MTU Aero Engines AG

XETRA:MTX

Earnings Call Analysis

Revenue Growth and Supply Chain Challenges

In Q1 2024, revenues grew by 8% to €1.7 billion, driven by a strong demand environment. Military revenues surged by 21%, while commercial revenues slightly decreased by 3% due to supply chain constraints and seasonality. The adjusted EBIT margin was 13%. Guidance for 2024 remains optimistic, with projected revenues between €7.3 billion and €7.5 billion. Military revenues are expected to grow by low to mid-teens, commercial spares by low teens, and commercial MRO by mid to high teens. EBIT margins should exceed 12%, while free cash flow is projected in the low triple-digit million euro range.

Strong Revenue Growth and Resilience Amidst Challenges

In the first quarter of 2024, MTU Aero Engines reported impressive revenue growth, with group revenues reaching nearly EUR 1.7 billion, an 8% increase from the previous year. When converted to U.S. dollars, this growth stands at 10%. The adjusted EBIT increased by 3% to EUR 218 million, achieving a margin of 13%. This slight dip in margins is attributed to a less favorable business mix in the commercial OEM segment and higher operational costs compared to the previous year【4:0†source】.

OEM Segment Performance

The OEM segment exhibited modest growth, with total OEM revenues climbing by 2% to EUR 575 million. A significant highlight was the military revenues, which surged by 21% to EUR 124 million. This growth was primarily driven by spillover effects from Q4 2023 and the ramp-up of NEFE revenues. Conversely, commercial business revenues in euros slightly declined by 3% to EUR 433 million due to various factors, including less favorable currency revaluation and hedging effects compared to Q1 2023. The organic spare part sales in U.S. dollars experienced a substantial decline of approximately 65%【4:0†source】【4:1†source】.

Commercial MRO Segment and Revenue Expectations

The commercial MRO (Maintenance, Repair, Overhaul) segment saw a revenue increase of 12%, amounting to EUR 1.1 billion. The U.S. dollar revenues in this segment rose by 14%. The segment's performance, however, was slightly below expectations, primarily due to extended turnaround times in MRO activities, which were influenced by supply chain disruptions. Notably, the GTF MRO share remained stable at roughly 33%, although this is expected to rise throughout the year in response to improved spare parts availability. Adjusted EBIT for this segment grew significantly by 26% to EUR 88 million, resulting in a robust margin of 7.7%【4:0†source】【4:1†source】.

Guidance and Future Outlook

MTU Aero Engines remains optimistic about its growth trajectory for 2024, maintaining its revenue guidance of EUR 7.3 to 7.5 billion, based on the U.S. dollar to euro exchange rate of 1.10. The adjusted EBIT margin is expected to remain above 12%, with free cash flow guidance projected to be in the low triple-digit million euro range. Key drivers include robust growth in the military segment (expected to increase in the low to mid-teens percentages), commercial OE growth (projected in the low to mid-20s percentage), and commercial MRO growth (expected to rise in the mid to high teens percentage). Additionally, the GTF MRO share is anticipated to increase to 40-45%【4:1†source】【4:2†source】.

Supply Chain Challenges and Mitigation Efforts

One of the significant issues highlighted during the earnings call was the ongoing challenges within the supply chain, particularly for spare parts. These constraints have led to longer turnaround times and have adversely affected spare parts sales. Key areas experiencing supply chain bottlenecks include powder metal production and other component availability issues, notably impacting the legacy Pratt engines and the IGT programs. Despite these challenges, MTU Aero Engines is working on mitigating strategies and is optimistic about improving supply chain dynamics in the second half of the year【4:0†source】【4:2†source】.

Environmental and Expansion Initiatives

MTU Aero Engines is also making significant strides toward sustainability. The company has embarked on a geothermal project at its Munich site, having discovered thermal water at a depth of 2.6 kilometers. This initiative is projected to cover approximately 80% of the site's heating needs and replace gas, with an expected amortization period of around seven years. Furthermore, the company continues to expand its capacity to meet future demands, including new facilities aimed at enhancing repair volumes and capabilities, contributing to a stronger market positioning【4:3†source】.

