FACC AG

VSE:FACC

Earnings Call Transcript 2022-Q1

[Operator]

Dear ladies and gentlemen, welcome to the conference call of FACC AG. At our customers' request, this conference will be recorded. [Operator Instructions]

May I now hand you over to [indiscernible] who will lead you through this conference. Please go ahead.

[Unknown Executive]

Thank you, and good afternoon, everyone. Welcome to FACC's conference call for the Q1 results. I'm [indiscernible] and with me today are Robert Machtlinger, CEO of FACC; and Aleš Stárek, CFO of FACC.

As always, we have provided detailed financial information in our press release today. The forecasts and targets we discuss this afternoon involves risks, including those described in the disclaimer at the end of this presentation.

If time does not permit to answer all possible questions on today's conference call, we will be happy to schedule additional one-on-one meetings afterwards. In this case, I would ask you to contact our Investor Relations Department, Michael or myself, to coordinate appointments.

I will now hand over to Robert Machtlinger.

[Robert Machtlinger, executive]

Thank you very much for the introduction. Ladies and gentlemen, thank you for participating in our Q1 call. So overall, as just mentioned, I think we went out with our Q1 results overall and then going through the presentation. I'm on Slide 3, on the Q1 '22 key topics. First of all, the first quarter of the year developed very much in line with our expectations in terms of rate increases on major platforms. All -- I think the most important here to mention is the A320 rate ramp-ups, which is continuing also in the next 3 quarters of 2022.

Also, I think important to mention is the Airbus 220 where we see a continuous ramp-up in demand. Why do I mention the A320 to A220 is a growing platform with more importance in FACC, we have more than USD 0.5 million of revenue on the airplane. And with the increased rates of the airplane, the organic growth of projects we have onboarded last year is constantly growing.

Also, a good development in the business trade arena. All our platforms, Bombardier as well as Embraer and the new platform we brought on board with Dassault are developing nicely. The rates are basically approximate rates we employed in 2019 or higher, which is also, I think, pushing sales in a market environment of product line requirement for FACC.

Overall, global traveling, good development overall. We just had a discussion at the 2021 year in closing conference call. So nothing too much new here. U.S. is leading on utilization, followed by Europe and China in terms of regional flights. International flights, also no changes to the picture as we shared and discussed in the last call.

So overall, on the marketplace, good development, stable development, with probably one point worldwide to mention is Ukraine-Russian war. So far, on the order intake, no impact we know pretty much, the plane deliveries from Airbus and Boeing in 2022 to the Russian market. In terms of Airbus, it's rather smaller number of airplanes. It's a little bit more than 10 airplanes this year. Most of them is A320s, a few A350s. On the A320s, we are expecting that those positions will be reallocated to other airlines because the A320 family is running at high rate and customers would rather prefer to have the airplane sooner. On the A350, I think we have to watch and see how these airplanes will be reallocated.

So overall, on direct order intake, not impacting FACC. Global supply chains not impacted the FACC as well because we are not having supply chains -- not in Ukraine, but also not in Russian. And the rest of the impact, which is pretty much energy cost, energy supply and liquidity cost, we had some precautions in our budget and our risks we have put into our budget ICS as well. So also here for FACC, no surprises.

Important for us, we have inloaded the vertical -- the ticketing and the shipping department, which was outsourced for the last 25 years. We have decided to do so last year to reduce -- further reduce cost and be more flexible in terms of shipping. We have to say it was a good decision because especially logistics and shipping is a changing environment today. Controlling logistics today 100% at FACC is giving us better flexibility and is also reducing cost and we see the benefits already.

Croatian ramp-up, we talked last time as well, is progressing very nicely on plane. Just yesterday, we have completed the AS9100 qualification of the facility. So fully qualified store standards in the meantime. We have ramped up the employment to 160 people, and revenue streams are coming out from the facility as planned and constantly increasing. Also here, in the repeating statement, operation facility is a fundamental setup for FACC to ensure long-term profitability of our Interior facility.

We talked about lengthy on the OEM, so I will not repeat that sentence. Growth in Q1 was close to 8%, 7.9% to be exactly, again, very much in line with our Q1 expectations. And looking into the next quarters, and I will come back to it in the guidance for the rest of the year, the 10% growth is reconfirmed. Group EBIT, EUR 3 million. Aleš will talk about details, also explain on inventory level and he also -- Aleš will have a few slides, slight increase. We have done this intentionally because of supply chain issues, just to protect ourselves, keep production up and running and support customer demand in the ramp-up process. In saying that, the market is doing what we've planned to do. We are prepared for the ramp-up. We managed to do ramp-up.

