MTU Aero Engines AG

XETRA:MTX

Earnings Call Transcript 2022-Q3

[Operator]

Welcome to the conference call on MTU Aero Engines Third Quarter Results 2022. 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. Reiner Winkler, Chief Executive Officer; and Mr. Peter Kameritsch, Chief Financial Officer. Firstly, I will hand over to Mrs. Claudia Heinle, Senior Manager of IR, for some introductory words.

[Claudia Heinle, executive]

Good morning, ladies and gentlemen, and welcome to our Q3 earnings call.

First of all, I would like to apologize on behalf of Thomas Franz, who is unable to participate in our conference call today as he is unfortunately ill. Get well soon, Thomas. As usual, we will start with a review presented by Reiner. Peter will provide the financial overview and details on the segments. Finally, Reiner will guide you through our latest outlook on the remainder of the year. This concludes our presentation, and we will open the call for questions.

Let me now hand over to Reiner for the review.

[Reiner Winkler, executive]

Yes. Thank you, Claudia, and also a very warm welcome from my side.

The robust positive trend of air traffic recovery continued in August, with passenger traffic reaching 74% of pre-COVID levels. Domestic traffic improved to 86%, while international traffic is at 67%. Cargo traffic showed resilience in August, being slightly above 2019 levels. So recovery is underway, but ongoing challenges such as recession fears, price inflations and a new wave of COVID-19 infections during winter, they remain. So this needs to be monitored closely.

Our new parts repair shop, MTU Serbia, officially opened its facility near Belgrad. It has a capacity of 470,000 repair hours and will increase its workforce to more than 400 employees over the coming years. Repair instead of replacement, not only is this a major cost saver, but more than that, it is also a driver to a more sustainable business. The additional MRO capacity in Serbia will further improve our strong and flexible network and boost our ability to offer competitive services in the global market.

We have signed an agreement detailing our aftermarket participation in the PW800 engine program. This enables us to perform full overhauls of PW800 engines at our site in Ludwigsfelde. This further strengthens MTU positions in the heavy business jet segment as the PW800 engine powers 4 business jet applications. Currently, there are more than 300 engines in operation, and the number continues to rise.

Pratt & Whitney has started flight testing with a GTF Advantage engine on an A320neo aircraft. Flight testing and certification work will continue through the first half of 2023. The entry into service is expected then in 2024. The GTF Advantage configuration would be the most powerful engine for the A320neo family, enabling increased range and payload for airlines. Additionally, it will offer full compatibility for sustainable aviation fuels.

We greatly appreciate the decision of the governing board of clean aviation program in favor of our proposed based on the WET technology. Clean aviation is the European leading research and innovation program for transforming aviation towards the sustainable and climate-neutral future. MTU's WET concept is 1 of 20 successful projects which will be supported by a EUR 700 million budget.

We are very happy to announce that Silke Maurer will join our team in February next year. She is taking over the responsibility for the OEM operations division as Chief Operating Officer. Our present Chief Operating Officer, Lars Wagner, who will become CEO on January 1 next year, will remain responsible for technology and engineering. And additionally, he will be keeping his responsibility for sustainability. By appointing Silke Maurer, we have secured a high-profile manager with extensive experience in operations for our company.

And finally, based on the good results in the past month and the stronger U.S. dollar, we raised our full year expectations slightly. I will give you an update in a few minutes, but let me first hand over to Peter for the financials.

[Peter Kameritsch, executive]

Yes. Thank you, Reiner, and also a warm welcome from my side.

In the first 9 months, total group revenues increased 27% to more than EUR 3.8 billion. Obviously, we had quite some tailwinds from the U.S. dollar at 1.07 in 9 months '22 versus 1.20 in the 9 months '21. So in U.S. dollar terms, revenues were up 14%. EBIT adjusted increased almost 50% to EUR 448 million, resulting in an EBIT margin of 11.7%. Net income adjusted increased, respectively, 45% to EUR 319 million. Free cash flow was EUR 219 million, was up 7% compared to last year's figures, which is perfectly in line with our full year expectation. Free cash flow generation was still strongly influenced by mainly supply chain-driven working capital headwinds.