Earnings Call Transcript 2024-Q1

[Operator]

Welcome to the conference call on MTU Aero Engines First Quarter Results 2024. 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 would like to hand over to Mr. Thomas Franz, Vice President, Investor Relations, for some introductory words.

[Thomas Franz, executive]

Thank you, Melanie, and also welcome from my side. Welcome to MTU's Q1 2020 results call. As usual, we will start with a review from Lars. Peter will then give a financial overview and take a look at our OEM and MRO segment. After that, Lars will share our view on expectations for 2024 and the outlook 2025. Then we will open the call for questions. And with that, I'll hand over to Lars for the review.

[Lars Wagner, executive]

All right. Thomas, thank you very much. A big welcome from my side as well. I usually start with a view on the market environment. As we'll see [ no ] passenger traffic has now fully recovered and exceeded pre-pandemic levels by nearly 6% in February 2024. Out of that, domestic traffic was up almost 14% compared to 2019. And as a last part of the market expected to recover, international traffic has now also surpassed 2019 by roughly 1% based on strong recovery in Asia Pacific regions. These figures are proof of the strong demand situation in the global aviation sector with no slowdown expected. Dedicated cargo flights also remained strong, well above 2019 levels. This strong market demand is very encouraging and is the foundation for the great prospects ahead. Nevertheless, the ability to satisfy this demand is not fully under our control as global aviation supply chains remain challenging. Even after significant increases in aircraft production rates since the corona crisis, there is still a lack of new aircraft on the market, for ourselves and our aftermarket in particular, this is not unfortunate per se. As airlines are keeping their older equipment longer in service than originally planned to serve the high traffic levels and passenger demand. This results in growing MRO and spare part demand. The challenge, in fact, is to digest these high volumes in a stressed supply environment. We see the impact of these supply chain hiccups in our MRO shops. A wide shortage of spare parts leads to significantly lower turnaround times as final assembly has to wait until all parts are available already. This slows the speed of inducting further engines into the shop and results in lead times for inductions. The implication is a reduced throughput, which reduces engine availability in the market. This causes airlines to focus on lighter work scope and deferral of LLPs and heavy maintenance wherever possible. In turn, the combination of these factors leads to lower orders for spare parts for large parts of the fleets in service. The result is a slower start of aftermarket sales, in particular for spare parts, even though the demand is there. Given the latest outlook on parts availability and signs of recovery on certain parts, we expect an acceleration of the aftermarket business in the second half year. So let's switch focus and move on to the GTF program. I'm sure you all followed last week comments from RTX on that plan. I'm sure you all hope for more information already at this stage, and this is totally understandable, being fully aligned on the inspection plan and given the confidential nature of the topic, both in our dealing with Pratt and our dealings with airlines, we hope for your understanding that we are not able to provide more color on the program than our partner RTX did. The fleet management plan and the assumptions as well as the financial assessment remains unchanged. All aspects of the program remain in line with expectations. And please keep in mind that we see more opportunities than risks in the execution of this program. We are fully committed to doing our utmost to reduce the impact on airlines and to mitigate costs. One clear point here is the acceleration of the work in our shops. Currently, we are in the middle of implementing measures to reduce the TAT in our shops. We have identified multiple areas where we can further improve and together with Pratt & Whitney, and we will share these learnings with all network shops. This is key to optimize the scope of the fleet management plan alongside increased availability of full life powder metal parts. Despite a strong focus on the GTF fleet management plan, we are happy to report progress on the other side of the GTF program, the new engine deliveries. On March 20, we delivered the PW1100G-JM engine assembled and tested by MTU. We started with the very first final assemblies of GTF engines back in 2016. And since then have consistently ramped up our GTF assembly line at Munich site, and we expect to deliver around 240 GTF engines in 2024 with further growth in the next years. Returning to the general business and the demand situation. Even in the years of the pandemic, we did not stop investing into our capacity. We remain committed to our plans as we were confident that our industry would rebound. Today's demand environment proves that this was the right approach. In Zhuhai, we are progressing as planned. The second test cell is up and running and the construction work for the second site is continuing. In 2023, MTU maintenance [ Dallas ] moved into a significant larger facility. Now we have accomplished another milestone with the certification of the test cell for CFM56 engines, opening additional opportunities for this location. MTU Maintenance Serbia, our newest site, is constantly ramping up its volume and capacity. This shop will be capable of performing over 10,000 repairs across 16 engine types for both the MTU maintenance network and third-party customers. And finally, the previously mentioned new turbine disc center in Munich started production recently. These are only a few examples of our activities to position ourselves in the best possible way to take our share of the strong market development. Let's move on to a financial topic. On April 23, we issued a new EUR 300 million promissory note. It was placed in 2 tranches, roughly 50% of the volume with a duration of 3 years and the remaining 50% with a duration of 5 years. The issuance of this promissory note is for January purposes as growth in all business segments results in a need to establish higher liquidity reserves. One last thing before handing over to Peter for the financials. We are very happy to announce that we achieved a significant step forward with our geothermal project at our Munich site. We actually found thermal water with a temperature of 70 degrees Celsius at a depth of 2.6 kilometers, and we expect to finish drilling work in the second half of 2024. The geothermal project will help us to cover roughly 80%, 8-0, of our heating needs at our Munich site and replaces gas. The total investment in the mid-double-digit million euro range is expected to be amortized within 7 years depending on the gas prices. Through this project, we have achieved another milestone on our path to climate-neutral production facilities. This is for now the review for today, and I hand over to Peter.

