MTU Aero Engines AG

XETRA:MTX

Earnings Call Transcript 2022-Q2

[Operator]

Welcome to the Conference Call on MTU Aero Engines First Half Year Results 2022. For your information, the management presentation, including the Q&A session, will be audiotaped 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. Reiner Winkler, 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.

[Thomas Franz, Vice President, Investor Relations]

Thank you. Good morning ladies and gentlemen. Welcome to our conference call for MTU’s H1 ‘22 results. We will start with a review and some key messages presented by Reiner. Peter will start with a financial overview and a more detailed look into our OEM and MRO segment. Finally, Reiner will guide you through our latest outlook on the remainder of the year. This will end the presentation and we will open the call for questions.

Let me now hand over to Reiner for the review.

[Reiner Winkler, Chief Executive Officer]

Thank you, Thomas and also a very warm welcome from my side. I would like to start with the latest developments in our market. The air traffic recovery continues to gain momentum. The passenger traffic in May reached around 70% of pre-COVID levels. Domestic travel improved to 77%, while international traffic is now at 64%. Backed by these positive developments in air traffic, the IATA raised its 2022 outlook for passenger traffic to reach roughly 82% of 2019 levels. Previously, they have only predicted 74%.

Cargo traffic is expected to continue to support the industry performance and should operate around 12% above pre-COVID levels. This solid recovery could be even stronger, if the challenging situation of airlines and the airports would improve. Current ongoing challenges such as COVID-19, Ukraine war, price inflation or labor shortage, create uncertainties that need to be monitored. Nonetheless, the current developments are a strong foundation for the continuous recovery of our business.

On the global aircraft demand side, the narrowbody market is reflecting this trend. The recent order of 292 A320 aircraft by Chinese airlines, demonstrates this impressively, especially given the current situation in China. Other positive signs can be derived from the last week’s Farnborough Airshow where MTU products had order intake of nearly $600 million. The strong order book in the narrowbody market and the penetration of the A321 XLR into the widebody segment are a solid base for ramp up in production rates.

As already mentioned at the Q1 results, the supply chain remains challenging, but stable at the moment. Our sourcing strategy and supplier management ensure a stable flow of materials and parts. Nonetheless, some suppliers are still challenged by difficulties to ensure a timely delivery in the MRO segment. One of the biggest concern in the market at the moment seems to be a possible limitation of gas supply. Many investors approached us with questions about how we use natural gas and what impact and interruption the gas supply would have on MTU. So generally at MTU, natural gas is used primarily for heating and to a small extent for production or test runs for industrial gas turbines. Overall, we have alternative plans in place and would be able to install alternative sources, if necessary.

Regardless of the current situation, MTU already relies on a mix of renewable and non-renewable energies and select energy resources, based on security of supply, cost effectiveness and ecological aspects. In addition, we are investing into a geothermal facility, which is scheduled to go into service, beginning of 2025. At the Berlin Air Show, Spain signed its order for 20 new Eurofighters. Together with Germany’s order of 38 Eurofighters, the engine program utilization is secured for many years. The increase in military activity has led to further efforts to improve the operational readiness of the German Armed Forces. From our side, we have prioritized the maintenance support for the entrance of the Eurofighter and the Sikorsky CH-53. This supports the effort to ensure that Germany, together with its areas [ph] can fulfill the current demands.

Let me say a few personal words about the change in our Management Board team. After more than 20 years in the Management Board of MTU, I now see the time has come to pass on my responsibilities. I am extremely thankful that I was allowed to help to shape the successful development of MTU over such a long period. It appears to be a very suitable moment due to the company’s expected new growth phase as well as the excellent succession plan at the top of both the Supervisory and the Management Board.

Lars is an excellent successor at the top of MTU and has been a potential internal candidate for some time. With his experience in both MTU and the industry and his convincing personality, he will lead the company into the future, which will be characterized by far-reaching technological innovations.

Having that said, I would like to hand over to Peter for the financials.

