FACC AG

VSE:FACC

Earnings Call Transcript 2023-Q2

[Tanja Maisenberger, executive]

[Audio Gap] figures of 2023, the CEO, Robert Machtlinger; CFO, Aleš Stárek and Michael Steirer from Investor Relations will speak in a moment. We're looking forward to the presentation. And with this, I hand over to Michael Steirer.

[Michael Steirer, executive]

Thank you for the introduction, and good morning and [ good ] afternoon to everyone. Welcome to the FACC earnings call in regard to the first half year of the fiscal year 2023. As already mentioned, my name is Michael Steirer. And together with me are today, Robert Machtlinger, our CEO; and Aleš Stárek, our CFO. As always, we have already provided some detailed information in regard to the financial performance in our press release issued earlier today. And in case it shouldn't be possible to address all possible questions in today's call, please let us know, and we would be very happy to schedule some additional meetings afterwards in order to answer all your questions. Now I'd like to turn over the call to Robert Machtlinger, our CEO. Thank you.

[Robert Machtlinger, executive]

Michael, thank you very much for the introduction. Dear ladies and gentlemen, a warm welcome from my side as well to today's earnings call of FACC. Well, let me start with a little bit of a market overview, which is certainly significantly important to FACC. If you can go to the highlights [ on Slide 3 ] a little bit of a tough labor overview on the industry. The global recovery of air traveling continues with a few slides later on showing the individual markets. Of course, this is some positive news. I also would like to address a little bit of a feedback from the Paris Air Show that took place in June of this year. And I have to say I'm visiting right now, Paris for more than 2 decades. And this Paris Air Show was extremely powerful. There was good momentum in the industry, simply driven by the strong recovery of air traveling, but also by the fact that airlines are back to profitability.

Record sales in the first 4 days during Paris, 1,300 new aircraft orders have been confirmed by airlines to the industry. Strong sales India, starting with the first day with one Indian carrier buying 500 airplanes from Airbus, followed by the second day with a big order for Airbus and Boeing as well. Of course, this is driving the order backlog of all of our customers but mainly the Airbus and Boeing to close to 13,000 airplanes, which is a good indication. However, this will not change the short and midterm perspective of the industry, as you all know, the industry is ramping up. Those great sales of course will not further improve each of the ramp up curve as we are managing it today, but at least it gives a strong indication that the new and fuel-efficient airplanes are requested and needed by the industry. Approximately 42,000 new and more efficient airplanes required in the next 20 years. This is a reconfirmation of the initial figures. And what you also see is a significant rate increase across the industry and across all aircraft models.

If you might remember, the rate ramp-ups have been quite positive on the short and midsized airplanes, mainly the A320 and the 737MAX as well as the A220 and the Embraer E2 jets. So this market started earlier in the recovery. The widebody airplanes until a few months ago was quite stable, but at lower rates. Right now, we have a good indication that also the widebody market will start to redevelop with promising ramp-up figures on most platforms as well. With all the good news, we also are currently managing a very complex environment, mainly supply chains across the world. It's not one element that the industry is chasing, its various elements, and they are changing from time to time. There is an industry consensus that this constraints will not go away within the next couple of months. So we are rather planning before a full stabilization of the global supply chains not happening within the next 2 to 3 years. So we all are very focused. We are well aligned, and we are managing the daily issues. And all and above, and this is probably a very long-term action. The entire industry, starting from airlines through OEMs and the supply chain is very focused on sustainability in aerospace, mainly CO2-neutral flying and you all know the target by 2050, this target shall be achieved. So overall, very positive takeaway from Paris with peaking [ maintenance in content also the one or the other challenge we have to master transit ].

Looking into the next page on the global traveling development. And here, the good thing is the markets, the retail market by itself have all been recovered to pre-COVID-19 levels. So worldwide, the regional markets are already above the 2019 figures and this is the one bar chart at the lower left of this slide, so 108% is the worldwide regional market traveling so 8% higher than before COVID-19. The international market is still below 2019. We are in May, the number was 89%. But also here, some markets like North America, like the Middle East, like Africa has been fully recovered. So here international traveling, intercontinental traveling is at the level of slightly above 2019. And there is a couple of markets like Europe, and Asia, predominantly China, that is still lagging a little bit behind the pre COVID-19 figures but also ramping up and closing the gap. Expectation is that within the next 12 months, all markets will be fully recovered under today's environment, and under today's circumstances. So this is, I think, positive news going in the right direction and what is also, I think, pretty known already, airplanes are booked quite well. Load factors on airplanes are significantly high, higher than before 2019, and the ticket pricing is not low at the time being. So people are willing to pay for air traveling in regional markets, but also internationally, which has certainly helping airlines being profitable and investing money into new fleets.