So now let's dive into our business segments, starting with the OEM division. Total OEM revenues increased 17% to EUR 1.2 billion. Within that, Military revenues were stable at EUR 309 million. Q3 here was a bit weaker than expected mainly driven by slight delivery delays of some production engines and MRO services.

Commercial business revenues rose 24% to EUR 950 million. And within that, new engine deliveries were up in a mid-single-digit percentage number. GTF deliveries further improved, and sequentially, we saw also improvements in the GEnx deliveries caused by the pickup of deliveries of the Boeing 787 to airlines in August.

Organic spare parts were up in the high teens perfectly in line with our full year guidance. Main drivers were, obviously, narrow-body and freighter engines on the one hand side. On the other side, we also see good demand for [ BizChat ] engines as well as for the GEnx platform. This favorable business mix overall resulted in an EBIT adjusted of EUR 251 million with a margin of 20%.

Let's move on to the Commercial MRO segment. Reported MRO revenues increased 32% to EUR 2.6 billion, while U.S. dollar revenues were up 70%. The GTF MRO share is lower than our expectation for the full year, rather in the 30% area. Over the past 9 months, we saw a lower number of GTF engines in the shop. In addition, these engines needed a smaller work scope than anticipated due to better durability of certain parts of the engine. We saw this already in the half year, and the situation remains more or less stable.

For Q2 '22, we expect an increased level of GTF MRO output, but the revenue share will remain below the 40% which we expected at the beginning of the year. EBIT adjusted in the MRO segment almost doubled and reached EUR 196 million, resulting in a strong margin of 7.4%. The higher EBIT margin is especially driven by the mentioned favorable business mix of independent versus GTF MRO. In addition, we see a healthy IGT business, and of course, the current U.S. dollar exchange rates are supportive.

At this point, I would like to hand back to Reiner for some words on the guidance 2022.

[Reiner Winkler, executive]

Yes. Thank you, Peter. Based on the strong results achieved over the first 9 months and the current environment, we can slightly increase our guidance. We have upgraded our group revenue outlook in euros to the range of EUR 5.4 billion to EUR 5.5 billion based on the stronger FX rate of an average 1.05. Within this, we expect revenues for the Commercial MRO revenue to increase from a growth in the high teens through a growth of about 20%. The top line outlook for the Military, Commercial OE and Spare Parts business remains unchanged.

The EBIT adjusted is expected to grow stronger than initially anticipated, and we now expect a growth in the low 30 percentage range. Our previous expectation was a mid-20 percentage growth. The outlook for the cash conversion rate is also confirmed, and we have now forecasted a narrow range of 60% to 70% from a broader mid- to high double-digit percentage range.

So with this positive outlook, we end the presentation. Thank you very much for your attention, and we are now ready to answer your questions.

[Operator]

[Operator Instructions] Robert Stallard from Vertical Research, may we have your question?

[Robert Stallard, analyst]

Two from me. First of all, I was wondering if you could clarify what the Spare Parts growth was in the third quarter of the year, whether you're expecting any positive impact from the pull forward of the Pratt & Whitney price increases in the fourth quarter. And then secondly, could you give us an update on your expectations for the energy situation in Europe or whether you're facing any shortages?

[Peter Kameritsch, executive]

Yes. Maybe coming to your first question regarding Spare Parts, so in the third quarter, it was roughly up -- spare parts portfolio was roughly up 20%. And yes, the September was a bit stronger compared to July and August, and that might be driven by the spare parts price list increase by Pratt & Whitney, but you cannot obviously quantify that. But definitely, the September was the strongest quarter -- strongest month in the quarter.

[Reiner Winkler, executive]

On the energy situation, I think there's no news flow from that. Actually at MTU, we do not see any shortages for energy. I think we have mentioned it already that we have a very low exposure especially to gas. And we have also switched to other energy sources in many regions, so I would not expect for this year and for next year huge issues for MTU.

