MTU Aero Engines AG

XETRA:MTX

Earnings Call Transcript 2021-Q3

[Operator]

Welcome to the conference call on MTU Aero Engines' Third Quarter Results 2021. For your information, the management presentation, including the Q&A session, will be audio taped and stream live or made available on demand on the Internet. By attending in the conference call, you grant permission for audio recordings intended for publication of the Internet to be taken. The speakers of today's conference 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 of Investor Relations]

Thank you, Ramon. Good morning, ladies and gentlemen. Welcome to our conference call for MTU's Q3 '21 results. We will start with a business review presented by Reiner. Peter will provide the financial overview and a more detailed look into our OEM and MRO segment. A walk-through of our guidance update by Reiner concludes the presentation. After that, we will open the call for questions. Let me now hand over to Reiner for a little review.

[Reiner Winkler, CEO & Member of the Executive Board]

Yes. Thank you, Thomas, and welcome also from my side. The passenger traffic further improved in the third quarter, but the trend is still volatile with regional setbacks. The international traffic -- travel remains the weak spot while domestic travel is developing positively. And cargo traffic remains strong, above pre-COVID levels, throughout the crisis. In October, IATA lowered its 2021 outlook for passenger traffic. The expectation now is to reach 40% of pre-COVID levels after an estimate of 52% in June. For 2022, global passenger traffic is forecasted to improve to 61% of 2019 levels. In our own network, this already translates into an acceleration in MRO activity. We saw a strong increase in V2500 induction lately. The deliveries of engines from freight operators to our shops are continuously strong. So basically, all of our MRO shops see a steep increase in workload. And on some engines, we are already having long induction buffers. In addition to these volumes, work scopes also start to increase. And this is a clear indicator that the airlines are preparing for an increase in flight activity. In the commercial segment, we saw a large order for the GTF in October. Spirit Airlines selected the PW1100 for its order of 100 firm and 50 option A320neo family aircraft. On the smaller GTF version, we are also pleased to see the first of 60 A220 delivered to Air France. This plane extends its customer base, and with it, our footprint in the regional jet markets. In the business jet segment, we welcome a new airplane powered by one of the engines in the portfolio. The PW812 has been selected for the new Gulfstream G400. In our MRO division, we are progressing our expansion. In early October, MTU Zhuhai inducted its first GTF engine, which marks a key milestone in the facility's history and sets the base for future growth. MTU Zhuhai MTU is, besides MTU Hannover and EME Aero, the third GTF MRO shop in our network. End of September, we celebrated the groundbreaking of our second facility in China. The new site will have an initial capacity of 260 shop visits, focusing on GTF and V2500 engines, and will enter operations in 2024. In August, we sold our marine industrial gas turbine facility, Vericor Power Systems, to CSL Capital Management. By divesting Vericor, we focus our activities on our core business. The divestment will have no impact on our revenue and earnings forecast in 2021. Let me now hand over to Peter for the financials.

[Peter Kameritsch]

Yes. Thank you. And also, good morning from my side. For 9 months, total group revenues increased 2% to EUR 3 billion. The average exchange rate in 2021 of $1.20 compared to $1.12 in 2020 was a headwind for our sales. In U.S. dollar terms, revenues were up 8%. EBIT adjusted was almost stable at EUR 307 million, resulting in an EBIT adjusted margin of 10.2%. In the third quarter 2021, we saw, as expected, a sequential improvement from 10.2% in Q2 to 11.7% in Q3. Respectively, net income adjusted was stable at EUR 220 million. Please have in mind that for calculating net income adjusted, we applied a reduced normalized tax rate of 26%, effective from January 1, 2021 onwards. Free cash flow remained strong with EUR 205 million. This number was significantly driven by a strong increase in MRO inventory in Q3 to meet the strong demand. A solid cash collection partly compensated that impact. Let me now provide some details on our business segments, and turning to our OEM division. Total OEM revenues decreased 6% to EUR 1,075 million. Within that, military revenues increased 4% to EUR 310 million. Commercial business revenues declined 10% to EUR 765 million. And within that, organic OE sales decreased in the low-teens range. On a quarterly basis, Q3 2021, OE sales were up 20% compared to Q3 2020. And this was mainly driven by an uptick of deliveries of GTF and bizjet engines. Organic spare part sales in U.S. dollars were down low single digit. In Q3 2021, spare parts revenues were up in the low-teens compared to Q3 2020. Please keep in mind that 2020 saw a precrisis Q1, which makes comparisons still difficult. EBIT adjusted at EUR 202 million, resulting in a margin of 18.8%, due to a favorable business mix and improved cost base. Let's now move to the commercial MRO segment. Reported MRO revenues in euros increased 8% to EUR 2 billion. In U.S. dollar, MRO revenues were up 15%. The mix between core MRO and GTF work remained roughly stable at 60-40. EBIT adjusted decreased by 9% to EUR 105 million, resulting in a margin of 5.2%. The lower EBIT adjusted margin results from a higher share of GTF work compared to 2020, as already mentioned in previous calls. The quarterly profitability in core MRO was a bit lower than usual, coming from customer and work scope mix effects in Q3. At this point, I would like to hand back to Reiner for some words on our guidance 2021.