[Peter Kameritsch, Chief Financial Officer]

Yes. Thank you, Reiner and also a warm welcome from my side. In the first half year, total group revenues increased 23% to roughly €2.5 billion. As you know, we had quite some tailwind from FX, with an average rate of 1.09 in H1 ‘22 versus 1.21 in H1 ‘21. So in U.S. dollar terms, revenues were up 12%. EBIT adjusted increased 53% to €290 million, resulting in an EBIT margin of 11.7%. Net income adjusted increased respectively by also 53% to €207 million. Free cash flow at €168 million was slightly below last year’s figures. This is perfectly in line with our full year expectation. Free cash flow generation in H1 ‘22 was strongly influenced by working capital headwinds. While the U.S. dollar spot rate end of June at 1.03 also pushed working capital levels upwards, volume wise, we are already preparing for higher output volumes in the months to come.

On the other side, to counter shortfalls in the supply chain, we have increased our buffer stock in certain fields. But certainly, internal turnaround times are currently also higher than usual due to a shortage of skilled workers, corona infection rates and longer lead times in the supply chain. Our earnings numbers are adjusted by a one-off effect in the quarter. The main one was a €24 million write-down on our participation on the T408 engine powering the CH-53K heavy transport helicopter. The write-down results from a weaker business outlook for this product, following the decision from the German government to choose the Boeing Chinook as the next heavy transport helicopter.

So turning to page and jumping into our business segments and starting with the OEM division. Total OEM revenues increased 15% to €810 million. Military revenues are up 14% to €213 million, mainly driven by spillover effects from Q4 ‘21. Commercial business revenues rose by 16% to almost €600 million, and within that, new engine deliveries were down roughly 10%. GTF deliveries improved, while others like the GEnx are still lacking progress. Here, we are still waiting for Boeing and the FAA to resolve the current issues. Organic spare parts were up in the mid-teens year-over-year and so perfectly in line with our full year guidance. Main drivers were narrowbody and freighter engines on the one hand side. And on the other side, we also see good demand for business jet engines as well as for the GEnx. This favorable business mix resulted in EBIT adjusted of €165 million. EBIT margin improved to 20.4%.

So, moving to the commercial MRO segment, in that field, reported MRO revenues increased 26% to €1.7 billion. U.S. dollar revenues were up 15%. Within the revenues, the GTF MRO came in lighter than our expectations for the full year. During the first 6 months, we saw a lower number of GTF engines in the shop. In addition, these engines need a smaller work scope than anticipated due to a better durability of certain parts in the engine. For the second half of the year, we expect more GTF MRO activity to be conducted as we are ramping up the activity as well in Zhuhai and also in our EME joint venture with Lufthansa in Poland. The material content of the shop visits should remain below our previous expectations. The higher EBIT adjusted margin was the result of the mentioned favorable business mix in the U.S. – at the current U.S. dollar exchange rate. The EBIT adjusted increased by 61% to €124 million, resulting in a strong margin of 7.3%.

At this point, I would like to hand back to Reiner for some words on our guidance ‘22.

[Reiner Winkler, Chief Executive Officer]

Yes. Thanks Peter. Based on the results of the first half year and the current environment, we have refined our guidance only slightly. Our group revenue outlook in euros remains unchanged in the range of €5.2 billion to €5.4 billion. This is now based on an FX rate of 1.10, after 1.15 in the previous outlook. Within the revenues, we lowered our expectations for the commercial MRO to a high-teens growth after mid to high 20s growth before. This is mainly resulting from lower GTF MRO demands in the first 6 months, as Peter has explained. Our core MRO business is developing as expected and should grow in line with our previous expectations.

The top line outlook for the military, commercial OE and spare parts business, remain unchanged and the expectations on EBIT adjusted also remains unchanged to mid-20% growth. The outlook for the cash conversion range remains at the mid to high double-digit percent range.

So, this ends the presentation. And we are now ready to answer your questions.

[Operator]

Thank you very much. [Operator Instructions] Your first question comes from the line of Robert Stallard. Robert, your line is now open.

[Robert Stallard, Vertical Research Partners]

Thanks so much. Good morning.

[Reiner Winkler, Chief Executive Officer]

Good morning.

[Peter Kameritsch, Chief Financial Officer]

Good morning.

[Robert Stallard, Vertical Research Partners]

Two questions from me. First of all, on the GTF, Raytheon Technologies said yesterday that they are a bit behind on deliveries into Airbus so far this year. I was wondering if you are aligned with that situation, when you expect to catch up and what the risks are to that forecast? And then secondly, on your comments on European gas rationing, you mentioned the situation that the contingency plan that MTU has in place, but what is the situation in your supply chain? Thank you very much.

