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MTU Aero Engines AG
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Welcome to the Conference Call on MTU Aero Engines First Quarterly Results 2020. [Operator Instructions] The speakers of today's conference are Mr. Reiner Winkler, Chief Executive Officer; Mr. Peter Kameritsch, Chief Financial Officer. Firstly, I will hand over to Mr. Thomas Franz, Vice President, Investor Relations, for some introductory words. Thank you. Please go ahead.
Good morning, ladies and gentlemen. Welcome to our conference call for the Q1 2020 results. We will start with a business review of the first quarter presented by Reiner. Peter will give you a view on the financial highlights as well as more details on our OEM and MRO segment. Following that, Reiner will give some information about our view on the current situation. After that, we'll open the call for questions. Let me now hand over to Reiner for the review.
Yes. Thank you, Thomas. And welcome also from my side. The aviation industry benefited from a strong market environment in 2019, with passenger traffic being up by more than 4%. This positive trend was expected to continue in 2020 and in January, there were no signs of a contraction. In February, following the virus outbreak in China, passenger traffic in the region declined sharply. In March, the crisis spread globally, resulting in a steep worldwide decline in passenger traffic. In April, IATA updated its traffic outlook for 2020 and now expects worldwide passenger traffic to decline by nearly 50%. At MTU, we immediately implemented organizational and technical measures to minimize the infection risk for our employees. To slow down the spread of the virus and to respond to an instable supply chain, we temporarily suspended a large proportion of the operations at our sites in Germany and Poland for 3 weeks. Currently, we restart our operations gradually in Germany where we use the instrument of short time work. The level of activity in our plants will be adjusted on a weekly basis, depending on customer demand, supply chain reliability as well as the current situation of the coronavirus infections. Our international MRO locations are currently operating at a decent level and we saw a remarkable contract win in the first quarter. The U.S. Air Force assigned the maintenance of the F138 engine to MTU Canada. Mid of March, we decided to postpone our AGM and to suspend our dividend proposal due to the coronavirus crisis. The AGM will be held later in the year, and we will provide details as soon as possible. On March 26, we withdrew our guidance for 2020 due to the uncertainties in our markets. A top priority in these uncertain times is to increase our liquidity headroom. We are in the final stages for an additional EUR 100 million promissory note to bolster equity and in the second step also to increase our revolving credit facility. For the first quarter of 2020, our business was broadly unaffected by the current situation. We expect a significant hit on demand from Q2 onwards. Please be ensured that we do everything which is necessary and possible to work through this crisis and to minimize the consequences on our financial performance. Let me now hand over to Peter to give you a view on the Q1 results.
Yes. Thank you, Reiner, and hello to everybody also from my side. Let's have a look on the financial highlights for the first quarter. Revenue increased by 13% to almost EUR 1.3 billion, driven by a strong MRO business. Group EBIT adjusted at EUR 182 million was more or less stable, resulting in an EBIT adjusted margin of 14.3%. Net income adjusted of EUR 128 million was also more or less in the same level as Q1 '19. Free cash flow of EUR 69 million in the quarter was on a more normal level compared to Q1 '19 with EUR 140 million, which was an exceptionally strong quarter. So turning to our business segments. I'll start with the OEM division. Total OEM revenues were stable at around EUR 500 million. Military revenues were down slightly to EUR 98 million, showing a typical quarterly fluctuation. So there's nothing behind that. Commercial business was up 4% to EUR 400 million. And within that, organic OE sales were up high single digits, mainly driven by our GTF engine platforms and business jet engine programs. Organic spare parts were roughly stable. This business mix led to a decrease of EBIT adjusted to EUR 116 million with a margin of 23%. So let's switch to the commercial MRO segment. Reported MRO revenues increased 21% to almost EUR 800 million organically in U.S. dollar, that means 19% increase. And this increase was mainly driven by more PW1100 warranty work. EBIT adjusted increased 60% to EUR 66 million, resulting in an EBIT adjusted margin of 8.3%. The lower EBIT adjusted margin results from a higher share of GTF warranty work, as mentioned before. So thanks for your attention. At this point, I hand back to Reiner for some views on the current situations.