[Reiner Winkler, CEO & Member of the Executive Board]

Yes. Thank you, Peter. Based on the Q3 results, we can further specify our guidance. For total group revenues, we narrowed our expectations to EUR 4.3 billion to EUR 4.4 billion. Our previous expectation was in the range of EUR 4.3 billion to EUR 4.5 billion. And this is based on the slightly lower sales expectations in the military and MRO business. Military revenues are now expected to be mid -- upper mid-single digit, mainly driven by some shifts of deliveries into next year due to some minor delays in the supply chain. The previous outlook was up mid to high single-digits. We slightly lowered our expectations for commercial MRO revenues to be up in the mid-teens range, mainly driven by slightly lower content on some engines. Our previous outlook was up 15% to 20%. The outlook for the commercial OE and spare parts business remains unchanged at up low to mid-single digits. Based on the resulting business mix, we expect EBIT adjusted margin on the upper end of our previous guidance at 10.5%. The cash conversion rate is expected to reach the upper end of our previous guidance range with high double-digit percentage. One reason is certainly the strong performance of the free cash flow in the first 9 months. And on the other hand, we now have a better view on the inventory growth in the fourth quarter as well as a better visibility on airline payment behavior. This guidance update largely confirms our expectations for the year issued with our guidance on November 2020. So even in the volatile environment, as we experience it right now, we are in a position to deliver. Furthermore, we remain very positive about the recovery of the aviation sector. Our confidence is confirmed by the expectations for the fourth quarter. So thank you very much for your attention, and we are happy to answer your questions.

[Operator]

[Operator Instructions] Okay. George Zhao from Bernstein.

[George Zhao, Research Analyst]

So on the engine programs seeing slightly lower MRO content, what's going on there? I mean, are you seeing less work scope compared to prior quarters? Any color on which programs drove the lower content? And I guess, related to that, in the last quarter, you talked about working capital consuming cash as the MRO picks up. Given that the ramp-up seems to be slower than maybe what you had expected, did that positively affect cash flow this quarter? And is this high double-digit cash conversion for this year, do you think that's a good measure to think about conversion in future years? Or do you think this year benefited from any one-timers?

[Peter Kameritsch]

I mean, regarding revenue outlook for MRO, I mean, that's focusing on GTF, so the work scope is we built in -- so we use less material. So for the work scope per shop, it's a little bit lower on average, which is -- I mean, basically, it's a good message because that means that the parts are more durable and you have a longer on-wing time. And you have really to exchange less parts in the engine. But that translates in our way of accounting that work in lower revenues. But there's nothing more behind it. That's not a market issue or so, not less demand. I mean, what -- on the working capital side, I mean, you saw that in Q3, working capital has picked up significantly. And that really has to do with a lot of engines, as Reiner mentioned, are standing in front of our shops and are inducted. So you have more work in progress. You have also to provision obviously more parts, more spare parts to do that work. And that will go on definitely in Q4. So we're going to see a further higher working capital at the end of the year compared to end of Q3. Is that -- a high double-digit cash conversion is obviously always our mid- to long-term target. Will we reach that in each and every year? We have to see that. We have also -- I mean, you know that we have a lot of things which we want to do. We extend our shop in Zhuhai. We invest in a new repair facility in Serbia and so on, also in a new manufacturing plant here in Munich. So there might be the one or the other year where we have a lower cash conversion. But overall, as an average for the next years, a high double-digit cash conversion is definitely the target.

[Operator]

Okay. Mr. Ben Heelan from Bank of America.

[Benjamin Michael Heelan, Analyst]

So a couple of questions on aftermarket, the low-teens growth in terms of spares that you saw in Q3 really stands out versus peers this quarter. So was that a sequential improvement versus what you saw in Q2? And keen to understand any color you have around that. And then how are you seeing exit rates? So in terms of the end of September and into early October, what are you seeing in terms of growth? I know you're seeing a pickup there. And then my second question would be on margins. Obviously, OEM margins were very strong and MRO margins were quite weak in the quarter. Was there anything specific in either of those numbers? And can we see those margins? And should we see those margins as sustainable?