[Peter Kameritsch, Chief Financial Officer]

Starting with the first question, GTF, yes, there was a little bit of a shortage in the first half year, but it’s – we are now back on track and we do not see a risk for the second half. Everything is, I would say, on track. So for the second half, we – as I said, we expect a growth in deliveries compared to the situation we had in the beginning. It was – I think it was especially in the first quarter, the shortage.

[Reiner Winkler, Chief Executive Officer]

70 engines.

[Peter Kameritsch, Chief Financial Officer]

70 engines. Yes. Regarding gas, it’s a good question. At the end of the day, I mean there was a statement, I think last week from the CEO of BMW, he said, we at BMW, we have no issues with gas on the small – but if one of our smaller supplier has an issue, we cannot finalize our assembly, our cars at the end of the day. So I think it’s not possible to monitor the entire supply chain, whether all the suppliers have enough energy, gas and things like that. I think at the end of the day, I mean – and at the end of the day, even if we were able to fulfill our commitments regarding deliveries to Airbus. If other parts in the – for Airbus are missing, then the aircraft cannot deliver to the customer. So I think that every company has to manage these things by themselves.

[Robert Stallard, Vertical Research Partners]

Okay. That’s great. Thanks, Reiner.

[Operator]

Your next question comes from the line of Ben Heelan. Your line is now open.

[Ben Heelan, Bank of America]

Yes, morning guys. Hope well. First question was on the guidance. Obviously, you have kept the profitability guidance. It implies quite a material slowdown year-on-year in the second half of the year, I think on my back of the envelope math coming out with a 10% margin, it seems quite a deceleration. So is there anything particular that’s going to be driving that in the second half of the year that we need to be aware of? And then my second question is on FX. I saw there has been some small updates to the hedging profile, obviously, very, very attractive environment at the moment. Are there any plans to be accelerating hedging to kind of lock in these rates as they are at the moment? Thank you.

[Peter Kameritsch, Chief Financial Officer]

No, regarding the guidance, I mean, we had – in the first half year, as you see, I mean, we have – we had a very beneficial business mix. I mean, new engine deliveries were rather down. I mean we had a healthy spare parts business growing mid-teens and we had – also in the MRO, I mean, very, very good H1 with more than 7% margin. Also due to the fact that we had only, let’s say – GTF MRO in the MRO division was only 30% of the revenues compared to 40% last year. But we do expect this going into H2, that I mean the – that we are going to see an acceleration of GTF MRO as EME and also Zhuhai ramps up. So volume-wise, you’re going to see more and as Reiner said previously, we honestly also see an acceleration of new engine deliveries in the second half of the year. On the one hand side, I mean, we are all hoping for Boeing and FAA to resolve the situation regarding the 787. So we will be able to deliver also more GEnx engines to Boeing, and also, I mean, we see ramp-up in A320 new engines and ramp up also for A220 engines in the second half year. So that’s natural – I mean, as the business mix changes a little bit, it’s a natural development that the margin will be slightly lower. But on the other hand side, I mean, looking on the full year for the MRO division, we’re going to be above the 6%. So it’s definitely a better situation compared to last year.

Regarding FX hedging, yes, I mean, you see in the appendix that we have stepped up hedging activity, especially also for – on the longer end of the hedge book. So for example, I think in the last quarter, we had an average FX rate in 2025 at 1.16, 1.17. Now we have – we could definitely lock in forward contracts at 1.06, 1.07 at the point of time where euro versus dollar was at parity. So the average hedge rate for 2025 has come down to 1 plus currently. So yes, we do that, but we stay in the range of our step hedging model.

[Ben Heelan, Bank of America]

Can I just follow-up on that, why are you so focused on staying in that range of that historic model? Is there any particular reason why you wouldn’t accelerate that a little bit more and take advantage of this environment?

[Peter Kameritsch, Chief Financial Officer]

Ben, it’s always difficult to assess whether it’s a good point of time or not. So deriving from the – or looking in the past, it was obviously a good idea to follow that hedge model and roll it forward. I mean, also at the point of time where the U.S. dollar was at the spot rate at 1.10, everybody said, it’s a very good point of time to lock in hedges at 1.15, 1.16 for 2024. And then the U.S. dollar fell to parity nearly. So nobody knows whether or not – in 3 or 4 months, we are at 0.9 or whatever. So I think it’s a wise thing to not put all your cards at once on the table. So just averaging...