Yes. Thank you, Peter. As everybody knows, there's a lot of uncertainty in the current market environment. We are constantly monitoring the situation, and we are in close contact to our customers, partners and suppliers, and we want to share some of these thoughts with you. Our look to the market follows the IATA scenario published in mid of April. After the current stem sale of the majority of aircraft around the globe, we expect a recovery beginning in domestic markets in the third quarter of this year. International travel should restart in Q4 and we expect the air traffic demand to be back on 2019 level end of 2022. There are various developments in the markets that could accelerate or set back these expectations. One major issue is, for sure, the availability of an effective medicine or vaccine and the development of global trade following the current developments. Based on this, we worked on different scenarios and actions to address the situation. Let's conclude our current view on the situation with a quick walk through these business segments. Our military business should be largely unaffected. Commercial OE and aftermarket business will see a significant demand reduction from the current grounding of the majority of the fleet, the very limited visibility on air traffic development and all airlines worldwide being in cash conservation mode. The MRO segment will also see a significant reduction in demand from passenger airlines but we expect more business from freight operators, especially for CF680 overhauls. Further, we see the opportunity to fill part of the available slots with more warranty work on PW1100 engines. To partly offset the negative impacts from the reduced volumes on our financials, we have identified a wide range of measures, including reducing payroll costs through short time working and an overall salary freeze for all employees in 2020. We significantly cut general expenses, worked on our CapEx plans and will have a strong focus on working capital. This cost and cash savings will be executed in all segments. On the other side, we decided to secure additional liquidity by EUR 100 million promissory note and to increase our yet undrawn EUR 600 million RCF credit line. Given this high degree of uncertainty at the current stage, it's too early to provide an updated financial guidance, but we will keep the market informed as appropriate. And all in all, we feel well prepared to weather the situation. So thank you very much, and we are now open for your questions.
[Operator Instructions] Your first question comes from the line of Mr. Robert Stallard of Vertical Research.
I hope you're all well and getting through these challenging times. A couple of questions from me. First of all, in terms of engine shop visits, I was wondering if you could give us an update on how these -- how the situation is evolving, what sort of level of deferral or cancellation are you seeing at the moment? And how this is impacting the scope of work that the airlines are asking for? And then secondly, on CapEx in 2020, can you give us an idea of how much that number could come down given the cash preservation moves you're taking?
I mean starting with PPE investments, I would say, we have identified roughly 50% of our budget, which we can -- that canceled, defer into the cancel or deferred to the outer years. So roughly 50%. I mean that is not a stable number. You're going to review that on a monthly basis and adjust that to the demand situation now?
Yes.
On the MRO shop visits, yes, we saw some deferrals and cancellations. But on the other side, we saw additional shop visits, especially for freighter engines, so mainly the CF680 but it's the same as with the PPE. We have to monitor that on a weekly or monthly basis. It's -- but I think that's the same situation is in every company in these times.
But if I could quickly follow-up, presumably, the freighter activity is much smaller than the passenger activity there right?
Sure. Yes. Sure. Yes.
Your next question comes from the line of Andrew Gollan of Berenberg.
So my question, I'm just trying to -- a bigger picture question, actually. I'm just trying to square your comments around the broad assumptions you're making on recovery and you talk about an extended -- assuming an extended global recession beyond 2021, that's I don't really contest that. But the aviation markets recover by -- in 2022. Can you just give us a little bit more color around your thinking here? So in absolute terms, are you telling us you think air traffic will be back to the 2019 levels? And in which case, where does that mean the global flying fleet in terms of capacity will be the same size? I'm just trying to get these -- pin these comments down a bit because a lot of companies are talking in these terms. So just a bit more color from your perspective, please?
I mean it's a difficult question. I mean, you can -- what we do, we work with different scenarios with, let's say, a base scenario and then maybe some upside and downside scenarios. But we are ready to adjust that or to monitor that and do this every week -- every month or every quarter, our current assumption is that we have air traffic being on the 2019 level maybe end of 2022 in this range. Is it the beginning of 2023? I don't know, but within that range. And if you follow the last 2 months, I think IATA every 2 weeks, revised their forecast, starting with about minus 25%, minus 38%, then minus 48%. I think that's the actual number, and that's what we have also used now for our current forecast. But it's today, very difficult to say, is it back in end of 2021, '22, beginning of '23.