[Peter Kameritsch]

Ben, Peter. So the low -- teens, I mean, we have -- we really saw in Q3 a really strong increase in V2500 spare parts demand. So if you really compare that Q3 versus Q3 2020 year-on-year, then the V25 has doubled. So that is really the momentum we see currently based obviously on a weak Q3 in last year, while the CF6, PW2000s were rather stable. So that was -- I mean, that was not so down in 2020 compared to precrisis levels. As you know that PW2000 and CF680 have in part a military application, in case of the PW2000, and are very popular on freighters. And that business didn't go our way that much throughout the crisis. So -- that is -- I think the very high growth rate of the V25 is the driver for the low -- teens growth in Q3. And I mean, in Q4, as I said, I mean, we see a really strong momentum, so a lot of -- especially V25 engines are standing in front of our shops. And that will ultimately also trigger spare part sales in Q4. So what the exact growth rate will be in Q4, obviously I don't know exactly. But it's going to be somewhere in the 30s, yes, so for the whole portfolio. The margin -- segmental margins in MRO and OEM, I mean, the MRO was a bit weaker. As you see, I mean, it was a little bit above 4%. And that has to do -- that -- not really a lot behind that. So we have a typical mix between GTF and core MRO. And we have more and more spare parts content compared to labor and repairs and also a little bit engine, customer mix on it. Not every engine program is as profitable as another engine program and so on. It's really a small mix effect. And we're going to see a stronger margin in the MRO division definitely in Q4. So we know that already. We know quite well what the customer mix will be and what the engine mix will be. So that was really rather an exemption than rather going forward the basis for calculating Q4 or so. But for the year, I mean, in the MRO division, we're going to be between 5% and 6% for the year. OEM division, there were some things. On the one hand side, obviously, we have our cost savings program, which we launched as a reaction on the crisis. So that sets us in a position where we have a lower cost base effectively in 2021 compared to last year. We have -- in the military, we have a stronger military business in Q3 compared to Q2. And in the military segment, we saw a very high share of aftermarket revenues in the quarter, so less new engine deliveries. And Reiner mentioned that we have some issues in the -- some minor issues in the supply chain. So we delivered less new engines and had a very high aftermarket portion that drove also the military business to a rather higher margin contribution in the specific quarter. I mean, that will revert a little bit in Q4, when we think -- when we have a pickup in engine deliveries in the military field. And then we had also in the -- and then -- so we had the V2500 spare parts business accelerating in Q3. And I mean, you know that V2500 spare parts are, due to the maturity of the program, the most profitable spare parts business which we have in our portfolio. And the new engine business in the commercial field, on the other hand side, was also not as loss-making as in other quarters. We have -- we are progressing in bringing the GTF margin upwards. So sequentially, we try obviously to bring our manufacturing costs down. The engine gets more and more durable. So in Q3, we were able to reduce also the warranty provision which we book for the engines. I think that is so -- these are the main reasons for the very high margin in the third quarter in the OEM division.

[Benjamin Michael Heelan, Analyst]

That's very clear. Can I just follow up? Were you surprised by the flat growth on the CF6 and the PW2000 in the quarter? Or was that kind of in line with what you were expecting?

[Peter Kameritsch]

No. That was our expectation. I mean, we have -- you might know that we have -- we are also the MRO provider for a lot of freighter operators in the world. And as we speak, I mean, the induction pipeline also in Hannover is quite long for the CF680 engine. Not so much for the commercial operates -- commercial airlines, but a lot of freighter operators are sending -- I mean, you just have to look on the freight rates which they can charge currently. So they are really trying to bring everything in the air, which they have there. So that is a very, very healthy business.

[Operator]

Mr. Harry Breach from Stifel.

[Harry William Freeman Breach, Research Analyst]

Can I just maybe touch on a couple of questions? Maybe just first, when we think here about commercial MRO and we think about the mix of the core business and GTF -- and I think earlier on, Peter, I think you said in the quarter, it was still around that 60-40 ratio. Can you guys maybe help us to understand how we should think about that ratio changing maybe next year in '22 and '23, give us a feeling about how that might evolve going forward, please?And just quickly on supply chain, as you know, it's sort of pretty well top of the list of market concern. How would you say your supply chain is performing? You talked about military and some small issues there. But I'm also thinking about commercial OEM in terms of on-time, on-quality delivery. How is that going? And how are you managing through any issues?

[Reiner Winkler, CEO & Member of the Executive Board]

So maybe I start with the supply chain, Harry. Actually, we see no major impacts. The delays in the military business are not caused by supply chain issues coming from raw materials. I think that it's more parts from partners in the consortia, where we have some smaller delays. So it's not a significant issue, it's really a small issue. And in the commercial business, we have typically long-term contracts. The major suppliers, we follow a dual-source strategy. And we have also long-term contracts regarding pricing. So actually, we have no, let's say -- I would say no bigger concerns about that. But it's -- I would say, overall, as in every industry, it's becoming a little bit more, let's say, stronger than it was -- more difficult than it was in the past. But still for the next, let's say, a couple of years, we feel comfortable with that.