[Robert Stallard, analyst]

Yes. Just a quick follow-up on that, Reiner. I think Airbus has said that they started to do some sort of buffer stocking in case there was an energy problem in the winter. Have you been doing anything similar to that? Or have your suppliers been doing anything like that?

[Reiner Winkler, executive]

I don't know that. Sorry, but we can check it. But -- no, we ourselves, we didn't create a buffer stock for, let's say, a blackout or something like that. So we don't foresee such a scenario currently, yes.

[Operator]

Mr. George Zhao from Bernstein, may we have your question?

[George Zhao, analyst]

First, on the guidance, I guess, what drove the organic revenue guide upgrade for the MRO division considering that the GTF work has been coming in lower than what you have expected?

And then second one, turning to, I guess, the cargo, I guess what's your outlook for just cargo traffic? And how do you assess the trade-off between recession risks and the slow widebody recovery for your dedicated cargo fleet?

[Peter Kameritsch, executive]

I mean part of the -- I would say, I wouldn't call it weakness because doing less on the PW1100 fleet is finally a good message as we don't have the aftermarket cost and the contracts are finally -- the aftermarket contracts are finally more profitable. Part of the, let's say, weakness was already -- sorted already in the half year. And now I mean we have a bit stronger business in the independent MRO contracts like the V2500, for example. And what we currently see is really a strong business with IGT, so industrial gas turbines, which we do in our Berlin facility. So we see very rich and heavy work scopes that is a very healthy and also very profitable business.

Cargo, I would rather -- currently, I would see the cargo situation in our -- let's say, in our with our customers more or less stable. I mean before -- in the summer region, so there was more demand versus our possibility to offer slots. So I wouldn't see -- for our cargo universe, I wouldn't foresee a big impact or slowing down of our business with cargo operators. We also don't see that in the Spare Parts business. I mean we have the CF6 engine. We have the PW2000 engine in our portfolio. And we don't see, let's say, less demand now driven by -- lesser demand from cargo operators also. So that is a more -- I would rather call it a stable situation in the cargo market.

[Reiner Winkler, executive]

There's no indication for any slowdown.

[Operator]

We will take our next question. Mr. Ben Heelan from Bank of America, may we have your question?

[Benjamin Heelan, analyst]

So I've got a few. So on Military, you mentioned delays in production and maintenance. Could you give us a little bit more color exactly what is happening there? Is it a supply chain issue? Is it an issue with the customer? So that would be the first question.

Second question on GTF. It feels like things are improving and you're seeing those deliveries come through. When we think about the profitability impact of GTF when we go into 2023, you're going to have higher volume, better fixed cost coverage, but also it's a loss-making engine, so there will be a headwind from there. So is there any color that you can give us today in terms of how we should think about the headwinds or tailwinds from GTF ramp as we go into 2023?

And then a final question on associate income. It looks like there was a drop in associate income in Q3. Could you just talk to a little bit about what actually drove that?

[Peter Kameritsch, executive]

Ben, for Military business, I mean, supply chain issues for parts deliveries and also parts from the partners and the program, in EJ200 program and also the tornado engine. So the parts are missing. So the supply chain is currently a bit weaker, so a lot of -- a handful of engines, they will go into the fourth quarter.

And I mean if you look where we are after the third quarter, with a little bit more than EUR 300 million, and the expectation for the full year which is roughly at EUR 500 million, so you can expect a quite strong quarter in the Military business. So that's what we expect and we recently did the forecast, and the forecast was still committed. And so -- but it shifted into the fourth quarter. And that is OE production.

But also if parts are missing, it also hits the aftermarket. Obviously, when you do an overhaul of an EJ200 or an RB199 engine and you need a new spare part and you don't have the spare part, then the delivery to the customer moves into the fourth quarter.

