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MTU Aero Engines AG
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Welcome to the conference call on MTU Aero Engines First Quarter Results 2023. For your information, the management presentation, including the Q&A session will be audio taped and streamed live or made available on demand on the internet. By attending in the conference call you grant permission for audio recordings intended for publication on the internet to be taken. The speakers of today’s conference call are Mr. Lars Wagner, Chief Executive Officer; and Mr. Peter Kameritsch, Chief Financial Officer.
Firstly, I will hand over to Mr. Thomas Franz, Vice President, Investor Relations for some introductory words.
Yeah, thank you. Good morning, ladies and gentlemen. Welcome to our conference call for MTU’s Q1 2023 results. We will start with a review and some key messages presented by Lars. Peter will start with the financial overview and a more detailed look into our OEM and MRO segment. After that, Lars will share our view on the current challenges and opportunities in light of our 2023 guidance. After that, we will open the call for questions.
Let me now hand over to Lars for the review.
Thank you, Thomas. And also welcome from my side. Good to have you guys with us. Let me start with the market environment. Passenger traffic is further improving, strongly supported by travel policy relaxation, mainly also in China. In February ‘23, global passenger traffic reached 85% of 2019 levels.
Domestic traffic was almost back on 2019 levels and international traffic has recovered to roughly 80%, 78% in general. And cargo traffic remains roughly 3% above pre-COVID levels, showing a slight slowdown to recent [inaudible]. This development supports the strong demand environment we are currently in, while additional MRO shop visits are still limited by supply chain and labor shortages.
Industry wide, the supply chain pressure is expected to ease later this year, which will support increased output of new and overhauled engines. While there are signs of improvements with some key suppliers, we see new difficulties rising. As one example, one of our key supplier had a fire in one of its facility, with the potential to further tighten the availability of certain parts.
Good progress on our new military engine program, the next European fighter engine. In March, just recently, we formally kicked off the program within MTU and have already allocated more than 100 engineers working on this game-changing platform. We continue to hire people for the program and are targeting a speedy progress on the technology for this engine.
Regarding our capacity expansion, good news from two international sites in the MRO segment, MTU Serbia, our new parts repair shop with a plant maximum capacity of 400,000 repair hours annually has started its operations at year end 2022. In the meantime, it has already received more than 54 repair process certifications. And in the coming years, we will increase the workforce to 400 at this site.
Additionally, we achieved a major milestone with our capacity expansion in China. The new Test cell is ready to start operations with an initial certification for test runs for the PW1100. These investments in our capacity are important pillars to further strengthen the flexibility within our MRO network and MTU’s global competitiveness.
On another topic, we are further preparing ourselves to expand our technological expertise to different fields. Last week, MTU announced the acquisition of eMoSys GmbH, a high-tech company for electric motors. The company with around 30 employees is specialized in innovative electric drives. This technology is part of our strategy and R&D efforts on our flying fuel cells.
And lastly, a few words on the guidance ‘23. The encouraging market environment that I just mentioned, and our strong results in the first quarter 2023, which Peter will present to you in a few minutes, make us very confident that we are on the expected growth track. But despite all the good signs, we remain cautious and stick to our full year outlook for today. I share our view on that in a few minutes.
Before we go into the financial details, let me take the opportunity to comment on recent news about the GTF. The engine entered the service in 2016, and the engine was able to deliver the best-in-class efficiency from day one onwards. We are very confident that the architecture itself forms the future of aircraft propulsion.
Nonetheless, we faced and we have overcome technological challenges in the early years of the program. While the engine performance and reliability of GTF engines have significantly improved since the entry into service in 2016, not all engines in the field on the latest standards and the development of improvement is not over. The next step – next big step will be the introduction of the GTF Advantage.
Amidst struggles in the global supply chain and labor shortages in conjunction with an overwhelming demand, the ability to maintain and upgrade the GTF fleet remains below our targets. In certain cases, this leads to aircraft on grounds and resulting in disruptions at airlines. The entire GTF MRO network is doing its best and supporting the MRO customers in every way they can in the current situation. And as previously mentioned, further technological upgrades, technical upgrades and improvements are on their way to improve the on-wing time in the near future.
Now, let me hand over to Peter for some financials.
Yes. Thank you, Lars and a warm welcome also from my side. For the first quarter 2023, total Group revenues increased 31% to more than EUR 1.5 billion based on some very strong growth in our commercial OEM and our commercial MRO businesses. We had some tailwind from FX. So we have 107 in the first quarter 27, 112 in the first quarter 2022. So if you adjust for that, in US dollar terms, revenues were up 26%.
