pension topic, you'll find some disclosure on Page 17 of our short notes, what has been happening there. There is a big impact from interest rates falling further, and then there were some secondary effects. The interest rate, they fell so low. Recall that the bond is now below 0 and on a 10-year basis, and the behavior of our employees is actually affected by that. They then choose certain options, which are actually, I'd say, more painful to us, and we reflected that in a more granular analysis of the pension.

And now if you kind of gross it up, you see that the pension, DBO, the DBO itself is about EUR 20 billion actually because what you see on the balance sheet is only the net of the assets and the pension liability, and then you can, of course, make the math what funding ratio we have. And it means that there is actually more to do than just EUR 1 billion or so, but the timing is the key question. As we are underfunded, we are not hedged against interest rates. We cannot be because there's no asset to cover all the liabilities. That means if and when interest rates at some point in time improve, we'll also see the pension deficit reduced. And from that perspective, we'll very gradually look at this and we speak to the statement we made that we're not going to fund at the tune of last year, which was EUR 2.5 billion. That's at a significantly lower rate and then observe over the coming years how do we play the catch-up, so to speak.

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Operator [15]

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The next question is from David Perry of JPMorgan.

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David Howard Perry, JP Morgan Chase & Co, Research Division - Head of European Aerospace and Defense [16]

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Can I ask 2 questions? The first one, just a comment on Brexit. I think when you made a comment this morning to the press saying Airbus is prepared, could you add a bit of color to that? What potential EBIT or cash impact you might see? What contingency planning you're doing if we have the harder Brexit? And secondly, so I'm going to follow-up on pension. You said less than the EUR 2.5 billion, but there's a big range, I guess, between 0 and EUR 2.5 billion. If you could give us a bit more color on your thinking, that would be helpful.

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Guillaume M.J.D Faury, Airbus SE - CEO & Executive Director [17]

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Maybe you can start with the pension, and I take Brexit?

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Dominik Asam, Airbus SE - CFO [18]

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Yes. It's really kind of in that range, and I don't want to be more precise than that because it's not really decided yet. Also in contemplating, really making sure that we work with the social partners on these topics, and the funding will be one part of that discussion. And I don't want to kind of jump the gun there, so to speak, on that one. I would guess that from a valuation point of view, the long term, it should not make a difference because it's a financial liability you have to detect. And if and when we fund it is a secondary effect, so to speak.

But bear with us, and we will provide more clarity by the end of the year.

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Guillaume M.J.D Faury, Airbus SE - CEO & Executive Director [19]

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And on Brexit, well, we had to be as prepared as we could by end of March because the no-deal Brexit scenario was a scenario on the table. Now it's much more likely that it will look like a no-deal Brexit by end of October. So we are preparing again. It's not fully bulletproof. We are preparing as there is uncertainty with a no-deal Brexit, and this is what we highlighted many, many times. But the no-deal Brexit being more likely we see by far more willingness on the government to prepare for this scenario, which basically means for us the ability to move parts.

For the other risk of problems of the Brexit, we think we have done the appropriate preparation with our supply chain, but the most risky part is the logistics basically and the so-called friction at the border.

So anyway, it's now very likely that it will not impact 2019. And it's more risk probably for 2020, but still, we are working hard to first protect ourselves with inventory, sort of a month of inventory for the majority of our suppliers and partners, all of them, and working with governments to get clarity on how the customs and the logistics will work in case of a no-deal Brexit.

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Operator [20]

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

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Tristan Sanson, Exane BNP Paribas, Research Division - Head of Aerospace & Defence and Equities Research Analyst [21]

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Tristan from Exane. The first question is on the A321 ACF, please. Could you give us a few data points or KPIs to help us quantify the progress you're making on it like the number of [the divestments] dealt with in Q1, Q2? And how many you want to deliver in H2? Or maybe just some lead times? So anything that can give the narrative to improvement in the industrialization of the aircraft would be useful.