What does it mean to the industry by itself? So if you just compare the first half year of 2022 with the first half year of 2023, on the left side of this slide, deliveries went up roundabout 14%. And this is true for both Airbus as well as Boeing. So there is another 71 airplanes delivered in the first 6 months, representing a 14% growth rate between the 2 periods. Also, the net order intake is quite promising which is shown on the right side of the slide, both Airbus and Boeing are selling airplanes more than in the years before. We have compared the year 2021, 2022 and the first half year of 2023, and we see basically in the first 6 months of the year, nearly as many airplanes have been sold to the market compared to the full year of 2022. Again, this is a good long-term perspective. However, the short-term rate ramp ups will not be impacted by those sales because some of the airplane models, especially the single-aisle airplanes are pretty much sold out for the next couple of years.

Next page shows again, the order backlog of the industry also here, order backlog increased by 8.6% overall in the industry. This is again a good indication. Airbus is a little bit leading, having a little bit more orders received than Boeing. Again, mainly driven by the significant orders Indian airlines have placed with Airbus, first of all, but also in the second phase with Airbus and Boeing. So overall, good market development, very stable and giving us good visibility on how to plan the next years to come. Also not new, 80% of the demand is single-aisle airplanes and the rest is widebodies and super large airplanes. Well, in saying that, I would like to touch base on the key topics of FACC. So we are benefiting from this positive market development since the market continues to recover, aircraft production rates are increasing. This is positive for FACC because programs we have engineered and we have produced before COVID-19 are further ramping up in demand, which, of course, is providing volume effect for FACC. Just taking the Paris orders, Airbus and Boeing, but also Embraer and our other customers have received. This was resulting in a EUR 400 million firm order backlog increase also for FACC.

Looking into the first half year, 31.3% growth in output compared to the same period of 2022. So group sales went up to EUR 354.7 million. And again, Aleš will talk about it, the growth came from every single division. So our all segments of FACC are growing. EBIT doubled to EUR 14.9 million. And again, Aleš will talk a little bit more in details on the EBIT development where did it came from and what we have to consider. Workforce. As we all talked about, ramp ups in the industry, there is 2 things that keeping us busy, the one is supply chain, materials, on-time deliveries and quality. And the second question, of course, is ramping up workforces, qualify them and make them ready to produce parts. Also here, we are quite successful. We are following our demand within the first 6 months of the year. We have further ramped up our workforce by roundabout 200 people, following 400 people we have added in the year, full year of 2022. We are investing further into growth, and here, we have released EUR 20 million investment plan for the expansion of our Plant 6, which is our Croatian low-cost facility. As you all know, we have started operations last year with this brand new facility. The output, the quality and the commercial figures are extremely pleasing for us. So we decided to triple the size of the company. This is right now ongoing and is, of course, a major contributor to the future EBIT development of the company, especially [ interiors ].

Next page, please. A little bit on the market, positive development of all aircraft models. We talked about it already. Not only single-aisle airplanes are right now ramping up also widebody airplanes are ramping up, and then we have a slide for you later on. The ramp up is across all existing products. In FACC, this, of course, is good because we are utilizing our facilities better compared to the last 3 years. And we're also seeing increased demand in medium- and long-body airplanes. Urban Air Mobility, one thing that was very transparent during Paris Air Show. So this Urban Air Mobility business right now takes momentum. This was also very, very transparent during Paris with all major OEMs working Urban Air Mobility being a part of Paris Air Show.

Also here, I need to name one new customer of FACC who is Archer. We talked about Archer in the last calls. Archer, we think, is doing an excellent job just looking into the last couple of weeks. Archer received not only orders from United Airlines, with a target to start revenue service in the first quarter of 2025. Archer also received a military contract from the U.S. Air Force accounting for EUR 140 million. And just last week, I think Archer joined forces with Boeing with another equity increase of roundabout USD 0.25 billion. So we as FACC are very happy to cooperate with Archer, we're doing the fuel fuselage, we're doing the wing structure for Archer and we will do the interiors. On the right side, you see a picture of the airplane as it will look like and actually, the Urban Air Mobility segment into contract besides Archer, we have as you know a few other contracts are taking momentum. And if certification is progressing is our customers are working on, I think we have quite [indiscernible] business onboard for the second half of the decade.