[Peter Kameritsch]

So the 60-40 share, I mean, that will -- at least for 2022, that will stay more or less in that ballpark. I mean, long term -- I mean, in the last 1, 2 years, we did a lot of warranty work on the GTF, so rather a high material content because the way it works typically is you exchange parts, yes? So that is -- the shop visit bill is obviously quite large. And so going forward, over the next years, obviously, that warranty portion comes down and we have more regular work scope in the shop visits. And the core business grows obviously also. So I wouldn't say that we go far away from the 60-40 split here in the next 1, 2 years or so.

[Harry William Freeman Breach, Research Analyst]

And Peter, just following up a little bit, I think in previously on calls, you said that the warranty work, the retrofit visits had finished in the summer. That's correct, is it?

[Peter Kameritsch]

Yes. I mean, it's all -- it's not -- it's always not completely black and white. I mean, when you do things on an engine that you have maybe a warranty portion, then you have regular work. And under these flight hour contracts, what you obviously also do, because the customer pays the bill via the flight hour payment, so he doesn't pay every spare part. So what we do is then obviously when we inserts a more durable part so that the engine as a whole can stay longer on wing and maybe you save even a whole shop visit over the contract time. So we do proactive things to really improve the profitability of the flight hour contracts. So that is the -- these are the three fields which we do. And so the shop visit bill is always a mixture between those. But you don't have the 100% loyalty shop visit and so on so that is -- that was the case at the beginning, at the very early phase of the engine lifetime, but now we have typically a mixture of all these three things.

[Harry William Freeman Breach, Research Analyst]

That's helpful. And just sorry, Peter, sorry to keep talking about GTF and warranty provision. But I think in answer maybe to Ben just now, I think you touched on the warranty provision. And I think in the third quarter, you said that you reduced that. And Peter, I just wanted to clarify, was that a reversal of the provision that you had on the balance sheet at the end of the third -- second quarter? Or was it a reduction in the rate at which you are accruing upon every delivery made?

[Peter Kameritsch]

Exactly. The second is the case.

[Harry William Freeman Breach, Research Analyst]

Right. So you have nothing unusual in the margins that needs reversal of provision. I've got it. Clear.

[Peter Kameritsch]

No, no, no.

[Operator]

Robert Stallard from Vertical Research.

[Robert Alan Stallard, Partner]

A couple of quick questions for me. First of all, one of your peers in engine man said that they had very good order intake. So I was wondering if you'd seen something similar on that. And then secondly, also on the aftermarket, have you seen any changes in the trends for surplus parts, particularly on older engines?

[Peter Kameritsch]

I mean, we have the order book in the appendix of our presentation. Now we stand at something like EUR 20.7 billion of orders. I mean, in the MRO division, I think we signed -- for the 9 months, we signed new contracts that was USD 3.7 billion for the 9 months. So we expect some more to come. You saw in our presentation that we have secured Spirit Airlines with the A320neo, so 150 -- 100 firm, 50 options orders. But typically, we don't book that into our order book at the time when we do the announcement. So typically, it lags some maybe 6 months or so until the contract is signed. And upon contract signature, we build then we book it into our order book. So there's always a time lag.

[Reiner Winkler, CEO & Member of the Executive Board]

Regarding surplus materials, I think there is no significant change compared to previous quarters.

[Robert Alan Stallard, Partner]

Yes. Sorry, Peter. I don't think I was being clear. I was specifically referring to spare parts on the OE division, whether you're expecting strong deliveries in November. Sorry.

[Peter Kameritsch]

Yes. I mean, what we see is that Q4, that is our expectations, at least that Q4 will be a strong -- a quite strong spare parts quarter. So we see already -- the order momentum is already transparent, yes, especially on the narrowbody engines.

[Operator]

Okay. Our next question, Peter -- Christophe Menard from Deutsche Bank.

[Christophe Menard, Research Analyst]

I had one question left. It's on the MRO margin and the recovery of the MRO margin into the next years. I understand you said the split will remain at 60-40. Should we expect on both sides, core MRO and GTF, an improvement of the profitability of shop visits? Is the Q3 EBIT margin representative of what you should expect in 2022? Or is it what -- is it the 5% to 6% that we should adopt for next year? And how do you see that trend evolving?

[Reiner Winkler, CEO & Member of the Executive Board]

Christophe, Reiner here speaking. No, Q3 is not the normal level of profitability we expect in the MRO division. So going forward, we expect more. As we said before, between 5% to 6% depending on the mix. But we will give more -- let's say, a little bit more clarity on our Capital Markets Day mid of November, I think.

[Peter Kameritsch]

But I mean, currently, I mean, if you look at the profitability of GTF MRO, I mean, it's the case that you obviously do a lot of exchange of new materials, so where we don't have a margin in the MRO division obviously, so -- but over the next years, you will see more repairs and so on, so might -- and we obviously will have some efficiencies and so on. So I think we can -- we will be in a position at least to increase the margin on the GTF side also. But that's not something what -- which happens overnight.