But a big step forward will be when -- once the vaccine is available and it's available for a broad percentage of the worldwide population. And I think then we can see a quick increase in travel demand. But before that, definitely will be a slow recovery. And I mean the starting point will be the domestic traffic. So -- I mean, you have maybe the announcement of Lufthansa, increasing the schedule from mid May on, you see the first signs also in Asia, in Vietnam, for example, that flight activity starts coming back on a low level. So -- but it will be slow until when the vaccine will be available. That's for sure.
And just 1 second question. Your comments on the MRO business. I think Reiner, you said that the international sites are operating fully currently. Can you just explain what happened or what was experienced in China, in Zhuhai through February and March?
I think they closed the facility also for a couple of weeks. They extended the Chinese New Year. And there are no back to work, but this also reduced capacity. I think they're working now 7 days a week, but just 1 shift.
And the demand level, sorry, within the business is really what I meant.
Demand?
Yes. So are we operating at 100% today? I mean I just find that hard to believe.
In Zhuhai, we are -- put a figure out that's something like 20% reduced demand.
And your next question comes from Mr. George Zhao of Bernstein.
First, could you share the organic spare growth for the -- that your first -- your 3 main engine programs. And then secondly, you talked about traffic getting back to 2019 levels by 2022. If that's the case, can the commercial aftermarket revenues also get back to 2019 levels by 2022. And why -- especially if you think about the fleet retirements coming in this downturn, how much of the passenger aircraft from the PW2000 and CF6 do you think will now come back into service? And how would that affect the aftermarket recovery?
I mean regarding spares in Q1 organically, I mean, the major platforms obviously are V2500, PW2000 and the CF680 and PW1200 was roughly flattish Q1 versus Q1. PW2000 was even slightly up. So we saw quite healthy demand from the military side of the fleet. Which is roughly 60% of the fleet and also a share of the fleet on the PW1000 also on the freighter. So the 757 freighter. So slightly up on the PW2000 and also slightly up on the CF680. And so the rest was slightly down. So business jet engines and spare parts of business jet engines and spares on the GP7000. So the rest of the portfolio was slightly down so -- and if you add that all up, we will be -- it was roughly stable. So I think it's to -- regarding your question on can the aftermarket really come back by 2022 to levels we have seen in 2019. I think that is definitely far too early to have a view on that. I mean, you don't even know exactly how many shoppers in you're going to have in Q2. So now speculating about 2022 will be, I think it's far too early. I mean, we tell you obviously have a lot of drivers. So what -- how does demand develop. Then you have, I mean, new engines delivery is tied, obviously, to new aircraft. Really airlines available to get the financing for new aircraft. On the other side, you have a very low oil price, so around USD 20, making an old fleet attractive to fly. So these are all the dynamics in the market and how that will exactly play out. I think it's far too early to say that.
Your next question comes from the line of Mr. Andrew Humphrey of Morgan Stanley.
I hope you're all well. Just a couple for me. Firstly, on retrofit and how that plays into some of the margin dynamics. And I know you've highlighted that effectively that is dilutive to overall margin mix because you're reporting it at cost. But I wanted to ask in a time of significantly lower utilization of your facilities, does that help you add some extent on stranded costs? And if you could kind of expand on that and talk more broadly about your expectations for operating leverage in your various businesses this year, that would be helpful. Secondly, you've talked about freight and the exposure you've seen to that, there's an implication there that, that remains more robust than commercial passenger traffic, which I don't think is particularly controversial. But could you maybe talk about the specific dynamics you're seeing there in the short term say with some of your legacy spares businesses. I mean you mentioned CF6 as well. And finally, just coming back on cost reduction plans this year, you've mentioned CapEx. Could you talk more broadly or more specifically rather, about other overhead reduction plans this year if you have a percentage figure in mind?
I mean going to start with operating leverage, I would say, on average, I mean, roughly 70% of our cost bases are variable costs. And 30% fixed cost, I would say. So that is the rough split, a little bit different in the segments. Obviously, MRO business I mean we mentioned that I mean frequently, regarding the revenues in the MRO that's roughly 80% is the passing through of our spare parts and outside vendor services. And that is for the -- this is a rough estimate of the cost base in the MRO. So 70% new spare parts, 10% outside services vendors and so on. So 20% is the MRO, the 6 -- so in the major portion, obviously, are salaries for the workers and depreciation for the assets in the MRO and on the OEM side, it's different. They are rather, you have maybe 60% variable and 40% is fixed. So I mean, also, I mean, salaries and depreciation and so on. So that is the operating leverage. And yes, PW1100 shop visits are at very 0 -- or very limited margins. This is MRO work, but obviously, it helps absorb fixed costs in the MRO segment as well. And we can accelerate that retrofit program. And so in the future, we're going to have a fleet of more upgraded PW1100 and avoid a lot of a dilution situation. So that helps -- that will help us in the future. A cost-reduction plan. I mean we spoke about CapEx. We have also identified, I mean, operating -- other operating expenses or the general expenses like travel, obviously, consultancy costs, maintaining of machines, energy,
R&D.
