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Edited Transcript of FACC.VA earnings conference call or presentation 15-Oct-19 10:59am GMT

Half Year 2019 FACC AG Earnings Call

RIED IM INNKREIS Oct 23, 2019 (Thomson StreetEvents) -- Edited Transcript of FACC AG earnings conference call or presentation Tuesday, October 15, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Manuel Taverne

FACC AG - Director of IR

* Robert Machtlinger

FACC AG - CEO

* Aleš Stárek

FACC AG - CFO

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Conference Call Participants

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* Oliver Simkovich

RBC Capital Markets - Analyst

* Peter Ortner

Baader Bank - Analyst

* Christophe Menard

Kepler Cheuvreux - Analyst

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Presentation

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Operator [1]

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Dear ladies and gentlemen, welcome to the earnings call of FACC AG. At our customer's request, this conference will be recorded. (Operator Instructions). May I now hand you over to Manuel Taverne who will lead you through this conference. Please go ahead, sir.

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Manuel Taverne, FACC AG - Director of IR [2]

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Yes, hello. My name is Manuel Taverne, Head of IR at FACC AG. With me as always, Mr. Machtlinger, the CEO, and Mr. Stárek, the CFO of FACC Group. I will hand over immediately to Mr. Machtlinger to give you an update on the market and on the sales issues of the first half year 2019.

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Robert Machtlinger, FACC AG - CEO [3]

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Good afternoon altogether. Welcome for the call. Thank you for joining. On a quick snapshot, if we go to page number 2 immediately on the overall business achievement, revenue slightly has increased to EUR373 million, which was a 1.6% growth year-on-year. Basically very much in line with our annual assessment and the principal guidance we have given after Q1, that Q2 is pretty much a quarter with a weak amount depending on the holiday season with our customers as well.

EBIT very much constant with the EBIT we have generated in Q1, also slightly better than what our internal assessment was after Q1. As you remember, especially in one segment, interiors, we are currently putting into production new programs, significant programs where we have to add a big amount of direct labor in order to compensate for the learning curve effect.

So far we have to say the improvement programs are progressing as planned, to a certain degree a little bit faster than expected. So, this is why the EBIT is slightly above what we have estimated after Q1. Cash flow is positive, EUR12.2 million. Aleš Stárek will guide you through the financial figures in his speech.

Very important for us is new orders. We have booked new contracts above USD800 million over a period of 10 years. And I will come to those three major programs later in the presentation.

Overall the air transportation business is progressing as planned. There is growth in traffic growth in the first six months of the year as planned. Definitely US and the Asia-Pacific region, very much to the expectations, and a little bit of a slower increase in Europe.

Overall, and that's very important to the industry, the load factors with the airlines are very high. The load factor on passenger seats is 82.7% over the last six months which is an all-time high. And I think is certainly underlining that the business is still progressing as planned.

Important for the long term, we announced that FACC will set up a new production facility and the new facility will be outside of Austria. It is Croatian and it's a strategic investment for FACC in order to reduce costs and increase efficiency and profitability once going forward. And I will come back to the timetable for that program later on in the presentation.

We also announced, and I just would like to mention it, we are in -- for fiscal year this year, we have changed the fiscal year-end from end of February to the calendar year end just to be harmonized with most of our peer group members in the industry. And we have decided to make this change this year, which will be the last, I would say, adjustment in our reporting once going forward.

Market environment we call it under review. Certainly we all know there is quite a big dynamic in the global industry. But also in a wide range of discussions.

And if I might switch to the next page, the WTO justifies tariffs against Airbus. That was a significant update on the information, a discussion on going over the last couple of years. Basically what does it mean to the industry? Of course a tariff can be applied for European exports into US.

Basically carriers will cut in for aircraft having a weight of 30,000 kg for Airbus. And those aircraft will be taxed with a 10% tariff. However, only aircraft will be taxed and not aircraft components, which means for the FACC business at the time being we don't see any impact.

If we translate that one into Airbus, which is not our main business, but we did the analysis, 13% of the Airbus backlog is with US customers and that's where a possible impact could show up. Nevertheless, and here we need to recognize again, Airbus is running a final assembly line in Mobile, Alabama and product that is manufactured or finally assembled in Mobile, Alabama also will not be impacted by this 10% tariff.

