MTU Aero Engines AG

XETRA:MTX

Earnings Call Analysis

MTU's Strong Management Faces Future Aviation Challenges

MTU is focusing on technological advancements for future aviation despite current tough challenges. With a motivated workforce and strong management, they anticipate a promising outlook. MRO margins increased to 7.9%, influenced by a favorable work scope and strong MTU Zhuhai performance, which is expected to sustain. The majority of a $1 billion cash outflow related to negotiated penalties will occur in 2024 and 2025. Although tax-deductible, the company has yet to give guidance beyond 2025. They also plan to reassess refinancing needs for a 2025 bond in late 2024.

Steady Ascent in Passenger Traffic and Commitment to Emission-Free Flying Define MTU Aero Engines' Trajectory

MTU Aero Engines, a leader in aviation technology, opens its Q3 2023 earnings call with a positive snapshot of the market environment. Passenger traffic nears pre-COVID benchmarks at 96% of 2019 levels, with domestic travel surpassing previous highs by 9% and international recovery making strong strides at 88%. Even amidst a decline, cargo flights still fare at 27% above 2019 levels, indicating resilient demand in this segment. MTU's future-focused vision is underscored by a 4-year technology contract with the German government for the FCAS program and a pioneering role in the Clean Aviation-backed HEROPS project, aimed at developing a hydrogen-electric, zero-emission propulsion system for regional aircraft.

Financial Fortitude Amidst Global Turbulence: MTU Aero Engines Weathers a Challenging Q3

Financial resilience underpins MTU's third-quarter narrative. Despite a significant GTF inspection program that imposes financial and operational headwinds, the company manages to eke out growth. Adjusted group revenues climb by 21% to EUR 4.6 billion, alongside a net income surge of 37% to EUR 438 million. However, a looming obligation of USD 961 million in customer support costs and a staggering USD 1.5 billion earmarked for additional MRO efforts weigh down the reported figures. Nevertheless, the OEM segment radiates strength with a 26% rise in revenues and a bullish commercial sector, while the MRO segment charts an 18% revenue increase, reflecting a burgeoning demand across all engine platforms.

Guidance Reaffirmed: MTU Aero Engines Aims High for Year-End Results

Eyeing the fiscal horizon, MTU Aero Engines confidently reiterates its guidance for the year. Revenue projections are optimistic, tending toward the upper echelons of the EUR 6.1 to EUR 6.3 billion forecast. The adjusted EBIT is tipped to crest just above EUR 800 million, encapsulating the company's strategic stability and enduring market appeal. This steadfast outlook embodies MTU's unwavering commitment to delivering enduring value and innovation in a fluctuating global market.

Earnings Call Transcript 2023-Q3

[Operator]

Welcome to the conference call on MTU Aero Engines AG Q3 2023 results. 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. Lars Wagner, Chief Executive Officer; and Mr. Peter Kameritsch, Chief Financial Officer. Firstly, I will hand over to Mr. Thomas Franz, Vice President, Investor Relations, for some introductory words. Please go ahead.

[Thomas Franz, executive]

Thank you, Ria, and good morning, ladies and gentlemen. Welcome to our conference call for MTU's Q3 2023 results. As usual, we start with a review and some key messages presented by Lars. Peter will start with a look on overall financials and more details on our OEM and MRO segment. Lars will continue with some thoughts on the 2023 guidance and a more general outlook. This will end the presentation part. And we will open the call for questions.

Let me now hand over to Lars for the review.

[Lars Wagner, executive]

Okay. Thank you, Thomas, and also welcome from my side. Good to have you with us. As usual, let me start with the market environment.

Passenger traffic improved to 96% of 2019 levels. Within that, domestic traffic exceeded pre-COVID levels already by 9% whereas international traffic recovered to roughly 88%. Cargo flights remained robust with -- as it is currently 27% above 2019 level. This is despite a moderate gradual downward trend as cargo airlines slowly reduce capacity to take weaker demands into account.