And in saying that, I would like to hand over to Aleš, giving you deeper insight on the financials.

[Aleš Stárek, executive]

Thanks a lot, Robert. And good afternoon to everybody from my side as well. Let's go to the first slide of the financials, where you take a look at the revenues and the EBIT. Revenues basically on a good trend, increasing trend, see that, basically, we are better by approximately EUR 9 million than we did in Q1 last year. So the increasing trend is intact, and the sales are then developing according to our expectations, especially the Aerostructure. This is a good news. Aerostructure sales are increasing followed by Interiors. And on the Engines & Nacelles, we are a little bit suffering on the sales side from the 787 situation. If we then basically cross over to the bottom line to EBIT, then we see EUR 3 million, so slightly coming up from the EUR 0.4 million that we had at the first quarter 2021, on track to triple in the overall EBIT for the whole year as we have guided at the end of the last financial year.

Again, here, Engines & Nacelles, nacelle while suffering on the top line from the 787 then basically the EBIT is supported by that. So a positive project and a good profitability. On Aerostructures, profitability increasing. Interiors still are losing money, however, contained. And we see small contributions coming from the ramp-up in Croatia. Of course, first quarter of the ramp-up are not so significant, but we are expecting debt contribution from Croatia will increase throughout the year. And so overall, no concerns here and everything is on track as expected.

When we go to the next slide and then we take a look at cash flows, then starting again with EUR 3 million EBIT. Depreciation on top and in line with what we have had last year, a little bit of onetime amortizations -- project-related onetime amortizations, so a little bit higher by EUR 1 million than what we have seen last year, bringing us to an EBITDA of EUR 13.7 million. And then the cash consumption, as has already indicated by Robert, partly due to inventories -- increasing inventories where we are selectively building up stock, safety stock in order to pay tribute to any potential disruptions in the supply chain on one hand side. On the other hand side, and then we have talked about it during our last conference call when we discussed our fiscal year 2021 results. There were some payments from customers that were actually scheduled for first quarter, they already arrived and already done in last quarter at 2021. So also from the receivables side, overall, EUR 27 million cash consumption, so resulting in EUR 16.9 million in cash-out.

In Investments, pretty much on the same level as they were in Q1 last year. So our first quarter of the year traditionally not so investment cash-out heavy. This is then basically coming during the year, and we are on track as we are planning cash-out between EUR 20 million and EUR 25 million on the full fiscal year scale. That's still on track. So nothing unusual happening here.

A quick look at the financial debt. And here, we see also, let's say, a positive trend in terms of deleveraging the company. As I said, in Q4 2021, some extraordinary elements in the customer payments. So we increased slightly in line with the negative free cash flow, still staying below EUR 200 million in net debt. And then as you can see from the graph, the trend is pretty much in line of deleveraging. And when we look at the leverage itself, we started this journey starting '15, '16 in our last conference call. And if we look at it from today's perspective, then we are standing at 3.6, which is actually a very good result. When we basically -- and the 3.6 is basically following the agreements -- the formal agreements from the banks on the waiver that we have agreed with the banks. By June, we will take the 6-month EBITDA multiplied by 2. So what we did here is we took the 3-month EBITDA multiplied by 4. And then basically, there was the denominator that we used for the calculation. So that brings us to 3.6.

As I said, there are a little bit of amortization still there in Q1, but will not be there in the following quarters. So when we would look at it from a little bit of a normalized level, then we will be around 4.2. So still good improvement in leverage. We are on the way. No worries here. Still meets the 5.25 leverage request or requirements that we have from the banks at the end of June.

Looking at the financial status. Again, here are pretty much stable situation and EUR 224 million in funding. The subsidized loans in the KRR facilities, EUR 50 million, EUR 60 million, fully utilized. Amortizing loans, slightly lower than 2 months ago at EUR 14.5 million and the EUR 100 million in revolving credit facility is still available to us. And the spread between the banks, no change here.

So with that, I would basically hand over to Robert and to the outlook.

[Robert Machtlinger, executive]

Thank you, Aleš. Well, key priorities for 2022, they will remain unchanged. And as reported also in the last call, first of all, the positive thing, industry is ramping up, further ramping up forecast until the end of the year, especially on short and midsize airplanes is further increasing. That's positive. In line with the ramp-up, we are securing supply chains from all over the world, especially FACC Task Force is in place to overlook the global supply chain. So far all under control, and we are not expecting changes here.