And secondly, the Airbus 220, the previous C-Series airplane is assembled in Montréal at the time being with a second assembly line also in Mobile, Alabama. And for those airplanes produced there, the tariffs also will not trigger in. So, overall I think the impact is kept to a range that is justifiable.

Basically how does the long-term look? There is the same discussion on going the other way around. So, Airbus in Europe claims non-legal subsidies through the military business [to us] to benefit of Boeing.

Here the industry is expecting a ruling by WTO within the next six to eight months. And we have to see what the outcome is at the end of that ruling and what it will do to the tariffs currently applied against Europe. Again, the supply chains are for product, and therefore also FACC. Tariffs will not apply at the time being.

If you can switch to the next page, we have booked new orders. The first one important for us is the extension of the business with (inaudible) Collins Aerospace, mainly on the Boeing 787 translating sleeves. The initial contract signed in 2002 -- sorry 2004, is ending at the end of 2021.

We have entered discussions with our customer, Collins, and we have agreed on a contract going forward between 2022 going into the years of 2030. So it is a 10-year contract extension with a significant order volume behind it. So, it is a high triple-digit order volume. And we currently have agreed on new terms and conditions. For this we are a significant program in FACC.

On the next page, as you know we are producing engine nacelles mainly for widebody airplanes, predominantly 787s and A350s. Right now we have also secured a contract for engine nacelles on the best-selling airplane, the A320 neo family. FACC is producing for one of the two engine variants, the [first two] version for Bombardier aerostructures. Also this is a very important contract for FACC.

Just giving you a little bit of a flavor on rate -- on the 787 we are producing 28 engine nacelles, amount for this A320 neo program. We will produce 17 engines a month. So there is a quite interesting volume effect in FACC.

The technology we have developed on the previous applications we actually can apply to the A320 as well. And we will see first deliveries in Q4 2020 with a ramp-up to full rate during the year of 2021. So again, for the engine nacelles segment, an important program for growing the business and taking market share onboard, which is currently held today by another company.

The next program or contract we have been successful on acquiring is a new product portfolio for FACC we talked about in the nose section of the airplane. So it is the Radom's. Radom's are aerostructures component protecting the radar system of the airplane which is mounted to the nose section of the airplane.

We are producing those components in the future for all Airbus 220, but also for the Bombardier Business Jet family. This is a lifetime contract for all programs. And again, also on this project, first revenues will come in in the last quarter of 2020 with full production ramp-up during the course of 2021. Also this contract is a nice triple-digit million contract [follow-on] over the next 10 years.

We are on track on the service business. As you might remember, we have decided in FACC to enter that market segment. The revenue business -- the repair and maintenance business today is a USD75 billion to USD80 billion large volume a year. And this is certainly not OEM business; this is (inaudible) related business. And this business will grow far above USD100 million in the next four years.

We would like to grab a certain percentage of the business, certainly not (inaudible). But our target is to gain revenues or have revenues in the ballpark of USD100 million in the next five years.

So where are we relative to our target starting the process 18 months ago? We right now have revenue of around about USD25 million a year. That is the forecast for the 2019 period. We have extended our Wichita operation last year, we doubled the size. Within the last couple months we have retrofitted 1,000 winglets of the Boeing 737 [plane] winglets with a new modification adding a second fin to it, which helps, again, the airlines to reduce fuel burn (inaudible) 2.5%.

We think this business is certainly very interesting, especially if fuel pricing currently is increasing again. So, we are seeing a similar trend as we have seen it in the early 2000 years when fuel pricing went up. The demand of (inaudible) winglets went up. This is what we are currently experiencing also with the (inaudible) winglet project we are handling there.

We also signed a contract with Boeing Global Services for 737 Winglet, first of all spares, but also repairs. This is covering the NG configuration but also the MAX version. In the Business Jet environment we are conducting the first cabin retrofit. We have onboarded the first contract with a North American customer. And what kind of a business are we dealing better?

There are a couple thousand Business Jets out in the market being older than five years. Those jets will fly the next 15 to 20 years, but they are having an outdated interior and we are currently proposing to those operators modifying their cabin to make it look nice again. And here we would like to create a certain amount of the business.