Next page, a little bit of input on Plant #6, our Croatian facility. As said before, we are investing further, we're tripling the size of the company, we are in-loading work with a discount that is currently [ on-buy ] suppliers. We are also offloading product from FACC's Austrian facility's Internet facility. We do this as we speak, and we will do more off-loads and in-loads once the extension of the facility is finished in June of 2024. Basically, what we're also doing there is adding some office spaces and will also start to hire IT specialist engineering and purchasing management because we have good access to excellent people in Croatia as well, helping us to build up our global footprint helping us to reduce cost and, of course, helping us to have access to highly educated and motivated people. So also here, we are on track. And this facility will do something very great for FACC going forward.

Next page, please. Well, I talked about sustainability in aerospace, and everyone is fully committed and knows the urgency. Let's start with the airlines continues with all of our OEMs and certainly Tier 1s. As we are, lightweight solutions will be one key element of achieving goals and this is just a little bit of a summary, what we are currently doing. We are collaborating with all of our major customers in specific development programs that are well lined up. What we are targeting jointly with our customers, having new technologies in terms of materials, processes but also products that will allow CO2-neutral flying. We are currently investing in 8 strategic research segments, which starts from material to process, digitalization, optimization and various other things. And we have 60 technology projects in these 8 segments, we are currently following up.

Our target will be ready for a full implementation of all those technologies by 2027, by 2027 -- we think by 2027, 2028, the next-generation airplanes will be launched. We need to provide those technologies and readiness of those technologies to conduct [indiscernible]. And at the time being, we are greatly aligned with our customers, and we are following our road map. This was also recognized by the Austrian Institute for Management and Economic Research, FACC was named in the first half year, the most innovative company in the aviation industry, which is certainly a result of our innovation roadmap. Well, in saying that, I would like to hand over to Aleš giving a little bit more insight on our financial figures. Aleš, please.

[Aleš Stárek, executive]

Thank you, Robert. And good morning to everybody on the call from my side as well. Let's jump on right into the numbers on the next page, [ I got ], here, traditionally, you see on the left-hand side, the sales development. And on the right-hand side, the profitability and EBIT development. As Robert already mentioned EUR 350 million in sales, growing, the trajectory as we look at it on a quarterly basis, just as looking upwards, almost EUR 200 million turnover in Q2, Q1, traditionally a little bit softer, weaker quarter after a very strong Q4 as it is every year, so we are on a growing path in terms of revenues. And what we can see now, finally we are in the position to translate the revenue growth also in the profitability growth.

As we have been already indicating on the last probably 2 or 3 calls, the discussions with our customers on finding a way of transferring the increased prices on the materials side and on the labor side, partnering an agreement with customers on how to go forward on the sales price on the side. These negotiations have been finalized in Q2, as I say, as indicated, so we see basically FACC turning profitable, a very strong profitability in Q2. Not all of this profit is attributable Q2, but this is also pitching up from prior periods and I'm sure that you already have that question in your mind as approximately EUR 4 million to EUR 5 million of EBIT that we are showing in Q2 that is not due favorable to [indiscernible] so when we look at that and then we look [ how ] we will pull the line there so we see basically a nice upwards moving trend. So the growth of the top line and on the sales side is nicely translating in the growth, in the profitability as well.

When you go to the next page, a little bit more details on the top line per division. And then the picture here is, let's say, projecting and developing, as has already indicated a couple of times in our calls, Aerostructures, the strongly growing division with 25% CAGR followed by interiors that as you remember, not [ so much ] in terms of the plan during the COVID time, Engines & Nacelles basically a little bit [ flatter ] the least growing division so far with still 12% CAGR when we look at it from a 2021 point of view. So all divisions growing and also on the EBIT side, the growth has translated in all divisions into profitability. On the next slide, free cash flow, a pretty much similar picture in -- compared to the last year, the cash flow -- the negative cash flow, negative free cash flow that we see in both half years, driven mainly by working capital. This year, the picture is a little bit different over the last year. Last year, the negative cash flow has been driven mainly by inventories. This year, the negative cash flow is driven mainly by CROs and that's related, if you remember, when we discussed the year 2021, that we mentioned some customer payments, transfer payments that were due actually in Q1 this year have were paid already in Q4 last year. So due to these customer payment shifts, the cash flow is negative in the first half of the year, most of negative as I said, is coming from Q1.

