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Edited Transcript of AIR.PA earnings conference call or presentation 30-Oct-19 7:15am GMT

Q3 2019 Airbus SE Earnings Call

1119 PR Schiphol Rijk Nov 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Airbus SE earnings conference call or presentation Wednesday, October 30, 2019 at 7:15:00am 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 Edward Humphrey

Morgan Stanley, Research Division - VP

* Benjamin Michael Heelan

BofA Merrill Lynch, Research Division - Analyst

* Carter Copeland

Melius Research LLC - Founding Partner, President and Research Analyst of Aerospace & Defense

* Celine Fornaro

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

* Christophe Menard

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

* 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

* Olivier Brochet

Crédit Suisse AG, Research Division - Research Analyst

* Tristan Sanson

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

* Zafar Khan

Societe Generale Cross Asset Research - Equity 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 9 Months 2019 Results Release Conference Call. I'm Alexandra, the operator for the conference. (Operator Instructions) 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, Alexandra. Good morning, ladies and gentlemen. This is the Airbus 9 Months 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 60 minutes. This includes Q&A, which we'll 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 emailed 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.

Now over to Guillame.

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

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Thank you, Thorsten, and good morning, ladies and gentlemen, and welcome to our 9 months 2019 earnings call. Let's start with the 9 months highlights. We observed a commercial aircraft market that remains solid, even against a challenging [micro] environment. RPKs continue to grow, albeit at a lower pace. Load factors are at a record levels. Overall, 2019 is expected to be the 10th consecutive year of airline profitability. We see healthy demand for our products across global markets, fostered by the long-term growth of our industry. Our latest GMF, Global Market Forecast, estimates traffic growing at 4.3% annually and demand for 39,000 new planes over the next 20 years. In particular, we see appetite for single-aisle long distance operations, where the A321XLR is ideally positioned.

Our 9 months results are mainly driven by the performance in commercial aircraft, reflecting both the A320neo ramp up and progress on the A350. We are focused on the A320neo ramp up and improving the industrial flow while managing the higher level of complexity of the A321 ACF, in particular. We have taken underlying actions to secure a more efficient delivery flow in the next years towards rate 63 per month in 2021. This is reflected in our 9-month deliveries, and on that basis, we have updated our delivery outlook for 2019.

Our full year free cash flow guidance has been adjusted to reflect this revised delivery outlook. Our EBIT adjusted guidance is maintained, and we're focusing on meeting our customer commitments, and at the same time, preparing the production system for the future with higher volumes and higher complexity.

Now let's take a look at 9 months '19 commercial position. First, I want to address the recent imposition of tariffs. They've been implemented since October '19 -- sorry, '18 on Airbus aircraft imported from the EU into the U.S. The tariffs, as announced, do not include components delivered to Mobile. Therefore, aircraft delivered from Mobile are not subject to tariffs, but aircraft delivered from Europe are levied a tariff of 10%, which is severely -- which severely impacts our U.S. customers. We are working with our U.S. customers to manage the consequences of those tariffs. Next year, the WTO is expected to entitle the EU to impose tariffs on the U.S. products at a significant level. I remain hopeful that the U.S. and the EU will find a negotiated solution before creating serious damage to the aviation industry and to the global economy.

The second important concern is still the risk of a no-deal Brexit. We planned for a no-deal scenario and run a major exercise to understand, eradicate and/or mitigate risks. The shape of the future of EU-U. K. relationship remains of critical importance to us.

Now let's take a closer look at our commercial positioning, starting with commercial aircraft. Our backlog is at 7,133 as of end of September. In 9 months, we booked 303 gross orders, including 20 A330neos and 22 A350s just in Q3, which shows customer endorsement of our wide-body products. 9 months net orders were 127 aircraft, following 51 cancellation in Q3, including the cancellation of 40 A220 from Republic.

On the A220, we continue to see good order momentum with 14 gross orders in Q3 and a commitment from Air France for 60 A220s, not yet reflected in the order book. Our backlog is now at 435 aircraft, and we're working on additional campaigns. We target to deliver around 45 aircraft in 2019, and we continue to ramp up to a max target rate of 10 in Mirabel and 4 in Mobile by mid of the next decade.

Looking at the A320. We booked 34 [some] orders in Q3. We have a backlog of more than 5,700 aircraft. And we're fully booked through 2024. We are working towards rate 63 in 2021, and discussions for further rate increases beyond 2021 are underway with suppliers. I'm sure you will raise question on that.

Moving to the 330. The backlog is now at 278 aircraft. And on the A350, we have a backlog of 601 aircraft, and we are producing at around 10 a month. In services, we're making good progress on extending the Skywise platform, we have now more than 100 airlines, 15 suppliers and about 8,500 aircraft.

Moving to helicopters. We booked 173 net orders in 9 months, including 12 H135 in Q3. We also booked the first Airbus Corporate Helicopter H160. Globally, the civil and parapublic market remains soft, always, especially in oil and gas, but we continue to see good momentum in military, with ongoing campaigns, including NH90 for the German Navy and H135 for the U.S. Navy Trainer.

Defence and Space. We had an order intake of EUR 6.1 billion in 9 months. In Q3, order intake was EUR 1.8 billion, supported by key contract wins in space, including an order for 2 SpainSAT NG satellites and a contract to develop the Constellation Optique 3D, which is the earth observation program for the French space agency.