Associated income, that's driven by the [ leaseco ] company, so the company which is managing the lease pool of the GTF engine. And that moved downwards significantly in the 9 months 2022 versus last year. Two reasons, so on the one hand side, we did that already in Q1. So we fully wrote down the leasing pools, so they leased out engines to Russian customers. So that is a magnitude, let's say, EUR 6 million, EUR 7 million or something like that. We adjusted that in EBIT adjusted.

And on the other side, they did a lot of overhaul of the GTF lease pool. So that drops into the cost of the company. So that's why the equity contribution of this company dropped from, let's say, EUR 50 million last year to 0 this year. But it has nothing to do with Zhuhai, Zhuhai is more or less stable than equity contribution. It's, as I said, attributed to the leasing company.

GTF head and tailwinds, I mean, on the one hand side, we are working on, obviously, improvements in the profitability, also on the manufacturing cost of the GTF platform, so PW1100, PW1500 predominantly. And yes, I mean we have higher fixed cost coverage driven by the volume. As you know, I mean the production of the GTF engines are highly automated. So for 2023, I mean we'll talk about that on our Capital Markets Day a bit more, but I would see the ramp-up rather in the neutral area and so next year versus this year. So no tail and no headwind.

[Operator]

We will take our next question. Harry Breach from Stifel, may we have your question?

[Harry Breach, analyst]

If I can ask maybe 3. Yes, I guess when we think about GTF deliveries, can you give us any feeling about how the number of deliveries sort of increased in the third quarter versus the second quarter and whether the fourth quarter should be up sort of in the same range versus the third quarter as the third was of the second? I'm trying to get a feeling really for what the headwind to margin could be as we go into the fourth quarter.

And secondly, thinking -- I know in the press release, I think you said that you expected a Commercial MRO that the mix of GTF revenue should be back up towards 40% in the fourth quarter. I'm just wondering, can you help us for the sort of the reasons behind that thinking? Is it based strictly on the engines for induction into the shop in the fourth quarter or the completed engine shipments out of MRO in the fourth quarter, so you've got high confidence in saying that?

And then maybe just a quick one. In terms of Commercial MRO overall, earlier in the year, I think you spoke about engines outside facilities at Hannover and elsewhere. Just wondering if the kind of -- if the sort of pent-up demand, if you will, the sort of waiting lists are still around the same as they were earlier this year, maybe coming down a little bit, maybe even going up a little bit. That would be very helpful.

[Peter Kameritsch, executive]

No, I would say there is a pent-up demand, your last question, it's rather neutral. So it's still -- I mean, it's still more or less on a quite high level. I mean you see this globally that MRO capacity is short, yes. So -- and it hasn't changed that much in the course of the year. Even I would say -- I would even say that the situation, so the balance between supply and demand is -- has gotten more negative. So there's demand really strongly growth. And capacity, no additional -- not a lot of additional capacity comes online.

Regarding, I mean, GTF MRO share in the fourth quarter, yes, we have quite a visibility there because, I mean, we have -- we do a lot of -- we do GTF MRO not only in our Hannover facility. We do it in our Polish facilities, so the EME joint venture with [indiscernible] and also in Zhuhai now. And we have a lot of engines in the shop in Zhuhai and also in EME, so that ramps up during the year. And we know we have a lot of engines in the shop where we know that we will build them to the customer in the fourth quarter. So there's quite -- that is quite tangible.

Regarding OE deliveries, I mean,the first 2 quarters in the year were a bit weaker. So we have really a sequential improvement now in -- we have seen that in the third quarter, where we are -- let's say, OE sales were up in the 20% range for the whole portfolio. And I mean, to -- obviously, if you do the math, then you can see that, I mean, in the fourth quarter, OE deliveries have to grow 40% to 50% based on -- so we see -- we're going to see a lot of ramp-up of deliveries for the PW1100 engine. I mean it's not only our -- let's say, our work share.