I would like to also give you a brief update about the GTF inspection program. As you heard and as discussed in early September, RTX has announced an enhanced GTF inspection program. On this Tuesday, RTX provided further updates at their Q3 results release and confirmed their expectations of the impact operationally as well as financially.

Further information has also been provided on the impact on other fleets, such as the smaller GTF variants as well as the V25. While these fleets might also be challenged with life limits to be applied on certain components, there will be only minor effects on the operational and financial side from these programs.

Key focus, and that's clear of all GTF partners, remains on limiting the impact on our airline customers. We are working very closely together with Pratt & Whitney to increase MRO capacity and to find intelligent and smart solutions to manage the shop visits and work scopes in the best possible way.

Defining factors for the program remain the ability to speed up turnaround times and ensure the availability of spare parts. Increasing GTF MRO capacity at MTU and at other MRO sites is still under review. We are working on all areas like shifting non-GTF MRO work from, for example, our Hannover facility, to other MTU MRO shops as well as accelerating the ramp-up at our EME Aero facility.

In Q3 2023 numbers, we have reflected the current knowledge in our results. The encouraging market trends support the positive developments in all our business segments. This is well in line with the assumptions we made as we reiterated our guidance on adjusted numbers.

Another topic, a 4-year technology contract with the German government was signed for the FCAS program. This includes the official order for additional technology studies for the demonstrator Phase 1b. These span from prototype production of hybrid titan blisks to, for example, a new test cell concept for low- and high-pressure compressors.

Also, interesting news on the technology side, MTU's Flying Fuel Cell concept was selected as one of three fuel cell concepts evaluated by Clean Aviation. MTU will take the lead in a new Clean Aviation research project which is named Hydrogen-Electronic Zero Emission Propulsion System, or in short, we call it HEROPS. The program is funded with EUR 30 million by the European Union.

Together with our partners, the aim is to develop a Flying Fuel Cell ground demonstrator within the next 3 years, which is capable of powering a 70-seater regional jet. This again reflects MTU's ongoing commitment to provide solution for emission-free flying.

Let me now hand over to Peter for the financials.

[Peter Kameritsch, executive]

Yes. Thank you, Lars, and also a warm welcome from my side. In our 9-month financial highlights, we present MTU's clean performance without the impact from powder metal. I will dive into the details on this topic on the next chart.

In the first 9 months 2023, adjusted group revenues increased 21% to EUR 4.6 billion. This growth was supported by all business segments as expected. In U.S. dollar terms, revenues were up 23%. EBIT adjusted increased 33% to almost EUR 600 million, resulting in an EBIT margin of 13%. Net income adjusted was up 37% to EUR 438 million. Free cash flow of EUR 257 million, up 70%, reflects a strong cash collection in the third quarter.

Before we move on to our segments, let me guide you through the financial impact of the GTF inspection program significantly burdening our reported key figures. The GTF inspection program has a significant impact on reported revenue and EBIT numbers. MTU has to share obligations for expected customer support costs as well as for expenses for additional MRO efforts. The largest effect results from a revenue-reducing buildup of refund liabilities for MTU's expected share of customer support costs amounting to USD 961 million.

The second effect results from sharing expected additional MRO efforts estimated at roughly USD 1.5 billion for 100% of the program. These MRO efforts burdens MTU's profit share in the program's aftermarket contracts. And this results as a consequence in the need for a revenue-effective buildup of corresponding refund liabilities by USD 52 million and a small cost of goods sold-effective devaluation of corresponding inventories by USD 17 million.

The remaining charge for MTU from these expected additional MRO efforts will be recognized when we recognize future profit shares from respective program aftermarket contracts. All in all, this results in a total impact on revenues and EBIT of slightly above USD 1 billion. On reported numbers, this leads to a revenue of EUR 3.65 billion for the first 9 months of 2023 with a negative EBIT of EUR 410 million. The detailed reconciliation from reported to adjusted figures, including all items, can be seen in the appendix as usual.