Ramp-up of the FACC Croatian site, we want to further expedite and inload faster than we have planned a year -- 1.5 years ago. Benefits already we can see. So this is why we are expediting. And of course, staff ramp-up is pretty much going in line with increasing demand. So far, we are on track here as well. We are able to attract people, good people to FACC. So overall, on track here as well, but the people ramp-up will continue for the rest of the year.

Of course, quality and performance is noncompromisable. So we are still keeping our 100% performance as main focus. And as Aleš said, strong focus on cash, liquidity and profitability will be focus areas overall.

Organic growth, I just mentioned before, A220 with new programs, but also the Engine business with new contracts last year is entering steady production phase in the second half of the year. Full focus here. So far, everything on track with, let's say, sizeable business volume coming in, in Q4 and, of course, in 2023 and thereafter.

Business guidance has not changed to the guidance we had at the year start. 10% growth overall between 2021 and 2022. Orders are fully supporting the 10% growth, and risks from the overall market are basically considered. So no tension. We have the target of triple EBIT compared -- operational EBIT compared to 2021. Q1, as said before, also nicely in line with our expectations. With the volume increase coming later in the year, we are expecting and we are seeing increases in EBITDA from quarter-to-quarter as well. With Q3, which is the seasonality, I think, with lower demand, especially in July and August with a little bit of lower EBIT, but nothing new for you because that's normal in the business in aerospace and for FACC.

Net debt target of EUR 197 million at year-end. This is considering the ramp-up, but also is considering the safety buffer in inventory, as Aleš just mentioned before.

Investments, we are still tight. Most of the investment reserved for this year is technology and growth investments. This is pretty much planned for programs we are currently negotiating with our customers, but not yet having a contract in our hands.

So in saying that, guidance reconfirmed, and I would like to give back and the floor is open for yours, and we are more than happy to answer your questions. Thank you.

[Operator]

[Operator Instructions] The first question is coming from Harry Breach at Stifel.

[Harry Breach, analyst]

Can I just ask a couple of questions? Maybe on margins and maybe one on supply chain. Just on margins, Aerostructures seem to be better than I was expecting for first quarter. Was there anything sort of unusual in the performance at Aerostructures? Or was it just the benefit of higher volumes and the fixed cost absorption?

Moving over, just to talk a little about Engines. Again, there, obviously, we have the 787 contract repricing effect. Any other effects in there? And should we be thinking about that first quarter margin as sort of being a sustainable level for later on this year, third quarter, as Robert touched on?

And then moving over, obviously, the euro-dollar spot rate has come down to very low levels now at $1.05. Aleš, can you give us an update on where you are in terms of hedging cover and the average rate in your cover for 2023 next year and maybe 2024 as well?

And then maybe last question, guys, just on the guidance, the cash flow. And please forgive me if I didn't hear so well. The cash flow number you gave there, I think that EUR 16.9 million negative, is that assuming the full payment of the arbitration award and the related amounts and costs all within 2022?

[Aleš Stárek, executive]

Okay, Harry, so let's -- let me take on your questions. When you look at Aerostructures, then basically, really, indeed, you are right. It is pretty much due to the volumes. And through increasing volume, as I said before, Aerostructures has experienced the biggest growth of the 3 divisions compared quarter-to-quarter between last year and this year. There are no specifics on our margin improvement. It's simply a better coverage of our fixed cost.

Engines & Nacelles, yes, again, here, this is really again then the 787 and no other special issues on margin improvement, margins jumping to be better on other projects. It's really the project mix. The 787 is still very low. Going forward, we all expect that at one point in time the issues will be resolved and going to return gradually to the rate of 5. So over the year, I would basically expect the normalization of the margin and a deterioration from the current levels to a more, let's say, on the mid-single-digit levels, around maybe 6%, 7% by the end of the year in Q4. That would be my expectation for Engines & Nacelles margins.

The U.S. dollar, yes, you're right. However, we have been basically hedging as the dollar was increasing already last year. So we have -- for 2022, we have done quite a lot of hedges over last year. Also for 2023, we have done some hedging -- hedges for 2023 as well. Now we are -- as the dollar has jumped now, let's say, to the levels of $1.06, $1.05, we have done some hedging now as well. So we are somewhere in the mid-17 as a hedge rate for the 2022 year. And for the 2023 year, we are approaching $1.16, I would say, yes. So somewhere between $1.16 and $1.17, closer to $1.16.

[Harry Breach, analyst]

Well, I had...

[Aleš Stárek, executive]

Yes. Yes, please.