R&D, obviously, also, and that's we're going to cut at a first step around 20% to 30% I mean, especially on the R&D side, I have -- we have to align that, obviously also with the R&D activities of our partners. With Pratt and GE, but that is -- I mean that is the magnitude of cost reductions and regarding workers, personal costs, I mean, we are under this short term working scheme in Germany, where the German -- the working agency pays the salary gap up to 60% or 67% and we use that for all German locations. And there are similar schemes in Canada as well. And Zhuhai has different measures for workforce flexibility, so we can -- we are quite flexible there on the cost side. So freighter versus commercial. I mean, I touched on that before in the spare parts. I mean, we have 2 engine programs where we have quite big footprint in the freighter market. So the PW2000 and the 757 freighter. And the major operators are FedEx and UPS in the U.S. and that the CF680 on the 767 freighters also the big U.S. freighters like Amazon, Fedex, Atlas Air also operate these engines. And there, I mean, we see up to now or even more demand for additional shop visits on the CF680 especially. How long the dynamic will be, it's a quite volatile situation on this year. But for now, we are quite optimistic for the freighter business.
Mr. Ben Heelan of Bank of America.
We heard from a couple of your peers yesterday in particular, GE highlighted the shop visits for them were run rating down about 60% towards the end of April. I was wondering if you had any color that you could share with us about how April is run rating for you so far? And then my second question would be one on working capital. Obviously, a lot of pieces to juggle with airlines and inventories and receivables, et cetera. But just wondering if there was any color that you could give us on how we should be thinking about working capital this year?
Please do understand that we don't talk about April. So we don't give Q2 numbers because, I mean, even before the corona situation, shop visits were rather volatile. So it's more volatile even now. So regarding working capital, I mean the first thing is on the one side of the working capital, so inventories, I mean, the task is to adjust our supply chain to a lower output demand, obviously, I mean, you saw Airbus cutting production rates of 60 to 40 and that is -- will also be reflected, obviously, in our engine deliveries accordingly. So we have to adjust our supply chain downwards quite quickly so that we don't get the ordered raw materials, semifinished goods flowing to our facilities. And we have then to pay these -- all these parts and have it on stock here without use for a long time. So that is the first thing. And the second thing, obviously, we have to monitor the situation on the receivables side. So I think up till now, we haven't seen a big impact, but that has to be monitored. I mean overall, I think it's fair to assume that the inventories will decrease in the year 2020 from end of 2019's level. That's for sure. I mean, OEM segment and also the MRO segment has to adjust to the lower expected output level.
Okay, great. And just to come back on that first one, if the shop visits are too volatile to infer anything, is there anything that you can infer from spares from the last 4 weeks or not either?
No, no. I wouldn't give a number out there because that is a quite volatile number. I think a good stage maybe when we try to give a new financial guidance is the mid of the year. I think then we have a stabilization of the situation also on the airline side and it makes really sense to talk about the outlook.
Ms. Chloe Lemarie of Exane.
I hope everyone is staying safe. I have 2 questions, please. The first one is, you've mentioned, obviously, you'd be looking to expand your liquidity level. So could you help us understand how you're looking at free cash flow development given all the comments you've made on cost savings and working capital management? I mean, is there a case where it could turn negative in Q2? Would you still hope to remain breakeven? So any thought on that would be helpful. The second question is a bit of a technical one. But on the V25 royalty payment you make, can you remind us whether they're effectively linked to the flight hours performed during the year. Or is it now fully set and you can only marginally limit those payments?
First thing is, yes, the payment to Rolls-Royce is tied, 100% tied to the flying hours of the V2500 fleet, which was in the air at the closing of the deal mid-2012. So that is the mechanics. Regarding liquidity, I mean, I wouldn't give a cash flow guidance for Q2 on this fleet. But I think the target is definitely to get to have a positive free cash flow in 2020.