In CIS, we see good momentum for our so-called Pleiades Neo satellite imagery service, and we unveiled a commercial platform for geospatial data analytics.

In unmanned aerial systems, we submitted our euro mail proposal together with our partners in H1, and contract negotiations are underway with the customers.

In military aircraft, France and Germany recently agreed to (inaudible) demonstrate a phase for the FCAS early next year. This is a key step in moving this ambitious project forward. We are also pleased to see that France and Germany have committed to develop a common position on exports for joint defense projects in the future.

Overall, we continue to see good prospects, particularly in defense. Also, the exact timing of rewards is difficult to predict.

Dominik, I'm looking at you. So I now leave the floor to Dominik, that will take you through our financial performance.

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Dominik Asam, Airbus SE - CFO [4]

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Thank you, Guillaume, and good morning, everybody.

Our 9 months revenue grew to EUR 46.2 billion, up 14% year-on-year, mainly driven by higher deliveries, favorable mix, and to some extent, a favorable exchange rate development.

In the 9 months, our EBIT adjusted grew to EUR 4.1 billion, up about 50% year-on-year, mainly driven by the performance in Airbus. The yearly improvement, broadly unchanged versus the first half of the year, is largely driven by the A320 ramp up and new premium; progress on the A350 financial performance; and the foreign exchange improvement, which has already materialized in the first half. We also continue to ramp up our investments in innovation and digitalization, which will accelerate in the Q4 as we ramp up demonstrators and the DDMS.

Our 9 months free cash flow before M&A and customer financing was minus EUR 4.9 billion. It mainly reflects the working capital build to support future deliveries, including advanced stage aircraft close to delivery. As Guillaume mentioned, we have updated our delivery outlook to around 860 aircraft. On that basis, we target approximately EUR 3 billion of free cash flow before M&A and customer financing. Recall that for every thing (inaudible) built but not delivered within the year 2019, we lose mid double-digit million amount of free cash flow.

To put a [remind-to-do] into perspective, this means we plan to generate at least EUR 8 billion of free cash flow in Q4 2019, which is about EUR 7 billion in Q4 2018 on a slightly lower number of aircraft delivered.

And finally, on WTO, based on the current U.S. tariff scheme and the measures we've taken, we see a single-digit number of single-aisle deliveries left from Europe to the U.S.

For 2020, we are in discussions with our customers regarding deliveries from Europe. We may have to defer some deliveries and reallocate affected slots to other customers, which would take additional time and costs.

Now let's turn to Page 7 to deep dive into our profitability. Our EBIT reported was around EUR 3.4 billion. The level of adjustments was a negative EUR 702 million and includes the following: minus EUR 253 million related to the foreign exchange rate and balance sheet revaluation, minus EUR 221 million related to the suspension of defense export licenses to Saudi Arabia; now to March 2020, of which minus EUR 13 million occurred in Q3; minus EUR 58 million (sic) [EUR 158 million] related to the A380 program costs, of which 22 were booked in Q3 as part of our continuous assessment of asset recoverability and quarterly review of onerous contract provision assumptions; minus EUR 70 million of other costs, including compliance costs partially offset by a positive EUR 45 million capital gain from the sale of (inaudible). Earnings per share reported include a negative impact from financial results affected by the recognition of a loss on ForEx hedges as a result of the defense export license suspension already booked as of Q1.

The effective tax rate on net income is 32%, where we continue to see the impact of the aforementioned charges related to the defense export license suspension as well as the reassessment of deferred -- 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% for the core business result. The resulting net income is EUR 2.2 billion, with earnings per share of EUR 2.18.

Now on to our hedging activities. We continue to ramp up our hedging activities in Q3 as the euro-dollar rate was more favorable. Our hedge portfolio provides good visibility for the coming years at attractive rates. In the 9 months 2019, we implemented $37.5 billion of forwards at an average rate of $1.21 per euro, mainly for 2022 and 2023, while $17.4 billion of hedges matured at a rate of $1.26. We again adjusted the intra-year phasing of our hedges to better reflect our delivery profile enrolled over $5.1 billion of hedges in total for the year. We also rolled $3.4 billion of hedges from '19 into 2020. We'll continue to adapt the pacing of our hedges in line with our delivery plan. Our portfolio stands at $101 billion with an average hedge rate of $1.22. So we remain well protected, and we will implement new hedges based on the overall FX environment, in line with our policies.

Now let's look at our cash evolution in the first 9 months of '19. Our gross cash from operations of EUR 4.5 billion broadly reflects our EBIT adjusted. Working capital reflects the inventory build to support the ramp up and other changes in working capital, including payments to suppliers. The free cash flow also includes dilution from the A220. As a reminder, this dilution in 2019 is largely covered by the funding arrangements up to an amount of $350 million for the year. This funding is recognized as a financing cash flow, and therefore outside free cash flow.

The A400M continues to weigh on free cash flow before M&A, actually at a slightly higher level than anticipated. On a fiscal year basis, we should see lower cash consumption than in 2018, but the exact free cash flow impact will depend on progress towards our capabilities, delivery road map and securing export business. In the 9 months, cash flow for customer financing was limited as the appetite for commercial financing remains high. At around EUR 1.5 billion, CapEx was broadly in line with the 9 months of the prior year. On a full year basis, CapEx should be around EUR 2.7 billion. All in all, this gives us the free cash flow reported of minus EUR 5.1 billion and a net cash position at the end of September of EUR 5.6 billion.