This is not to say that inventory is in perfect shape, it is not. And you will hear it probably from others as well, the ramp-up of the business is still a topic in the industry, still causing inefficiencies on inventories, but we were able to kind of stop the bleeding on the inventory side. So we are kind of coming to the point where I would say we are reaching the I mean [ pinnacle ] of inventory inefficiency, working capital inefficiency and you see it also on the -- and on the next slide, we will see it in -- when we look at the banking capital development in the time line as well. Before we go there, however, a quick note on investments. You see still first half of the year, below on investments in the same way as it was last year. If it's EUR 4 million or EUR 3.1 million pretty much doesn't matter. It's -- the investment activity is pretty much on the same level as the last year.

So looking at investments and working capital in more details on the next slide. We see investments, as I say, same development as last year. However, we will see increased investment activity in the second half of the year, which is basically due to the expansion of the Croatian plant out of the EUR 20-plus million that we are expecting or budgeting for the plant, increased probably half, they will be spent in the next half of the year. So approximately EUR 10 million will flow out from Croatian expansion this year and the rest -- for the rest, the investment will be probably on the same level as in last year. No special items here. On here, on the right-hand side, net working capital, as I already said, the increase is coming in the first quarter of the year, now basically flattening out. And I would expect that in terms of cash flow development, will continue on that level also for the remainder of the year.

Which basically brings us to net debt and leverage. Net debt, after the increase in the net debt in Q1, now we could reverse the trend, it came down to EUR 225 million in net debt and I would expect that for the next, let's say, again -- Q3 will probably be a weaker quarter as it always is, so maybe a slight increase in net debt in Q3 but Q4 again is a strong quarter. So overall expect a flat development in net debt going forward for the next 2 quarters. In terms of leverage, all in check, EUR 4.43 , million below the EUR 4.5 million threshold and we came close to the threshold in Q2, but it was expected. We knew that this is going to be the case. Nevertheless, we managed to basically satisfy the covenant, the leverage covenant from the bank funding, so no issues here and also going forward for the next half of the year, we do not expect any issues on that front. With that, I will hand over back to Robert and for the outlook.

[Robert Machtlinger, executive]

Okay, thanks Aleš for the guidance. Let's go into the market outlook, very quickly. I think if you look into the airplane development, this is just a summary of a pretty much public domain, and I think you have all insight to it. But just looking into main platforms of FACC, the A320 family, which you know and we know is the most dominant airplane platform in FACC. So roundabout 40% of our revenue comes from the A320. Here, we see an increase in demand and build rates from today's rates to the end of 2026 by another 35%. So it's a continuous step-to-step ramp-up [indiscernible]. And I have to say on all programs, we are on [ time ] and on quality. So we are not those guys are causing our customers paying in that respect. A350 and this is very positive also the B787. I just talked about Aerostructures and engines nacelles was the most impacted divisions in FACC during COVID-19. Why? Because in engines and nacelles and Aerostructures, we have quite a big amount of wide-body programs namely A350, B787. Rates have been stable in the last 2 years, but low, but right now, we see a continuous ramp-up on those platforms as well. So the A350 from today's rate will increase 60% in the next 4 years to come. So this is on and above the ramp-ups we are making on the A320 family.

And also the 787, as we know, there have been some issues in terms of deliveries of the airplane. Also this airplane has great presence in the market. It's a well-performing airplane and rates will significantly increase in the next 4 years as well. The Airbus 220 where we got some significant programs in 2021 and with rather [ the elevated they pick the body faring ] as well, is ramping up as we speak, a 50% increase between today's rate in Q4 2024. So we think in the next 14 months the rate will double from to today's rate to Q4 2026. So also here, we are on the right platform with good organic growth potential in the years to come. Business jets, high demand have reconfirmed over the last periods. We have 17% of FACC sales comes from business jet applications. And currently in the midsize business jet segment, which is the Challenger 350, which is the [indiscernible] 500, 600s FACC in terms of cabin supply is the market leader with a 57% market share in this market, and we are working on this to further extend it. Start of series production on the C919 is ongoing as we speak as well, the first 2 airplanes handed it over to Chinese airlines, [ they had ] renew service. The airplanes are doing quite okay. So no surprises. And also here, we are right now ramping up our production volume, which is roundabout USD 1 million [indiscernible] COMAC 919 airplane.