And second is a simple question on the A380. The termination charge assumption that you made in Q2, is that full and final? Or is it subject to potential further revisions in Q3 and Q4?

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Guillaume M.J.D Faury, Airbus SE - CEO & Executive Director [22]

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Well, on ACF, we started the deliveries last year. We're ramping up in 2019. We had a few [attempts] of airplane in H1, and it has to be significantly more in H2. We are late -- or we will be late in H2 compared to the commitments we have made to our customers, but it's still a very steep contract that we have in our plans, which means we have had to change a bit the mix to be able to deliver more A320s or non-ACF A321s given the difficulties we have on increasing the ACF. But it's a lot of innovations as we are at the beginning of the life of this product. And each time we have a new customer, we deliver a new airline, and you see a press release of the first delivery to an airline, which means its beta version. And as you have seen so far, we have a lot of it.

On the A380, maybe you take the question, Dominik?

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Dominik Asam, Airbus SE - CFO [23]

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Sure. On A380, recall that we still have the kind of social charges out there, which have not been accrued yet because there is no agreement with the social partners on that yet.

I would anticipate that the amount you have seen in the last 2 quarters will probably trend down more. So I don't want to rule out that it's kind of all over. It's a massive supply chain behind that, where there's a lot of negotiations ongoing with different stakeholders, and we have to quantify them every quarter. But I'm anticipating a certain kind of moderation of that type of issue going forward to maybe more -- a low double digit million, if anything, a big chunk still out there to see is the social charges. And then, of course, they will do another very thorough review in the context of the fiscal year and to assess. So still a little bit of a moving part here.

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Operator [24]

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The next question is from Olivier Brochet from Credit Suisse.

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Olivier Brochet, Crédit Suisse AG, Research Division - Research Analyst [25]

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I wanted to go into the practical consequences from the WTO tariffs, if they are applied, please? Based on the conversations you have with airlines and lessors, do you expect that they could actually refuse to take deliveries? Or are they thinking of deferring orders? And then I would like to go back to one second on the ACF to understand practically, what exactly is wrong at the moment. Where are you making progress and where are your main risks from a very practical point of view, please?

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Guillaume M.J.D Faury, Airbus SE - CEO & Executive Director [26]

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Dominik, you want to...

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Dominik Asam, Airbus SE - CFO [27]

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Yes. So on WTO, I think that's -- it is, of course, still in the movement. Our key focus is not so much. I mean, we have all the data and all the specs about which aircraft is going where to be prepared if and when it comes, but of course, our key focus for the campaign is on trying everything we can to convince the stakeholders that is not a good idea to avert the situation. So just want to reemphasize that we're also doing everything we can to make sure that the aircraft we can deliver to our U.S. customers will be there because this is a key priority to make sure they understand that we are fully committed to them.

Now what happens if these tariffs come, then is it hard to predict because, first of all, it will depend on the percentage applied. If it is a significant percentage, you can assume that it's uneconomical for our customers to pay the tariffs. And I say, to pay the tariffs because for aircraft delivered from the EU into the United States. That would basically be the consequence because our customers will then asked to pay that. And what they are then going to do is, of course, their privilege to decide and not on us to have a view on that. And this is also why we cannot be more precise on a scenario here because we don't want to speculate on what our customers are doing in such a scenario.

And there is also a topic with Mobile. In Mobile, we send kits, and we send them there. And if from there, we're delivering to those customers, there is also some tax issues. So everything is still in the making and it's hard to predict. So this is why we want to not speculate on the precise amount for the time being.

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Guillaume M.J.D Faury, Airbus SE - CEO & Executive Director [28]

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Yes. But if and when and what, how is still very unclear. So that's why can't speculate, just try to prevent this from happening, obviously. On the ACF well, there's a lot happening, and we are making progress. And the thing is it has been very successful from a commercial standpoint. And the industry ramp up of the ACF proves to be more difficult than what we had anticipated. So it's the speed of ramping up the ACF, which is slower than what we had in the plan, and this is what we've had to adjust. So the complexity comes from the complexity of the plane itself. It's a very performing plane, more flexible in the way you decide to install the cabin, there's more capacity for more configurations. You can put more seats, basically in A321 with the ACF consideration. So it's very competitive as a plane. It's challenging as an industrial market. And you know that we had our issues in 2018 that took a lot of energy, focus to solve the consequences of the engine crisis we had the beginning and mid of last year. And therefore, overall, I think we have lost time in preparing for ACF. I am convinced that this remains, and this is a great plane when we deliver it, but it's a matter of speed to get there.