And then we are very active with our engineering people, talking to airlines finding out where they have maintenance issues with the original equipment. We found a couple of good applications. We are currently qualifying alternative products, so-called STC projects where we are qualifying certain products to the FACC engineering and then the airline can replace a product that is not performing to their demand with an FACC produced system.

With that outlook on the business development I would like to hand over to Aleš giving you more deeper information on the financial figures of FACC.

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Aleš Stárek, FACC AG - CFO [4]

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Thank you, Robert. Good afternoon from my side as well. Let's go to the next slide, FACC Group sales and EBIT (technical difficulty) that we show. Basically in the first half of the year the sales came in at EUR373 million, a slight increase compared to the first half of the last fiscal year, mainly driven by a solid growth of engine nacelles and in interiors with a slight [increase] on the aerostructures side.

On the earnings side, basically the first half of the year was more or less according to our expectations, maybe a little bit better with EUR16 million overall. Again on the aerostructures side, a decrease in EBIT compared to last year, I will come back to it in a minute.

On the next slide a solid, stable profit situation in engine nacelle, even a little bit better than last year. And then cabin interiors more or less a known situation. We already spent some time on it in the first quarter where basically the losses were relatively material, a little bit of improvement in Q1, but again we have more details on the following slide.

Let's take a look at aerostructures; basically I am comparing Q2 of last year with Q2 of this year. Then we see a decrease by around 8%. And then basically mainly driven by the phase out of the Boeing 737 NG winglet program that was basically fully there in the first half of the last fiscal year. And basically that was not in production in the Q1 and also in Q2 of this fiscal year.

This phase out or run out of the program had two -- basically two implications on the profit side. First it is a loss of volume. So basically when we look at the EBIT in Q2 of last fiscal year and then the EBIT of Q2 in this fiscal year, then we are losing a contribution margin in terms of volumes.

But we are losing contribution margin in terms of pricing. I [will say] mix impact. The high margin winglet project is not in production anymore and so there are two impacts: loss of volume, and then a mix impact when we look at -- when we compare Q2 of last year with Q2 of this year.

When we go further to engine nacelle then we see a solid increase of 5.3% in Q2 of last year. Basically we were flat or breakeven in Q2 of this fiscal year. We have generated EUR1.8 million in profit, partly driven by the increase of volume for sure, and partly also driven by operational improvements.

Operational improvements in a smaller scale are basically kicking in and that's what we see. We have a profitable Q1 and in this fiscal year we have a profitable Q2 -- and in this in this fiscal year. So, basically a very positive EBIT margin development in engine nacelle overall.

When we go to cabin interiors, I already touched on it. So again here good growth, 5.4% Q2 of last year to Q2 of this year. We have recovered quite well from Q1 of this fiscal year in terms of profitability even showing a profit of EUR1.1 million. I think it's fair to say we are happy that we could realize an even slight profit in interiors.

But when we look at it from a stability point of view, for sustainability point of view, then it's fair to say that we expect another, I would say, one, two or three quarters in interiors until we can really speak about sustainable profitability in that division on a lower margin level. And then, again, as next steps the Croatian facility then will get operational in 2021 and then be fully operational in 2022 is another element in margin improvement on the cabin interior side.

When we go to the cash flow, so basically the EBITDA of last year, EUR38.4 million, this year EUR29.9 million, mainly impacted by the lower EBIT. A little bit of increase in depreciation and amortization compared to last year driven by -- driven partly by the implementation of IFRS 16.

Another element to mention here is the positive development in working capital. And in last fiscal year in the first half, we still burned EUR17 million in cash out of working capital. In the first half of this fiscal year we were much better in that inventory on a stable level, and especially cash collection on a very good progress. A decrease in [end day] sales outstanding over the last six months. So, overall basically working capital more or less flat even though the business increased slightly.

Investments we see also here EUR16.5 million in the first half of last year, EUR6 million cash effective in the first half of this year. So, basically the investment activity is not so much different this year to last year. The cash effectiveness is a little bit delayed in the second half of the year. So overall positive cash generation of EUR12.2 million.

Going to the balance sheet and in more detail, still take a look at equity and equity ratio. Equity ratio pretty much stable over the last I would say four quarters. They are moving around 40%. 40% equity ratio is also the level we would like to see.

It needs to be noted that with the repayment of our promissory note in July, equity ratio is not so much of an importance for us anymore because it's not a covenant in our financing anymore. But we are still taking (inaudible) and this is the reason we present it.