Obviously, you know that also Raytheon said that in, I think, in the second quarter and the first quarter this year, there's engine shift to the end of the year because of their supply chain problems. And now we see a lot of recovery of the delivery shifts from the first or the second quarter in 2022, and that will happen now in the fourth quarter.

But not to forget, I mean, we see also sequentially a pickup of deliveries of the GEnx engine. We know that Boeing has restarted deliveries to customers for the airframe in August, I guess mid-August. And that also triggers again deliveries of the GEnx 2 -- of our GEnx models to GE and then further from GE to Boeing.

[Operator]

We will take our next question. Chloe Lemarie from Jefferies, may we have your question?

[Chloe Lemarie, analyst]

I have a couple, actually. The first one would be on the spares momentum and what you see in Q4 in terms of volume versus pricing. So I'm thinking you would have kind of low-teens growth in Q4, and I would think that most of it would actually come from price increases. So if you could quantify that a bit, that would be great. And also, how would you qualify the discussion with customers on pricing now that I would assume they're pretty significant versus last year? So are you seeing them pushing back a little bit more than usual?

And my second question is on China and the activity that you see in Zhuhai. Because traffic has been relatively poor this year, so how you see the level of demand specifically in Zhuhai for shop visit? Has it come down by any means?

[Peter Kameritsch, executive]

I mean in the spare parts guidance, we always -- I mean also in our original guidance, there was a certain level of spare parts price increase incorporated into the guidance. And yes, I mean it's something like a low-teens spare parts growth in the fourth quarter. That's correct. And that there will -- a significant part of that comes from spare parts price increases. I mean you know that, I mean, Pratt has increased in the low teens. Also CFM ING has more or less in the same bulk. I think they come in a little bit later in the year. So -- but yes, that's the most important driver for spare parts growth is pricing.

[Reiner Winkler, executive]

China.

[Peter Kameritsch, executive]

China, Zhuhai, I mean, we saw in the -- I would say, in the second quarter -- second half of the second quarter, we saw a dip in deliveries to induction of shop visits due to the lockdown situation in China. But now we have -- we see, let's say, at least a recovery of deliveries to our facilities. So for especially the V2500 engine also, to a lesser extent, the CFM56 engines.

And what we currently do is we ramp up also PW1100 in Zhuhai. So these are also heavy shop visits and create quite some workload there. So the facility [ results ], we're currently in the process of building their second test, which will be up and running in the second quarter 2023. So then we will have more capacity also in Zhuhai. This is...

[Unknown Executive]

Discussions of price increases.

[Peter Kameritsch, executive]

No. I mean as I said, we have -- I mean, especially in the MRO business, the situation that there's less capacity than demand, so there are no discussions about pricing or discounts or whatsoever. No, they don't take place.

[Operator]

We will take our next question. Christophe Menard from Deutsche Bank, may we have your question?

[Christophe Menard, analyst]

Yes, I have 3 questions. The first one was on the MRO margin, which in Q3 is actually a good level considering the circumstances. I was wondering what was the overriding element. Is it gas turbine? Is it FX? Or is it the lower share of GTF or a little bit of everything, you may say? And how should we think about the gas turbine profitability....

[Peter Kameritsch, executive]

We said it already.

[Christophe Menard, analyst]

Okay. I mean -- okay. Well, should we be thinking about gas turbine profitability as better than independent MRO? Or is it same type of margin level?

[Peter Kameritsch, executive]

Yes. I mean the industrial gas turbine business is typically more profitable than independent MRO business, yes.

[Christophe Menard, analyst]

Okay. So it's a mix of everything. The second question is the target rate for hedging. I mean you improved your hedging in this quarter, I mean, for 2023 and beyond. Should we be thinking of -- I mean, do you have in mind target rates for 2023? And 2026 is obviously very appealing. But I mean do you have a sequence in mind? Or how should we be thinking about this?

And the other questions are around HR. So I mean that's the last one. It's around the [indiscernible] renegotiation, if you can give us an update. And also more specifically around FCAS, have you stopped the hiring plans for additional engineers? Or are you still hiring people for the FCAS program?