[Peter Kameritsch, executive]

Yes. Thanks, Lars, and also a warm welcome from my side. In the first quarter 2024, we achieved group revenues of almost EUR 1.7 billion, up 8% from last year. In U.S. dollar terms, revenue were up 10%. And adjusted increased 3% to EUR 218 million and a margin of 13%. The margin was slightly down due to a less favorable business mix in commercial OEM and higher costs compared to the previous year. Net income adjusted remained stable at EUR 158 million. Free cash flow is EUR 60 million, reflecting higher working capital needs, which has been significantly influenced by higher workload and longer turnaround times in commercial MRO, which in turn has been driven by unstable supply chains. Let's look at the details in the business segment, and let me start with the OEM segment. Total OEM revenues increased slightly by 2% to EUR 575 million. Military revenues were up 21% to EUR 124 million, mainly due to some spillover effects from Q4 2023 and the ramp of NEFE revenues. Commercial business revenues in euros are slightly down by 3% to EUR 433 million. Please remember, in Q1 '23, commercial OEM included positive impacts from U.S. dollar revaluation and hedging effects. We talked about this at the release of our Q1 '23 numbers. Further, the first quarter of last year was an extraordinarily strong quarter especially in the aftermarket, whereas in a normal year, the first quarter typically is a bit softer. Organic OE revenues in U.S. dollars were up in the 40% range in Q1 '24, mainly driven by higher GTF output, business chat and GEnx deliveries based on higher production rates. Within these numbers, we saw a healthy volume of spare engines. Organic spare part sales in U.S. dollars were down roughly [ 65 ]%. As Lars described earlier, the impact of ongoing constraints in the supply chain in conjunction with the mentioned seasonality and comparison base led to lower spare parts sales. Main programs with reduced volumes were legacy Pratt engines as well as ITT. SGTF programs were prioritized within parts production. EBIT adjusted in absolute numbers decreased by 8% to EUR 130 million, resulting in a margin of 23.4%. Higher military revenues, a more favorable business mix in new engine sales and better fixed cost absorption due to higher workload, partially compensated lower spare parts sales and the higher cost base due to increased salary. Margin-wise Q1 ‘23 certainly was outstanding in a tough comparison days. Remember, for the full year, we had 22% margin in the OEM segment and Q1 2023 was almost at 26%. So let's move on now to the commercial MRO segment. Reported MRO revenues increased 12% to EUR 1.1 billion, while U.S. dollar revenues were up 14%. Revenues were at the lower end of our growth expectations, mainly due to longer turnaround time in MRO, holding up further MRO activities. Within revenues, the GTF MRO share was stable at roughly 33%, which is below our full year expectation of 40% to 45%. We expect a further increase throughout the year in line with an increase in spare parts availability. EBIT adjusted increased 26% to EUR 88 million, resulting in a strong margin of 7.7%. The higher EBIT adjusted margin was a result of a better mix in independent business, while the material intensity on GTF MRO was lower. At this point, I would like to hand back to Lars for some words on our guidance 2024.