Regarding our pension obligations, we again had to reduce the discount rate assumption in Q3. The global decrease in rates resulted in an increase in pension provision by EUR 1.3 billion. As we mentioned in the first half, we still expect to top up the funding level of our pensions for the end of the year, but at a lower level than last year. If -- when and to what extent we are going to fund this increased deficit in the future will depend on different factors, but in particular, interest rates. Our objective remains to increase the pension funding ratio to benchmark level.

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

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

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Thank you, Dominik. Let's start with Airbus. We delivered 571 aircraft in 9 months, 68 aircraft more year-on-year, which is an increase of 14%.

Now let's take a closer look at where we stand on each program, starting with the A320. We delivered 422 A320 family aircraft, of which 338 neos. So 338 out of 422. Our A320neo fleets, as the neo fleet has about 99.7% operating reliability, which is very high and equivalent to the A320ceo. We also delivered the 1,000th A320neo as well as the first A321 this year from Mobile. On the ACF, we continued our ramp-up in 9 months, which remains challenging. In Q4, we will further ramp up the ACF with about half of this year's ACF deliveries expected in Q4. As our full year target approaches triple-digit territory for ACF, this means a large increase from the 12 ACF deliveries in 2018.

The teams are focused on improving the production system and the in-store flow, and we have developed and deployed the necessary resources to reduce so-called outstanding work, including on a number of almost finished aircraft. Efforts will continue for 2020 to improve the industrial maturity and efficiency of the program towards a successful way forward looking at 2021.

We also inaugurated the new A320 structure assembly line in Hamburg to help build additional efficiency in our production plan. As part of our plan to ramp up to rate 63 in 2021, our FAL in Tianjin and subsequently in Mobile will be at rate 6 soon. In addition, we continue to study different options to increase the share of the A321 in our current A320 family production capacity.

On the A220, we delivered 33 aircraft, sorry, and we started production of first U.S. assembled aircraft in Mobile.

Switching to the A330, we are in the year of the crossover. We delivered 34 aircraft, and we see the neo ramp-up coming through with 26 deliveries in 9 months. The tax certification for the A330-800 is expected in early 2020.

On the A350, we delivered 77 aircraft in 9 months. We have now 30 A350 operators. We continue to make good progress on RC convergence, and we're on track to reach our breakeven target for the year.

And for the A380, we delivered 5 aircraft.

Now on to Slide 14 and Helicopters. Stable revenues were supported by growth in services, reduced by program phasing. EBIT adjusted was stable and reflects an increased contribution from services, reduced by less favorable delivery mix. In September, we delivered our 1,000th Super Puma. To date, the Super Puma is operated by nearly 100 customers in 50 countries.

Let's have a look at our Defence and Space business. The increase in revenues was mainly driven by military aircraft. EBIT adjusted mainly reflects efforts to support ongoing and future campaigns. The team is focused on performance and cost control. Looking at Q4, we have a lot left to do, and we're focused on execution across our program lines. Our EBIT reported reflects an adjustment of minus EUR 221 million due to the prolonged suspension of defense export license from Germany to Saudi Arabia. This is indeed the fourth time in 12 months that the German government has prolonged the suspension.

9 months '18 includes the net capital gain from the disposal of the Airbus DS Communications Inc. business in the U.S. [for memory].

Now on to the A400M, we delivered 10 aircraft in 9 months, bringing the in-service fleet to 84 aircraft. During Q3, we achieved several key milestones towards full capability, including the deployment of 58 paratroopers on a single side draw and the certification flight test for the dispatch of 80 paratroopers from both doors simultaneously. Finally, we achieved the first air-to-air so-called dry contact refueling with an H25M helicopter. These were major milestones.

As Dominik said, the A400M cash consumption is reducing, however, not at the pace we are targeting. We will continue with development activities towards achieving the revised capability road map, [rest] profit activities are progressing in line with the customer agreed plan. Challenges remain, particularly on exports.

Now on to the guidance slide. As I said before, our 9-month delivery numbers and the adjusted delivery outlook for the year reflect the underlying actions to secure a more efficient and a more predictable, sustainable delivery flow in the next years as we progress to rate 63 per month in 2021, with a lot of more complex planes with more value.

For year 2019, we have updated our guidance. Of course, we will continue to monitor how the situation on U.S. tariffs and Brexit evolves. Airbus 2019 earnings and free cash flow guidance is before M&A. Airbus now targets around 860 commercial aircraft deliveries in 2019, which reflects the updated delivery schedule. On that basis, Airbus maintains its expected increase in EBIT adjusted of approximately plus 15% compared to 2018. Airbus now expects free cash flow before M&A and customer financing of approximately EUR 3 billion.

Our full year free cash flow guidance has been adjusted to reflect the revised delivery outlook. Based on our 9 months performance and the operational measures we have taken, we are increasingly confident in our ability to meet our EBIT adjusted target for the year.