Next page, [indiscernible] please. Our key priorities for 2023. We're expecting a sales growth of 12% to 16%. Why is the spread that wide? Well, there is still some volatility in the market. So we still see the one or the other adjustment, not only in one direction on some platforms, we see higher rates, on some platforms, we see a little bit of a slower rate. But overall, year-on-year, we see a double-digit growth in terms of output. Gradual increase of our earnings power, as stated by Aleš, negotiations are completed. New programs are stabilizing, the new workforce starts the [indiscernible]. So we see a gradual increase in the earnings as well. Inventory management and cash flow is key to the management also here, Aleš has as well spoken on it. So [indiscernible] and steel are critical. We need to protect us and our customers by a little bit of extra inventory we are holding for the time being. But also here, with our procurement and program management departments, we are on site of critical suppliers, and we see a step improvement also here.

Another point is workforce expansion of FACC growth beyond 2023. All following our plans, we are able to attract people, and just test alone last year, 1,800 job interviews, and we can select most people we need showing FACC is a great employer and which is also as our [indiscernible] of course, strengthened FACC's market position. We want to win new business in our core business, which is [ typical ] aviation industry. Here, I can say, we see a very strong RFQ dynamics in the market. This is also driven by the one or the other geopolitical discussions between East and West. So there is customers on both sides who are setting up alternative supply chains, and we are a part of those few processes on both sides of the world. So the opportunity for FACC is there. And we are definitely going for getting more market share on current airplanes in order to grow FACC beyond the normal natural growth rates. In saying that, I would like to thank you for listening, and we are ready to answer all of your questions. Thank you.

[Tanja Maisenberger, executive]

Thank you very much for the presentation. We will now move on to the Q&A session. [Operator Instructions] And we already received the first hands. With this, I hand over to Miguel Lago.

[Miguel Lago Mascato, analyst]

Yes. Thanks, and good morning, everybody. A couple of questions from my side. First would be on the EUR 400 million orders you received in context of the Paris Air Show. Can you put this maybe into perspective with your order backlog, let's say, before the air show and how is it now as of June 30?

[Robert Machtlinger, executive]

Miguel, yes, I can do that. The EUR 400 million basically is just taking the orders, this 1,300 orders. The good thing is FACC has the one other piece on every airplane that was sold. And if we take our contracts and we take the order, the firm orders received, and we just do the mathematics, every single program with every single airplane then there is a firm order backlog increase of EUR 400 million that we saw. Again, I think majority of the firm order backlog comes from the A320 sales or A320 family sales and to the A320s of course, going into India, so 500 airplanes ordered Indigo that with Airbus and then there is another big order that was received from Airbus and Boeing from another Indian carrier. So I cannot go into every single piece, but most of the EUR 400 million I would say EUR 0.25 billion is order backlog increase on the single-aisle platforms. If we just take the order backlog before Paris, with an order backlog of roundabout USD 5.4 billion in this were EUR 5.8 billion. Again, this is good. This is nice because we know we are working on the right platforms overall, and this is also no secret most of the single-aisle platforms are sold out for the next 4 to 5 years. So these sales are definitely expanding the long-term perspective of those airplanes, giving us good visibility on the demand but short term, no [ jumps ] in further rate increases.

[Miguel Lago Mascato, analyst]

Okay. Quick follow-up on this one. This [ EUR 4.5 billion or EUR 4.8 billion ], is it over lifetime platform lifetimes? Or is it over the next 3, 5 years?

[Robert Machtlinger, executive]

No. If we talk about firm order backlog, so we have a contractual backlog let's put it that way, if we say we have a contract on an airplane and the airplane market is just dropping under 2,000 airplanes. We could calculate the contract value with the 2,000 market demand for the airplane, well, which is nice but if there is no customer behind, it has no real value. The firm order backlog is for FACC if we have a contract and if an airline where airlines order the airplane. So if we take the -- if we take, for example, the A320 family, we know that 5,000, 6,000 airplanes are on firm order backlog by various airlines. So if you take all of our contracts, multiply it with the firm order backlog where a customer -- an airline customer has committed to buy the airplane, this is driving the firm order backlog. And in terms of the A320, the firm order backlog right now is going forward by roundabout 7 to 8 years.