[Lars Wagner, executive]

All right. Thanks, Peter. As mentioned at the beginning of our presentation, the demand environment remains very encouraging. Supply chain and MRO capacity are factors that need to be managed and monitored. Nonetheless, the signs we receive from the market give us confidence that we will achieve the growth rates we communicated. This allows me to reconfirm our guidance issued with our full year release in February. The group revenue expectations remain unchanged at EUR 7.3 billion to EUR 7.5 billion based on U.S. FX assumption of USD 1.10 to euro. Within that, military revenues are expected to be up low to mid-teens, driven by solid deliveries and FCAS demonstrator work. Commercial OE will be up in the low to mid-20s driven by higher production rates for the A320neo A220 and E-Jets and higher deliveries for Boeing 787 and business jets. Commercial spares are expected to grow in the low teens range. Spare parts should benefit from further growth in air traffic, list price increase as well as easing supply constraints. Commercial MRO will grow in the mid- to high teens percentage. The GTF MRO share should increase to 40% to 45%, mainly driven by the GTF fleet management plan. EBIT adjusted margin should be above 12%. And FCF guidance of a low triple-digit million euro number remains unchanged. Based on the settlements achieved with airline customers, timing of AOG compensation payments remains unclear for the time being. And finally, the complete to complete the picture, also next year's ambition is unchanged, EUR 8 billion of revenues with EUR 1 billion EBIT in 2025, so EUR 125 million. This marks so far at the end of our presentation. Thank you for your attention, and we're now happy to answer your questions. Melanie, it's up to you.

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Kseniia Maslova from UBS.

[Kseniia Maslova, analyst]

If you can just start on spare parts, please. Thinking about the Q1 results, if you can please talk a little bit just how different programs in your portfolio performed in the quarter, like V2500, CF6 and GTF? And just a second question as well on spare parts. So you talked a lot about supply chain issues, delay in shop resistance per consumption. Can you please just elaborate on the nature of these supply chain issues? I'm particularly interested in programs outside of GTF? And also like any implications from GTF inspections that they are having on other programs as well.

[Peter Kameritsch, executive]

I mean, in Peter here. We don't split out spare parts program by program. But it's fair to say, as you mentioned in the call that, I mean, Pratt legacy engines are probably down definitely. So that is the B25,W2000 downwards, PW1100 in a stable, stable direction, I would say. And the wide body is obviously ramp up. So GEnx is growing. GP7000 is growing. IGTs, a little bit down, as we mentioned also in the call. So I would say there is a little bit of the picture here on the spare parts now.

[Kseniia Maslova, analyst]

And any details on supply chain issues that you can share with us as well?

[Peter Kameritsch, executive]

The manufacturing of parts in direction north of the P1100 is a little bit the bottleneck, so as the one is a powder production, the one is the different kind of production of these parts is all focused on the GTF. And so part some 2,500 parts are not produced and as Lars mentioned on the call, the airlines know that. So they focus more on lighter work scopes. So we sell less spare parts because the part availability is not there. So there is a pent-up demand that we will see recovery in the second half of the year once powder production starts ramping up for the past.We had an case -- there's one special case in case of [indiscernible] had also a fire in the facility of one supplier. That is also one specific item in the 2500 supply chain?

[Lars Wagner, executive]

It is not new that has been in the past. We have been recovering now as we speak.

[Kseniia Maslova, analyst]

So the [ 325 ] supply continues in 1Q this year. Did I get it correct?

[Lars Wagner, executive]

Yes Correct.

[Operator]

Our next question comes from the line of Ross Law from Morgan Stanley.

[Ross Law, analyst]

So first one on military, how big was the catch-up effect in that 21% growth rate? And secondly, just to go back to spare parts. So if revenues were down 5%, and we assume pricing is still in the mid- to high single-digit range. Is it right to conclude that volumes were down more like low to mid-teens? And if so, how should we think about the phasing of that through the rest of the year? You've obviously mentioned an improvement in H2. Does that imply spares will be down again in Q2?