[Harry Breach, analyst]

Yes. Sorry, Aleš, I was just saying, can you give us any idea of the percentage of your net exposure that is now covered over the next 3 years?

[Aleš Stárek, executive]

2022 is hedged closer between 85% and 90%, yes. And we are getting to 80% hedging for 2023, yes. And 2024 is not hedged yet. I think the -- so say from my personal point of view, how I view this, I wouldn't start hedging 2024 maybe until the summertime. I think we will move on these levels for some time because why should things change, yes. The interest rate differential will probably increase. Probably the Fed will be more aggressive than the ECB when increasing interest rates. And the geopolitical situation with Ukraine and Russia will certainly not resolve during Q2. So until the summertime, I would probably not do hedging. But I intend to start hedging, let's say, in Q3 for 2024. So that's my plan.

Now looking at your last question, cash flow, the arbitration, there were no cash-outs on the arbitration yet, yes. We are still in the situation that we are waiting a couple of clarifying rulings from the arbitration and the interest rates that are part of the game. And also the underlying, as we already mentioned, we have filed a complaint to the High Court in London on the outcome. And that's also not decided, so no payment there. I would not expect any payments on the arbitration in Q2. And yes, well, maybe some payments will be done in Q4 as of today. That's likely. But probably also during the summer, we will not be doing any payments from today's perspective. Yes, so that's the situation.

[Harry Breach, analyst]

Yes. And Aleš, just to understand the guidance, where the third bullet on Slide 11 cash flow of negative EUR 16.9 million. Is that assuming that all of the cash-out relating to the arbitration occurs this year or that none of it does?

[Aleš Stárek, executive]

No, it's related to the Q1. Actually, that's the Q1 numbers.

[Harry Breach, analyst]

Okay, okay, okay. I'm sorry. So on Slide 11, that third bullet is just the Q1. I'm sorry.

[Aleš Stárek, executive]

Just a Q1 basis. Sorry for the confusion.

[Harry Breach, analyst]

No, I'm having a slow day again.

[Aleš Stárek, executive]

It's really confusing the way it's there. So don't worry about it.

[Operator]

The next questions come from George Mcwhirter at Berenberg.

[George Mcwhirter, analyst]

I've got 2 questions, please. Firstly, on the inventory buildup we saw in the first quarter. Should we expect it to continue? I think you said that we should. Just can you put a number on the full year impact on inventories, if that's possible?

And secondly, on Cabin Interiors margin, do you know when we should expect the margins sort of trending towards positive territory and beyond? Sort of on number term, what's the sort of possible margin we can reach in this division?

[Robert Machtlinger, executive]

If I may, I would like to answer the second question, Interior margins. We had shared our Interior plan in 2019 at the Munich conference, which had 5 pillars. One major pillar was Croatia setup, which had been postponed because of COVID-19, that's right up and running. Some vertical integration and some cost reductions in fixed as well as variable.

In answering the question, Interiors will be solid EBIT positive at the -- during the course of 2023, rather in the later quarters. And then stepping up from that point on to a 5% to 7.5% EBIT margin business, whereas I would say 5% is the low end, 7.5% is more at the up end depending on our product mix.

In comparison to Aerostructures in the past, here, we had EBIT between 11% and 13%, 14%, also a little depending on product mix. Nacelle was a little bit handicapped because of one contract that was loss-making, which is cured since the 1st of January 2022, which was the 787 contract. Overall, profitability in Interiors will come, and we're expecting only about 5% to 7.5%.

And the first question, Aleš, if you can answer?

[Aleš Stárek, executive]

And on the inventories, George, basically, the original plan was to be flat on inventories by the end of the year with slight increase of EUR 4 million to EUR 5 million in the summertime around June, July. That was the plan. Now if, let's say, selectively build up some buffers and the inventories are higher than we have originally planned, so from here, I would basically expect another -- what we have actually expected another EUR 4 million in buildup until summertime. And then gradually from the underlying business model by the end of [ the year ], the inventories should then basically go down again.

How much we'll be able to improve inventories in the second half of the year pretty much depends on the stability of the logistics and the supply chain and how things will develop further with all the containers and on the ships and that stuff. So that's to be seen. But probably we will not be able to get to the same level as we were at the beginning of the year. So probably the inventories by the end of the year will be slightly higher than they were in the beginning of the year.

[Operator]

The next question is coming from [indiscernible].