[Ben Heelan, Bank of America]

Okay, okay. Very glad. Cool. Thank you.

[Peter Kameritsch, Chief Financial Officer]

Okay, thanks.

[Operator]

Your next question comes from the line of Milene Kerner. Milene, your line is now open.

[Milene Kerner, Barclays]

Yes. Thank you. Hello Reiner, Peter, Thomas and the rest of the team. Just a follow-up question on the guidance after Ben and I would like to come on your sales guidance for 2022 regarding the offsetting effect of currency on the lower GTF MRO. And there is three parts to that question, so sorry, it’s going to be a bit long. Firstly, if I start with the GTF. So your dated MRO guidance implies that the GTF share will now be roughly 35% for the full year, compared to roughly 30% in H1. So what gives you confidence that the GTF retrofit – sorry, not retrofit, but GTF overall, so revenue will accelerate in the second half? Then secondly, just coming back on the currency effect, so your guidance is now based on an exchange rate of 1.10, Peter, you mentioned the exchange rate was 1.09 in H1. The current spot rate is at 1.01. So in case the spot rates remain below 1.10 in the second half, could you help us understand a bit more, the currency sensitivity for the full year? So could you remind us how much of your sales are in dollar? What’s the currency sale sensitivity for every cent change? Could you also confirm that if the exchange rate remains favorable in the second half, your EBIT for the second half should benefit from the conversion of your dollar revenue, that are covered by dollar costs via procurement? And then my last question is, so – and that’s where I’m getting to the point on the guidance, on the offsetting effect of currency on the EBIT. Given that you have now lower GTFs that does not flow through your EBIT, but the conversion of your dollar sales naturally hedged by dollar cost does, why did you not change your EBIT guidance for the year? Thank you.

[Reiner Winkler, Chief Executive Officer]

Maybe I’ll start with the first question, and Peter has a moment to think about your question. What makes us confident that the GTF will ramp up in the second half, I mean, we have a very high visibility. I mean we know the customers we have the contracts for [Technical Difficulty] to specifically no engine by engine, when the engines will come into the shop. I mean there is a high visibility on that. So Peter, now it’s for you?

[Peter Kameritsch, Chief Financial Officer]

To add that, I mean, we ramp up – I mean, we have just introduced the GTF in Zhuhai. So we have inducted the first engines at the end of last year. So Zhuhai will ramp up and will do more – a higher number of shop visits, and also EME, the joint venture in Poland, is in the phase of ramping up. So in the second half, we’re going to do more volume. So that is clear that H2 versus H1, we’re going to see higher GTF MRO revenues. So regarding your FX question, I think the answer to all of your question is quite simple. I mean if you look in the appendix of our presentation, you see the hedge book for 2022, and that is – that means that more or less 100% of our O-U.S. dollar exposure. Yes, we have U.S. dollar revenues. We have U.S. dollar costs, and the net exposure is $1.4 billion. And more or less, all of our exposure is hedged with forward contracts in 2022. So the – any change in an FX rate would – that wouldn’t mean any impact on EBIT. So we – a very, very tiny impact on EBIT. So the whole thing – so if the FX rate would be more favorable compared to our assumption of an average FX rate of 1.10, it would inflate the revenues there, it would have an impact, and the impact would be on our complete commercial portfolio. So commercial business, you can say, 100% is U.S. dollar. Commercial MRO, 100% is U.S. dollar. So it would increase the revenues, while EBIT adjusted would stay more or less untouched. So I mean the whole benefit – I mean the flipside of the coin of doing hedging with forward contracts. So the benefit from the current strong U.S. dollar is, we can lock in a very beneficial forward contracts for the future, for ‘23, ‘24, ‘25. But for 2022, EBIT sensitivity is close to zero.

[Milene Kerner, Barclays]

Sorry, Peter, if I can follow-up on this. Maybe I mean it’s just – I didn’t understand. But for me, I mean what you have on Slide 10 and your hedge book, I mean, yes, the transaction exposure. So the revenues that are in dollar, with costs in euro are hedged. But I thought that on conversion, given that it’s naturally hedged, if you end up having more sales in dollar, but I mean the margin will remain the same, that should flow in profit.