[Miguel Lago Mascato, analyst]

All right. Then you mentioned I guess, a one-off effect in EBIT, it was hard to understand at this point. Can you maybe repeat this?

[Aleš Stárek, executive]

Yes. So basically, what we are showing is a EUR 14.9 million EBIT in Q2 and out of that, approximately EUR 4 million to EUR 5 million is attributed to prior periods.

[Miguel Lago Mascato, analyst]

Prior period, okay. Can you elaborate a little bit on this?

[Robert Machtlinger, executive]

What means prior period, Aleš discussed on certain cost increases we have seen from the market in terms of material, labor, energy cost, there was discussions with our -- with the market, with our customers on how to pass on some of those inflation-related increases. This was a fair and a good discussion. We settled in the second quarter, but the settlement was also [ considering upon ] deliveries we had in the first quarter of 2023 as well.

[Miguel Lago Mascato, analyst]

Okay, understood. Then on your guidance, you narrowed now down the guidance but the sales development implies a slowdown of sales development in the following quarters. Can you maybe elaborate a little bit on this? And also EBIT-wise, what this would imply for H2?

[Robert Machtlinger, executive]

Well, on the top line, I can answer. I think we know that the industry adjusted some of the ramp-up curves for various reasons. Basically, what we see is FACC is very much on track with the customer demands. There is some inventory build-up here and there, and our ramp-up curve there is a little bit slower than what we see. So overall, there is a ramp-up also in revenue but a little bit slower because our OEMs need to level out supply and demand and harmonize, I think, their working capital as well. So we see good growth, step-to-step growth also in the next months to come. This will continue. In terms of EBIT development, very strong Q2 because of a couple of one-offs. There was also a couple of development costs we have invoiced to our customers. Still, the environment is not easy. Just said before, material, and it's not one element. It's various, it's keeping us busy, not only us, the entire industry and we see a positive development in EBIT as well. But the EBIT development in the second half of the year is a little bit lower. And we need to consider that Q3, July and August is weak month in terms of delivery because of company shutdowns with our customers as well.

[Miguel Lago Mascato, analyst]

Okay, got it. That's it from my side.

[Robert Machtlinger, executive]

Thank you, Miguel.

[Tanja Maisenberger, executive]

Thank you very much for your questions. And with this, I hand over to Sebastian Mathe. Mr. Mathe, unfortunately, we cannot hear you right now, might be an option to check your microphone you have chosen. In the meantime, you're checking your microphone, I will hand over to [ Ian Douglas-Pennant ].

[Unknown Analyst]

Hopefully this works.

[Tanja Maisenberger, executive]

Yes, we can hear very well.

[Unknown Analyst]

Perfect, yes it's [ Ian, EVS ]. The -- sorry, does the Airbus has shifted away from or stopped talking about the rate [ EUR 65 million ] guidance that they were giving on the A320 before. Does this impact your guidance or expectations for this year or for next? And secondly, in terms of the production rates that you gave on the outlook slide, on sort of Slide 19, the numbers seem to be -- the increase in build rates seem to be consistent with what the OEMs are saying but the time lines are not, what should we read into that if anything?

[Robert Machtlinger, executive]

Yes. [ Ian ], thank you for the questions. On the first question on the guidance of the [ EUR 65 million ], this is not impacting our guidance for this year. I think what Airbus and all of our other customers are telling us is pretty much part of our reviews. So it basically -- what's out there on the market as of today and as we speak, is pretty much a part of our guidance. So no negative no positive effect from what we heard is the last statement from all of our customers. On the overall rate guidance, I think also here, customers are pretty much telling us in the industry what they are expecting. In terms of, again, the most sold airplane today the A320 family. The rate will continue to ramp up to a rate of [ EUR 75 million ] and not higher. I think there was times in the past when there was a rate of even [ EUR 75-plus million ] under discussion, we think, and this is what we took away from carries as well. The rate -- maximum rate will be [ EUR 75 million ]. We think the demand, and this is not only for the A320 family, this is also true for the MAX 737 and for some other platforms. The market is there. Where I think, at the time being, the drumbeat of the rates is pretty much controlled by the weakest chain in the supply chain. And we know that a big portion of suppliers are delivering to the end customers' demand and some of them are not, and they are not building the rate. So we are expecting in FACC, at least a 24, maybe 36 months over demand compared to supply opportunity or supply capability. And this is why we see the ramp-up as we have put it into our charts.