[Peter Kameritsch, executive]

I mean regarding hedging, no, we don't have a target hedge rate or so to say. I mean we have our step hedging model, so we can -- theoretically, we can hedge out until 2026. We have a lower band and minimum band -- minimum level and the maximum level for each quarter, and we execute that on a more or less mechanical way. So we don't speculate it. We really do that not with revs or something like that. So you do that only with clean forward contracts. So we do hedge accounting. So the unrealized gains and losses going into the equity and the realized go into the P&L.

So typically, we start with 90% hedge cover in Q1, and then it goes down to -- I mean, the latest quarter is between 0% hedge coverage and 30%. So we can do -- you can go to 0, let's say, in 2026, and we can go to 30% hedge cover in 2020 -- 30% in 2026. And so obviously, when you can lock in forward contract at 1.04 for 2026, you do that, yes. Is it the best possible point of time to lock it in? I don't know that.

So I don't have a glass ball. But what I can say is that a hedge of 1.04 in 2026 is probably a good thing. So for us, it's a very good FX rate. And so we have a model in place with minimum and maximum levels and -- but obviously, we go up and down depending a little bit on our expectation. So -- but we don't have a target hedge rate in mind.

[Reiner Winkler, executive]

Coming to your other questions, starting with the salary increase negotiations, they are going on. We expect -- I would say, I would expect a solution or results maybe in the course of second half of November. Yes, it will be higher than in the past due to the -- actually, the situation of inflation and so on. On the other side, you should have in mind that we have also some contracts where we can pass the higher cost to the customer in Military business but also in some commercial activities. There's -- with some time delay, for sure, but it's possible.

On the FCAS, we hired already in the fourth quarter of last year some, I would say, 60, 80 engineers. And after the situation that the contract was not finally signed, we stopped that. We used these engineer for other activities. And during 2022, we have not hired yet additional engineers. We expect a solution in that program also towards the end of this year, and then we can start beginning of next year with hiring additional engineers.

[Operator]

David Perry from JPMorgan, may we have your question?

[David Perry, analyst]

Reiner, can I just start by embarrassing you a bit because I think it's your last call?

[Reiner Winkler, executive]

Yes, it's my last call.

[David Perry, analyst]

So listen, can I just congratulate you on huge success MTU has been since the IPO under your leadership. I just checked that you are the best-performing European A&D stocks since the IPO.

[Reiner Winkler, executive]

Thank you.

[David Perry, analyst]

So congratulations, and I wish you well for the next phase of your life, although I think we will see you at the CMD.

[Reiner Winkler, executive]

Yes.

[David Perry, analyst]

Great. Peter, 2 questions for you, and I know you're going to try and resist answering, but let me try. So look, at the CMD last year, you gave guidance for 2024. It was a bit open ended. All you said was EBITDA could be above -- in 2024 could be above 2019. But look, FX is now 12 cents better. I just wondered if you plan to be more precise about 2024.

And I guess, following Christophe's question, I mean, it's clear on your slide today the big open FX exposure is in 2025. So I mean will you extend the guidance out to 2025? That's the first question.

And then just a second one, just on FX. Can I just clarify what is your net dollar exposure, i.e., your gross dollar revenue less your dollar costs? So if I look at that slide today with the FX position, can I assume that the EUR 1.4 billion of hedging in 2022, does that mean your net dollar exposure is EUR 1.4 billion in 2022, and that will grow as the business grows? If that question makes sense.

[Peter Kameritsch, executive]

Yes, that makes -- so your last question, yes, I mean that's in 2022, we are more or less completely hedged. So we can assume that USD 1.4 billion is our U.S. dollar exposure. And that obviously grows as the business grows. That's a good rule of thumb there.

[Reiner Winkler, executive]

Exactly.