[Peter Kameritsch, Chief Financial Officer]

But that’s what, what is shown here is the net exposure. So it’s U.S. dollar revenues minus U.S. dollar cost. That is our U.S. dollar exposure. And for 2022, the complete exposure is hedged with forward contracts.

[Milene Kerner, Barclays]

Yes. I mean, on this, I was – sorry, it was really just regarding the conversion, not the transaction; because as you said, on transaction, there is no tailwind. Okay. We will follow-up with Thomas. Lucky, you Thomas. Thank you.

[Peter Kameritsch, Chief Financial Officer]

Sure.

[Operator]

Your next question comes from the line of Christophe Menard. Your line is now open.

[Christophe Menard, Deutsche Bank]

Yes. Good morning. I had three questions, I guess. The first one is on the GTF MRO. Could you tell us – I mean, you’re mentioning 35% as the split between – I mean, GTF MRO as part of the total MRO in 2022. What is the expectation in 2023? Is there any catch-up or do we have, I mean, the kind of return to the 40% that you mentioned earlier? So that was the first question. The second question is, you mentioned on the call that, there was – on GTF MRO specifically lower shop visit content. Is there any impact on spare part growth related to this, or it’s minimum? And the last question was, on the core MRO, you mentioned, I think, in full year in Q1, that the supply chain and HR issues could be resolved by H1. Is it the case or – I mean, I understand you’re still seeing some of those issues at the moment. When do you think you will be – you will have those issues addressed? Thank you.

[Peter Kameritsch, Chief Financial Officer]

I mean regarding 2023, I think it’s a little bit early to say, if what we see in 2022 will have any impact on 2023. What I can say is that, I mean, last time we looked at our – let’s say, 3, 4 years planning, the share regarding GTF MRO was more or less in all years, at roughly 40%. I mean we’re going to do a full new valuation of all – let’s say, on the one hand side, all flight hour contracts, but also on our MRO activities in autumn, together with our budget planning. But sure, I mean, what we see is currently that – so spare parts consumption regarding GTF is lower than expected. So that has to do that – has to do with the fact that the durability of certain parts in the engines are better, so you don’t have to exchange these parts earlier, which is a good – which is basically good news. So the engine has a longer time on-wing, higher durability, we need less spare parts. So also, we have in the GTF environment less spare parts compared to last year. That is good. And once we do the full reevaluation of all flight hour contracts, that is a positive thing because the profitability of these PW1100 flight hour contracts will be better.

[Reiner Winkler, Chief Executive Officer]

So regarding supply chain in the MRO facilities, yes, we see an improvement and there is still some issues, especially for outside vendors. But we see in the last couple of, I would say, 1, 2 months, we saw already improvement, and we expect further recovery in the second half.

[Christophe Menard, Deutsche Bank]

Thank you very much. If I can, I have a follow-up on the spare parts. I mean, you have lower spare parts – I mean spare parts needs on the GTF. Does it impact your spare parts – your specific spare parts growth, or it’s part of...

[Reiner Winkler, Chief Executive Officer]

That’s the minimum. That’s the minimum on these [indiscernible].

[Christophe Menard, Deutsche Bank]

Thank you very much.

[Operator]

Your next question comes from the line of Chloe Lemarie. Your line is now open.

[Chloe Lemarie, Jefferies]

Yes. Thank you for taking my question. Most of mine have already been asked, but I do have a few follow-ups. So the first is on the GTF volume on the OE side, it’s good to hear that you have no concern in terms of reaching your commitments, your delivery commitments. Just wondering how confident you are headed into 2023, with further step-up in production? And if the disruption and delays that you’ve seen in H1 have caused any sort of cost increase on that front? The second one was just a clarification on the hedging. So you mentioned already 100% hedged in 2022. How hedged are you for 2023 from today’s perspective? Thank you.

[Reiner Winkler, Chief Executive Officer]

Maybe I’ll start with the first question. What makes us confident for 2023. As Peter said, the main reason for the slowing in H1 was that restart in Zhuhai and in Poland, in Polska, with the GTF MRO work, and we are now ramping up that and for next year. So the capacity is available, and that makes us confident, even for 2023.