EBIT adjusted increased 62% to EUR 212 million with a margin of 13.7%. This strong performance was driven by a couple of effects. A very favorable business mix, and lower general costs were pushing the results, while the agreed salary increases become effective not before the second half of 2023. Furthermore, we also had positive year-on-year FX effects.
Net income adjusted increased 70% to EUR 157 million. Our free cash flow was EUR 93 million is a good start into the year. Q1 ‘23 free cash flow is a bit below Q1 2022, mainly due to the EUR 120 million working capital increase we saw this year caused mainly by supply chain challenges in both segments, as Lars pointed out.
So turning to page and jumping into our business segments. Total OEM revenues increased 42% to EUR 560 million. Military revenues are more or less stable, EUR 103 million, still impacted by supply chain constraints also in the segment. Commercial business revenues rose 40 to 44 – EUR 446 million and within that organic OE revenues were up in the 40% range in Q1 ‘23 mainly driven by higher GTF engine deliveries and slightly more IGT sales. Easier comps from 2022 and a higher volume of spare engines and IGT’s with a richer revenue contribution led to this exceptional performance.
Organic spare part sales in US dollar were up around 35%, driven by growth in all platforms, in particular, old wide-bodies and IGTs, whereas this is also a strong increase that comes from Q1 help also in this area. The favorable business mix combined with lower general cost at our German sites, and a positive FX impact resulted in an EBIT adjusted of EUR 141 million, and a margin improvement to 25.8%.
Let’s move on to the commercial MRO segment. Reported MRO revenues increased 25% to more than EUR 1 billion, while US dollar revenues were up 19%. The strong growth came predominantly from wide-body and freight engines, the CF34 and IGT business. Further, the GTF MRO ramp up at EME in Poland and our Zhuhai plant provided the growth on GTF MRO.
Within the revenues, the GTF-MRO share was roughly 32%. EBIT adjusted increased by 32% to EUR 70 million, resulting in a margin of 6.8%. The higher EBIT adjusted margin was a result of a favorable business mix on the one-hand side with a lower share of GTF’s maintenance, compared to full year expectations, and further tailwinds we saw also hear from a more favorable FX environment.
At this point, I would like to hand back to Lars for some words on our guidance 2023.
Yeah. Thank you, Peter. Sounds good. As mentioned earlier, our end markets are performing very well, with demands even surpassing our expectations. This dynamic meets an already stretched MRO capacity and supply chain. The level of uncertainty on this site prevents us from setting the bar higher, even though the strong Q1 ‘23 results are very promising start. For the time being, we’ll keep our full year guidance unchanged.
Nonetheless, we are constantly monitoring all sectors, and we’ll review the outlook regularly. Therefore, Group revenues are expected between EUR 6.1 billion and EUR 6.3 billion based on an US FX assumption of USD 1.10 per euro. Within that, military revenues are expected to be up 10%, driven mainly by FCAS demonstrator work and some spillover effects from 2022.
Commercial OE will be 30%, driven by growth of the GTF volume, a moderate increase of the GEnx production and strong growth in business jet engines. Commercial spares are expected to grow in the high-teens to low-20s and commercial MRO is expected to increase in the high-teens. Drivers for both businesses will be narrow body’s ongoing strong demand for cargo engines and the growing demand for wide-body engine.
On free cash flow, we’re not putting in official guidance into the market, while the situation remains as volatile as it is. Regardless, this is our target to reach last year’s level of free cash flow. This closes our presentation. Thank you for your attention. And we’re now happy to answer your questions.
Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Kseniya Maslova from UBS. Please go ahead.
Hi. Good morning, everyone. Just two questions from my end, please. So first one on your spares performance in 1Q. So you mentioned cargo platforms have been driving some of the outperforming there. Could you just please provide a bit more color given flying hours have started to normalize? And also if you could comment additionally on narrow-body platform performance in 1Q?
And my second question is on your full year outlook. So with your guidance numbers unchanged, and thinking about their spare parts performance, should we assume 2023 should be more front-end loaded for your aftermarket? And why is that? And to what extent this is a function of supply chain please? Thank you.
Well, maybe on the second one to start with, this is Lars. We do not really believe it’s front-end loaded. We just see what we’ve mentioned several times, our MRO capacities are fully loaded, clearly the demand is higher than the capacity. So that’s why we are cautious to really improve our view on the end performance, while we still have these supply chain issues. We would like to deliver way more engines and spare parts when we are currently and able to. So we review like I said, we review that in the second quarter, and then come to a new guidance eventually in our forecast to in the middle of next year.