More important, net debt and then leverage. We have -- let's say until the end of last fiscal year we have deleveraged the Company nicely to levels between 2 and 2.5. And now we are looking at leverages that are more closer to 3.5.

It needs to be noted that, for one, we have the impact of IFRS 15 and then I believe I spent some time already over the last 12 months explaining these impacts. And then since March of this year, we have another impact of IFRS 16 where you basically put around EUR33 million to EUR35 million of leasing liabilities on the balance sheet. And overall these two accounting principle implementations mean that basically the leverage has shifted by approximately 0.8. And so, that's basically where we stand today on the balance sheet indicators.

Cash flow investment on the next slide I already mentioned, EUR16.5 million down to EUR6 million. Working capital, again here we see the improvements that we achieved over the last two years coming down to levels over EUR160 million and then pretty much flat over the last six months with the impact from account receivables improvements.

With that we are coming to the outlook section of our presentation. And for the first part of the upcoming slides on the financial key performance indicators I will hand over to Robert again.

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Robert Machtlinger, FACC AG - CEO [5]

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Thank you Aleš. Well, I think if you come to the top line development of FACC, we stick to our plan that we want to grow with the market and slightly above the market. We would like to outperform the market. And I think the contracts we have onboarded recently is a good example that with FACC's approach we can take market share on board that is not in FACC today.

We certainly are planning on the continuation of -- and (inaudible) of orders we already have in our books, but also are signing up further contracts. So basically, based on market demand and the overall global economy and the environment, this is what we are forecasting for the top line going forward.

At the time being and also going forward, most important is the earnings situation at FACC. As we discussed and Aleš Stárek presented in detail, there is some in the segment a difference between the earnings position. Aerostructures are on a good stable earnings. I think engine nacelle with a good potential to follow based on contracts onboarded starting in 2022 going forward with solid single-digit, high single-digit earnings position as well.

And of course interiors, as Aleš said, we will ramp up the new programs as planned. A learning curve effect will help us to reduce costs. First positive effect we have seen in in Q2. It will take us another three quarters to fully stabilize. And here I would like to come back to our Croatian set up. Croatia is the best cost location for FACC for the work scope we are producing for our European customers and where logistics does not afford producing let's say in Asian countries.

Croatia will be up and running in Q1 2021. The investment will be spent next year and the year after next year. And once the facility is fully up and running we see a positive cost effect of around about EUR7.5 million to EUR10 million per annum once the operation is fully up and running.

Certainly we will benefit from rate development. As anticipated. volumes effect would regain, but keeping the fixed costs at the same level. And of course our optimization and fixed cost reductions certainly areas is on the trend of diminishment forward as well across all areas, procurement, operational excellence, but also the administration of FACC.

With that statement, I would like to hand over again to Aleš for the last time, giving a little bit of our long-term forecasting on financial KPIs.

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Aleš Stárek, FACC AG - CFO [6]

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Well, so when you take a look at the slide, it represents the four pillars of let's say quantitative indicators that we would like to follow up strategically. And the first half, then Robert was outlining, is basically dedicated to our operational performance.

And the second stool that you see on the right-hand side of the slide is basically driven by the view that we are taking over from the capital and financial markets. And we would like to follow up as well in order to honor the requirements and the expectations on the capital markets.

Number one, net debt to EBITDA leverage, it's a covenant in our funding and financing. So it's important from the debt side of the balance sheet. So, that's why it's a strategically important KPI for us. We have already seen the numbers. We have seen basically where we are today at levels between 3 and 3.5. And clearly the target is to deleverage the Company over time back to levels below 2.5 where we've basically already been.

We know that the shift is mainly driven by change in accounting, so most structural changes in the business. And the cash flow generation that we will do over the next couple of quarters, maybe one, two or -- say 12 to 18 months. I'm sure that we can deleverage the Company back to levels below 2.5.

Number four in our four strategic pillars focusing mainly on our equity investors. And here we need to somehow consider the variety of investors that basically we have. On the one hand side investors that are more focused on growth, we'll basically like companies to reinvest the profits generated in the growth and business development. On the other hand side are investors who would like to participate on positive earnings and participate in the form of dividends.