[Peter Kameritsch, executive]

Well, regarding guidance for -- we don't give you a specific step up guidance in Q2. But also, I mean, looking -- if you compare the numbers with our guidance also, our guidance in spare parts include a price increase. So we have to basically to compare apple with apple. So if you compare our guidance to Q1, then the 5% down is the right number. But certainly, I mean, in the 5% down, if you add up price increases, then the number of spare parts or the organic decline is a little bit stronger sure. That's true. And the further question in Q2?

[Ross Law, analyst]

Just on military in.

[Peter Kameritsch, executive]

As the military was missing. So yes, I mean, the growth was, let's say, EUR 20 million altogether. So what you can say is fair to say is that -- so the net revenues increased by EUR 10 million and the spillover effect from Q4 '23 was also in the magnitude of EUR 10 million. So if you want to look at it like that, that 20% growth is 10% organic growth and 10% spillover from Q4 '23.

[Operator]

Our next question comes from the line of David Perry from JPMorgan.

[David Perry, analyst]

So thanks for the detailed explanations. I apologize, I just do want to try and dig a bit deeper. So I think I understand what you're saying. I guess my question would just be this. MTU clearly is a bit of an outlier in the other companies haven't reported this negative print. And I understand your explanation. I just wonder, is there something about the parts you make or where you are in the chain on your engines that has meant you've been affected more in this quarter. The second question also on the spares, I know you didn't want to answer Ross' question about Q2. But I guess it would help us a bit just to try and understand how much will be needed in H2 versus H1. So I don't know if you can make any qualitative comments or what trends you're seeing in April? And then just changing topic a third question. Any update on the GTF advantage and the likely entry into service, please?

[Peter Kameritsch, executive]

I mean, I wouldn't give a specific. I mean, specific guidance. April looks to be a bit stronger, but I wouldn't give a specific guidance for Q2. I mean we expect is we expect the acceleration throughout the year. So sequentially, from quarter-to-quarter, we expect more spare parts sales. As production capacity ramps up powder metal production ramps up. And so the replacement effect GTF versus legacy engines on the press side declines over the next quarters. So are we an outlier, I would say, it's not due to our parts universe that we manufacture. I mean, we are an RSP partner in the program. So we get -- in case of the 5, we get 16% of all program share. Are these our parts or are these spare parts? You cannot differentiate what we manufacture or what our partners manufacture. So that's really, let's say, the footprint is the V2500 program, not our manufacturing universe. And I mean, we report differently. I mean we report spare parts and others like RTX, they basically report MRO revenues and the spare parts are only the costs. So if you look on our MRO revenues, our MRO revenues are up 14%. But we have a second aftermarket footprint that is also the spare part. So we sell the spares to the OEM, the OEM sells the spare parts to the MRO shops. And then finally, we report MRO revenues. And so that twofold aftermarket reporting is unique to the industry. So that's why you see the spare parts in our books on the OEM side and the MRO revenues on the other side. So the footprint is not so different compared to [indiscernible].

[Lars Wagner, executive]

Maybe on the advantage, David, it's progressing as planned. We are undergoing tremendous testing for that engine, and I'm still positive that we are going to see enter into service as previously announced in ‘25.

[David Perry, analyst]

And any idea when in 25 Lars?

[Lars Wagner, executive]

No, I don't want to be specific. I mean it's also a result of the testing. As soon as we know, whether the certification work is done, but no update yet.

[Operator]

Our next question comes from the line of George Zhao from Bernstein.

[George Zhao, analyst]

On OEM margin. It seems like higher spare engine deliveries helped to offset some of the weaker spares to keep the margins elevated in the quarter. So could you provide some color there? I mean how high was the spare engine ratio in Q1 for GTF? And what was the effect of that on OEM merger? And secondly, coming back to the spares acceleration in H2 and you talked about pent-up demand catching up. But is this still all dependent on the maintenance turnaround times coming down?