[Chloe Lemarie, Jefferies]

Sorry, Reiner, I actually meant on the new engine deliveries, not on the MRO…

[Reiner Winkler, Chief Executive Officer]

Sorry, excuse me. Also for the new engine deliveries, we – I mean, Airbus is actually, I think, in the rate, roughly around 15 a month, little bit further increase next year. From our side, we see, we are prepared for that. That includes not just MTU, includes the consortia, the IAE.

[Chloe Lemarie, Jefferies]

Okay. And you didn’t experience any costs related to the slow...

[Reiner Winkler, Chief Executive Officer]

No.

[Chloe Lemarie, Jefferies]

Perfect.

[Peter Kameritsch, Chief Financial Officer]

Regarding hedging, I mean, it’s on Page 10 in the appendix. So we have roughly €1 billion hedged, which is roughly 70% of our exposure. So there will be – so in a situation where we had parity or so, we definitely will have a tailwind on earnings next year.

[Chloe Lemarie, Jefferies]

Alright. Thank you very much.

[Operator]

Your next question comes from the line of Andrew Humphrey. Your line is open.

[Andrew Humphrey, Morgan Stanley]

Hi, thanks very much. I’ve got a couple. One is a sort of extension of the durability point you’ve made on shop visits. Clearly, that’s positive for the life of the program. I wanted to kind of drill into that in a bit more detail, if you’re able to. Clearly, we went through kind of a number of upgrade packages for the GTF in 2017, 2018, I wonder if you can kind of talk about which of the areas of the engine you’re seeing more improvement, whether that improvement is a direct result of those upgrade packages you went through? And also, you kind of alluded to potential kind of upgrade to margin assumed on those programs over time with the higher durability, when is the time that we might see that? So that’s the first little cluster. And then my second question is on an eventual ramp-up to the equivalent of rate 75 on the A320. Pratt & Whitney obviously said the other day that they are targeting that by – or they believe that’s feasible by sometime in ‘26. I wouldn’t expect you to comment on their comments. But clearly, you are also seeing or taking delivery of some of the longer lead time components for assembly into engines. Is that sort of ballpark consistent with what you are seeing in terms of, when your suppliers are kind of ramping up those larger, longer lead time engine components?

[Reiner Winkler, Chief Executive Officer]

I mean starting with the first question, what part of the engine – first of all, yes, it’s a result of the improvement packages, which were introduced in the last couple of years. I don’t have all the details, but one example I can give you, is the combustor, with higher durability. It’s not our part, it’s a Pratt & Whitney part. But it’s only one example. I don’t have all the details, technical details with specific parts responsible for the higher durability. Rate increase, yes, there are discussions with Airbus, what is the right time for the rate 75. Is it then ‘25, ‘26, I don’t know. At the moment, I think the final agreement on that has to be made, maybe 2 years in advance. So, that’s a question of more than 2023, 2024. But at the end, I think it’s not as important as many people think, is it in the second half of 2025 or is it in the first half of 2026, or in the second half, I think we are talking here about 1 year difference in the discussion and so on.

[Andrew Humphrey, Morgan Stanley]

Thank you. And just on the margin impact, on the program option on the GTF…

[Peter Kameritsch, Chief Financial Officer]

I mean what we technically do is, I mean we have to – I mean we have a high-double digit number of aftermarket contract. We have to – these are all, let’s say, 10 years, 12 years, 15 years, it’s a basket of different contracts, and we have to reevaluate all of these contracts. So, that we have – so the basis to really change the margin, that we book on the PW1100 spare parts, and we do that typically, together with the planning we do in the second half of the year.

[Andrew Humphrey, Morgan Stanley]

Great. Thank you very much.

[Operator]

Your next question comes from the line of Harry Breach. Your line is open.

[Harry Breach, Stifel]

Good morning Reiner and Peter.

[Reiner Winkler, Chief Executive Officer]

Good morning.