Now a few words to wrap up. Our key priorities remain the same as last quarter. Clearly, the entire team of Airbus is focused on deliveries for the remainder of the year, but also on ramping up the ACF and improving the efficiency and the underlying performance of the delivery flow in 2019, in 2020 and moving forward to 2021. This should, and will, support the A320 ramp up to rate 63 in 2021 and should help achieve a more linear delivery profile, which we are focusing on. We are also continuing our discussions for further rate increases beyond 2021. We will provide an update on this topic with our full year '19 results disclosure. On the 350, we've made good progress, and we are continuing our efforts to drive further cost convergence. Beyond those 2 main topics, we remain focused on the A220 integration, commercial momentum, ramp up and cost reduction on the A400M program execution; on improving our helicopter business competitiveness through the transformation efforts; leveraging the digital and accelerating innovation within Airbus; and continuing to expand our services businesses worldwide, with the help of Skywise.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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

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(Operator Instructions)

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Operator [3]

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So the first question is from Olivier Brochet of Crédit Suisse.

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Olivier Brochet, Crédit Suisse AG, Research Division - Research Analyst [4]

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I would go for 2 questions. The first one on the free cash flow for Q4. Your guidance implies something like EUR 8 billion, despite the cut. Can you walk us through some bridge element to think about in Q4, anything to note? For instance, from Defence and Space that would help us understand how you get to EUR 8 billion?

And the second question would be on the WTO conversations. Airbus and Europe has been -- have been calling for a negotiated solution. Is there a case where it does involve Airbus at some stage, and in particular, cash from Airbus?

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Dominik Asam, Airbus SE - CFO [5]

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So -- okay. On the free cash flow, yes, you're right that we're basically increasing the remain-to-do from EUR 7 billion last year to EUR 8 billion and just on a slightly lower number of aircraft, we can easily calculate that the guidance implies [8%] lower aircraft. So what are the puts and takes, so to speak? The first one is, as you mentioned already, the Defence and Space is quite back-end loaded, and there are certain profiles in terms of order intake, but also deliveries which trigger that. And secondly, yes, we do have higher payments per aircraft because of the mix improvement as we move from A320neo to A321, and then ACFs are increasing to ramp up in earnest. So we do half of that, sort of around about 100 we do this year in that quarter, and that should give us a very strong pickup there. And this is why we're confident on the revised guidance.

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

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On WTO, well, we are negotiating with our customers. The remain-to-do in '19 from European production sites is rather limited. And you have noticed that the tariffs do not apply on aircraft delivered from Mobile, and therefore, it's a discussion that is now much more looking at 2020, and this will be obviously difficult to manage, especially in the second half of 2020, as tariffs, as you know, are in fact import duties that apply to airplanes exported to the U.S. And therefore, the airlines have to pay for those tariffs.

So -- but this will be a discussion for later. And in the meantime, there will be the WTO ruling on the case, EU against the U.S., where we expect, I mean, another set of tariffs to be put in place in the other we are on, and therefore, more -- even more reasons for a settlement. And that's basically what we think will happen, and we are trying to contribute to that discussion to this escalation of this useless tariff war that we see at the moment.

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Operator [7]

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The next question is from Ben Heelan of Bank of America.

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

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Yes. I guess the first for me is to what degree is this delivery cut to ensure a better delivery ramp as you move towards 63 months? And to what degree is it about you continuing to underperform expectations in that ramp up of the A321 ACF? And what confidence can you give people on that ramp? Because this is the second delivery curve that you've given us in 2 years now.

And then the second question I've got around the implications of this for 2020. Should we be thinking about this delivery cut as resulting in a more balanced delivery profile in 2020? And then as a result of that, what could be the implications for cash flow in 2020?

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

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Yes. I think this is at the core of the call today. Well, basically, what we are doing here is the disappointment on the 2019 delivery, but it's completely in line with our efforts to ramp up efficiently to the rate 63 in 2021. We have to look at the future, we're delivering more airplanes. We are targeting 63 (inaudible) in 2021, but I have indicated that we will continue to ramp up on the outliers, given the very strong demand on the single line. And at the same time, we see a demand that is going for aircraft with more value, but also more complexity. And we have to prepare to transform our production systems to do this in an efficient and sustainable manner. And this is really what we are doing this year, and we will be doing as well in 2020. So we are doing this to secure our ability to serve efficiently 2021, 2022. It goes with transformation, that's what it is. We were targeting more planes, but we are facing the situation that's doing both, ramping up production and transforming -- sorry, the production system is a difficult thing to do. Will it lead to a more balanced delivery in 2020, where we are looking at it as we prepare 2020, but we are suggesting that we will go step by step towards 2021? I think we'll be able to update in more details on that question probably at the next call, which will be the [end of] full year results. But importantly, I really want to say, we are doing the right things. We're doing things to prepare the future and to make sure we are going on top of the industrial problems we have been facing in the last 2 years for very different reasons, mainly driven by engines last year and driven by the ramp up of the ACF this year, but we want to be at the right place moving forward. That's a transformation exercise that we are running, and it comes with some consequences for '19, but I really believe we're doing the right thing.

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Operator [10]

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The next question is from Tristan Sanson of Exane.

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Tristan Sanson, Exane BNP Paribas, Research Division - Head of Aerospace & Defence and Equities Research Analyst [11]

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So I guess it was me that was just announced, Tristan Sanson from Exane.

So the first one, looking at what you did on the hedge book, the rollover of a bit more than $3 billion hedges from 2019 into 2020. (inaudible) is that you would probably get back on track with your initial ramp-up program into 2020 and maybe even catch up a few deferred A321 ACF deliveries over that year, hence the deferral of hedges on that year. Is that a correct way to look at things?