So having said that, let's jump into the segments. And let me start with the OEM segment. Total adjusted OEM revenues increased 26% to roughly EUR 1.6 billion. Military business was up 19% to EUR 367 million, representing a very strong third quarter in line with our full year expectations, especially driven by TP400 and the RB199 aftermarket.

Adjusted commercial business revenues rose 29% to EUR 1.2 billion. And within that, organic OE revenues were up in the 30% range, which is in line with our full year expectations. And that was driven by a higher installed number of GTF, GEnx and business jet engines. Further, a slightly increased IGT output was supportive. On a quarterly basis, OE sales were also up roughly 30%.

Organic spare part sales in dollars were up in the 20% range, driven by growth in all platforms, in particular, wide bodies such as the CF6 GEnx, GP7000 and also the PW2000. On a quarterly basis, spare part sales were up in the high-teens range, so very similar.

The overall favorable business mix, lower general cost and the supportive FX rate resulted in an EBIT adjusted of EUR 374 million with a margin improvement to 23.6% for the 9 months. Margin in Q3 was a bit weaker than the first half of the year following cost impacts like salary increases in Germany starting in June and a higher share of installed engine deliveries in the quarter.

So turning the page, and let's move to the commercial MRO segment. Reported MRO revenues came in 18% up to the level of EUR 3.1 billion. Dollar revenues were up 20% and all engine platforms saw a solid demand while the GTF MRO growth was mainly driven by a further ramp-up at MTU Zhuhai and EME Aero. Within the revenues, the GTF MRO share was roughly 35%.

EBIT adjusted increased by 14% to EUR 223 million, resulting in a margin of 7.2%. GTF share of revenue was in line with the expectations while the work scopes turned out to be less dilutive to margins compared to expectations. The mix of contracts and work scopes in the independent business was very profitable in the quarter.

So at this point, I would like to hand back to Lars for some words on our guidance in 2023.

[Lars Wagner, executive]

All right, Peter, thank you. Well done. As already mentioned at the beginning of our presentation, we are once again confirming our guidance today on adjusted numbers.

Based on the current FX environment, we expect revenues to reach the upper end of our EUR 6.1 billion to EUR 6.3 billion range. Growth rates within the business segments remain unchanged. EBIT adjusted should be slightly above EUR 800 million. And free cash flow should slightly exceed previous year's levels of EUR 326 million.

Before we end here, let me say some words on the overall situation beyond the dominating headline around the inspection program. As you can see and you know, there's a lot going on and a lot to like at MTU. The core of MTU and of our businesses is in tremendous shape. All business segments are performing smoothly. The positioning in new programs, while having mature engines in the best phase of their lives, gives us confidence that we are greatly positioned to work through the current challenges.

At the same time, we contribute to technological solutions for the future of aviation. We'll continue to benefit from the bright long-term outlook in our industry. Of course, don't get me wrong. The current challenges are tough, and we need to work through them. But we believe in the fundamental strengths of our company and the great future that lies ahead of us. We have a very strong and motivated management and workforce that works hard to justify the trust set in MTU. That was important for me and us.

With this, thank you very much for your attention, and we're now ready to answer your questions.

[Operator]

[Operator Instructions] Our first question is from Kseniia Maslova from UBS.

[Kseniia Maslova, analyst]

I have two questions, please, if I may. So first one, on your relationship with RTX, just wondering, are there still any negotiation going on with RTX regarding metal quality incidents and if they are willing to provide any support to the partners, maybe some help with financing? And second question on commercial MRO, maybe if you can spend a bit more time explaining the step-up in margins this quarter and how you feel about the sustainability of the drivers.

[Lars Wagner, executive]

So the first one, as you can imagine, I'm not commenting on ongoing discussion. But I'd like to clearly say, yes, we are in discussion about this one. And once we have found an agreement, then we will notify you.

[Peter Kameritsch, executive]

Regarding MTU margins, I mean, if you do the math, it was 7.9% margin in the MRO, I mean, driven, on the one hand side, we saw, if you look at it in the equity results, a strong performance at MTU Zhuhai, which came in roughly at EUR 20 million in the quarter, which I would say from today's point of view is a very sustainable level currently. And we have always a little bit of mix shift in the MRO, so between different engine programs, between different customers, also between different work scopes.