Mr. Harry Breach -- sorry, from MainFirst.
Reiner, Peter, Thomas hope you're well and I hope the same for the whole MTU team. And can I just touch on maybe 3 issues. Just to help us to understand a little better the installed base for commercial OEM. Obviously, the GTF has made a significant difference numerically. But if we think about the installed base excluding GTF, okay, if I look back at my notes from the past, this is a while ago, but I think around 9 years ago, it was about 11.5 year average age, okay? Are you able to give us the average age of the installed base today, excluding the GTF? That's question one. Question two, maybe just moving over to commercial MRO. Again, just trying to look at or think about work scope. Just because I'm a bit of a simple guy. When I look back at my model and I look back at the sort of 2009, 2010 period, it looks as if when I look at sort of the rough sort of revenues per shop visit or shop load unit that came down by sort of around 10%. Is that a reasonable assumption for us to make in terms of sort of value per shop visit and how that can change in this kind of environment? Or could it be maybe significantly more than 10%? And then sort of just following on from your answers earlier on particularly to Andrew's question. When we're thinking about commercial MRO and shop visit scheduling, sort of -- are you able to share with us sort of your idea of how much of the deferral and cancellation, you think you might be able to offset by accelerated GTF warranty shop visits and incremental freighter demand?
I mean, I'll start with the average age of our platforms. I mean, the average age of our fleet that makes no sense because we have different program shares and so on. I mean share -- I mean, the V25, I mean, we have stressed it a lot. I mean, the V25 average age, is something like 9 to 10 years. The CF6 and the PW2000, both in commercial operations rather in the range of 20 years, 20 years of age. The PW2000, which is on the military side, which is 60% of the fleet is quite young, 11, 12 years or so. So that is for a military application, it's a baby, so to say. So our major -- I mean the techniques, obviously -- is quite young also the GP7000 and A380 is rather young. I think here's where the questions, how Emirates fleet plans are before the crisis, obviously, they plan to fly the A380 until 2030 and so on. But we haven't heard anything about new fleet plan from Emirates yet.
So Peter, so...
I think for our shop visits, I think we have never experienced that value for our shop visits itself is reduced. So rather, the value goes down when we have different mixes of first or second shop visit. So when you have more LLP exchange or not so I think that is rather the driver than mix between the different types of shop visits rather than an airline. I mean it's a big thing for an airline to send an engine out to an MRO shop. You have to lease -- in a lease engine and so on. You don't reduce the work scope or shop visit by 5% or 10%, risking another shop is maybe some 2, 3 years later and so on. And we never experienced that, honestly. And then you had a I would like -- I couldn't quantify so how many shop visits can really replace the gap we have from the commercial shop visits. I mean, I think it's too early to say how many shop visits we are going to lose in 2020 compared to our initial plans. But we're going to -- what we see is we see a stronger demand than usual from freighter operators from the big U.S. operators. But how many of those will be in 2020, it's too early to say. And with the PW1100 GTF retrofit shop visits, we have to align it, obviously, on the one hand side with the airlines. And also with Pratt & Whitney, but I think the -- our plan is to do it as many as possible in 2020.
I would say what we can do now is we can accelerate the retrofit program. So can do shop visits, which were planned or for, let's say, end of the year or beginning of next year, we can do now in the course of this year already. So we will use the capacity to accelerate the retrofit program.
[Operator Instructions] Mr. Joachim Kotze from the Morningstar.
I hope everyone's well and healthy over there. I've got just 3 questions. The first one relates to the rate of flight hour contracts. Can you give us an indication of what percentage of the fleet is on rate of flight hour contracts? And then just elaborate on the dynamics with that. In terms of airline behavior, airlines that have the flight hour contracts and time and material contracts and then the cash flow dynamics because the one is cash outflow for the airline and the one is a cash outflow for you because you've already received the payments in advance. Can you talk about that? Then secondly, maybe looking longer-term in terms of MRO work, do you see scope and an opportunity? And secondly, are you in a position to take market share in that market as a result of the crisis, perhaps some smaller and weaker independent players? And then thirdly, I'll ask my third question after the first 2 answers.