And second, if we dig into your Q3 numbers, we get a very high underlying contribution there, aircraft delivered in -- at Airbus. Can you give us a few elements underpinning that profit contribution per aircraft improvement is coming from cost or price on the A320? Is it coming from faster move up the learning curve of the A350? What is delivering better than expected right now in the business?

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Guillaume M.J.D Faury, Airbus SE - CEO & Executive Director [12]

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Dominik, will you take those questions?

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Dominik Asam, Airbus SE - CFO [13]

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Happy to do so. Hedge book, I mean, I cannot hide here that -- and it should not come as a surprise as we revise the delivery guidance downward that rolling the hedges into the new year were simply a result of us delivering less aircraft this year than what we had initially thought. Now technically, you shouldn't kind of interpret too much into the kind of pacing here because we are not -- we don't have the precise delivery dates yet for next year, and we've kind of [parked] these hedges in the Q1, and then we will kind of distribute them to the precise delivery date by rolling them forward next year. So be a little bit careful on assuming too much for Q1 here because this will be adjusted again. But you have seen also in the backup of our slides that, in general, is a more attractive hedge rates in there for next year than for this year with the grain of caution that we need to rephase potentially next year.

Now the Q3 contribution was indeed not bad. If you think about us delivering less aircraft than last year and maintaining the EBIT adjusted, I think the upside here have been commented a couple of times already, is good progress on A350 recurring costs. It is the mix improvement, the structural improvement in terms of delivering more higher value-added and also higher-margin products. And if you compound all of these effects, there's a lot of smaller effects, which gives us the ability to basically offset the lower deliveries at the same EBIT adjusted contribution.

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Operator [14]

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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 [15]

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I have 2. The first one would be on the A321 and the ACF ramp up in terms of trying to understand the relationship with the workforce in Hamburg. And if there, the extra time implementation is starting to pay off or not? And what's your view on that beyond also the industrialization?

And secondly, on the A400M. You mentioned an increase -- a slower, I would say, bleed on the cash than you expected -- or recovery, sorry, of the bleed. And so I was wondering on that one, you also flagged the export risk if you don't secure an export. Maybe you could put a little bit more color on the time lines? And what's the time pressure there? Is it within 6 months? 1 year? Or you have a bit more room to maneuver?

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Guillaume M.J.D Faury, Airbus SE - CEO & Executive Director [16]

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Thank you for your question. I'll take the first one on the ACF. Yes, we have implemented a lot of measures in 2 directions. As I said, transforming the production system, automation, robotization of activities, but as well additional workforce to cope with the complexity and training the people for the long-term growth of that complexity. As you rightly indicated, for the moment, it's mainly Hamburg, and we have all the complexity sort of concentrated in Hamburg. We want to change that in the future and sort of debottleneck Hamburg. To manage the situation, we have put in place new labor structural organizations and especially what you call extra time. I think you're referring to additional work that we have organized. Yes, it's paying off. It's paying off in both the increased volume of the ACF. As Dominik indicated, we intend to deliver half of the ACF '19 in the last quarter. So it shows that those products are in the production pipeline, but as well in the transformation I was mentioning before and the underlying improvement of our production systems. Now it's not a 3-month exercise. It's a sort of 2 years exercise, and we'll be focusing on doing this consistently, end of '19, second half of '19, 2020 and moving Forward. And from there, Dominik, I hand over to you.

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Dominik Asam, Airbus SE - CFO [17]

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Yes, I think, Celine, the question related really to the export business there, and there's 2 things we have to take into account. Firstly, when we get an order in for export, we, of course, book PDPs, which are quite significant in the military business. So for this year, basically, the only thing that would give us more cash flow is really getting an order and then receiving the PDPs on that order. There is another aspect, which is more longer term. You know the initial contract with OCCAR on the A400M is spending across the next decade. And we have to do every year an estimate at completion or is a triggering event, which we don't have at present. But every year, we have to do it anyhow. And on that front, it of course matters, what is the assumption? How many of these export orders can be placed, by when and how many can be delivered within the time frame of that initial contract? Because this estimate of completion is bought for that initial contract. And that means here, we talk about a time frame of a decade to come.

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Celine Fornaro, UBS Investment Bank, Research Division - Head of EMEA Industrials Research [18]

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And sorry, the decade, they start once the contract was revised at the end of last year?

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Dominik Asam, Airbus SE - CFO [19]

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No, it is for now. It's kind of going to the 2030 type of time frame. I'm not exactly when it will end, but this is kind of the time frame we talked about for this contract. So it's -- until the last delivery of the OCCAR customers is done, this is how long the contract runs.

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Operator [20]

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The next question is from Christophe Menard, Kepler Cheuvreux.

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Christophe Menard, Kepler Cheuvreux, Research Division - Head of Aerospace and Defense Sector [21]

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Two questions on my side. The first one is on the free cash flow in 2020. Could you give us some indication on whether the -- your efforts to normalize the production across the year will have a significant impact on your free cash flow targets?

And the second question is the U.S. tariffs. It's only 10% -- or at least 10% tariff. Are you willing to take that, I would say, impact on your deliveries in the sense that will you have the -- your customer pay for that? Or could you take that hit on your pricing basically?

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

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Well, Dominik, maybe you take the first one and I take the risk to take the second one.