[Harry Breach, Stifel]

Good morning. Thanks for taking my question. Can I ask maybe sort of one question on commercial OEM and one on MRO. With OEM guys, and this is a difficult one, and it depends a little bit on what proportion of spares that you or IAE sell directly to shops, as opposed to distributors. But I am wondering whether you have any sense about whether you are seeing kind of restocking effects by spare parts customers, or is really that the buying patterns are just consistent with the rise in number of shop visits? And then moving to MRO, I remember back in April, and even in February, you both spoke about engines lined up outside at Hanover, and I think you were sort of saying you had at least sort of six months visibility. Can you give us your current feeling on the amount of visibility you have, for sort of engines to be inducted into Hanover and the overall network of commercial MRO? And then looking over on the margins side of commercial MRO, I guess what was particularly impressive to me in the second quarter, was that with the mix at about 30%, if I remember well, of GTF versus legacy shop visits, you had a margin of 8.1%. And I appreciate that the lower material content would have helped. But I am just thinking, as we look into the second half of the year, and we see that sort of mix may be turning towards 40% GTF, should we be thinking about – if the material content stays where it was in the second quarter, should we be thinking about second half margins at MRO maybe around the 7% level?

[Peter Kameritsch, Chief Financial Officer]

I mean the MRO margin, I would say, I mean that for the full year, we are going to be above the 6%. I mentioned it earlier. So – but if you assume, for example, let’s say, 6% for the second half of the year, you are going to end up with 6.5% margin roughly for the MRO. And I think that is a reasonable assumption. I mean we mentioned several times that GTF volumes in the second half of the year will be higher compared to the first half year, due to the ramp-up of EME in Zhuhai. So, in the first half year, let’s say, 30% share GTF MRO, second half year, 40% share GTF MRO, so average for the year to roughly 35%. You asked about stocking or restocking of GTF spare parts, so there is none. So, there are no independent spare part distributors. So, there, we have a network of GTF MRO shops, the Japanese – our joint venture with Lufthansa. So, it’s a handful or two handful of MRO shops in the world. And so I think the shopper’s assumptions are quite transparent. So, there are no big stocking or restocking effects regarding spare part sales to independent distributors.

[Harry Breach, Stifel]

Peter, can you comment maybe a little bit on the V2500 side, and the other legacy engine spare parts?

[Peter Kameritsch, Chief Financial Officer]

I mean there we see definitely a very dynamic growth in the market. So, as well, I mean we have – I mean you have seen our spare parts growth, and that is definitely driven by the V2500 spare part sales. Not only also, let’s say, PW2000, we see a healthy growth, more driven from the military side, and you know the PW2000 powers the C-17 military transporter from the – especially from the Air Force. Currently heavily utilized for transporting equipment and troops from several parts of the world to Eastern Europe. Then we have the, let’s say, CF680, which is more or less a stable situation. I mean we had also already last year, a very healthy spare parts demand from the commercial freighter market, and that is more or less unchanged, yes. Business activity is also quite good, so.

[Harry Breach, Stifel]

And Peter, I guess with these legacy programs, is there any – do you have any visibility or any sense about whether customers – whether there is any sort of restocking, that’s driving the growth in spare sales on V2500 in particular, or is it just more or less in line with the number of shop visits on V2500?

[Reiner Winkler, Chief Executive Officer]

In line with the shop visits.

[Harry Breach, Stifel]

In line with shop visits?

[Reiner Winkler, Chief Executive Officer]

Yes, in line with shop visits.

[Harry Breach, Stifel]

Good. Okay, great. And just the visibility in terms of commercial MRO, so I think engines…

[Reiner Winkler, Chief Executive Officer]

We typically have, I would say, between one or two quarters, higher visibility. So, I would say two quarters is a good number. So, you know very clearly, what will come in the second half.

[Harry Breach, Stifel]

Right. Guys, thank you very much.

[Reiner Winkler, Chief Executive Officer]

Thank you, Harry.

[Operator]

Your next question comes from the line of George Zhao. Your line is open.

[George Zhao, Bernstein]

Hi. Good morning everyone. So, first on inflation, clearly has still – has not seemed to have impacted your margins so far. If inflation continues to run at the current rate, can your escalation clauses continue to protect this, considering there are caps in place for these clauses, and with the labor negotiations you have at the end of the year change any of the outlook for that? And second question, coming back to your guide, so you reiterated the total revenue for the company and also for MRO, so it applies to revenue – reported revenue for the OEM is also reiterated. Yes, there is clearly FX benefit within OEM, but you also reiterated the mid-teens for spares and the mid to high-teens for OE. So, I guess what are we missing here? I mean is this just rounding differences? How can you have the currency benefit, the same organic growth, but also the same amount, I guess, in revenues reported?