Yes. I mean, I think our major platforms obviously in narrowbody markets are V2500, the GTF and then V25 roughly, say, half of the fleet is under a flight hour agreement, the half is time material. And on the PW1100, I mean, then on the GTF, I mean a very high share of the fleet is in flight hour agreements. So -- but it's -- I mean, also on the flight hour agreements, there are different styles, I would say, on flight hour agreements, so they are directly so called pay as you go, flight hour agreements were really an airline pays on a monthly basis. And there are also paper events, flight hour agreements where the airline pays when the shop visits really happens. So from a cash flow perspective, very similar to a typical time and material contract.
Regarding MRO. Yes, sorry.
Yes. Just on the retrofit, let's say, you're not seeing, obviously, because the payments are tied to flight hour. So you're not seeing airlines with engines that are very close to shop visits now demanding a retrofit because, I mean, most of the cash outflow would be your burden. Because I've already paid the flight hour in advance. You're not seeing a risk of that?
I think it's too early to answer that. I mean we are now end of April. I mean, it's now 2 months where we are at this situation. I think it's too early really to say something about that. Second question was, I think, regarding market share in that crisis. I mean, it's a good question. I mean, at the end of the day, I would say, it's like another industry, the strong will survive. We'll get a better position and the one we have, let's say, a true position already before that crisis, they will have more trouble but it's -- again, we think we have a quite good market position, and maybe we can benefit from that, yes. But again, it will be too early now really to talk about that.
Do you see any clear opportunities and pockets the way you would like to be represented? And are you actually in a position to take market share from a liquidity perspective? [Technical Difficulty] Gentlemen, can you hear me?
Yes. Sure. I mean, we wouldn't -- I mean the answer is, I mean, obviously, we have facility worldwide for MRO shop visits, and I mean -- sure I mean we can to take additional shop visits working in today's situation, that into a brand-new facility rather not. But I mean we have a track record over the last years. I mean for several years, we had a market share, it was in a low market from, let's say, 6% to 7%. Now we are roughly 10%. And I think our broad portfolio and our broad service offerings including diesel engines, probably and so on, sets us in a good position to take also in the future, further market share. So that is my -- the general answer to your question.
Okay. And just one quick final question. It's just relating to -- sorry, I know this question has been asked twice about the fleet retirement risk. Maybe just can you give us an indication of what percentage of your fleet is older than 18 years?
Older than, what, 18 years?
Yes. Or assuming it's...
Yes. I mean, just answering your question before. So I mean the whole, I would say, the whole CF6, the whole CF6 fleet, so the magnitude is roughly 3,000 engines. And the whole PW2000 fleet in commercial operations, which is 500 engines.
Okay. And then of the V2500, nothing over 18 years?
A very tiny portion.
Mr. Richard Schramm of HSBC.
Yes, that's Richard Schramm from HSBC, in fact. I have a question concerning your backlog, which still looks pretty good. And I assume that about EUR 13 billion or so are belonging to the MRO side. So in light of the discussions about insolvencies from airlines, how safe would you consider this backlog, which at first glance looks, of course, very good and solid, but it might immediately change if one or the other of your customers drops out here. So I'm sure that you have made a kind of risk assessment to your customers. Could you give us an indication what portion of this contracts you would think are at risk in this current situation? That would be my first question. And second, coming back to this remarks you made on the freighter business. In MRO, can you just give us an indication what the percentage of your business is attributable to this. It's not a big portion, I think not, but is it somewhere around 10%, 15%? Or is it more?
I mean freight of freighter business, so a rough number is, let's say, 10% to 15% of our MRO sales, that is a rough number. So it is tied to CF680 and the PW2000 MRO services for different customers, the major customers coming from the U.S.
So at the moment, it should be then more towards the 15% or even a bit higher than as the other business decline?
Yes.
Okay. And what about your backlog? How solid should we consider this at the moment?
I mean, I can't exclude that one or the other smaller airline in our backlog will not survive. And the major part of our backlog is obviously with large flag carriers, U.S., and Europe and so on. So I wouldn't see a big risk of a large portion of our backlog.
So you think protected against quite, let's say, unexpected cancellations in this respect.
I mean, I think the one question is cancellations. This cancellation is rather tied to the, I would say, rather to the OEM backlog. I mean we have that EUR 19 billion to EUR 20 billion of backlog. As you mentioned, EUR 13 billion or so coming from the MRO, EUR 6 or so from the OEM segment. But in the OEM segment, we have only firm orders in our backlog, so no options and so on. So the cancellation is rather tied in to the OEM backlog. So should the airlines decide to cancel the one or the other order. Currently, so what we hear is we are rather talking about postponements in to the other year. I mean, not to forget, I mean, the backlog there, which we show stretches until 2026 or '27 or so deliveries, it's not only tied to 2020 deliveries.