And just for me to add to that, I mean, the comparison base, obviously Q1 2022 is the lowest in an absolute term for the growth rate. So might come down sequentially when the comparison base gets higher, especially in the second half of 2022 spare parts revenues were higher. So, still stick to the roughly 20% spare parts guidance, but as Lars said, we’re going to review that in the middle of the year.
Okay.
Regarding the engine platform, your question, I mean, the major source of growth Q1 ‘23 versus Q1 2022 came from the older wide-body platforms which are used for freighter aircraft as the 767 freighter is, also the 757 freighter, so CF680, PW2000, but also obviously from commercial airlines. So these were two sources of growth. Also IGT’s also LM6000s, which is basically a CF680C used as an industrial gas turbine. So these were the sources of spare parts growth.
Narrow-body spare parts grew a little bit under proportionally so, for, I would say for supply chain reasons Lars mentioned, the fire we saw in the facility of one supplier, which impacts the V2500 spare parts business. And on the PW1100, we have the situation that obviously spare parts and new engines kept the same raw material source. You know, so that is – that limits a little bit the spare parts sales in the PW1100, and as supply chain pressures ease, we’re going to see a pickup of growth sequentially throughout the year. So that’s the picture we have in mind.
Let me add on this that, when we talk about freighter engines, we obviously we should not forget that military is using the same engine. And so, we still see a very high demand in military aircraft usage and this supports the spare parts sales of our freighter engine programs.
Okay, understood. Thank you very much. Can I just follow-up very quickly on our cargo engines comment. So when I’m looking at flying hours data, it still points to quite configure normalization in 1Q. How does it necessarily reconcile with growing demand from these platforms or should we take it as more forward-looking numbers?
Yeah, I mean, we have tested our freighter engines that are the CF680 and the PW2000. So, and you see a pickup in demand for these two engine programs. But obviously, it’s a good thing to distinguish what demand comes from freighter end customers and from commercial airlines. We see as Lars said on the PW2000 strong demand for PW2000 coming also from the C17 fleet.
But for wide-body commercial airlines, obviously you see yeah limited, let’s say output for new engines on a new equipment and that also drives growth for older wide-body platforms for 767 passenger aircraft, but also for the two big US carriers using the PW2000 and the 757. They also invest still in a lot of shop visits on these platforms. So, and as a whole, these two platforms grow, now the PW2000s and the CF680.
Okay, thank you very much.
Thank you. We’ll now move on to our next question. Please standby. Our next question comes from the line of Robert Stallard from Vertical Research. Please go ahead. Your line is open.
Thanks so much. Good morning.
Good morning.
Good morning, Robert.
A couple of questions for me. First of all, on the supply chain. RTX had some fairly encouraging things to say about the GTF supply chain yesterday. And I was wondering if you’d seen similar things in your business, particularly on castings? And then separately on free cash flow in the quarter, you mentioned the working capital built. Do you expect this to reverse as you move through the year? Thank you.
And to comment on the castings, Robert. Yes, of course, we are – everyone is going to the same two suppliers. So when Whitney and Pratt are saying this is improving, we can see that obviously as well. We always said it will massively improve over the year of ‘23. The labor seems to be hired now strongly and then we add some qualification time. But in a nutshell, we see the path coming in way better than previously. So yes, I support that.
I think regarding working capital. Yes, we expect some easing in the course of 2023. I mean, the major the source of the working capital increase is I mean, limited parts supply and for new parts on the one hand side, but also free repaired parts, especially in our MRO division so you have unusually long turnaround times in all of our MRO divisions due to the fact that in some cases, new parts are missing also repaired parts were used outside vendors for third-party repairs and there also turnaround times are quite long.
In some cases, you can counter that that’s longer turnaround times. So higher, let’s say, new material buffer in our MRO facilities. But there’s also finally in the first step to a higher level of working capital. So, but as supply chain pressures ease throughout the year, we expect working capital to come down.
That’s great. Thank you.
Thank you. We’ll now move on to our next question. Our next question comes from the line of Chloe Lemarie from Jefferies. Please go ahead.
Yes, good morning, I have a couple as well. The first one is on the GTF. Could you actually provide a bit more color on the time on-wing performance improvement that you’ve already achieved with the features you know, that are currently being rolled out? What would the advantage provide on top of this? And roughly how long will the retrofit program last?
And the second one is on the OEM. Obviously, margin is quite, you know, solid, the margin improvements. So I wanted to check how much the mix in new engine probably help versus what you had, you know, with spare engines in Q1 last year. And in terms of the cost being in there proportional if you could help us understand how much of a boost it was in Q1. That would be very helpful.