[Peter Kameritsch, Chief Financial Officer]

I mean the organic – the answer to the second question is, I mean the growth numbers we mentioned, these are U.S. dollar growth rates. So, the spare parts, let’s say, mid-teens spare parts growth means, spare parts sales grow in U.S. dollars at mid-teens. So, naturally, if you give growth numbers like that, there is no benefit to the growth numbers. So, these stay unchanged. And in MRO, it’s the case that we lowered a little bit, the growth rate in U.S. dollar, yes, because of the GTF – lower GTF spare parts consumption in the MRO, and the FX in euros is a tailwind. So, the euro number stays the same.

[Reiner Winkler, Chief Executive Officer]

Regarding inflation, typically, the contracts allows us – allow us to hand over the inflation to the customer. There are some, I would say, maybe in some contracts, MRO contracts, for example, you have a clause or cap sometimes, or we call it the hyperinflation clause. If it’s above a specific inflation rate, then you have to share it with the customer. But it’s – I would say that’s not the range where we are actually in.

[Operator]

Your next question comes from the line of Eric [indiscernible]. Your line is now open. Eric, your line is now open. We will move on to our next question. Your next question comes from the line of Aymeric Poulain. Your line is open.

[Aymeric Poulain, Kepler Cheuvreux]

Yes. Good morning and thank you for taking my question.

[Reiner Winkler, Chief Executive Officer]

Good morning.

[Aymeric Poulain, Kepler Cheuvreux]

Good morning. I have a follow-up question on the inflation side of things. What’s your current rate of inflation for wages in particular? And secondly, I think your partner, Pratt & Whitney mentioned continued supply chain bottleneck risk. What do you see are the main tensions in the supply chain, and where are this risk actually most present? And last but not least, I think in the Q2, you mentioned hope for signature of the FCAS between Dassault and Airbus, and I think the situation seems to be at a standstill. So, could you quantify the risk if indeed, this is not signed and this project comes to an end, what did you assume for FCAS in 2022, and what should we assume now?

[Peter Kameritsch, Chief Financial Officer]

Regarding wage inflation, I mean we have the negotiations with the unions upcoming in autumn, September, October. So, currently, we have no wage inflation here in Germany, but we are going to see what, I mean given the other union, it was in the magnitude of 6% wage increase for next year. It was not our union, but it was something comparable in Germany still, so…

[Reiner Winkler, Chief Executive Officer]

But it was not for 1 year, it was for 18 months.

[Peter Kameritsch, Chief Financial Officer]

18 months. So, I think we – it’s wise to expect something similar also for our union for…

[Reiner Winkler, Chief Executive Officer]

But it will not be for 2022, it’s then for 2023.

[Peter Kameritsch, Chief Financial Officer]

For next year. Supply chain, I think – I mean what we see is that, in our MRO division, especially our outside vendors for – I mean we use outside vendors for certain parts repair techniques, which we do not have in-house. And there you see that, turnaround times, or lead times are quite long. So, that is really – that causes in our universe, a higher working capital level, because you have to wait for the repair parts, in order to be able to ship the engine finally to the customer, I think. And we counter that with let’s say – in some things, you can counter that with buffer stocks and so on. But finally, it results in a higher working capital level. And also, customers are not happy, because they get their engine late. But I think every MRO shop in the world has to face the same situation.

[Reiner Winkler, Chief Executive Officer]

Regarding FCAS, in our guidance, we have no revenues from FCAS for 2022, we have it for 2023. Originally, we had a little bit of customer financed R&D, for the second half, which is – which we have now excluded and we – our assumption is that, the program will start beginning of next year, and that is a small amount for 2022, that could be compensated by a little bit higher spare parts for the other military programs, like Eurofighter and Tornado. The guidance for the military is unchanged in total.

[Aymeric Poulain, Kepler Cheuvreux]

Perfect.

[Thomas Franz, Vice President, Investor Relations]

Alright. I think as we do not have additional questions, this is – this marks the end of our conference call. Thank you, Reiner. Thank you, Peter. And thank you to all the participants for joining and have a rest – a good remaining day. Bye-bye.

[Reiner Winkler, Chief Executive Officer]

Bye-bye.

[Operator]

This brings us to the end of our conference. You may now disconnect.