I mean, if you have a lot of, let's say, material heavy shop visits and then obviously the margin is a little bit lower. In that specific quarter, we had also quite -- I would say, a favorable work scope, so less material involved, more labor, more testing, more repairs. And that also drives the margin. So a little bit of everything, but I mean, we're going to end the year definitely with a margin above the 7%.

[Operator]

Next question is from Ben Heelan of Bank of America.

[Benjamin Heelan, analyst]

So I've got a bit of a technical one to begin with on GTF. So you highlight additional MRO efforts of $200 million for our 18%. And you say that, that will be recognized over the course of future aftermarket revenue recognition. So I just wanted to check how I should read this.

Because the way it works traditionally under IFRS 15 is you are completing work. You're incurring cost. And therefore, you recognize revenues against that at a contract margin. Is that how we should assume the revenue recognition will work for this $200 million of excess cost? And how should we think about the margin of that?

The reason I'm asking is because it feels to me that going into '24, '25 and '26, there's obviously this excess cost that could drive actually quite a lot of incremental revenue recognition, albeit at maybe a slightly lower margin because of the long-term contract margins. So that was the first question and keen to kind of hear your views on that.

And then the second question was around progress -- sorry, on program costs, you just answered that, was around CapEx. You talked on your prior call about looking at where you could save in terms of other CapEx programs. Is there any update on how we can think about that? Or is that something we can potentially get in February? How should we think about that?

[Peter Kameritsch, executive]

So regarding the recognition of the $200 million, it's the second way as you described it. So I mean, we put -- I mean, you can -- we have obviously a calculation for each and every aftermarket contract with each and every airline. The additional costs based on the engine portfolio for each airline burdens the margin of these aftermarket contracts.

And then you take the average of all aftermarket contracts. And if you look at that, so the margin of the aftermarket contract is obviously slightly reduced. And so with every spare parts we sell in the future, we book a slightly reduced margin. But it's not only concentrated over the time from '24 to '26. So it's the basket of the current aftermarket contracts for today's basket of contracts with the airlines.

[Benjamin Heelan, analyst]

Okay. But with the $200 million of cost that is going to be incurred, you will be recognizing revenues against that at a contract margin?

[Peter Kameritsch, executive]

Sure, sure, sure. So you have a stream of revenue out of these aftermarket contracts. And against that, you have a stream of costs. And these are the costs for the shop visits we do. And now the cost for the shop visits we do is 100% of the program, $1.5 billion higher and our share is $200 million higher. And that burdens the margin of these aftermarket contracts.

And it's -- if you only look at one contract, it's recognized over the remaining lifetime of the whole contract. So it could be that the contract spans over the next 10 years or so. So it's not only recognized in the '24 to '26 time frame. So the margin impact in 2024 to 2026 is rather tiny.

[Benjamin Heelan, analyst]

Okay, super clear. And on CapEx and mitigations?

[Peter Kameritsch, executive]

We are working on that still. I mean, we are currently in the process of our budgeting -- internal budgeting process. And we collect all proposals. We talk about them. But also, I mean, if you postpone CapEx, you also have risk associated with that. So we have to balance that. We are not a typical situation where, let's say, we have a low demand, so you can slash CapEx.

So we have a very, very good performing business. We have to fulfill all the customer demand. So we have to be also a little bit, let's say, cautious where we slash CapEx. So -- but it's not -- there's no update yet. I mean, we are working on that. And once we give, let's say, a guidance for the full year, typically in February 2024, we will have a clear picture on what we do and what we don't do.

[Operator]

Next question is from George Zhao of Bernstein.

[George Zhao, analyst]

I guess, first one, what is the average turnaround time for GTF engine at one of your MRO shops today? And how does that break down into the time waiting to go into the shop versus time inside the shop?