Let me start with the time on-wing. Obviously, this is a story, Chloe, the story is starting in 2016, when we put the engine into service. And since then, we had several upgrades already. So I don’t want to compare 2016 with 2023. But we are at Block D. So we had A, B, C and D.
So several improvements were slotted in and obviously the new engines that we are delivering, have incorporated all these upgrades. What we are now trying to speed up is to retrofit the older engines with the newer configuration. And here, we still are faced with a supply chain issues that comes over time. And then we have all the, let’s say, old engines retrofitted to the new standards.
The Advantage is a complete new design and a new engine. So this won’t be retrofittable to the old engine, as is a new program per se. The latest standard, if I’m correct, is a Block D that will be retrofitted to all the older engines starting in ‘24.
Beginning of ‘24, we will deliver the Advantage and only the Advantage, that we should be bringing significant improvement with everything we know since entering the service is incorporated into the new engine, another 1% of fuel savings and we let it run cooler the hot section that should improve furthermore on the time on-wing.
I’m sorry, just to retrofit to the Block D standard, when will that be completed do you expect?
I cannot estimate. It takes a couple of years because we have 1000s of engines out there. Taken a couple of years, I don’t a complete figure in mind.
Okay. Thank you.
I mean regarding cost, what we saw is that, we had very low, let’s say, general costs, especially now in our German sites for things like just the machine maintenance, IT project costs, so these kinds of things. But these typically don’t run in a linear way throughout the year. But in Q1 2023 was comparably low, maybe, let’s say 15 – EUR 50 million or so we had some FX tailwind also in the let’s say low-to-mid teens also in absolute terms and the rest is business mix.
So strong spare parts growth and then on the one-hand side I mean we have 40% growth in a new engine business. So stronger compared to the spare parts and in the – with the new engines, we have unusual high level of spare engines. So we won’t see that in the same way in the next three quarters. So, we will see some kind of reversion. But for the full year, we are still quite optimistic.
Very clear. Thank you.
Thank you. We’ll now move on to our next question. Our next question comes from the line of George Zhao from Bernstein. Please go ahead. Your line is open.
Hey. Good morning, everyone. First question on the MRO. Do you still expect 100 basis points of margin contraction for the year given a strong Q1, as you think about the GTF share normalizing over the remainder of the year? And second question on the spares, you know, for the 35% spares growth this quarter, how do you think about the attribution from volume price versus work scope? And you know, is there more room for work scope to grow from here?
Margin compression, I would say the picture hasn’t changed that much now. I mean we had a lot of support last year from let’s say, unusual low shelf of GTF work. And as he pointed out in some calls, we had tailwind from FX. So because of the development or the development of the US dollar versus the euro throughout the year, so purchasing material rather cheap and billing it to the customer with a more favorable FX rate. So you don’t expect that to happen again to that extent in 2023. So yes, we still expect a lower margin in 2023 versus 2022.
On the first one, probably the strong growth in Q1. Yes, obviously, we had some catalog list, price increase late last year, that suddenly had a little bit, especially on older programs, and wide-body, GTF, don’t forget it, it’s a long-term agreement most of the time. So the impact of the price increase is not that high.
And on the shop visit, it’s difficult to forecast, smaller shop visit work scope or bigger ones. Some of the retrofits we talked earlier on the blocks, that’s certainly a major shop visit. But some of them we see some customers bringing in engines with a small work scope as well. So it’s difficult to forecast throughout the year.
Got it. And how much would you say the GTF is as a portion of the commercial space portfolio now?
We don’t give the shares of the programs in the commercial space portfolio. That’s –
I guess as we think about the margin progression and application will vary. How significant is it versus your other major programs?
It’s still I mean, it’s growing obviously, the PW1100 spare parts. But don’t forget, I mean, the PW1100 profitability also in the spare parts is not at the level where we have it on the V2500. I mean, we commented that quite often that I mean, the V2500 had 20 years’ time to mature, to bring our production costs down and so on. And so the profitability of the PW1100 spare parts are still currently below the V2500. I mean, that’s fair to say, but it’s also non-use.
All right, thanks.
Thank you. We’ll now move on to our next question. Our next question comes from the line of Sash Tusa from Agency Partners. Please go ahead with your question.
Thank you very much indeed. Good morning. I just got a question. I’ve just got a question about the military business. You highlighted that one of the reasons for the slightly slow start to the year was specific supplier problems, which didn’t seem to come through in the same way to the commercial OE business.
And I just wondered whether you could sort of just better customers light on why it is that the military business had supply problems that really did affect Q1, but commercial didn’t. Is this actually a problem with one of your partners on EJ200? Presumably Rolls, Avio or so forth. So it’s actually it’s a partner problem rather than a supplier problem?