[Christophe Menard, Research Analyst]

Okay. And if I may, a follow-up question, not necessarily on MRO. But I mean, some of your peers have mentioned rehiring. And you obviously cut back on workforce last year. When are you planning to rehire? And in terms of group costs, incremental group cost, when do you think that could impact your EBIT margin?

[Reiner Winkler, CEO & Member of the Executive Board]

So we are starting already to rehiring people. It's mainly in the MRO business. Because we see -- as Peter mentioned, we see a lot of inductions coming in the next quarters, starting with, let's say, with the high flexibility. That means in the beginning, more temporaries, so leased workers and things like that. And especially in the OE business, in the OEM business, we have more hiring engineers, especially for R&D activities for the FCAS or the next -- the FCAS project, the military program with France and Spain together. So we're hiring 200, 300 engineers in the next 2 years.

[Operator]

Okay. Ms. Milene Kerner from Barclays.

[Milene Kerner, Research Analyst]

I have a follow-up on aftermarket, just asking maybe another way. So you mentioned that your inventory has increased at MRO at the end of Q3 and that you have a lot of engines that are standing in front of your shops. So could you comment on what you're seeing in terms of activity in your shop in October so far? Is it at a similar pace or it's increasing versus what you had at the same time in September? And my second question is what that implies for your spare sales in Q4 versus what you have seen in Q3.

[Peter Kameritsch]

Yes. I mean, I would say that it's -- the activity is really accelerating. So the -- I wouldn't say in the shop but in front of the shop because the pipeline gets longer and longer. And it's really -- I mean, we are really trying to hire more people [indiscernible] or on a short term rather, obviously leased workers to be able to do all that work. So it's especially around V2500 in Hannover, the CF680 for freighter customers in Hannover and also in part the GTF. And that will trigger, on a short-term basis, also spare parts demand. So we are -- I mean, we have a market share of 35% in the MRO work of the V25. And we order obviously a lot of V25 spare parts so that we have a quite good -- the transparency, what will happen on the spare parts side of the V2500 as well. And I mean, Q4 definitely will be a lot above Q3. So as I said before, we think Q4 will be a growth rate in the 30s year-on-year compared to 2020, yes.

[Milene Kerner, Research Analyst]

Very helpful. And just maybe a follow-up, given that -- I mean, the shop visit on the V25, I mean, usually it's between 60 to 90 days. Does it also mean that your Q1 for next year will be very strong, given all this V25 that are queuing in front of your shop?

[Peter Kameritsch]

Yes. I mean, that is -- that's the consequence. So we see a lot of momentum currently. What that means for the full year as we're going to do a comment on our Capital Markets Day, but obviously, that we cannot do that all in Q4. So there's a very good momentum going into 2022, yes.

[Operator]

Mr. Andrew Humphrey from Morgan Stanley.

[Andrew Edward Humphrey, Vice President]

A couple, if I may. One was just clarifying the answer to an earlier question that I think Ben asked. My -- what I heard was that you said V25 spares demand had doubled year-on-year and CF6 and PW2000 were sort of flattish. I'm kind of scratching my head about how that translates into overall spares revenue growth in the low-teens, which I think was what you mentioned. So just a clarification on that. And the second one was on GTF work in particular. Clearly, that has kind of cushioned some of the impact of the downturn the whole industry has seen over the last year. I think as we've seen in Q3, that becomes a bit of a headwind as the industry starts to recover. You've talked about the mix between normal course business and proactive work. But I wonder, could you give any more granularity, say, on what the year-on-year figure would have been this year had no proactive work being undertaken in '20 or '21? And also, talk about how that mix this year of normal course versus proactive affects growth prospects looking into '22.

[Peter Kameritsch]

I can give you -- I don't want to scratch your head about our spare parts growth rate. So I give you the solution to the riddle. So I mean, the GTF spare parts were down, yes? So until last year, we had a lot of very material-intensive warranty shop visits. So in Q3, you had a lot of provisioning of GTF spare parts for that for something like hot section replacements. And so that is not -- to that extent, not the case anymore. So that translates then, if you take all pieces of the puzzle together, to that growth rate. So we don't do that analytically. I mean, we have a mixture of that. But you cannot always say that shop is 20% of that, 10% of that, 30% of that. So that, we don't calculate that. But that was a rather qualitative answer to that question. But I cannot say what would have been the rate without that proactive work. So I have no answer to the question, frankly.

[Andrew Edward Humphrey, Vice President]

Maybe just a different angle on GTF then. I mean, you've highlighted lower spares consumption there as being something of a positive, given that it suggests higher durability on the parts of the engine and lower spares consumption going forward. If -- can I ask a kind of slightly provocative question on that, which is, if the engine is more durable and spare parts consumption is lower, given program accounting rules and IFRS 15, does that not lead to a higher margin for that program overall at some stage? And have you already started to take some of the benefits of that?