Second one, just wanted to get your thoughts on, yesterday, Spirit Airlines said that it was notified by Pratt that all of its GTF engines, including engines slotted for future deliveries for an undetermined period, are in the potential pool of engine subject to inspection and possible replacements. So do you have any comments on that? Because at the surface, that sounds more expensive than what you and RTX have been saying regards to the engines affected up to 2021.

[Lars Wagner, executive]

Let me try to answer both ones. This is Lars. What we see currently, and I don't obviously want to go far into the details, but take it a low 3-digit number, 130, 120, really depends on the work scopes. Sometimes it's even below 100. But let's say, on average, it's close to 100 days, 110 days for the current work scopes.

As we mentioned several times, this has not yet -- it's not yet reflecting the heavy work scopes that we are anticipating out of this inspection program as we only started to induct these engines, and we have a visibility on them, let's say, around Christmastime. Because we said 150 days, that should be around the Christmas date. And then we know how smart, how -- what we see in the engines, and we can give a better guidance of this 150x TAT time that we mentioned.

And the second one, I don't know, I have not read this news. But well, it's clear, I mean, the engines delivered today have been produced in the past. We have a lead time of, what is it, roughly 12 months for producing these engines and -- but I -- this is the only explanation I have right now. I need to look into the news from yesterday.

[George Zhao, analyst]

And then that triple-digit number, is that just the time in the shop? Or is that from the time it's off the wings to back on the way?

[Peter Kameritsch, executive]

That's the time within the shop. Because we have obviously planned our capacity towards the removal that we have seen. Now we have these additional programs, additional shop visits. And that's further congesting the shops or giving additional waiting time. And that's why we said it's going to be, wing-to-wing, it's going to be roughly 300 days.

[Operator]

Next question is from Phil Buller.

[Philip Buller, analyst]

Thank you for the very detailed run-through that you've provided on Slide 4. That's all very clear. On the numbers, it looks like you have the same numbers as Pratt's and are taking 18%. I understand why that is. But have you managed to independently arrive at these numbers or independently audited the Pratt's assumptions in some way?

And outside of the numbers, can you take us through what has happened in the past month or so, I guess, on the softer side, so with regard to any evolved ways of working or communicating with RTX on this and how the discussions are going with operators and Airbus, I guess. That's question one.

[Peter Kameritsch, executive]

Yes, Phil. I mean, a $1 billion charge for MTU is obviously a significant charge. So you can imagine that also our auditors -- so we, as a company, get access to the assumptions, going into the assumptions from Pratt, obviously, on the one hand side, but also our auditors in Q3 and more so in the year, those will have access to data and documentation for an issue like that.

[Philip Buller, analyst]

Sure. Okay. And anything softer in terms of the working relationship? Has anything else changed?

[Lars Wagner, executive]

Yes, it's a good -- it's -- I would say it's a good relationship. We have a long decade, a legacy of working together. Obviously, on every level -- hierarchy level of the company, we are talking about how to limit the impact on our customers, so what can we do operationally. There are some discussions, obviously, on the financials. The discussions with the customers and Airbus are only done by RTX and Pratt & Whitney. So we are not participating in these talks. But I'm seeing Shane next week. There is a phone call. We are together on that working through the challenge.

[Philip Buller, analyst]

Okay. Just so I understand that Airbus and Pratt discussion topic, that's on the idea of potentially diverting some engines into this spares pool concept that I think we've heard about?

[Lars Wagner, executive]

Yes, there are plenty of discussion between Airbus and Pratt & Whitney. I don't know the details.

[Philip Buller, analyst]

Okay, understood. And in terms of what would make a difference, I know that there's -- a key focus is to reduce the impact to airline customers. So if that was to be a solution, what kind of numbers would we be talking about in terms of how big a spares pool would be to actually support the grounded fleet?