Exactly. It’s a different supply chain, and it’s a partner problem. And there’s one company they also had an issue with the industrial sites, fire in one of the production plants. So it’s limited to one partner in the military program, and that is not a partner on the civil.
That’s the reason. And do you expect that the impact of that fire to persist through Q2 and possibly into Q3 or are they now back on schedule?
We’re getting very promising comments on the recovery. I would say, yes, probably in Q2, we are still impacted after that it should be sorted out.
Great. Thank you very much.
Thank you. We’ll now move on to our next question. Our next question comes from the line of Christophe Menard from Deutsche Bank. Please go ahead with your question.
Yes, good morning. I had three quick ones. Good morning. The first one is on the spare parts. You mentioned all the wide-body spare’s up. What about A380 and Boeing 787 similar catch up or is it just like narrow-body? So first question. Second question is on the GTF Advantage. You mentioned that it cannot be retrofitted on an existing engine. But can or is your contract – according to your contract, can you be forced to actually swap an older engine for GTF Advantage under some warranty programs? Or I mean, if an airline wants the GTF Advantage does – can you adapt it on a Neo? And the last question is on HR. Is it still an issue to recruit people for maintenance? Or is it essentially supply chain that is causing most of the delays and turnaround time delays? Thank you.
Christophe, let me start with GTF A that’s a fairly easy answer. No, it’s not. It’s not swappable. And as far as I know, our contracts do not allow or enforce us to change GTF A with a GTF base engine. Very clear answer on that.
HR. For us, we don’t see labor issues in our global facilities. It’s mainly, we’re waiting for parts, we would have the capacity available. And I’m not aware that we have significant numbers of open positions in our worldwide maintenance facilities. And on the A380 –
I mean, the growth rates of the GP7000 and PW4000, they’re huge. But the volume is low now. I mean last year, we sold zero spare parts for the GP7000, zero spare parts for the PW4000 for the old 777. And now we see a pickup of spare parts demand. So the growth rate is fantastic. But honestly the absolute impact is yet quite low.
But we expect obviously also in that field recovery due to the fact that I mean a lot of wide-body – new wide-body platforms are postponed so the ramp up is flat. So airlines are missing new wide-body equipment and they try to use the old platforms more intensive and that finally leads to more shop visits on – coming back onto the segment in the year on almost every airline that has been used it. So very, very significant reintroduction of this platform.
Thank you. Very clear. Thanks.
Thank you. We’ll now move on to our next question. Our next question comes from the line of Milene Kerner from Barclays. Please go ahead.
Yes. Good morning, Lars, Peter and Thomas. And thank you for taking my question. I have three, please. First, Peter, can you tell us how big the positive impact was from the cost phasing at OEM in Q1? And how these costs are expected to increase throughout the year? And then I have two question on the GTF. The first question on GTF is, what is the portion of GTF delivery? There are for normal spare engine as compared to additional spare engine to improve the engine availability for the in-service fleets?
And then my second question on GTF is, could you comment on the split of the GTF aftermarket between what is normal maintenance versus what is warranty and upgrades? Thank you.
Well I mean on the cost side I would say, I mean, we had I mean it’s always difficult to say what is the baseline so because costs do fluctuate but I would ask do we have comparatively low cost-wise as I pointed out before for machine maintenance, IT costs and project costs I would say so maybe we had an advantage of EUR 15 million or so in our German sites.
And then on the GTF that I’m struggling to answer, because obviously we don’t disclose details on the spare engine mix. I guess it’s fair to say that we are trying to allocate enough engines to the OE side of Airbus, obviously, while maintaining our customers, the fleet, keep them flying on the MRO side. So it is a mix between OE and spare engines, but I don’t – we don’t usually disclose these numbers.
Thank you, Lars. Maybe can I ask it another way? Maybe can you comment on the trend in Q1 relative to what it was in the last two quarters? Do you have more or less, same?
You know, we’re increasing our output at the same time. So most likely, the trend is similar and similar regions. But in absolute numbers, more engines go to the final assembly and more engines, more spare engines goes to the flying speed. And it’s probably also fair to say it’s slightly increasing because of the MRO issues and AOG issues we have out there.
I mean the share of spare engines for total output is a little bit higher in Q1 that supports obviously towards profitability in Q1 2023.
Okay, thank you. And then on the last, if you can comment at all, on the aftermarket like on the GTF what is like normal maintenance spare parts versus what are like warranty and upgrades?
We’re sitting here and nodding our heads. Nope, we don’t know. We don’t do that.