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Operator [29]

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The next question is from Andrew Gollan of Berenberg.

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Andrew Paul Gollan, Joh. Berenberg, Gossler & Co. KG, Research Division - Senior Analyst [30]

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I'll just switch to defense for a moment, if I may. The performance in defense was slightly below expectations, I would say, at the margin level. And I think you mentioned in your prepared remarks just if I'd like detailed comments reflecting efforts to support ongoing campaigns. Can you just expand on exactly what that means, please? And then looking longer term in defense, legacy programs, A400M sort of stabilizing quite nicely now. So where is your optimism in the future in terms of growth? What might be the ambition in 5 years? We have 400M still going through at 0 margin. So where do we get the margin expansion? So just some comments around that division.

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Dominik Asam, Airbus SE - CFO [31]

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Maybe I comment on the kind of margin impact that you have highlighted, and then Guillaume will comment on the strategic long-term outlook.

Yes, this is a big impact because we're currently really driving massively these certain campaigns, and the most prominent ones are, of course, FCAS and Eurodrone. And these are really huge projects, which require a lot of resources and in the bidding process. So this is the key driver here.

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Guillaume M.J.D Faury, Airbus SE - CEO & Executive Director [32]

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Yes, which aids the flaw for the long-term answer. We are a bit at the turning point where we have historical programs behind us, and we sell those programs -- those products, those solutions as well to export. But we are at the time point because we see those new major programs arriving. Eurodrone, FCAS are 2 of them. You've seen probably as well the ambitions in space in defense. And this is also a turning point. So we are actively working on a large number of new programs or new projects. And this is extensive.

Now that's what makes me optimistic for the future in defense as Europe, overall, is ramping up its ambition, its budgets. We see now very specific projects popping up, we are involved in those major projects. And that's the future of what we are contemplating. We need to take the lessons from the difficulties we've had in the previous project. This is what we are doing. And I believe in the growth of defense business. But it's going to take time to materialize.

On export, there's a lot going on, but as I said in my introductory notes, the timing is more difficult to predict.

Hope it answers your question.

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Operator [33]

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The next question is from Harry Breach of MainFirst.

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Harry William Freeman Breach, MainFirst Bank AG, Research Division - Research Analyst [34]

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Just a couple of questions, if I can. First, can you give us a little bit of commentary about the Commercial Aircraft sales environment? And particularly, if you're seeing any pricing behavior changes from Boeing, perhaps in response to its recent issue?

And then second question, completely different. Just when we look at A330neo, are we seeing the engine OEM delivering on schedule there to [fund] assembly or any remaining issues there or is that now completely resolved?

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Guillaume M.J.D Faury, Airbus SE - CEO & Executive Director [35]

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Okay. So on the commercial aircraft side, as I said, we see a strong demand for our products. And the demand for the single aisle, in particular, is very strong and very solid and looks very sustainable with the new volumes being very successful. So that's a key point. It was the case before the events of our competitor beginning of '19. We think the XLR is adding to the portfolio of competitive products we are offering with an entry into the middle of the market for the A320 family. We are now booked, fully booked till 2024, and that's some of the limiting factor. And that's why we are looking at more capacity for the 321 on the one hand, and we're conducting this supply chain assessment, as we speak, to see if we can increase beyond 2021 the overall volume of the A320 family.

So that's what I would like to say. Now the rest and the reaction of the airlines and of the industry to do the MAX issues is something we see in the press and you can see in the press as well.