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Dominik Asam, Airbus SE - CFO [23]

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Thanks for giving me the easier part. So on the free cash flow, we of course have indicated we want to do linearization. And yes, we want to do some progress already on the turn -- from the turn of coming out of '19 into '20. I mean, if you look at our balance sheet, you'll see that we have a very high inventory number, actually up EUR 3.7 billion over the year, and that we have also said that not all of these aircraft, many of which are very, very close to be completed, will be delivered this year. And then, of course, we have an opportunity to ship them early next year. Also from some other structures we try to mitigate. So we do want to have a better free cash flow in 2020 than we had in 2019 to start linearizing. However, I could caution that linearization will not be completed that quickly. It will take the full next year. And then, of course, come 2021, we really want to shoot for that famous cash conversion of 1. And so this is the game plan, and I think we can hopefully show a certain step in that way already at the turn of this year.

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Guillaume M.J.D Faury, Airbus SE - CEO & Executive Director [24]

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Indeed. On the tariffs, well, these are import duties. So by contract, they have to be paid by the customers, by the airlines themselves. Now there's a lot of complexity on the short term. So we are managing that complexity with our customers sort of aircraft by aircraft. But moving forward in the mid of next year, we want to be in a situation where the tariffs, I mean, are paid by the customers. And the 10% is a lot of money, which means they will have to choose between paying the tariffs on the airplanes or deliver plane to the U.S. Airlines and the ability for the U.S. Airlines to have the capacity they need in a market which is very strong. And therefore, we think it's a lose-lose. And it's a lot of lose for the U.S. industry. That's why we continue to push for amicable settlement between EU and U.S., especially with the perspective of the next WTO ruling sort of May or June next year. That will give the ability to EU to sort of retaliate, to put tariffs on goods coming from the U.S. to Europe and especially Boeing airplanes. So it's time to come to reason before we are in that escalation scenario. But if we come in that escalation scenario, we'll have to live with it.

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Operator [25]

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Next question is from Doug Harned of Bernstein.

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Douglas Stuart Harned, Sanford C. Bernstein & Co., LLC., Research Division - SVP and Senior Analyst [26]

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I'd like to go back to the A320 family. And really, what is it about the ACF that has been so difficult from an industrial standpoint? It doesn't seem like it should be that difficult a variance on the surface. So the first question is, what has been so hard about that? And then second, related to your digitalization strategy, MROs have pushed back pretty hard against the proposal to charge royalties for data. And what does that mean for your overall strategy here and your opportunities to monetize some of the work you've been doing about -- around digitalization and data?

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Guillaume M.J.D Faury, Airbus SE - CEO & Executive Director [27]

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Okay. So why is ACF so hard? That's a good question. And in fact, it tends to be harder than what we probably have anticipated. Well, the fact is the ACF is an aircraft with a new cabin and a new -- these parts of the plane, including with the capacities, with the provisions for new systems like fuel tanks because the ACF is also the LR version, and therefore, the rear part of the plane is new and is more complex, which means we have to relocate, to reroute wires, harnesses, fuel system to modify the airframe. And we have a big one-off for older head of versions of the new ACF as we have to redo all the design, the industrialization of all those new head of versions, and they come in very large numbers as we have sold a lot of ACF. So there is more work content. There is more complexity in that plane, not in the wings, but in the rear part, the rest, the cabin, the harnesses, the -- all the hydraulics and fuel systems, and there's a lot of industrialization, okay, to be done, especially for each of the head of versions. And therefore, this big one-off comes with a lot of additional work. And as I said before, we are doing this at the same time we are improving the underlying structure and performance of the production systems to ramp up to higher rates with even more ACF next year. And you remember that by, I think, end of 2021, all A321s will be ACF. So it's not rocket science, to be clear, but it's a lot of work in a short period of time. We are gearing up for rate 63, so 63 airplanes a month. And higher complexity at the same time, higher value of the airplane. We want to be prepared to do this in a sustainable and predictable way.

On the MRO, well, I'm not completely happy in the way we have introduced this fee on our IP, and we are working with the MRO shops in the airline to update our policy and move forward in a more cooperative way with them, so work ongoing. And I would say we are in the transition on this thing. What is really -- I mean, that's a bit of a small event compared to the bigger one, which is the move towards digital and the change of nature of the services we're delivering, going more to flight hour services. So there's a big change of business model, and we can see that there are some difficulties on the way, but I'm sure we will overcome those difficulties.

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Operator [28]

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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 [29]

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Can I -- and I'm sorry to labor the point, just with ACF, can you -- I think you touched in the remarks earlier about having made 12 deliveries last year. You touched also just earlier, I think I'm saying by the end of 2021, all A321s will be ACFs. Can you give us any more data points in terms of just the annual numbers and the numbers of heads of version, in particular?

And then just separately, can I just clarify something that I think Dominik said? Dominik, did you say earlier on that in 2021, we'll be looking at free cash conversion of 1? And does that mean that your free cash before M&A will be equal to net income adjusted, that will be the target for 2021?

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Guillaume M.J.D Faury, Airbus SE - CEO & Executive Director [30]

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Okay, Harry, I'll take the first question. Well, a number of ACF for full year 2019 will be probably reaching triple digits. That's basically what we're targeting. And as I said before, it's half of them in the last quarter. So you see that we have interesting last quarter to manage. Well, we're on the way. A lot of them were in Q3 already, and that's part of the explanation of why we've been down in number of planes compared to Q3 2018. It's only part of the explanation. Last year, in Q3 '18, we -- after a couple of months without engines, we were starting to deliver our famous gliders, planes that were [part] and therefore easier to deliver. So it's difficult to make year-on-year comparison. But basically, what is important is that we are now in the ramp up of the ACF. It will be even much higher in 2020, so it's a similar pattern in 2020, but targeting a rate 63, 2021, with the very vast majority of planes -- of 321s being ACF and as well the target to debottleneck Hamburg to regain room to maneuver and sustainability of what we are doing.