[Lars Wagner, executive]

No, I cannot comment on this. We are focusing -- as a partnership with Pratt, we are focusing on increasing the MRO capacity, making sure that all the spare parts are available that we need for this exchange and that we find smart work scopes to reduce the turnaround time. And that is the question, like I said, the first know-how we have at the end of this year when the first heavy shop visit -- or maybe a little bit earlier at Pratt side, but at our side at the end of the year, and then we know better what to assume and how to go into '24. Before that, I don't want to give speculative figures.

[Operator]

Next question is from Chloe Lemarie.

[Chloe Lemarie, analyst]

I have the first one on the discussion with airlines actually. Have any discussions been finalized at this point? Have you set a dollar amount per day for aircraft on ground? Or do these discussions still very much have to be completed?

The second is in terms of the charge you recorded in Q3, are you able to share some rough free cash flow hit timing in the past few -- in the next few years? And last point was just in terms of the share of the shop visits that you're doing, the extra shop visits that you're doing, are you still comfortable with the mention you did in the past that you can do a bit more than your current share in the total GTF work?

[Lars Wagner, executive]

So the first question, Chloe, I repeat myself, I don't disclose any information between airlines, Airbus and Pratt. These discussions are done by Pratt and Raytheon. And they should comment on this one. Peter?

[Peter Kameritsch, executive]

Regarding free cash flow timing, I mean, if you want to put something, I mean, that is obviously, let's say, a result of these negotiations. But I mean, the lion's share of the cash-out will probably happen in 2024 and 2025 with some spillover into 2026. That would be my assumption. So if you take the $1 billion we have to share, then it's maybe $400 million next year, $400 million, 2025 and $200 million, 2026, so as a rough picture.

[Lars Wagner, executive]

And I believe the last one was our share on MRO. And we are already doing today more than our program share. And we have -- in the past, we have significantly invested in our MRO capacity. So we would be able to do additional shop visits, that is dependent on positive commercial discussion within our partnership.

[Peter Kameritsch, executive]

And what I gave to you, Chloe, was the pretax number, obviously. So that is obviously tax-deductible. So when the AOG payment really happens not upon putting an accrual on the balance sheet. So also, the tax credit will happen in the same time frame, so 2024 to 2026 proportionally, obviously, with roughly 30% is tax-deductible.

[Chloe Lemarie, analyst]

Perfect. Just if I can come back on the discussion with airlines, I know that you can't really share the outcome. But are they still very much ongoing? I mean, is this still something where there's a lot of potential different outcomes from this? Or do you have like a pretty good view of what these will turn out to be?

[Lars Wagner, executive]

Well, discussions are still ongoing. I think I've heard Chris mentioning that he personally is involved in the discussion chain, Shane Eddy, obviously, as well. They talked about 40 to 50 customers, they talked to already. So I would say there's a pretty good view on what's the status on both sides.

[Operator]

Next question is from Ross Law of Morgan Stanley.

[Ross Law, analyst]

I have three, if I may. Just a follow-up on a couple of previous questions regarding your discussions with RTX on the GTF costs and whether RTX's sizable share repurchase program, which they announced earlier this week changes your stance or your negotiating power in these discussions at all. That's the first one.

Second, again on the GTF, and how confident you are on your ability to ramp up this production to meet both Airbus OE and replacement demand during the additional shop visits. And then last one is just on free cash flow, obviously, very strong in Q3. You mentioned good cash collection. Can you just give a bit more color on where that's coming from?

[Peter Kameritsch, executive]

Regarding the cash flow, we received a lot of payments, especially on the MRO side. So we did a lot of -- so it was a little bit -- so we had receivables built up in the MRO in the first half year of 2023. And now in the third quarter, we really did a lot of cash collections. So that was, in that respect, a very, very good quarter. It's really allocated in the -- or the effect comes from our MRO customers.

[Lars Wagner, executive]

And then maybe on the middle question, obviously, we are trying to increase capacity as fast as possible for the new engine production. You need to distinguish between the MRO, obviously, the -- where we have spare parts and labor work and the new production. And in our industry, nothing is immediately. So there is an ambitious plan to increase production over the next year and years. And this needs to be backed by supply chain, by labor work, by skilled manpower.