I’m trying, I’m trying.
Because, I mean this we do not look on our business in that way. So you have a shop visit. And in each shop visit, you have a different mix of what is a pure warranty and what is proactive maintenance to keep the engine longer on being and what is really wear and tear and what you would consider as real MRO. So, and each shop this is different. And we don’t analyze that in that way. So I couldn’t give you that figure actually. So it’s not that we don’t want to tell it to you, we just don’t have it on hand now.
Okay. Thank you so much.
Thanks.
Thank you. We’ll now move on to our next question. Our next question comes from the line of Ben Heelan from Bank of America. Please go ahead.
Yeah, good morning and hope you guys are well, thank you for the question. So first, I want to talk on the margin, because it implies quite a material drop off in margins in the second half of the year for you to be stable for the full year. I get the MRO comments, but in the commercial OEM business, I think it does imply like quite a material drop off.
So, I just wanted to understand that a little bit more. Obviously, you’ve got an FX benefits for the full year. Have you taken the vast majority of that FX benefits and hedging in Q1? Should we expect that FX benefit to continue in Q2, Q3 and Q4? And is there anything else that has been front-end loaded? And thinking is it may be operating leverage, phasing of cost? You know, anything that can help us with that? Because it does imply quite a material drop off in the second – in the last nine months of the year from a margin perspective.
And then secondly, just a bit of a clarification. I mean, you’ve got revenues in euro terms in commercial OEM are up 60% and organic revenues in dollar terms were up only 37%. And obviously the FX is in 23 percentage points. So, I’m wondering if you can help me you know, kind of square the circle there in terms of what the difference is?
Yeah, I mean, the outlook for the next three quarters for here, I mean, yes, I mean, the guidance is conservative. I mean Lars mentioned that. I mean, what I mean, what were the sources for the good margin in the OEM segment, I mean, yes, quite low cost in Q1. I mentioned that so we got to see a pickup throughout the year, we’re going to have a salary increase that is agreed with the unions in Germany are starting in June as a 5% salary increase.
So that will impact H2 obviously not so much Q2, and I mean, we’re going to see obviously in the higher output of installed engines in the next three quarters and lower spare engines. So that’s more or less the story.
And we’re going to see ourselves I mean we said that I mean that the demand is really above what we saw when we should our guidance, that’s true. So the market demand is there, but we have to execute on the market demand and the supply chain is currently the bottleneck. And we have to evaluate, we’re going to do that in summer. So what we really can deliver then finally in 2023, I think in this summer we have a more grip around that issue.
Then on the growth that’s in the commercial segment, as you see that commercial business was up 60%. So if you adjust for the average US dollar, development, I pointed out, I mean, 2022 was 112, on average, 2023 was 107 on average, if you adjust for that, so the organic growth rate would be something in the low-50s. So 50% to 53% organically. And if you compare that with that same 35% spares, 40% OE revenues, maybe the blended growth would be something like 37%.
So the GAAP is indeed the impact of hedging, which runs through the revenue line. But also FX valuation of balance sheet positions like receivables and also liabilities run through the revenue lines, that this IFRS 16 predominantly. And so we had a negative, let’s say, effect out of FX issues. So hedging combined and with mark-to-market valuation of balance sheet positions, negative effect in 2022 and a positive effect in 2023. So and that’s based on a quite low revenue basis. So the 278 in 2022 choose the goal set in that way. So if you would compare the nine months so that the effect is far lower so that’s –
Okay.
That’s the story.
Okay, that’s clear. And then, sorry to back on the margin. I mean, you said low cost in Q1, outside of the salary increase starting in June, what are the costs are going to be increasing in particular? And then on the FX, so from a hedging perspective, that I think there was a benefit in Q1 to EBIT? Is there going to be a benefit in Q2, Q3 or have you recognized a lot of that in the first quarter of the year? Thanks, Peter.
Yeah I mean that the latter, so we had achieved right away I mean Q1 is always hedged by 100%, you can say it. The achieved rate is the hedged rate. And we got 111 in Q1 ‘23, 117 in 2022. So we had something like if you do the math, we had something like EUR 20 million tailwinds in earnings from the achieved US dollar rate. And that’s – we’re going to see some benefits also in Q2, Q3, Q4, but it’s going to be lower and lower and lower.
So that goes away as well the – and I mean, what cost increases is going to see I mean, we’re going to see a reversion of these effects I just mentioned so we’re going to spend for machine maintenance, we’re going to see IT costs coming in and also different projects we have –
Back on planning level.
Back on planning level, exactly. So –
And estimated on post in Q1 –
Okay.