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Dominik Asam, Airbus SE - CFO [31]

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What was the second question?

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

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Yes?

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Harry William Freeman Breach, MainFirst Bank AG, Research Division - Research Analyst [33]

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Just the heads of version, is there any...

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Guillaume M.J.D Faury, Airbus SE - CEO & Executive Director [34]

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Yes, sorry. Yes. So each and every new customer is a head of version. Now -- and there's a lot of new customers, as you can see in our press release, leaving Hamburg with a new -- with an ACF. So it's in dozens of head of versions. It's mainly -- it's a lot of head of versions in 2019 and 2020. That's why this is really the 2 difficult years for the ramp up of the ACF. It's a lot of new lines.

And once we have industrialized the head of version and we can reuse the drawings and the work that has been done for one head of version to the next one, then we are becoming (inaudible). And therefore, the most difficult head of versions are the first 30, 40, 50 head of versions. That's really a one-off that we have to digest, and we are currently doing it.

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Harry William Freeman Breach, MainFirst Bank AG, Research Division - Research Analyst [35]

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[When will we get to] number 50?

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Guillaume M.J.D Faury, Airbus SE - CEO & Executive Director [36]

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Sorry, can you repeat the question?

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Harry William Freeman Breach, MainFirst Bank AG, Research Division - Research Analyst [37]

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So I think you just said, sorry, the first 30, 40 or 50 heads of version, the most difficult. Can you share -- can you give us any idea of when we get through those first 30, 40 or 50?

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

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Not precisely as we speak. But what I can tell you is this complexity that we are digesting is second half of '19, 2020. By end of 2020, we will have digested, sort of digested the very large quantity of new head of versions, for which the industrialization is not existing and needs to be developed. That's what we are doing currently in 2020.

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Dominik Asam, Airbus SE - CFO [39]

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Maybe just one point to add, you know that the A321 represents way more than 40% of our backlog. So when Guillaume says that by end of 2021, we will reach 100% penetration with ACF, you can imagine how steep the ramp is even beyond 2020.

Now on the cash conversion, it's always a very tricky thing because our cash flow is so sensitive to cut-off effects, like what we just discussed. But in general, of course we see opportunities that once we have gone through this linearization, which will be actually cash-consuming in 2020, and we have stabilized the production process, there is opportunities to significantly improve on working capital. And as a result of that, of course you want to kind of converge towards that goal.

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Harry William Freeman Breach, MainFirst Bank AG, Research Division - Research Analyst [40]

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And is that goal conversion, is it one or is it further beyond?

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Dominik Asam, Airbus SE - CFO [41]

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Sorry?

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Harry William Freeman Breach, MainFirst Bank AG, Research Division - Research Analyst [42]

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Did I hear you say, Dominik, that, that goal of -- that the conversion of one was in 2021? Or were you talking about beyond that, beyond 2021?

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Dominik Asam, Airbus SE - CFO [43]

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I mean, of course we'll try to do it as quickly as possible, but it will take some time to stabilize.

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Operator [44]

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The next question is from Carter Copeland of Melius Research.

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Carter Copeland, Melius Research LLC - Founding Partner, President and Research Analyst of Aerospace & Defense [45]

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Just wondered if -- Dominik, if you could expand a little bit on the -- help us bridge the guidance between cash -- the difference between cash flow guidance, which obviously came down in the reiterated EBIT guidance, how much of that relates to a better profit contribution per aircraft? And then as we think about that going forward, is there any reason, given that you've got drag on the profit contribution due to the ACF, is there any reason that as you work through your plans, that you think that, that won't, I guess, sustain or even expand on a profit per aircraft basis? Just help us think through that.

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Dominik Asam, Airbus SE - CFO [46]

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Yes. I mean, we have previously also commented that one single aircraft, which has been built but is slipping, is generating a low double-digit million amount of profit contribution and a mid- double-digit million amount of free cash flow, which is basically the payment upon delivery.

So if you take kind of the very average temperature of the hospital, of our deliveries, we can talk very, very roughly, EUR 30 million to EUR 40 million delta between the profit contribution and the cash contribution of an aircraft that's already built. And then if you apply it to the 25 aircraft less you're guiding now, it's pretty much the kind of delta of EUR 1 billion, why it hits the kind of free cash flow more strongly. On top of that, we said there is a little bit of a headwind on A400M. So you see that actually in these communicating (inaudible) between deliveries, profit contribution and cash flow are very much intact.

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Carter Copeland, Melius Research LLC - Founding Partner, President and Research Analyst of Aerospace & Defense [47]

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Okay. So no real change, actually, despite the performance in Q3?

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Dominik Asam, Airbus SE - CFO [48]

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Well, we have been moderately better because otherwise, we could not keep the guidance. We have lost a little less than 3% of deliveries and could keep the EBIT. And from that perspective, there is a slight improvement, but no kind of fundamental trend. But underlying assumptions are intact and steady, I would say.