So, what we basically try to do is to find a balanced approach between retaining the earnings and distributing the earnings as profits. We think the 20% to 30% of net income and distributing it as a dividend is kind of corresponding with that balanced approach. So, that's why we want to stick to this ratio in terms of dividend policy.

Going to the next slide, pretty much looking at the rest of 2019, as has already mentioned, the current fiscal year will be a short fiscal year, only 10 periods ending in December 2019. So basically when we look at the upcoming four months, what is going to happen, where we are expecting to end up in terms of sales and then EBIT?

When we look at the seasonality of the business and we see how especially Q4 will be distributed between December and January and February, on the other hand, then we are basically expecting the sales for the 10 months to come out at around EUR600 million. And we are expecting that the EBIT margin will be approximately in the area of 6%.

With that basically I would like to end our presentation and probably hand over to the Q&A session so that we can answer any potential questions you may have. So, so far, thank you very much for your attention and the Q&A can be opened.

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Questions and Answers

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Operator [1]

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(Operator Instructions). [Oliver Simkovich], RBC.

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Oliver Simkovich, RBC Capital Markets - Analyst [2]

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So, I have three questions. The first one is relating to the ramp-up costs in interiors that affected the first half of this year. Could you maybe quantify this, what this amounted to? And also how it was split between the two quarters.

Then the second one is -- there are quite a few products being currently launched or will be launched in the near future. Can we expect that there will also be some development revenues coming in from those product launches?

And lastly about the passenger drones, could you maybe provide us with a quick update about the status of the production line? When we'll be able to see the first impact on financials, when the first deliveries will happen and how much the impact will be next year? Thank you.

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Robert Machtlinger, FACC AG - CEO [3]

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Sorry, here we are. I think we had a problem on the phone. I will answer your questions starting with the first one, ramp-up costs in interiors. Basically we are ramping up new cabin interiors, new layouts for the Airbus airspace cabin. What does that mean?

First of all, some engineering efforts to configure the configurations to the airline request. Every airline has a different cabin interior, so we have to engineer those options and bring them into [serial] production. This is a little bit of an effort we have with every new ramp-up in interiors.

The good thing is with every airline the preconfigured options are getting more and more and we can pull from those [preconfigured] options with the longer the system or the new cabin is in [revenue] service. So that will take a few months before we have enough options engineered and then production will more and more enter into serial production.

The second part is learning curve effect. This is not unusual, so once we start this new product the learning curve is at a higher level. People are less trained, processes need to be stabilized and optimized. And this is in effect we had over the last couple of months, especially in the interior segment.

The positive thing is between July, end of July, end of September we see a positive trend. So we have added a significant amount of labor to our interiors, which is partial labor forces we are using from time to time. Right now the learning curve starts to be effective and we can (inaudible) reduce the amount of people producing the same amount of our product.

So, that will continue over the next 12 months. And once we are learned out with those projects we see a positive impact in the EUR5 million to EUR7.5 million of cost savings. We are targeting that this learning curve effect will continue over the next 12 months, so by the end of July/August of next year we think that a EUR5 million to EUR7.5 million cost reduction can be achieved by that.

Production launch, correct, I think linked to the production launch of those new programs there is development cost -- not on the first one with the contract extension. I think we have set up with Collins, because this program already is up and running with very solid processes learned out with good labor cost (inaudible).

So, here I think the benefit is there is no need to invest. I think we can produce the units as we are producing them in the long term, but with a contract that is renegotiated between our customer/FACC.

On the other two programs, of course there will be nonrecurring cost of revenues. Basically those revenues from set-up and engineering will come spread over the next three to five years, so it's not one-offs. It's basically amortized over the next couple of years. But there is revenues coming out of those programs not only linked to the product but also to the engineering FACC is providing.

And on the passenger growth, basically this is continuing very stable at the rate of 4.8% on an annual basis. Nevertheless the growth is stronger in Asia-Pacific with numbers around 7.5% to 7.8% as we speak, starting at the end of -- and here I'm talking about the next 20 years.

Nevertheless also in Asia the growth rate will stabilize at the end of the next decade and will come down to 5.8% roughly. High developed countries like Northern America as well as Europe will grow with 3% or 3.3% for Europe. And this growth will generate demand of around about 40,000 new airplanes, which again was confirmed recently by both Airbus and Boeing in the global market outlook.