[Tanja Maisenberger, executive]

Thank you very much for your questions. And with this, I hand over to [ Miguel Sutsake ].

[Unknown Analyst]

Okay, can you hear me?

[Tanja Maisenberger, executive]

Yes, we can hear you very well.

[Unknown Analyst]

Okay. Congratulations. I have a couple of follow-up questions regarding this one-off payment. So what I understood so far is that we have like EUR 4 million to EUR 5 million attributable to prior periods, which were invoiced and you say this was compensation for Q1 and Q2. So is it fair to assume that your run rate is roughly half, like the quarterly run rate of additional EBIT going forward is roughly half of this EUR 4 million to EUR 5 million per quarter because you were able to increase prices. Is this how we should read that? That's the first one. I'll take them one by one, if that's okay for you.

[Unknown Executive]

Yes, yes, you can take it question by question. I think that would not be fair, as Robert already mentioned before, the -- it's not only a question of the prices it's also the question of the volumes and so what we clearly expect this and especially the July and August are very low months. So basically, the prices are helping us right, but the volumes [indiscernible] are doing. So we expect a kind of very weak Q3 and then, again, a strong Q4. So that's why we are basically saying that in the second half of the year, the EBIT will not be as strong as it was in the half of the year. This is basically what we are saying.

[Unknown Analyst]

Okay. Then the second question is like the invoicing of the R&D cost, which you said was also kind of one-off. Can you please explain firstly, why is this one-off? Because I think R&D is typically also invoiced by your customers or paid or at least supported by your customer. And for which period was it? And where was it booked in which segment and how -- what was the number roughly? Was it also around EUR 4 million to EUR 5 million? Or was it EUR 10 million? Was it -- a bit clear, please some light on this.

[Aleš Stárek, executive]

No, I think R&D cost, well there is a few different agreements that could be taken. One could be that we're investing in and we are amortizing over time and over chipsets we are delivering. Another one is milestone payments, I think in the first -- in the second quarter of this year, we have concluded a couple of development milestones with the one or the other customer. So here, we are not prefinancing a new program, we are developing but based on certain milestones, we get certain payments paid. The volume that has been invoiced was in the area of EUR 1.5 plus/minus million. So this was not a huge amount, but of course, it was a contributor to the EBIT as well. And well, once going forward, there is a further industry development because we are currently developing product for customers. And at the time being, we are more focused on, let's say, earlier payments of the development costs versus amortizing over that many years.

[Unknown Analyst]

Okay. And then which segments have like the 2 one-off payments being booked like the EUR 4 million to EUR 5 million we talked about before and the EUR 1.5 million of development milestones?

[Aleš Stárek, executive]

This is more contributing to the engine and nacelles business.

[Unknown Analyst]

Both? Both the EUR 4 million to EUR 5 million and the EUR 1.5 million?

[Aleš Stárek, executive]

No, no, the EUR 4 million, EUR 5 million, let's say, price compensation is across all segments because there was price increases and inflation cost across the business. So the EUR 4 million to EUR 5 million is across all of them spread out and the one-offs in terms of industry the EUR 1.5 million is more contributed to the engine and nacelles business.

[Unknown Analyst]

Okay. Then another one. The financial result was minus EUR 4.2 million in the second quarter. It's, let's say, worse than the EUR 1.8 million 1 year ago. Is this due to the rising interest rates? And is this like a new flight level that we can expect going forward, like the minus EUR 4 million per quarter? Or how should we think about this financial result?

[Aleš Stárek, executive]

Yes, it's exactly that yes. So basically, not all of the funding that we have is fixed, a smaller portion is fixed. The bigger portion of the funding is [ floating ] and as you see and in the course of last year, the Euribor has increased by a certain margin. So the increase is not an increase of the margin but we are paying on the funding, it's an increase of Euribor that is facing the one translated into the financial results. Going forward, and that's probably a more philosophical discussion what is going here and what we are going to do, I would expect that in the course of next year maybe Q1, Q2 we will see the highest levels from there, probably the easening will start. At the same time, we are expecting to start to deleverage FACC from, let's say, second half of the year next year. And with the deleveraging, the margins on the [ funding ] will go down as well. So yes, for the next couple of quarters, maybe 3 quarters, plus/minus, I would expect the interest rate expenses to be on the level of Q2. And from there on, I would expect them to slowly basically ease and go down again.