[Peter Kameritsch, executive]

I mean what was beneficial in the first quarter was on the one hand side, a better margin in the OE business. So as you mentioned it, a higher share of spare and lease engines in Q1 ‘24. And the other tailwind, I would say, is the higher military business that was also supportive to margin, but we don't give an exact number how many spare engines have been delivered and so on, but it was certainly a higher -- significantly higher share compared to other quarters, and that helped compensate the decline on the small decline in the spare parts business. But as I said in my introductory comments, so the 26% margin for the OEM segment, which we had in Q1 '23, was certainly not a typical quarter. So we had very low OE deliveries in Q1 '23, are rather higher spare parts consumption, a very low cost base. So Q1 was at 26%, while the full year was at 22%. So that is let's a little bit the comparison between these 2 quarters.

[Lars Wagner, executive]

Sure. If you have shorter turnaround time, then you consume -- you can, let's say, you have more shop visits per year and you consume more spare parts. And that is certainly our assumption on both sides of our aftermarket businesses. So we need better turnaround times to book more MRO revenues and also to sell more spare parts. That is, I would say, that is the precondition.

[Operator]

Our next question comes from the line of Robert Stallard from Vertical Research.

[Robert Stallard, analyst]

Lars, if I could, can we dig into the supply chain issue a bit more? Is it purely powdered metal or the lack of powder metal is holding everything up? Or are there other issues that are swirling around that are slowing down the MRO business versus plan? And then secondly, for Peter on the $300 million debt issue, do you expect to carry this sort of level of debt going forward? Or longer term, do you expect to pay it down?

[Lars Wagner, executive]

Robert, I mean, clearly, on the Pratt programs, GTF and V25 powder metal is a predominant issue. In general, I would say it's swirling around with thousands of suppliers, you have an issue here and there every day. But given the importance of the powder metal, I would say, yes, it's correct. It's Powdered metal predominantly all the other programs, IGT. And what Peter mentioned, there you have rather a mixture of issues that are coming up and will be resolved or are resolved as we speak.

[Peter Kameritsch, executive]

And regarding that, I mean, what was the driver behind the EUR 300 million promissory note here, I mean that our business has grown significantly over the last 2, 3 years. And I mean the guidance you know for 2024 is between EUR 7.3 billion to EUR 7.5 billion of revenues. And typically, rating agencies look on the company and say, well, you need something like 2 months or 15% of revenues as liquidity on the balance sheet. And if you do the math, then we need something like EUR 1 billion of liquidity, and that was sort of a one-step measure to increase our level of liquidity as the business growth is not something like a preparation for larger cash outflows or whatsoever. It's just following the growth of our business and bolstering our liquidity.

[Operator]

We'll now move on to our next question. Our next question comes from the line of Chole Lemarie from Jefferies.

[Chloe Lemarie, analyst]

I have a couple. And if you allow me, I have to go back on the spare parts issues there. Can you detail about what makes you really confident that in H2, you're going to have the increased availability of obviously, the powdered metal, but also, I guess, the MRO capacity. Are there any specific facilities opening or extensions that we could track that could help us gain a bit more confident in the H2 momentum? So that's the first. And the second is on the discussion with airlines that you're having. So how do you think you'll be able to fine-tune the free cash flow guide for 2024. Will this have to wait for H1 results? Or will it remain rather volatile and you'll excessively update quite late in the year?

[Peter Kameritsch, executive]

I think I can say something on the second question, I mean, if you listen to the Artic's call last week, they confirmed that they have finalized 9 settlement agreements with airlines. A lot of them are still pending. So I would rather, let's say, wait until H1. I think there we have more visibility and as Lars suggested, let's say, a view also on the other parts of our cash flow like working capital and so on, and then we will update you with more or less -- with the new picture of our cash flow forecast for 2024.

[Lars Wagner, executive]

And Chole, on the first question, both capacity and powder metal, we are remaining optimistic -- on the one hand, the whole -- there's a task force mode for both companies to increase capacity but be powder metal, which is under Pratt & Whitney. But I see the figures, how our partners ramp up on the other side of the Atlantic, and this is encouraging. It takes a while. It took a while. We knew that from the beginning, but the capacity is there, and the output will grow significantly during this year and then even going into '25. From a capacity standpoint there's no specific item you can watch, but we grow capacity as we speak. Our 3 facilities, Hannover and EME Aero and Zhuhai are ramping up. And the better the supply chain situation is the shorter the lead times are, the more capacity we have for the GTF program. And all that, I really say I see more opportunities and risks in that journey. So I stay confident we will get better every day, every month, every semester.

