Managing Risks For Performance

On a Global Scale

Eurofinance Paris - October 2004

“Putting the Building Blocks in Place to become a global player”

-Gérard Adsuar, Senior Vice President, Finance and Treasury

Department, EADS
-Jean-Baptiste Pons, Vice President, Head of Corporate Finance
and Treasury, EADS

Agenda

1 Assessing the environment and the risks page 1

2 Responding to risk with proprietary integrated solutions page 5

3 Wrap Up page 17

1
 EADS: a Global Leader ….
Boeing 44,8 EADS 179,3
EADS 30,1 Boeing 92,9*
LM 28,2 BAE 69,3
NG 23,2 LM 68,2
BAE 18,2 NG 46,8
Raytheon 16,1 Revenues GD 36,4
Orderbook
GD 14,7 Raytheon 24,4
Thales* 10,6 No. 2 No. 1
FM* 18,9
FM* 6,3
Thales* 18,3
L3 4,5
Saab 5
Dassault 3,3
L3 3,5
Saab 1,9 2003 figures for Aerospace & Defence activities *Reported backlog of firm contractual orders
In € bn (1$ = 1.128€ ; 1£ = 0.691 €, 1 SEK = 0.1095 €) Thales & FM backlogs are estimated

… with leadership in all segments Commercial

Helicopters Satellites
(Eurocopter) (Astrium) Launchers
(Ariane)
1st 3rd 1st

1st 3rd 4th 2nd

Commercial MTA Military Aircraft Missiles
Aircraft (MBDA, LFK)
(Airbus)
22

One Group …Many Markets

Military Aeronautics** Space Defence

Airbus
Transport (Astrium 100%
and Security
Aircraft since Jan. 2003) Systems**

Order book € 141.8 bn € 20.0 bn € 9.8 bn € 7.9 bn € 14.3 bn

Revenues € 19.0 bn € 0.9 bn € 3.8 bn € 2.4 bn € 5.2 bn

EBIT* € 1,353 m € 30 m € 217 m € (400) m € 171 m

Civil
Defence
Eurocopter, Astrium, Military Ac
in % of external
ATR, Launch Vehicles, (Eurofighter,...),
revenues A400M, CASA Espacio, Space Missiles (MBDA,..),
EADS Socata,
Sogerma Services, Services, Defence Elect.,
CN235, C295....
EFW CILAS, EADS Telecom,
Sodern EADS Services

* pre goodwill and exceptionals 3

** Military aircraft included in DS division

2
Specific Industry Sector Issues

„ Aerospace Business
„ Cyclical
„ Long-term
„ Global
„ USD based
„ Financial standing of customers and budgetary constraints
„ Financial
„ High Liquidity and Flexibility requirements
„ Long-term funding needs
„ Long-term hedging needs
„ Strict control of customer financing
„ Regulatory
„ Accounting Rules (IAS 39, Project financing & consolidation, R&D capitalisation)
„ No tax harmonisation at the European level
„ Financial Market Regulatory Framework (Sarbanes-Oxley, Basel 2)

Responding to Risk with...

„Treasury centralisation principles mandated by the Board

„ Support and anticipate Financing, Hedging, Funding and Liquidity needs of Business Units
„ Mitigate and smoothen the impact of business cycles
„ Leverage group scale and optimise bank relationships

„Treasury Policies
„ Hedging : systematic hedging of firm forex net exposure
„ Counterparty risk : continuous monitoring and management of counterparty exposure
„ Funding policy : optimise terms and conditions, market access and limit structural subordination
„ Customer financing : significantly contained to preserve balance sheet strength
„ Liquidity and investment : timely access to cash and liquid high grade investments

„…and proprietary integrated systems

3
 Mapping the Risk and Process Interfaces
Risks Credit
Counterpart FX IR Liquidity Operational
Balance
Process Sheet
-Central Management (ISDA)
-Group Policy
FX Management 9 9 9 9 9 9 -Counterparty limits
-Back-Up Facility
-Cash Pooling
-Back-Up Facility
Cash Management 9 X 9 9 9 9
-Rating Monitoring
-1st pension fund
Pensions 9 X X 9 9 X -Pension fund projections
-A.L. Management
-Group policy
-A.L. Management
Funding 9 X 9 9 9 X -FX & IR Hedging gap
-Group policy
-Investment committee
-Cash pooling
Cash Investment 9 9 X 9 9 9 -Central Asset Management
-Conterparty / trading limits
-A.L. Management
-Back-up facility
-Group policy
Contingent Liability
Management 9 9 X X 9 X -Central Monitoring
-Counterparty limits
-Credit pricing control
-Group guidelines
-Risk pricing model
Customer Financing 9 9 9 9 9 X -Sell down policy
-A.L. management
-FX & IR gap hedging
-Monthly reporting
Business Forecasts X X 9 9 X X -Operative planning
-Strategic planning
-A.L. Management

Foreign Exchange Management - Business Case

How is the policy determined?

„ Governance:
„ Key principles of hedging policy are established by the Board of Directors…
„ …and reflected in the Treasury Procedure

„ Highlights:
„ Subsidiaries must hedge the net firm exposure within ‘Corridor’
„ Maximum time horizon of 8 years
„ IAS 39 compliance
„ Tender offers can be hedged on a selective basis
„ Implemented centrally by EADS Treasury

4
 Foreign Exchange Management - Business Case
How is hedging organized?

„ Role and means of EADS Treasury:

„ Co-ordination with Business Units
„ Execution of hedging decisions
„ Sole interface to the market
„ Ensure overall cost efficiency
„ Constantly monitor market trends and developments
„ Suggest hedging strategies

Foreign Exchange Management - Business Case

Flexible dimensions of the hedging policy

„ Time span mathematically puts volatility “on our side” (visibility vs opportunity)

„ The Corridor provides room for cyclical uncertainty and occasional contract
weakness

„ The Corridor is not meant as a speculation instrument

„ Expected exposure is not hedged – Why?