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Carter Copeland, Melius Research LLC - Founding Partner, President and Research Analyst of Aerospace & Defense [49]

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Okay. And just one kind of verification. Were any of the deliveries that are slipping out in '19 related to anything tariff related? Or were they all production challenge related?

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Guillaume M.J.D Faury, Airbus SE - CEO & Executive Director [50]

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They are not tariffs related.

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Operator [51]

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The next question is from Zafar Khan of Societe Generale.

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Zafar Khan, Societe Generale Cross Asset Research - Equity Analyst [52]

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I have 2, please, 2 questions. First one is just on the pension deficit. And I note that the EUR 1.3 billion increase that you flagged, Dominik, is on the discount rate. But I see between the 9 months last year and Q3 this year, the deficit's gone from -- or the liability, I should say, on the balance sheet has gone from EUR 6.7 billion to EUR 11 billion. Can you please help me understand a little bit that big ballooning in the pension liability?

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Dominik Asam, Airbus SE - CFO [53]

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Sure.

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Zafar Khan, Societe Generale Cross Asset Research - Equity Analyst [54]

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And then the second question. Sorry, shall I ask the second one? The second question is just on the 787 rate cut back. Clearly, in the [air show], you did mention the pricing pressure negotiations because Boeing have gone to 14 per month, and you're saying that was putting pressure on prices for the 350 and the 330neo. What would be -- with Boeing kind of conceding on that and cutting to 12 per month, does that actually ease the pricing pressure? Does that make it more intense because they will now want to maintain 12? So if you can just help me understand what the dynamic will be there.

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Guillaume M.J.D Faury, Airbus SE - CEO & Executive Director [55]

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Maybe I start with the second one, and then I hand over to you, Dominik, on pension?

Well, yes, basically, we said that we thought there was too much production compared to the market demand moving forward, which was sort of suggesting that there was something to happen and the skyline of Boeing was not appropriately filled with others. So we are not surprised that they reduced their production rates from rate 14 to rate 12, and that just reflects, I think, the reality of the market.

Dominik?

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Dominik Asam, Airbus SE - CFO [56]

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Yes, on the pension, you're right, there was more than just the discount rate, and we did that actually in the Q2 results. So what has happened is that we've seen that the interest rates have come down significantly, and that has triggered some changes in the way our employees or retirees choose to exercise their options to get the pension entitlement, and that changed in the (inaudible) assumption was representing a little bit half -- less than half of the overall 9-month impact. So the bigger portion of the impact was the discount rate itself. And the other one was more a secondary effect of changes and assumptions about how our people behave in terms of choosing certain payout assumptions.

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Operator [57]

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The last question is from Andrew Humphrey of Morgan Stanley.

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Andrew Edward Humphrey, Morgan Stanley, Research Division - VP [58]

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One thing -- we've obviously seen some headlines yesterday about a very large potential order on the A320s, and I think you alluded to that in your prepared remarks. Can you give us an indication of the latest discussions you've had with your supply chain partners about what kind of visibility they feel they need to increase production?

And my second question is, I guess, also on supply chain. In a way, you highlighted that you're planning now basically for a no-deal Brexit in terms of your U.K. operations. Can you talk a little bit about what you believe your longer-term options may be on that and whether we might be looking at an increase in investment on alternative production facilities at some point to hedge the risk of your U.K. facility?

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Guillaume M.J.D Faury, Airbus SE - CEO & Executive Director [59]

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Okay. So on the first question with suppliers. We have engaged last year heavily with the suppliers in the perspective of ramp-up of the single aisle family, and the outcome of these discussions was -- is the rate 63 in 2021. Now we are doing the same this year. We are scouting, we are assessing the capacity of the supply chain to continue to ramp up. And that's why I said in our full year results 2019, let's say, in February 2020, we will be updating on the objectives, on the targets we take in coordination with a full supply chain for 2022 and 2023.

So what we are doing is fully supported by the supply chain. We don't take bets when it comes to ramping up. We really share with our suppliers the perspective, their ability to ramp up their capacity to do it and the time plan it requires to do it.

I hope it answers your question. Now on the Brexit, well, you might remember that we prepared ourselves for a no-deal Brexit by end of March. The main risk was the so-called friction at the border and the risk on logistics. And we thought, at that time, the countries and the customs of the countries were not prepared for a no-deal Brexit. Therefore, we have pushed very hard, we've pushed back a lot on the risk of a no-deal Brexit. Then Brexit has been pushed to 31st of October. The risk of a no-deal Brexit now by end of October, remote, as far as I understand. Anyhow, we have prepared ourselves again for a potential risk of a no-deal Brexit. I think we are now more looking at the long-term implications of Brexit, and I think there's still a lot of uncertainty. And there can be opportunities as well.

On the short term, we can't move our production out of the U.K. We are very happy with the production efficiency and the skills and the know-how of our employees on wings in the U.K., but obviously there are major changes on the long term in the relationship between the EU and the U.K. For the future investments, we will have to adapt to those long-term changes.

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Thorsten Fischer, Airbus SE - Head of IR & Financial Communication [60]

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Thank you, Guillaume. This closes our conference for this time. If you have any further questions, please send an e-mail to Mohamed, Nicolas or myself. 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 [61]

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Thank you very much. Bye-bye. Have a good day.

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Operator [62]

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Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone.

Thank you for joining, and have a pleasant day. Goodbye.