This is in discussion with Pratt & Whitney. And then that reflects me back to the -- or brings me back to the first question. I don't know exactly what you asked, but this is a strong partnership. And we are discussing basically every day on what needs to be done to solve this issue, to overcome this issue and to be back on our customer reputation as fast as possible. So no further details on this one.

[Operator]

Next question is from David Perry of JPMorgan.

[David Perry, analyst]

Two questions, please. The first one, maybe it's a bit unfair because for understandable reasons, you're not having the CMD this year. But when I talk to investors at least about MTU, one of the questions I'm getting asked a lot is, is there any tail risk from the GTF situation? In other words, what does it mean for group margins post 2025? You've got very clear guidance to 2025. But is there any reason why we should think group margins would be weaker after 2025 or not from this situation? That's the first question.

And the second one is I thought it was interesting that Raytheon announced a share buyback with their CEO saying very strongly that he thought his shares were significantly undervalued. You could argue the same perhaps for MTU with the share price drop you've had. Would you give any consideration to a possible share buyback?

[Peter Kameritsch, executive]

So I would say margins after 2025, I mean, I elaborated a little bit on the impact of the $250 million extra MRO costs, which go in the aftermarket contract. So we have a very tiny impact in the profitability of the PW1100 aftermarket also beyond 2026. But that is on group level not very significant. So there's not a big impact on margins coming from that one.

[David Perry, analyst]

And obviously, it's one thing though, Peter. But in the totality, roughly, I know you're not having the CMD, but direct group margins flat post '25, rising, I mean...

[Peter Kameritsch, executive]

We don't give -- I mean, we don't give guidance beyond 2025. We haven't even given the guidance for 2024 yet. So that depends on a lot of things. So I mean, we expect obviously aftermarket growth throughout of the decade, a further ramp-up of OE deliveries and reaching a certain plateau at a certain point of time. So that is all I would say, so supportive to margins, but I wouldn't give a concrete guidance for the years after 2025 right now.

[Lars Wagner, executive]

On the other question, David, of course, we are under-evaluated. That's a clear picture we have. Does it lead us to a share buyback? I currently -- I don't think so. We have rough 3 years to look ahead to overcome the challenges both operationally and financially. And this is not on top of my agenda right now.

[Operator]

Next question is from Christophe Menard.

[Christophe Menard, analyst]

I have two questions. The first one on the free cash flow impact that was detailed earlier in the call. Is it -- I mean, is it all cash? Or is there a chance that you reduce the cash cost? I mean, you basically mentioned the $1 billion in pretax, so -- and 30% tax applied to it. Is there any chance in the negotiations you're currently having that some of this will be noncash? That's the first question.

The second question is not technical, but it's -- in Q1 and Q2, you had FX impact on commercial OE sales that apparently is not recurring in Q3. So could you help us better understand this. And I'm -- back of the envelope calculation, I'm also a little bit surprised, I would say. I mean, given the growth rate you gave, organic growth in commercial OE, more around 20% and the calculation, I mean, if we look at everything organically, you apparently grew by something like 17% at -- in Q3. So trying to understand that FX impact we had in Q1, Q2 and the impact we may have in Q3. I hope it's clear enough.

[Peter Kameritsch, executive]

No, I mean, I would say that the strongest focus is obviously in reducing the penalties via reduced wing-to-wing time. I mean, that is the focus. Will there be any noncash compensation for airlines? I don't -- I wouldn't comment on that. I mean, the negotiation package is done -- or negotiations are done by Raytheon, as Lars commented earlier. So that would rather be a question for them. But I can't see really that a big portion comes out of noncash compensation. We might be able as a consortium to reduce the overall burden. But that is it. The growth rate, I mean, that would be something to discuss with IR, honestly.