On the A330neo, we've been impacting -- impacted, sorry, in 2018 by the Trent delays. The Rolls-Royce engine delays in entering to service, mainly production issues on the Rolls-Royce side. Now we're humping up our deliveries, as you have seen, we've delivered more neos and ceos in the first half. It will be the case as well in the full year of 2019, so it's the year of what I call the crossover from ceo to neo on the 330. It was the case last year on the 320, and it's obviously a lot of complexity and challenges. But we're getting the engines to support this objective in 2019. So it should be okay, from an engine perspective.

For 2019, the challenges are obviously on getting the planes to the delivery center and then accepted by customers. And all of these are -- or most of them are planes of a new type with a new customer so it takes a bit of time. But it looks -- it will be good for the 330neo by year-end and with the engine as well.

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Operator [36]

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The next question is from Robert Stallard of Vertical Research.

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Robert Alan Stallard, Vertical Research Partners, LLC - Partner [37]

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A couple of quick questions. First of all, Guillaume, you mentioned the widebody pricing environment as being competitive. I was wondering if you could comment on what you are doing in response to this situation. Are you essentially matching your competitor on price? Or are you prepared to walk away from some deals? And then secondly, on the investment in digitization. I was wondering if maybe you could put some numbers around what the R&D or CapEx implications could be from this shift.

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Guillaume M.J.D Faury, Airbus SE - CEO & Executive Director [38]

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Okay, 2 important topics. On the widebodies, well, the first thing we've done is to size the production capacity at the level we think we can sustain without adding to more capacity and being forced into price where we don't want to go.

There's no one size fits all to your question. It's on a case by case. We want to compete. We think we have the better products, but there are some times where -- I mean, we go to what we think is appropriate, and we don't go further. We've had successes so far in 2019, including the Paris Air Show and more recently with Air China. So we think that's the right thing to do, but we are too in the market. And when there is price pressure and some volume approached by the main competitor, it defines the market condition.

Digitalization, we have 2 main -- or we have several initiatives, but we have 2 main projects ongoing, one is on Skywise. And the other one is what we call DDMS, which is basically putting 3D across the board for the product, which we have already, the production system, and it's quite new in aerospace to have the product and production systems in 1 set of data and going to the support and services. So an end-to-end approach to the data. That's very structuring. That's the big change in that industry, where we have the largest and most sophisticated products from the industrial revolution, I would say. It's triple-digit numbers, which we are investing in digital. But basically, there's not a clear frontier between what is digital and what's not. So I think which is relevant for Airbus today is what we do in R&D and CapEx. And I think this has been commented several times. Maybe Dominik, if you have comments on R&D, CapEx. But it's included in our numbers, I would say.

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Dominik Asam, Airbus SE - CFO [39]

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Yes. I mean, the number we've given is that we have about 0.5 billion ticket for CTO, DTO earmarked here, and this will be a little bit back-end loaded in this year.

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Operator [40]

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The next question is from Jeremy Bragg of Redburn.

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Jeremy David Bragg, Redburn (Europe) Limited, Research Division - Research Analyst [41]

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Two questions from me. One is on ACF again, sorry for that. I want to ask you say you're considering options to increase production. I wanted to ask you to elaborate on that. And I also kind of wanted to explore what the margin impact of these problems have been because I would venture that these aircraft are making a lower margin now than they should ultimately be because of the problem. So should we expect a step-up in A321 margins next year? And that's obviously important because it's a large percentage of deliveries.

And then the second comment really is on demand environment. I know Harry asked and a couple of other people. But I mean, we've seen traffic growth slow from 7 basically to something with a 4 on the front. And I just wanted to ask at what point do you start to get worried? Are you seeing any signs of any kind of softness in demand for your products, please?

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Guillaume M.J.D Faury, Airbus SE - CEO & Executive Director [42]

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I'll let Dominik comment on the margin of the ACF. I'll try to answer the questions together.