Overall on those 40,000 airplanes, 75% is single airplanes, typical A320, A321 or 737 MAX airplanes. Plus at the lower end the Airbus 220 or the [E2 jets], so this is the majority of the (inaudible) business. The remaining 25% is right for the airplanes. Here again the two major platforms are Boeing 787 and A350, but also the 777 and to a certain degree (technical difficulty).

As of today, FACC has (inaudible) on all airplanes. At the time being our revenue stream comes to a high degree from the Airbus, 50% is Airbus volume we are producing, around about 20% belongs to Airbus product and the remaining 30% gets spread between Bombardier, Embraer and COMAC.

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Oliver Simkovich, RBC Capital Markets - Analyst [4]

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Okay, thank you.

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Operator [5]

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Peter [Ortner], Baader Bank.

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Peter Ortner, Baader Bank - Analyst [6]

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Firstly on your expected development at aerostructures where we have seen in the first half of the year a decline in sales due to the phase out of the Boeing Winglet. Is this effect in Q3 and you have a potential fourth-quarter lower? Or do we have here the same effects?

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Robert Machtlinger, FACC AG - CEO [7]

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Basically it's stabilizing and I would like to bring up two numbers. In aerostructures 2017 figures, I have to say, the winglet and the A380, because it too has a joint revenue of USD70 million to USD80 million a year and both programs are currently phased out. So, basically the NG is gone and the A380 we have stopped production because of the announcement of Airbus.

So, we are compensating a fair portion of this portfolio change with new programs. Last year in the first half year we still have produced NG winglets but also A380. So, right now it's stabilizing. And we are approaching I think at the turnaround point.

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Peter Ortner, Baader Bank - Analyst [8]

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Okay, so this means that in Q3 the negative effect will be lower than in Q1 and Q2?

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Robert Machtlinger, FACC AG - CEO [9]

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Absolutely correct, good statement.

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Peter Ortner, Baader Bank - Analyst [10]

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Okay. Then with that regarding your guidance for the current year was EUR600 million. So, if I would take the sales of the first half year, the EUR373 million and add let's say an unchanged sales level, which we have seen in Q3 last year, to EUR216 million, I would already come to EUR590 million. So, it is clear that December sales are low -- lower than on average, but I can imagine that even in December sales should be much higher than EUR10 million.

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Aleš Stárek, FACC AG - CFO [11]

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There is some seasonality in demand, of course. And December definitely in a very weak month because two things. First of all it's a short month because of the holiday season, Christmas and New Year's.

And secondly, our customers normally order a little bit less because the airplane demand they are having -- we have delivered everything in the month before. And normally the December and January revenues are higher. So, because they need to back fill what they have ranked down on demand in December. So overall this needs to be considered.

We also have to say that we are -- basically in the old fiscal year we have forecasted a certain degree of ramp-up of our urban air mobility project we are doing together with (inaudible), accounting for around about EUR30 million in our business year planning.

Basically we are currently producing, we are doing the system checks with our customer, and we have decided internally before all system checks are well performed and passed, we will not further ramp-up our production on this air mobility project, which will have some impact to the top-line growth in the range of EUR20 million if we look into the old fiscal year. So, this is pretty much I think the effect you will see with the fiscal year change.

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Peter Ortner, Baader Bank - Analyst [12]

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Okay and perhaps let's ask another way around. Is there any reason to believe that Q3 sales this year will be lower than last year with the EUR216 million?

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Robert Machtlinger, FACC AG - CEO [13]

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Q3 last year was ending in November, which is pretty much -- we see also right now. And we see it I think pretty much at the same level, so I don't see a slowdown. But then I think after Q3, which is ending November, we have two weeks to go, which is the first two weeks of December and then pretty much everything we deliver then to our customer is even not counting as revenue because it's product we have in 2020. And this is pretty much accounting like assembly parts we have in storage. It's not counting as revenue.

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Peter Ortner, Baader Bank - Analyst [14]

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Okay, understood. And then coming back to the cabin interiors division. You had I think relatively a better than expected performance in the second quarter with a positive result. I think during the last conference call you even expected further losses and then a positive result in the second half of the fiscal year.

Do you think that this breakeven or even slightly positive level can be also maintained then in the third quarter? Or is there something which we have to consider on the negative side?