[Peter Kameritsch]

I mean, we do assess all flight hour contracts on a regular basis. But if you do some shop visits with a lower spare parts content, that's not -- next day, you have a higher margin on the spare parts business. So it takes some time until that translates into the margin contracts. But I mean, in theory, you are completely right. So once you can take out costs of a flight hour agreement, that translates into a higher margin. And in our accounting world, that would lead to a higher spare parts margin on the OEM side of the business for the GTF spare parts.

[Operator]

Okay. Miro Zuzak from JMS Invest.

[Miro Zuzak, Investment Professional]

I have a couple of questions. I would like to take them one-by-one, if I may. The first one is again about Q4 and your top line development. You mentioned before again that you expect a growth rate of 30%. I mean, that's mathematically necessary to reach your guidance. How sure are you actually that you're going to reach that? I'm especially referring to the military business, where you see a big jump in revenues, basically plug in your guidance into my model.

[Reiner Winkler, CEO & Member of the Executive Board]

We have high visibility on that. And we are quite confident that we will achieve our guidance. So I mean, we are now end of October already. So we see the momentum going forward, so a very, very high, let's say, confidence that we will achieve in the military but also in the commercial and MRO business, our guidance. As Peter said, we have the engines waiting for induction in the MRO facilities. On the military business, we see the progress. We know exactly which engines will be delivered until year-end, which -- let's say, other activities, we can invoice for. And so as I said, very high visibility and confident level.

[Peter Kameritsch]

And I mean, the military phasing, you see that each and every year. So you typically have a weak Q1, weaker -- weak Q2, then Q3, it accelerates and Q4 is typically the strongest quarter. That was also in the last years, it was the case to a more or less extent. Because don't forget that we do a lot of milestone bookings. So when you reach a milestone, you can really send a bill to the customer, so to say, so -- and there, we are quite sure that we're going to reach all these technical milestones. And then finally, you can book revenues and the respective profits.

[Miro Zuzak, Investment Professional]

Okay. And same side for the margin guidance. I assume despite the really high, let's say, seasonality aspect this year, so if I just plug in your guidance, I get a huge jump in adjusted EBIT in Q4. Also there, you're super confident if I got it correct.

[Peter Kameritsch]

Yes. I mean, the high margin comes from a high share of military business, obviously, and a very strong spare parts business in the commercial business. And that -- both things are very transparently tangible to us. So we are very, very confident to reach the guidance.

[Miro Zuzak, Investment Professional]

Okay, cool. But there's another question regarding your MRO margin, which has, in my view, been disappointing now in Q3. You're a little bit more confident for Q4. But can you give us basically some form of guidance here for the upcoming years? Because you're coming from 9%, almost 10% in 2019. You're now at 5%. You mentioned a structurally higher share of labor work versus spare parts. How fast, if at all, are you going to jump back to the 8%, 9% that you achieved in the past?

[Reiner Winkler, CEO & Member of the Executive Board]

I mean, to achieve the 8% or 9%, as we have seen in the past, not in the next, let's say, 1 or 2 years. Because of that mix between, let's say, I would say traditional business like service for V2500, CF6, PW2000 and then the high portion of GTF work. And as we explained several times, if you do these service on GTF engines, it's a very low-margin business. And if you assume 60% of the classic MRO work and roughly 40% on GTF, that in consequence will reduce the margin to a level of, whatever, let's say, around 6% or something like that. So to achieve the old level of 8%, 9% or 10%, I would say not in the next years. But if we look just into that core MRO business, so providing engines like CF6, PW2000, V2500, in this business, we have 10% or more margin.

[Miro Zuzak, Investment Professional]

Okay, cool. And two more smaller ones -- or actually three more questions, smaller ones. But the first one is you did a great job on the SG&A cost development versus last year. Do you expect this cost to snap back in 2022? Or do you feel that you -- basically, with the structural measures that you put in place this year, that you will have a lower cost base in percentage of revenues going forward as well?

[Peter Kameritsch]

No, I think that is rather what the basis for the next year or so. So I mean, where we -- we won't hire a lot of white collars. Rather, I mean, as Reiner mentioned, we do a lot of -- we're going to hire a lot of engineers, but they will show up in the R&D line, not so much in SG&A. So SG&A will be -- I mean, you have a certain wage increase obviously year-over-year, so -- in that, so the growth rate would rather be in that range of 2%, 3% per year. So we try to do all of our jobs here in the SG&A department with the same workforce. Although regulatory and IFRS, things get more and more complex, but still, we try to counter that with some more efficiencies.

[Miro Zuzak, Investment Professional]

Okay, cool. And just one technical one, the EUR 30 million one-off gain in the quarter, in which P&L line was it booked? Was it the other line?

[Peter Kameritsch]

You mean the EUR 30 million?

[Miro Zuzak, Investment Professional]

Yes.

[Peter Kameritsch]

The EUR 30 million, that was, I think -- that was of cost of goods sold, yes.