Basically, from a numbers perspective, we continue to see a very, very strong demand for the single-aisle aircraft, and we are limited by our capacity to produce and by the fact that we are fully booked in 2024. And I think a significant share of the backlog is already sold for 2025 onwards. That's why we need to ramp up, and it's mainly an additional demand coming from the 321. So we are really focusing on the 321 on one side and then as I explained with these supply chain assessments on the overall volume.

What are the options to ramp up on the 321, and you know that 2022 onwards, all A321s will be ACF. So it's the same -- again, it's the same. There are different possibilities. What is the situation today, our 4 lines in Hamburg, our A320, A321 lines, the 4 lines are capable of the A321, and this is where we do the ramp up today. We delivered a handful of A321s from Mobile in H1, but it's not really contributing to the size of the answer we need. And the lines, which are includes our A320s and the line in Tianjin is an A319 and A320 line as well.

So it just explains the possibilities. We are suffering in the ramp up of ACF in Hamburg. There are possibilities to do better in Hamburg, but there are other possibilities, and we are looking at all possibilities within the frame of the existing production system within the frame of the existing sites because we would like to be fast. Now we have just started the study, and it will be premature to come to conclusions. We are not yet there.

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Dominik Asam, Airbus SE - CFO [43]

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So and coming to the ACF margin discussion, I would not overestimate but I don't want to quantify it, but the big thing is not on the efforts, which we call continued support to really ramp. The impact is more on the cash side. It's on the inventory side because the cycle times are too long. We want to bring that down and improve on the inventories. I didn't mention it on topic about the prepayment loss and the inventories gives some counterbalance, so to speak. And then also, of course, the deliveries are much more sensitive. So the real sensitivity is not so much on the efforts we make to ramp. It's really on the deliveries themselves.

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Operator [44]

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The last question is from Christophe Menard of Kepler Cheuvreux.

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Christophe Menard, Kepler Cheuvreux, Research Division - Head of Aerospace and Defense Sector [45]

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Two questions on my side. The first one is actually on the free cash flow. Just wanted to have a better understanding of the phasing in H1. I mean, do you -- did you have excessive impact from A400M in H1 versus a more spread out impact last year in H1 and H2? And also can you quantify, if possible, the impact of the inventory linked to Brexit? So just to understand that phasing on the free cash.

Second question is to go back -- going back to Defence and Space actually. The margin, is space margin also under pressure? We've seen some of your competitors having some difficulties. I mean, the market is difficult. So are you seeing some downward pressure on your margin? I mean, we will assume that you won quite a number of contracts. So -- but was it at the detriment of the margin? Any communication would be helpful.

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Dominik Asam, Airbus SE - CFO [46]

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So on the phasing of the free cash flow, and you've seen that not much happened basically in Q2, there was a very negative number in Q1. I think it's not so dissimilar to last year. And on A400M, I think there's a little bit of -- it is a front-end loaded profile on the cash out, but I don't want to go into more details there, but there's less to come definitely in the second half.

And Brexit inventories, I mentioned there's 1 month as Guillaume mentioned, there's 1 month of buffer stock, but I cannot precisely quantify that. And if we are really able to release that already by the end of the year, I'm not so sure either because it really depends on how the Brexit will come along.

Margin on Defence and Space. Yes, obviously, the market is highly competitive. But I don't want to kind of now project is that kind of secular trends or to margin erosion in that sector. I think that would not be warranted based on what we see so far.

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Guillaume M.J.D Faury, Airbus SE - CEO & Executive Director [47]

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Inventories and stock for the Brexit, very significant share of it is with our suppliers. Their commitment is to be able to deliver to us. And in that uncertain environment of a no-deal Brexit, we have asked them to prepare to be able to deliver in spite of a degraded environment, and therefore, the majority is on their side.

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Thorsten Fischer, Airbus SE - Head of IR & Financial Communication [48]

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That was the last the question. This closes our conference call for this time. If you have any further questions, please send 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.

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Guillaume M.J.D Faury, Airbus SE - CEO & Executive Director [49]

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Thank you.

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Operator [50]

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Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.