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Robert Machtlinger, FACC AG - CEO [15]

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No, I think it is currently [depending] a little bit on the product mix. Today we are delivering three different configurations of the cabin: the enhanced cabin, which is a cabin we are producing since 2009. The (inaudible) configuration and the (inaudible) configuration. [basically] the enhanced cabin configuration will rank down and the (inaudible) -- the airspace configuration will ramp up. And today I think it's more based on the customer demand.

So, let's give you one thing that if one customer already flies 200 enhanced cabins, he might not change configuration for the last couple of (inaudible) he will take over. But in a -- and that was the effect I think we have seen in Q2. A better product mix on these cabin configurations, but also positive signs of our learning curve.

Honestly saying, customers can switch the configuration quite short-term before we have to deliver. If we look into our plan going forward, as mentioned before, we need the next three quarters to fully stabilize having solid production processes on the new cabin layout.

So, it's (inaudible) to a certain degree, strongly depending on the configuration we are delivering, but starting second half of 2022 the division will be in a solid environment developing or producing positive margin.

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Peter Ortner, Baader Bank - Analyst [16]

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And in the next year in 2020 then you have in cabin interiors the burden from the ramp-up of the entry area?

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Robert Machtlinger, FACC AG - CEO [17]

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Yes, correct. But the entry area is not configured. So, the entrance area is a configuration. The entrance area is not subject to high customization, so there could be one or the other screen and the [elements] to have because of a different entertainment system. But overall the configuration level in the entrance area is insignificant compared to the main cabin.

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Peter Ortner, Baader Bank - Analyst [18]

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Okay. Then your result at aerostructures is always dependent on milestone payments which you receive. What do you expect here?

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Robert Machtlinger, FACC AG - CEO [19]

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Aerostructures is pretty much not so much [paying] on milestone payments because the product portfolio is very stable. Of course, there is one of the other service payments we are receiving, giving us a little bit of upstream. And we are expecting that those milestone payments will be pretty much at the same level going forward.

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Peter Ortner, Baader Bank - Analyst [20]

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On the same level. And I think there was always a statement in a normal environment you are able here to generate margins, let's say, of between 10% and 12% in the last years. You often had margins higher Q2 payments. What can you say here about the margin prospects?

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Robert Machtlinger, FACC AG - CEO [21]

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Margin will stay above 10%, so in the ballpark of 12% as we had it in the past. So, we don't see any impact from any asset in aerostructures. It's a very stable business, not configured and running at (technical difficulty). So, we'll stay in this 12% ballpark.

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Peter Ortner, Baader Bank - Analyst [22]

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Okay. And my last question, you had a slide expecting was it mid-term sales growth of around 5%. So, you mentioned several new projects that will ramp up in the course of 2020 and have some more effect on 2021. So, is it then fair to assume that perhaps 2020 might see somewhat lower growth than 2021 then perhaps higher growth than the 5%?

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Aleš Stárek, FACC AG - CFO [23]

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This is a good assessment and a good summary. I only can confirm what you just said.

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Operator [24]

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Christophe Menard, Kepler Chevreaux.

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Christophe Menard, Kepler Cheuvreux - Analyst [25]

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Yes, good afternoon. I had three questions. The first one is on that new order you had on the nacelles. You mentioned on the call that you are expecting volume increases. So, I think it will also play in favor of better margins. In the past we are pointing to 9% to 10% EBIT margin mid-term for the nacelle business. Could it go higher thanks to that program? So that's the first question.

The second question, you mentioned EHang and I always had in mind that you are looking at a certain volume of delivery for this year. I understand that has changed. So, if my memory is right, you are looking at something in the range of 100 units to be delivered in 2019-2020. Is it significantly down? Can you just detail this a little bit?

And the last question is on the cash. So, a few things here. Did you collect the cash from China, the 10.8 million? And also, when you mentioned the net debt or EBITDA of 2.5 over your guidance horizon, what should we -- I mean, of course there are implications on free cash flow generation. What kind of cash conversion rate should we be considering over the period of 2020 to 2024? Thank you.

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Robert Machtlinger, FACC AG - CEO [26]

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On the engine nacelle side, on the profitability, as we have seen, engine nacelle was under pressure 2015. We turned the business around and over the next three years going forward this segment will stay in the low single-digit profitability area. After 2021, starting 2022 the new terms and conditions comes into play.