„ Accounting unfriendly

„ Over-hedging risk: uncompetitive parity may weigh on future orders

5
Foreign Exchange Management - Business Case
Providing long term visibility

Over 50% of
foreseeable
exposure is
hedged

Close to 100% of
firm exposure
hedged
2004 2008
hedge book expected exposure firm exposure Corridor

10

Foreign Exchange Management - Business Case

Applying the policy in the « real world »:

„ Value protection in spite of operational imperfections

„ Implementation: a continuous but discreet market presence

„ Active counterparty risk management

„ Flow assessment and natural hedging

„ EBIT protection: subject to accounting rules and revenue recognition

„ Role of budget and commercial rates

11

6
Cash Management - Business Case Automatic
Cash pooling
EADS NV Branch

OVERLAY

France USD-GBP EUR Germ any USD-GBP EUR USD-GBP EUR Country X

BANK 1 OVERLAY BANK 2 OVERLAY OVERLAY BANK 3

Automatic EUR Automatic EUR Automatic EUR

Cash pooling USD-GBP Cash pooling USD-GBP Cash pooling USD-GBP

BANK 1 OVERLAY BANK 1 OVERLAY BANK 2 OVERLAY BANK 2 OVERLAY OVERLAY BANK 3 OVERLAY BANK 3

„A European cash management structure to: EADS France Other Subs. EADS GmbH Other Subs. EADS country X Other Subs.

„ Monitor and integrate Business Units’ liquidity at the European level

„ Reduce Liquidity Risk Exposure at Group level
„ Take advantage of various cash flow cycles within the Group

„Automated pooling between in-country and EADS NV accounts

„ Local cash planning:
„ Subsidiaries forecast their funding requirements on a periodical basis

„ Subsidiaries monitor their day-to-day outgoing/incoming flows

„ Automatic zero balancing:

„ Group Treasury’s local banks concentrate funds

„ Group Treasury monitors end-of-day balances per currency

„ Complete and homogeneous multibank reporting over 17 banks with JPMorgan

12

Cash Management - Results

„Financial Improvements
„ Integrate Business Units into a unified EADS brand /group
„ Reinforce EADS cash fire power and synergies
„ Higher volumes due to fewer banks, trigger economies of scale
„ Eliminate idle cash at Business Unit level
„ Compensate debit and credit balances at EADS NV - less overdrafts & loss of interest -
„ Savings due to processing improvements

„Processing/Accounting Improvements
„ Standardise cash pooling/payments procedures groupwide
„ Standardise & automate banking information statements at EADS NV level
„ Optimize balance sheet
„ Book cross-border & inter company payments via current accounts

13

7
Conservative Liquidity and Investment Policy -
Business Case

„Investment policy
„ Maintain at least Eur 3bn cash at all times
„ Invest in highly rated credit instruments
„ Access to total cash within few days

„Asset & Liabilities Management considerations

„Implementation
„ Investment Committee
„ Selection of liquidity funds and set up of trading limits

„Front to back analysis of investment decision

„ Investment parameters in the risk, accounting and back-office systems
„ Integrate the operating model to other partners (eg. Global Custodian)
„ Define funds reporting requirements to enable risk monitoring

14

Liquidity Management - Results

„ Prudence : high credit rating, trading limits, diversification between different

liquidity funds, diversification within each fund
„ Daily access to cash (largest funds settle on T+0)
„ Partnership approach reinforced during the selection process with fund
providers
„ Clear operating model reviewed to ensure maximum of control and efficiency

„ Leverage of cash pooling structure and optimization of cash invested overnight

„ “Outsourcing” of low risk investments
„ Reduced number of banks to improve returns and reduce management fees

15

8
 EADS: strict control of customer financing

Outstanding gross customer financing exposure (US$bn)

7 (excl. stipulated loss values)
„A discretionary tool …
6 0,88
0,9

„ Granted on a case-by-case basis 5 0,51

0,87
4 0,82 0,64
„ Pricing in line with market conditions 5,36 5,7
0,73 4,82
„ Active sell-down policy 3 3,94 3,54 3,79
3,2
2
1997 1998 1999 2000 2001 2002 2003

Q… used conservatively 100% Airbus 50% AT R

„ Almost 100% of customer financing is secured Includes on and off balance sheet
on aircraft Total gross Provision
„ EADS applies systematic discount to customer € 1.6 bn
independent appraisals of collateral financing
exposure Estimated
„ Net exposure is fully provisioned Collateral
„ Exposure spread over 40+ airlines and 150+ € 4.2 bn € 2.6 bn
aircrafts
as of Dec. 2003

16

Wrap Up

„EADS has successfully weathered the “perfect storm”

„ Through industrial discipline

„ And a conservative financial policy

„ With an effective risk management

„While assembling the “building blocks” for performance on a global scale

„ Steady investment for future growth

„ Adjusting the industrial tool to evolving market requirements

„ While maintaining one of the strongest balance sheets of the Aerospace industry

17