[Miro Zuzak, Investment Professional]

Okay. And the last question, the industry -- I mean, the financial industry is talking a lot about ESG now. We are talking about classification of funds and so on. I have seen MTU popping up now on some exclusion lists because of the more than 10% share of the military business. And there are also some exclusion lists where you see 5% as a threshold to be on exclusion list because of military business. Are there any thoughts on your side regarding this development? Is this a topic in the management of MTU? And are you considering measures to basically make sure that you are going to be an ESG champion going forward?

[Reiner Winkler, CEO & Member of the Executive Board]

It's actually not on our top priority. I mean, we are working on this ESG topic, yes. But I mean, we are not thinking about selling the military business just to be then on every list. I mean, that could not be the consequence. But as I said, it's not the top 1 priority.

[Peter Kameritsch]

I mean, the 10% threshold we got, the military business is going to be diluted anyway. I mean, the commercial business will grow strongly over the next years. So the military business, I mean, in the next years won't be above 10% of our sales. But we are focusing on things like CO2 and things like that. That is obviously important. But there's no plan, as Reiner said, to sell the military division to comply with something like 10% threshold or so.

[Miro Zuzak, Investment Professional]

Okay. But that's going to be 2023, right, not next year?

[Reiner Winkler, CEO & Member of the Executive Board]

Yes, latest, I would say.

[Operator]

Okay. Next is Ms. Celine Fornaro from UBS.

[Celine Fornaro, Head of EMEA Industrials Research]

It would be very quickly, it would be just if you could provide a little bit of color on the Zhuhai operation and how that has performed in Q3, given the slowdown in China and how you're seeing the outlook there for Q4 and 2022, also the behavior of your partner there in terms of shop visit contents.

[Peter Kameritsch]

Celine, Zhuhai, the same is true, what I just said for our Hannover facility. So there also, we had a weaker Q2 there. So Q3, now we see also huge momentum. So the induction buffer is strong. And Zhuhai is getting longer and longer for their portfolio, so V2500 and CFM56, both engine types. And also, not only the number of engines, but also the work scopes are increasing, so -- and they will also buy a lot of spare parts in Q4. So that's quite transparent to us. And Q4, we're going to also -- as we're going to see a very strong quarter in Zhuhai there. What we did, I mean, sales will increase there strongly because they do have also started now doing GTF work. So the first engine was inducted, I think, some weeks ago. So they will also do GTF work ongoing. So I think that is more or less the answer to your question. Or do you have any follow-ups?

[Celine Fornaro, Head of EMEA Industrials Research]

No, that's good.

[Operator]

Okay. Mr. David Perry from JPMorgan.

[David Howard Perry, Head of European Aerospace and Defense]

Just a couple on the aftermarket. The first one -- sorry, it's a bit boring. The spares growth on Q4, I know you've been asked a few times. Just that 30% seems to me to be very strong compared to what you're guiding for the full year. I just wondered if you could try and reconcile that. And maybe I've got my weightings wrong. But if I popped in 30% for Q4 year-on-year, I think you'd be more like 7% for the full year. Sorry if my math is wrong, I just wanted to check that. The second question is -- I don't want to steal your thunder for the Capital Markets Day. But Reiner, you did say in your intro that IATA is expecting global air traffic in '22, 2022 to be 61% of '19. But 6 months ago, they were probably expecting it to be about 75%. And that was certainly something Raytheon had back in its CMD slides back in May as a working assumption. So everything has slipped a bit to the right. I just wonder if that's changed your thinking about some of the aftermarket trends. I'm just asking a high level for 2022. And then lastly, if I can, can you just give me a feel for the V2500 sort of activity? So where is it today versus the peak? And do you think it can get back to the peak? Or is that unrealistic?

[Reiner Winkler, CEO & Member of the Executive Board]

Maybe I'll start with the last two questions. Yes, you are right. The IATA forecast 6 months ago was more positive than the actual one even for the next year. But as we saw already this year, I think due to our business -- or due to our portfolio, we are, let's say, not totally depending on that, let's say, general trend. We have a high exposure to narrowbodies. And I think everybody expects narrowbody market to recover earlier than the widebody market will recover. So that's one piece why we're, let's say, a little bit not independent from the overall trend, but we can, let's say, meet our targets. Secondly, it's the freighter exposure we have, which is more or less independent from the overall traffic development. And then it's the military business. So yes, you are right. But I think beside that, we are still -- let's say, we feel comfortable with our outlook for not just this year but also for next year. And the other question was?

[Peter Kameritsch]

The quarterly growth rate. I think, I mean, in our model, if you take something like 30%, you come up with something like a mid-single-digit percentage. If you want to clarify that completely, then I think Thomas welcomes your call and you can go through that calculation quarter-by-quarter. But I can't do that here right now.

[Reiner Winkler, CEO & Member of the Executive Board]

And the third question was?