Mr. Sean Stewart from JPMorgan.
I have 2 questions, please. On Slide 10 of the presentation this morning, it looks like you have made no changes to your 2020 and 2021 FX hedges. And given that you could be over hedged. And how easy is it for you to move your hedges? And are there any costs involved? And then secondly, is the German government covering salaries of workers on short time work? And how long -- if so, how long will they do that for, please?
I mean, starting with the hedge book. Yes, we have stopped hedging activity, obviously, for 2020 and 2021 and doing already -- so once -- I mean, that is a little bit tied to our new planning for 2020 and then 2021, where we are not finished yet. Obviously, we have to -- the 75% you see is still linked to the exposure we had from our internal planning. But obviously, we're going to see a falling U.S. dollar exposure. And should we be -- I mean, should we be over hedged that we -- then we're going to close some of the forwards. But I mean, my -- there might be some cost involved, but that is obviously quite tiny. So that is not at a big risk, I would say. On the other hand side, we have currently a situation, where it gets quite attractive hedge rates in the outer years. So you might have seen that we have increased our hedging levels for 2023 and starting already adding hedges for 2024, where we had hedges like 113. So and then the other -- the interest difference between the U.S. and the euro has come down significantly. And so are the markup, which you pay for hedges for 2024 have come down by roughly 60% to 70%.
Regarding the short-term work in Germany, it's -- normally it's for -- maximum for 12 months. How is it working? Let's say, quite simple example if you work only 50% then the government pays for the remaining 50%, 60% of that. And as I said, for maximum of 12 months, they are actually discussing to extend that to maybe 15 or 18 months, but that's not yet decided, but it's in discussion. And what is also, especially for 2020, the case. Normally, if we have this short time work as a company, you have to pay the insurance cost for health, for unemployment and things like that. And that is, in this time, also covered by the government. So that you really -- if the people work only 50% as a company, you really also pay only 50%.
Ms. Chloe Lemarie from Exane.[Technical Difficulty]
I think we should go to the next question or we need to wait.
Sorry. Can you hear me?
Now we can hear you.
Sorry, sorry. So I just wanted to go back to the GTF warranty shop visit comments you've made. And if you could tell us how many sales were recorded in Q1? And if there were really 0 margin as you indicated in your initial guidance? And given that you're accelerating the pace of the shop visit? Should we still include EUR 400 million in sales for the year? Or could it be even a bit more in MRO?
So I think we don't give shop visit numbers. But regarding PW1100, it should be -- I mean, as Reiner and myself commented. I mean, we are in negotiations with the airlines and partners, but I think we can do more for PW1100 in 2020 compared to initial plans.
Okay. So we should definitely take more than the EUR 400 million sales you initially indicated in your guidance?
For the PW1100 you mean?
Yes, yes, yes, absolutely.
Yes, sure. But I cannot tell you how much more. So next question. Is there one question remaining or? [Technical Difficulty]
I think routing operators lost the connection sir. I'll open up the Q&A box myself and have a look for you.
Chris, are you there?
Yes, I'm online. If you can hear me.
Yes. Now, we can hear you.
There's quite a lot of pressure to ask a good question now. But I just had 2 questions on military revenues. So first, can you give any indication on the phasing of revenues through the rest of 2020? And secondly, can you comment on whether you expect to receive any major prepayments this year in military in relation to the potential German Eurofighter order and how important those prepayments could be in achieving positive free cash flow this year?
Chris, first of all, I think military business, as we said, will be not affected by this crisis. So I would say it's more or less what we guided for the full year. So no change in that. We expect the decision on -- or I think we will see two issues in Germany. One is the replacement of the tranche one. And the other one is the replacement of the tornado, where the final decision will be made in, I guess, in 2 years, but the principal agreement maybe this year on that again, but we do not expect significant prepayments for both of these orders.
So I think this was the last question. Thank you for joining us in this call. Thank you, Reiner. Thank you, Peter. And yes, the IR team is there for question if there are some outstanding. So stay safe. Bye-bye.
That does conclude your conference for this morning. Thank you for participating. And you may all disconnect. Thank you.