And we are expecting that engine nacelle will be in the high single digit 8%, 9%, 10%. 10% could be possible pending on a couple of effects like material cost escalation. So, we think it's fair to say high single digits is possible in the short-, mid-term future, which I think is, based from where we are coming, a nice step change.

EHang, basically we want to start production in October of the year. We have finished all the reengineering, we have increased performance, reduced weight. We have produced a handful of product which is right now tested with our customer that all requirements are met, center of gravity and the introduction of the new systems because a couple of changes have been made.

Instead of eight batteries we right now have 12 batteries incorporated to have a fully let's say redundant system for all motors and propellers. So, increasing the safety of the product again. And we decided internally that we will not further ramp-up production before all system checks are given. And that we have security that's what has been engineered and modified is fulfilling our customers' expectations.

For the next year, we are more thinking about 200 units being produced and delivered to our customer. And for those units customers are lined up. Production will be done in Austria, but end users are in this China, Asia and Pacific region. So, it is not 100, we are more looking into 200 with the production set-up already done. And as said before, within the next weeks we are waiting for the final results of testing. Testing so far looks good and we are on track.

Cash collection from the 10.8 million frozen accounts -- basically all requirements are met. This was more a legal issue between two countries because there is no support agreement between Europe or Austria and China. So, both governments have agreed green lights are there. Right now all signatures are collected and we're expecting the cash to come in.

Honestly saying I would like to have it already, of course it would be good to have it in our pocket. But we are working on that -- not we but the government are working on the signature collections in order to make the transfer back to FACC accounts in the next weeks or months.

I am sorry, I cannot be any more specific. This is a complex process and it's not one or two things; it is many signatures. But we have indication from both governments it's all okay. It's justified and they are working on the process.

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Aleš Stárek, FACC AG - CFO [27]

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And I think you had one more question on the leverage and on the cash conversion cycle, right?

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Christophe Menard, Kepler Cheuvreux - Analyst [28]

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Yes, I did.

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Aleš Stárek, FACC AG - CFO [29]

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So, basically the cash conversion, I see three drivers that basically we can make an influence. On the playable side, I would not expect any improvements here since basically -- and I mentioned it a couple of times already -- we have these specialty (inaudible) suppliers in the German-speaking European region. And this is basically around 2% that we can deduct and we can discount if we pay early. And that's basically cash in the pocket and this is a financing that you don't get anywhere else. So, we will keep on that.

So, I do not see that our supplier base will significantly change. And I do not see that we will waive these special discounts. So, there is basically no room for improvement on the payable side.

On the accounts receivable side, I think we are already at a very strong cash collection and I mentioned it in my presentation as well. So, also here I wouldn't expect any major improvements on non-cash collection on accounts receivable. So, days sales outstanding will stay where they are at the moment.

The only leverage I see and the only improvement I see we can achieve is on the inventory side, and this is a very tricky thing. We have been looking at it I think for the last two or three years. And honestly speaking, we didn't have so much improvement. In any case, we are looking into that.

Today where do we stand? We have inventory levels we think 120 and 130 and it basically means we are turning inventory a little bit faster than three times a year, which is basically a day inventory outstanding around 120 days or something like that. I think that there is room for improvement, I wouldn't be all too aggressive. Maybe a week, seven days can basically be achieved.

What I would propose for this one here, we are just in the planning phase -- we are planning our budget for 2020. I do have a couple of ideas and a couple of targets I would like to do. When we can park this discussion for maybe eight weeks, six to eight weeks, then I have more clarity on where we are heading. I have a little bit of a button up verification on the inventory days. And then the nice thing, I think a week or 10 days can be then confirmed and be a more solid number.

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Christophe Menard, Kepler Cheuvreux - Analyst [30]

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Thank you very much for all the details.

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Operator [31]

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There are no further questions, so I would like to hand back to the gentlemen.

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Manuel Taverne, FACC AG - Director of IR [32]

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Yes, thank you, ladies and gentlemen. If there are no further questions, I think thank you for joining this call again. And see you next time for the Q3 results in February. Thank you for joining. Bye-bye.

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Robert Machtlinger, FACC AG - CEO [33]

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Thank you very much.

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Operator [34]

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