[Operator]

Our next question comes from the line of Ben Heelan from Bank of America.

[Benjamin Heelan, analyst]

I wanted to ask about the comment you made around airlines focusing on light shop visit, and that's driving the deferral of LLPs and heavy maintenance because it seems to be slightly counter to what some of the other OEMs have talked about. So is that based around a specific program? Is that GTF specific? Are you seeing that across your MRO business? If you could just help us understand kind of how broad that issue is? And is it a brand-new issue? Is it something that's been going on for 3 to 6 months?

[Peter Kameritsch, executive]

That's a short one. That's [indiscernible] specifically.

[Benjamin Heelan, analyst]

Yes. Is it 25 specific any color as to what's driving that? It seems very counter to what [indiscernible] have seen on the CFM56. Just wondering if there's something.

[Lars Wagner, executive]

Yes. I mean if you -- I mean at Pratt, all eyes are all production, whatever is necessary is focused into the direction of the GTF. And so GTF part production suffers a little bit from the focus, which is given for a good reason on the GTF program. And if you have limited availability of LLPs in case of the V25. I mean airlines need obviously capacity and need lift, and they want the engine back as soon as possible. And if there is the risk that the engine stands in the MRO shop and has to wait because part supply is shaky. So they do rather, let's say, quick turns or short shop visits and get the engine back quicker. And so the heavy shop is then postponed into the future. That's a very individual decision. And if you have, let's say, still green time on the engine, you can do that. Obviously, if you don't have green time, you don't do that. But we see that in some cases. And that's preventing higher, let's say, spare parts sales for the V25 currently.

[Benjamin Heelan, analyst]

And then on some of the legacy engines like CSX PW2000, it sounds so that they were weak in Q1. Is that what we should expect? And is that baked into your full year guide that those engines will remain weak from a volume perspective going forward?

[Lars Wagner, executive]

PW2000 is slightly down and CF6 is rather flattish. I mean, what we baked into our guidance is a more or less flattish development in 2024. So that's not so far away from our full year estimation.

[Benjamin Heelan, analyst]

And then final one. Capitalized R&D stepped up in the quarter by about 50%. Is there any particular driver around that? And is there any view on how we should see that playing out for the full year?

[Peter Kameritsch, executive]

No, this is always a little bit lumpy. So what we did is for the -- we paid one R&D payment in the first quarter. That was something like mid- to high single-digit number we paid for. I mean what we typically do is -- I mean, we have a 17% or 17% or 18% program share on the GTF programs and have to share also, obviously, 17% to 18% of all R&D costs. And if you don't do the R&D ourselves, we have to pay compensation payment. And whenever we do the compensation payment that is directly capitalized. And in that quarter, it was one compensation payments to what's Pratt & Whitney that makes the increase so steep, yes, but there's nothing big behind that.

[Operator]

Our next question comes from the line of Victor Allard from Goldman Sachs.

[Victor Allard, analyst]

A question on July. You gave an update during your presentation on the ramp-up in the region with the plan and train service of the [indiscernible] and assembly facility, if I'm not wrong. I was wondering what the run rate contribution at EBIT could look like over the medium term once you're fully ramped up?

[Peter Kameritsch, executive]

So I mean the new facility Lars just spoke about, that is -- will be up and running in beginning of 2025, probably, and then we're going to ramp up the shop. I mean, the first increase to something like a little bit below 300 shop visits annually regarding capacity. So it can be something like mid-double-digit number, mid-double-digit EBIT for 100%. So it's, I would say, a low to mid-double-digit contribution to our MRO EBIT if the facility has fully ramped up, so towards the same end of that decade. I mean it starts 2025 will be probably fully utilized 28%, 29%. So in that direction. And there, we're going to have a low to mid-double-digit number EBIT contribution, which is -- I mean, we take 50% of the net income of Zhuhai into our MRO EBITDA.

[Operator]

[Operator Instructions] Our next question comes from the line of Christophe Menard from Deutsche Bank.