[David Howard Perry, Head of European Aerospace and Defense]

Just the V2500, I'm just trying to get a feel for where it is versus its peak and whether you think it goes back to peak.

[Reiner Winkler, CEO & Member of the Executive Board]

We have -- in 2 weeks, we have the next Board meeting with our partners. I think the expectation is that we will not fully recover to the old level of shop visits. Is it 10% less? Is it 15% less or 20%? I don't know. But it will not be exactly -- we will not reach again the level of what we have seen in the peak in 2019. So it would be a little bit less than that, that's for sure. I mean -- and it's not surprise. I mean, some of the mature aircraft and engines will be outphased or will be parked and will not come back into the market. But V2500 will be still a very important program for us. And the fleet is not very old, its average, 8 to 9 years.

[Thomas Franz, Vice President of Investor Relations]

11.

[Reiner Winkler, CEO & Member of the Executive Board]

11 years, sorry. Now it's 11 years. But it's still, let's say, another, whatever, 10, 15 years to fly.

[Operator]

Mr. Ben Heelan from Bank of America.

[Benjamin Michael Heelan, Analyst]

So we heard this morning from Safran that they were seeing a price increase in November and would be returning to a similar trajectory of what you saw pre COVID. Is that something that you guys would expect for the portfolio that you have, that you're seeing pricing returning to those pre-COVID levels? And then supply chain has obviously been a key focus of the result season in general. Are there any -- I think you talked a little bit about labor. But are there any pressure points that you're seeing at the moment?

[Reiner Winkler, CEO & Member of the Executive Board]

Regarding price increases, I would agree what Safran told this morning. So we see it in a similar way. And regarding supply chain, as I said in the beginning, it's not a big issue actually because we have, typically, as I said, dual-source strategy. We have long-term contracts, including also pricing conditions. So as I said, actually, it's not a main concern we have.

[Operator]

Okay. Mr. Harry Breach from Stifel.

[Harry William Freeman Breach, Research Analyst]

Apologies, just a quick, quick follow-up. Just can you help us at all think about capacity utilization at commercial MRO across the network, sort of roughly your best idea of that this year and how you think that will trend maybe next year and beyond? And then second question was -- and please forgive me if you answered this on the last call, I don't quite remember. But with Airbus' intentions on A320 production rate increases in coming years, clearly higher volume in theory helps to bring forward break-even point on GTF. Can you give us any idea of when you expect that to go through breakeven for you guys?

[Peter Kameritsch]

I mean, Airbus suggests something like a rate 75 or so, I think, in the call. So I don't think we're going to be that near term. I mean, I think now for -- the first step will be coming back to something in the range where we were before the crisis, so 60-plus, 61, 62, 63 or something like that. I think that is doable in the mid-term for the engine guys. And then we have to see in a second step if the market really digests a higher -- can digest a higher output of Airbus, together with something like 50 of the markets and so on, [indiscernible] narrowbody markets will be receptive. And also, I mean, you have heard also some critical words from lessors obviously. So if we go to 75, I think it's still not yet clear. Break-even point of the GTF engine, it's always a question, I mean, on what you look, I mean, cash breakeven or earnings breakeven. Because as you know, I mean, a high number of manufacturing costs in GTF is depreciation because it's a very automated production, so not so, you don't need a lot of blue collars for doing that. So on a cash basis, you're going to be there mid of the decade. But if you take depreciation into account or capitalized R&D, all the depreciation coming from the machines and buildings and so on, then it's going to take a bit longer.

[Reiner Winkler, CEO & Member of the Executive Board]

And MRO. Was it MRO? The first question, was it?

[Harry William Freeman Breach, Research Analyst]

Yes. Well, it was just whether you could give us some idea of the capacity utilization overall, yes, this year and then how you see that maybe next year and then the year after.

[Peter Kameritsch]

I mean, now, as I said, I mean, the Hannover, for example, and Zhuhai are quite full, I would say. Is it then 90% to 95% or so? I don't know. I mean, there, we have really to -- I think the bottleneck is there really the workforce currently. Berlin, it's a bit more difficult. The regional jet market hasn't picked up so compared to the narrowbody market. And also the small engine business is a bit weaker. There, we rather speak about, I would say, 70%, 80% or so capacity utilization. So that's -- I would say Vancouver, Vancouver is also full.

[Reiner Winkler, CEO & Member of the Executive Board]

But if you add it up and say a number of shop visits, we are, I would say, late next year on the level as what we have seen in 2019.

[Thomas Franz, Vice President of Investor Relations]

Okay. I think this ends today's session. Thanks for participating and your questions. And watch out for our CMD on the 18th of November. Have a good remaining day. And yes, stay tuned. Bye-bye.

[Operator]

We want to thank Mr. Reiner Winkler and Mr. Peter Kameritsch and all the participants of this conference. Goodbye.