[Peter Kameritsch, executive]

So I mean in 2023 and 2024, then obviously, the hedge cover declines. And then more or less, I mean, in -- you see that, I mean, in 2026, we have placed the first hedge contracts there at the rate of 1.04, but there is maybe -- it's below 10% of the exposure. Obviously, in -- below 10% of the exposure in 2026, yes.

Yes, we will be -- I mean, in the structure of our guidance on the capital markets, that will be the same. I mean we will be more precise for 2023, obviously, giving the business drivers and so on. And then we will talk about the business development until 2025. Sure, yes.

[David Perry, analyst]

You'll just extend your envelope 1 year.

[Peter Kameritsch, executive]

Yes. Yes. But I mean nobody knows what the FX rate will be in 2025, so it's a tricky one. So forecasting FX rates is not so easy.

[David Perry, analyst]

Well, I guess if I can just follow up on the FX, I mean, we sort of had a message from Airbus at their CMD a month ago, I guess, it was saying, look, we won't keep all of the FX benefit because we think will be consumed by things like inflation and other headwinds. I mean is that a framework to think about MTU? Or do you think -- obviously, we don't know what the FX will be, but let's assume it stays at today's rate, do you think you can retain a lot of the upside?

[Peter Kameritsch, executive]

At least we can retain -- I would say the ambition would be we can retain -- I can't say all of the upside, but at least the share of the upside, yes, that's definitely the ambition. I mean regarding inflation, I mean, obviously, we try to pass on as much to customer as possible. And also, we have -- obviously, we can work also on our internal efficiency also with the method of the digitization and things like that. But I mean, yes, part of the inflation will hit our P&L. But most of it I think we can compensate, yes.

[Operator]

Richard Schramm from HSBC, may we have your question?

[Richard Schramm, analyst]

Sure, if I missed it, I have a question concerning the cash flow statement and just would like to have a bit of more information about this huge turnaround, the changes in provisions and liabilities, which at the end of the day was the trigger for this increase in the cash flow and free cash flow you could achieve despite this huge uptick in working capital. So maybe you can shed a bit light on this one.

[Peter Kameritsch, executive]

May I -- it's -- I mean it's -- if you look at the cash flow statement, then the change in provision and liability is finally a correction of what is booked in the earnings. So it's the reason for the higher cash flow. And I mean what you can say is that from the 200 million change in provision, half of that comes from FX. So I mean we have -- as you know, most of the provision are U.S. dollar denominated. And if you start the year with 1.13, and at the end of Q3, it was 0.97, then we have 15 cents valuation difference.

Obviously, that drives up the value of the provision in euros significantly upwards. And that is -- I mean, you have a you have the same impact, obviously, on the receivables, but you don't see the impact of the receivables in the provision line. You see that in the working capital line. So that moves the working capital upwards. So if you look on that on each line item, then you have to offset, let's say, provisions with working capital change. It's a valuation.

[Richard Schramm, analyst]

It's fair to say that this is also then driven by the tailwind from the U.S. dollar you see on the earnings side but also on the cash flow side then.

[Peter Kameritsch, executive]

Sure. I mean we are -- yes, I mean, a lot of our business is U.S. dollar driven. A lot of balance sheet positions are U.S. dollar denominated, and they are all subject to revaluation in euros based on the spot rate at the respective quarter. So you have a lot of valuation effects in the cash flow statement, not only in the provision line but also on the working capital line.

I mean if you buy a -- spare parts at the value of USD 100 and you divide -- you have a spot rate of 1.20, then you might have that -- you might have EUR 80 on the balance sheet. And if you have 0.97, then you have, let's say, 103 on the balance sheet. So you have an increase of 30% in working capital, but it's the same part, yes.

[Richard Schramm, analyst]

Okay. That's very clear.

[Operator]

There seems to be no further questions, so I would like to hand back to the speakers for closing remarks.

[Claudia Heinle, executive]

Thank you very much for your attention. If you have any further questions, please feel free to contact the Investor Relations team. Thank you very much, and have a good day. Bye-bye.

[Reiner Winkler, executive]

Bye.

[Operator]

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