[Christophe Menard, analyst]

The first one, again, sorry to come back on that spare part and powder metal issue. But at the moment, Pratt producing some of those parts. And they are not enough for the GTF servicing. So are you confident that they will be able to produce enough of those parts to help you service those GTF I mean in the future because at the moment, it seems that everything is dedicated to serial production rather than GTF servicing, correct me if I'm wrong. The second question is more on the, I would say, on the cargo. And one of your competitors mentioned that there was some sort of a cargo boost to expect on MRO in the rest of the year? Are you seeing the same? And does it mean that for the legacy engines, you will see a balance in the rest of the year. And the last question is more a broad question. I mean we've been seeing, again, some of your competitors talking positively about the progress we're making on the RISE program and the 20% reduction to consumption. Do you think that your recent R&D is helping you develop a product that could match their own developments? I mean we know that you're acquires developing products. But how has this changed over the last few months?

[Lars Wagner, executive]

Maybe I'll take the freighter question first. I mean, we have obviously several freighter customers in our MRO universe. And what we expect is we expect significant growth coming from the GE90 program over the next years, not only in 2024, but also going into the next year, there we think we -- as I said, we see significant growth. This year 6 is rather we see a rather flattish development.

[Peter Kameritsch, executive]

And then the other 2 questions, Christophe. The first one is clearly, yes. I'm confident that we are -- will support both OE but also MRO side on the powder metal. This is the exercise that Pratt is doing, and I see promising evolutions in the output numbers. However, it's clear yet, it's not enough. And there's a work to do in the course of this year and going into '25. I repeat again what [indiscernible] also shared. I mean all the OE deliveries are delivered with unlimited life disks, and we continue to increase putting in these unlimited life disk into the MRO, but not to 100% content. So this is still a challenge, but the answer is clear, yes. And then thirdly, on your R&D question, yes, also here, we are confident. I mean, this is technology work on both sides of the Atlantic and rice and on the GTF second-generation MDU and Pratt thinking about both evolutionary and also revolutionary technology elements and don't forget that the introduction of the service is somewhere middle of next decade or maybe a little bit later. So there's still some time to go in these technology solutions. They need to be -- give a significant reduction of SFC and hence emission. And we are the one company that is focusing on more than only CO2. So this is revolutionary. As you know, we are focusing on all 3 kinds of a mission. This is technology work, but we continue to invest, and we are looking very positively in this R&D work.

[Operator]

We'll now move on to our next question. Our next question comes from the line of Olfa Tamallah from ODDO BHF.

[Olfa Taamallah, analyst]

Could you please comment first the free cash flow performance in Q1. I'm wondering if it does include some mean compensation to airlines? And if yes, if you can give a number? And how should we think about the ramp-up in compensation over the coming quarters?

[Peter Kameritsch, executive]

If I can give you a number, it was 0 in Q1. So we paid EUR 0 to airlines for the whole. As I said before, the whole negotiation process took a little bit longer. So payments probably moved a little bit from the rise. I mean the free cash flow was tracked down rather working capital. Working capital increase we see in the OEM segment and the MRO segment. So with a focus more on the MRO segment, I mean, as we mentioned several times, longer turnaround times due to the supply chain issues. So we have more work in progress in the shops. And you see that in the working capital in the receivable line basically because all unfinished engines in the MRO shop are accounted for as a so-called QC receivables. So you see it in that line, not in the inventory line.

[Olfa Taamallah, analyst]

Sorry, just a follow-up on that because I mean we had some communication from Andes that have received already and some compensation. Does it mean that we see -- we should expect some lags between now what Pratt is paying and what you pay as compensation?

[Peter Kameritsch, executive]

Yes. I mean maybe they have received something in April or there's a timing difference between what the Pratt pays and when we get the invoice. But as I said, we have -- MTU has not paid EUR 1. So that is not the reason for the weaker cash flow. So that will accelerate throughout the year with a, I would say, a stronger focus in H2 where we see a stronger cash outflow for the settlement agreements.

[Operator]

There are no further questions at this time. So I'll hand the call back to Thomas for closing remarks.

[Thomas Franz, executive]

Thank you, Melanie. This finishes our call for today. Thanks, Lars. Thanks, Peter, and thank you to all participants and for your questions. Enjoy the rest of the day. Bye-bye.

[Operator]

Thank you. You may all now disconnect. Goodbye.