[Unknown Analyst]

Okay. And maybe a last question from my side regarding salaries and wage increases. So in some German companies, we can hear a lot about like the timing was now beginning of July that they had to face basically to pay a quite a large increase in salaries. Was there such an effect also with you and in Austria or was the timing a bit different of the wage increase? Was it already earlier at the beginning of the year?

[Robert Machtlinger, executive]

No. We are negotiating our -- not we as a company it's our collective agreement. We are signed up to and negotiations normally take place between the month of March and April and also settlement in April on the payment increases for 2023. And we started to pay the -- to the new contract in -- starting with May of this year. So it's basically always in May of the year. [indiscernible].

[Tanja Maisenberger, executive]

Thank you very much for your questions. And with this, I hand over to Christian Obst.

[Christian Obst, analyst]

I have a question concerning deleveraging second half of next year. Of course, that makes sense that as you always stated that but how about growth? So should this deleveraging come from only normalizing net working capital? Or what can we expect there? This is the first question.

[Aleš Stárek, executive]

Yes, I think it's both on the one hand side, it's the improvement of the balance sheet for sure and an improvement of the working capital, as I said, for the next 2 quarters or 3 quarters, at least, as we expect the ramp-up will still impact the industry. I do not expect a major improvement in working capital that we are probably kicking in the course of next year. And the second level on the leverages and for sure EBITDA. So with the expansion of the business with the expansion of the EBIT, the EBITDA will also increase and that will contribute for the deleveraging of the company. So short term, this is more driven by the EBIT expansion, medium term or let's say, starting sometime next year, it will be driven by both working capital and EBIT expansion.

[Christian Obst, analyst]

And in addition to that, do you have some kind of a normalized net working capital to sales ratio in mind? What you like to achieve or can achieve in the current structure?

[Aleš Stárek, executive]

Yes, we are looking at it. We are looking at it more from a base sales and inventory days because on the payable we are not really optimizing that. This is pretty much driven by the special discounts that we are kind of having with our German, Austrian and Swiss suppliers. So we are not really optimizing that. On the day sales outstanding, I think we are in the area of about 90 days and a little bit higher than that. So I would not expect major improvements on here. On the inventories, we are in the area between 110 inventory days, 120 fluctuating month-by-month. And definitely where we want to go, we want to go below 100 and then the ultimate target. But basically medium term would be around 90 days.

[Christian Obst, analyst]

Okay. And another question is, if I got it right, you talked about growing further in carrier. Of course, you're investing in Croatia in the new plant but are you also in talks with possible M&A activities in that area? Can we expect something there maybe in the longer term?

[Robert Machtlinger, executive]

Well, I can answer this one. We are constantly looking into opportunities. And I think there is, as mentioned before, a dynamic in the industry right now by changing supply chains because of the geopolitical discussions that are ongoing, both sides of the world, I have to say. We also see that some very large corporations are releasing scope of works, which is not considered a key business for them in the long run. Well, we're looking into those opportunities, but nothing is concrete at the time being. So we are [indiscernible] opportunities. We are trying to align well with our strategy in terms of our core business, which is Aerostructures, Interiors and Engines and Nacelles are balanced, we are looking into the market and if something fits and makes sense for FACC also from a global production and networking standpoint, opportunities will be taken once they are fair and reasonable for us.

[Christian Obst, analyst]

Of course. Maybe a last one on that. I think you have a 5% target margin on Interior. When do you expect to achieve that in the current structure?

[Aleš Stárek, executive]

Yes. So basically, the Croatia facility is actually the biggest driver on the margin expansion as already explained a couple of times. Now we are starting the expansion of the facility that we will take further 12 months, then basically the ramp-up of the transfer of business into the newly expanded facility will take another 12 months. So probably the target EBIT is a matter of [indiscernible] 12 months.

[Tanja Maisenberger, executive]

Thank you very much Mr. Obst for your questions. Due to the limits of time, we therefore come to end of today's earnings call. A big thank you also to the gentlemen for your presentation and the time you took to answer the questions. Should your questions haven't been answered or further questions are raised at a later time, please feel free to contact Mr. Steirer or us and with this, I wish you all a lovely week. Goodbye.

[Robert Machtlinger, executive]

Thank you everyone.

[Aleš Stárek, executive]

Thank you very much, goodbye.