[Unknown Analyst]

So I would have 3 questions. First one is until why is the -- until when, sorry, is the M&A facility amounting to EUR 50 million restricted for availability? The second one is, when is the EUR 6 million KKR (sic) [ KRR ] facility loan due? Is it on March 31, 2023? And the last question would be the EUR 100 million unused credit facility. Which is the latest date when you would be able to draw this credit line? And do you have any indication on when you plan to draw it? And in the end, will it be different tranches or all at once?

[Aleš Stárek, executive]

Okay. So the M&A credit facility was basically dropped as part of our second waiver negotiations in December last year. So the M&A facility will not come back anytime soon. It will not come back, but it's not so dramatic as the EUR 100 million revolver can be also utilized for M&A purposes. So that was not a dramatic loss for us when we gave it up in December last year.

The EUR 60 million COVID KRR facility is due for repayment in March next year, by the end of March next year. And the overall clubbed loan is basically due by August next year. And basically, the tranches are 3 months. So basically, in May next year, that will be the last possible drawdown point in time for the revolver. That's pretty much theoretic because we have already started discussing with our core banks extension or, let's say, not necessary extension. We have started discussing how to deal with the [ cap loan ] and how to deal with the 2 KRR tranches. We also started discussions with the OEKB, the government bank that are subsidizing those loans and also securing those loans.

So we are in discussions. And the plan would be that by summertime, when we return from summer holidays, we will have a plan how to do it. We will execute the plan in the rest of Q3, September and then in Q4. And by Christmas, we should have basically renewed facilities in place and then basically looking to a safe funding scenario. And let's say, we are safe now and we want to be safe going forward. So I want to have everything in place well ahead of the point in time the current facilities become due.

[Operator]

[Operator Instructions] The next question is again coming from Harry Breach at Stifel.

[Harry Breach, analyst]

Just wondered if I could ask a slightly different one. One of the concerns really for the sector at the moment has been cost inflation both on the energy side and also in terms of the bill of material, the subcontractor direct purchases. Can you give us any light or any understanding typically for the purchasing you make of the average sort of contract length and how pricing works with those? Is it fixed until the end of each contract? Can you give us any feeling on that and also about how you guys can pass through or whether you have any escalation clauses in your contracts with your customers?

[Robert Machtlinger, executive]

Yes, Harry, I can answer that question. So first of all, in terms of material supply contracts, we have longer-term contracts in place ranging from 3 years to 5 years. So it's a little bit depending on the program, that's a little bit depending on rates and also a little bit depending on the commodity. In areas where we see more dynamic and more opportunities where we have more flexibility, we are rather going for a 3-year term on commodities, where I think the flexibility is not that high because there is only a very limited amount of supply chains available. We rather fixed pricing for a longer term in that case, 5 years.

In terms of some materials, let's say, aluminum, let's say, pre-brick or some other commodities, we have agreements in place with our customers. It's 1 of the 2 pending on the contract. The one could be if there is increases or decreases in the raw material, we pass on the changes to our customer in terms of price adjustments. That's the one vehicle we have in our contract. The second one is the material contract like for titanium or some other raw materials is confirmed or is negotiated by our customers.

And then we have access to that material volume, and we enjoy a stable price. And the ups and downs from the stable price are compensated by the OEM. So here, I think on unique aerospace materials, we are able to pass on the inflation through our contract arrangements. There is some other material which is not unique. Here, we have to work through ourselves by changing suppliers, changing supply chains, which is well under control at the time being.

In Energy, energy, we are hedging as well. We are normally hedging at 12 to 18 months, sometimes 24 months, the energy hedging contract. And on electricity and gas, for example, we are hedged for the year 2022 and half 2023. So the peaks we have seen in the last couple of weeks and months are not impacting FACC this year and also not at least for the first 6 months of next year. We will go into hedging later in the year. And we are watching, of course, the industry quite closely.

Maybe one more point, which to complete the story and give information. In terms of labor cost inflation, 2 things. There is step changes. So at the specific term, which could be 2 years, 3 years or 5 years, we can rebalance our labor rates and adjust the price. In between those steps, we are compensating the annual increases, which are normal by productivity gains, by cash ends, by industrialization. So this is a standard thing we've done for many, many years. We're under control as also here, we have countermeasures.

[Operator]

There are no further questions at the moment. [Operator Instructions] No new questions are coming in. For closing remarks, I expect to the speakers.

[Unknown Executive]

Good. Thank you for your participation and for all questions. If any further questions come up, please feel free to contact us.

[Robert Machtlinger, executive]

Thank you very much, and talk to you soon. Bye-bye.

[Aleš Stárek, executive]

Thank you very much. Bye-bye.

[Operator]

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