Back to normal level to planned levels in the following quarters.
Okay, okay, great. Thank you. Appreciate it.
Thank you. We’ll now move on to our next question. Our next question comes from the line of Zafar Khan from Societe Generale. Please go ahead.
Thank you very much. Good morning, everyone.
Good morning.
I’ve got three questions, please, just looking for some help and clarification for modeling purposes. So the first one just on commercial OE, And remember, pre-COVID, the early theories versus spares, the split in commercial it was around about 60% spares for the century. Can you just tell us where we are on that? Peter I know you mentioned the blended sort of growth rate. So just can you help us with the split between spares revenue and OE revenue? Where that was in 2002? And where we might get in ‘23? That’s one question.
And then you mentioned the spare engines that you’ve been delivering? Do you actually make a positive meaningful margin for spare engines? And then the third question is just on Geared Turbofan. If I remember correctly, lot of the contracts are flight hours, contracts rather than time and material. So, can you help us just understand how you’re accounting for that the moments and how much of the revenues are coming through that? What’s the cash impact?
So I got to start with the mix. I mean, roughly you can say two-third is spare parts, one-third is OE. So that’s the rough, obviously, hovering around that baseline so from quarter-to-quarter. Yes, and we do generate a meaningful profit by selling spare engines. I mean, on the one-hand side, and that’s for a reason, because spare engines are not as utilized obviously as an installed engine and with the spare engines, you have less aftermarket. And so that’s why the discounts on new engines are substantially lower than compared to discounts on installed engines.
And on the accounting of the flight hour agreements around the GTF, I mean we have just pointed out in several capital markets. And so finally, I mean, the profitability of the flight hour agreements at OEM levels on IAE/LSE levels determine the margin which we book together with the PW1100 spare parts. So when we sell PW1100 spare parts, the margin we realize is depending on the profitability of the baskets of flight hour agreements on IAE level.
So that’s in a nutshell how we account for that. And we get obviously our share of prepayments out of IAE, we get 18% of all prepayments the program generates. And I mean, obviously, IAE is in again let’s say management companies of IAE does not have own shops. So the shop visits for these contracts are done in the GTF MRO network and our shops on Zhuhai, EME in Poland and Hannover, they perform GTF MRO work, and build that back to IAE, within, let's say, with a framework of pricing, which allows only a limited margin.
So these are I think the different aspects of the GTF aftermarket, and Peter were mentioned several times as well, that the whole organization is working on the profitability issue, obviously, by designing first of all, upgrades that had to improve the time on-wing. Secondly, with the development of repairs, every repaired part is a very good part, because you don’t need a new part, obviously, limit extension is another thing we are progressing in to extend the limits on certain parts. So, all these partner shop visits returned – reduced turnaround times. So all these are helping to improve the profitability on these flight hour contracts.
But, okay. Can I just summarize what you’ve said, Peter, that I fully understand this. So essentially, the entity that’s supplying the services is the risk and revenue sharing partnership that’s done that sort of – that sort of level. So MTU supplying into that will make profit on that spare parts, which is supplied and that entities during the flight by hours and you take your share of that? Is that how it’s doing? So there’s kind of an arm’s length between the supply and where the risk in revenue and profits are taken? Well, maybe you know you could just point me, you know –
No, no it’s right. The contract holder with the alliance is IAE. So I used the management, the sales company in phase two, I mean they do all the business with that’s the direct business with the alliance. And we supply our parts, our modules into IAE, and we do to the works to a share of the aftermarket work by our MRO network for IAE. And for all these transaction there are, let’s say, there are prices between the two companies and especially regarding spare parts. And that’s what he specifically asked. The profit we book when we sell a spare part to IAE, is depending on the profitability of the final flight hour agreement that’s the logic behind that.
Okay. Maybe I’ll take this offline with the IR team. Thank you for that.
Welcome.
Thank you. We will now move on to our next question. Our next question comes from the line of Tristan Sanson from BNP Paribas Exane. Please go ahead.
Yeah. Good morning, everyone and thank you for taking my questions. And I have three as well. The first one is, I wanted to come back briefly on reclassification of the provision into liability to profit that was done in Q4 by EUR 219 million. If you quickly explain again what happened at that time, and for this quarter, I’m most interested in the filling of the related cash out and the spending spread of five or six years. But is it happening every quarter? Or is there one quarter that we will see the cash out? And especially did we have an impact in the free cash out of Q1 coming from this? That’s the first question.
The second is on the performance in service of the PW1100 engine. We’re familiar with the issues of performance of the engine in harsh environment. So in Germany they released, I suspect China as well. But we also had complaints from a number of operators on the A220 operating in normal environment. Can you explain to me what is the actual issue on relating to the time on-wing of these engines is operated in normal environment?
And the last question is on the EUR 120 million of inventory increase that you reported in Q1 over looking at total headwind? Is it fair to assume that it’s mostly work that is being performed in the MRO division, and that you cannot book in revenues? Because you’re missing a few parts? And so you have extended the turnaround times? And I would be curious to see what is the assumption for this that you have for the full year underpinning your guidance of at least stability free cash flow? Many thanks for your answers.
I’ll start with your last question. So the working capital question, And I said that before. I mean, the major source of the working capital increase is unfinished work sitting in our MRO division, that’s accounted not in inventories, it’s rather a so called POC receivable as we account that work as a percentage-of-completion. So, and yes, I mean, the major sort of the basic source of the working capital increase is so a disciplined part supply, so difficult supply chains of two or three parts are missing, and we cannot finalize the engine, put it on a test cell and send it to the customer billings finally to the customer.
So it’s sitting there waiting for the final parts and the same is true also not only for new parts, but also for outside vendors. So where we used to tap outside sources for certain repair technologies we don’t have in-house. So these two are the problematic fields and leads finally to our working capital equivalent. As I said before, we’re going to – we expect there are certain level of reversion throughout the next three quarters. So on the –
Which you know that’s a way you mean that if you had all the parts you wanted, you could have done a 10% more revenues you know in Q1.
At least I mean, we could have I mean, as I said, I mean, we book when we have the engine in the US the engine, the shop we book up to POC receivable, which means also, you have the corresponding POC revenue. So you booked – it is already revenue, although it’s unfinished, but you recognize only a limited margin on the POC revenue, the sort of the major part of the profit you book when you sent the engine finally to the customer.
And what was – the second effect when the shops are full, obviously, because the engines are standing there and waiting for the final parts, you don’t obviously impact new engines. So it also limits your capacity to impact more shop visits. So that limits your MRO growth. So the shops are contested.
And maybe on the second one on performance. Maybe I’m not that astonished as you might be because it’s a similar design, the 1500 and the 1100 is a similar design. You have mentioned quite rightly that the durability, and the time on-wing in especially harsh environment is not what we – where we wanted to have on the normal environment it’s also not as good as we forecasted, but it’s not significantly lower and especially not under 1500 compared to 1100, as we have the same design. So I’m not that surprised that we have a similar issues on the 1500 than we have on the 1100, in normal environment as well.
So regarding the –
Can you point – I’m sorry to speak on that, but can you pinpoint actually out or are you talking about filler corrosion issues or accurately warranty or specific parts of the engines in normal environments?
The latter one, accelerated wear and tear.
So regarding the reclassification of the liability, I mean, in 2022, we reached an agreement with this [inaudible] that is made more or less a production related compensation payments, which we accumulated from the start of the program until end of 2021, which was always accrued for I mean, since then, so there’s no only earning impact. And that’s, I mean, we mentioned the quantified that also, it was something like UDS 250 million, and we reached an agreement to pay it over the six years, and the first installment will be paid next year. So we haven’t seen –
Okay, just wanted 2023.
No, no –
And is going to be like EBIT every quarter or it’s like a one usual payments?
No –
No possibilities there would take you from this.
Exactly now it’s – that’s because it’s a long-term payment, and it’s so the payment plan starts in the future more than 12 months. So under IFRS, you are obliged to classify that as a financial debt. And so it’s went out of working capital and moved into financial debt.
That’s very clear and helpful. Thank you so much, guys.
Thank you. We’ll now move on to our last question. Our final question comes from the line of Charles Armitage from Citi. Please go ahead. Your line is open.
Good morning and thank you. So the overwhelming theme through the Q seems to be great demand held back by supply chain bottlenecks. Are any of these supply chain bottlenecks likely to be worse in the remaining quarters versus Q1?
No, clearly, no. I think I mentioned earlier, labor is improving. The recruitment of labor is improving on all the sites that we are observing. Qualification is as forecasted, industrial capacity has always been there. So I’m a full optimist that we are getting better every quarter.
Okay, thank you.
Yeah.
Thank you. There are no further questions at this time. So I’ll hand the conference back to you for closing remarks.
Great. So we are perfectly in time. Thank you very much for participating. Thank you, Lars. Thank you, Peter for answering these questions. And yeah, to everybody, enjoy the rest of your day. Bye-bye.
We want to thank Mr. Lars Wagner and Mr. Peter Kameritsch, Mr. Thomas Franz and all the participants of this conference. Good bye.