[Christophe Menard, analyst]

Okay. No problem. If I may then just on MRO margin, I know you already discussed it earlier on the call. You also mentioned in your press release that -- I mean, beyond Zhuhai, you had a positive impact on the margin. Is it same reason as Zhuhai? Or is it -- I mean, I think you mentioned the ramp-up of EME. Can you elaborate a bit more? I mean, I was pleasantly surprised by the margin of 7.9% in Q3. That's the reason why.

[Peter Kameritsch, executive]

I mean, we have to distinguish between the margin impact and the revenue ramp-up. So I mean, the -- if you look at the 7.9% EBIT margin of the MRO in the third quarter, then that is massively supported by a strong equity contribution from MTU Zhuhai. I mean, you know that we take 50% of the net income from MTU Zhuhai into the MRO EBIT adjusted. So that was a strong tailwind.

EME Aero does not contribute a lot to our equity results. But it obviously contributes to the revenue growth from GTF. So they do more shop visits. So the revenue contribution from them is more and more significant. And it's also a source for maybe additional capacity for additional PW1100 shop visits in the future. So EME Aero contributes a lot to the revenues but not a lot to EBIT.

[Christophe Menard, analyst]

And probably comes at lower cost, I guess, overall?

[Peter Kameritsch, executive]

Yes. But I mean, it's -- I mean, EME Aero, they bill their shop visits to our MRO. I would say the MRO bills it then further on to the consortium. But the -- I mean, it's -- obviously, the labor cost in Poland are far lower compared to our German facilities. And that is obviously a positive -- it has a positive impact. That's true compared to our shop visits, which we do when we do it in Hannover.

[Operator]

Next question is from Jorge González Sadornil.

[Jorge González Sadornil, analyst]

I also want to follow up, I'm sorry about this, on the MRO margins but together with this spectrum program. So in the previous call that you provided us with the RTX findings on the cost, you mentioned that you were considering taking more -- or taking a greater share now on the efforts to solve the program in your workshops.

And you even mentioned today that you were getting a little bit more than you were supposed. So I was wondering how this can impact your independent business if it has an impact at all, just to have a better view on the evolution of the margins for the following quarters. And also, it will be very helpful if you can provide us the share of independent works for this quarter over the total.

[Lars Wagner, executive]

George, I think I mentioned that already. Yes, we're doing more than our current program share. And also yes, we would be ready to do even more on that one, but it comes with a commercial agreement. We have independent business. We have independent customers that need to be served. And this is our priority as well. And both needs to be aligned.

So once we have an agreement with Pratt, we'll be happy to talk about it. Until then, we try to manage as best as possible between GTF burden and independent customers. It's an ongoing project. And this has 3 years to go. So we will try to succeed within the next couple of weeks. And then we inform you and the market.

[Jorge González Sadornil, analyst]

Okay. So it is likely that this will need ramp-up capacities of some kind and not immediately, not working immediately.

[Lars Wagner, executive]

Well, we did -- I think I mentioned that earlier as well. We did invest in our capacity throughout the last years already. That means we do have here and there capacity available. But we only change the nature of the programs when it is equally -- at least equally profitable.

[Operator]

Next question is from Aymeric Poulain.

[Aymeric Poulain, analyst]

Two questions, please. One is on the market share risk for the GTF. Have you seen since the second recall any cancellation of the -- on the backlog? And regarding the current campaign and bookings, are you forced to discount more aggressively to retain your share of the A320 family? And the second question, pricing on the aftermarket, I think you're planning a price hike in November. Are you also able to do this price hike as you are facing all these problems and challenges on the GTF?

[Lars Wagner, executive]

All right. I have a clear position on this one. Firstly, I don't see and I haven't seen any cancellations on the GTF orders. The GTF itself, as I said in the beginning, is the technology of the future. And we need to not forget that this is a manufacturing issue in the past so that going forward, the engines are good and better with every modification we bring into that.

And we have a GTF advantage in the pipeline, it should be even better. So -- and let's not forget, if you order an aircraft today, your delivery time slot is going to be somewhere at the end of this decade until then all these challenges will be solved. So I'm very confident on the long-term success of the GTF program also going forward in the next year or 2.

[Peter Kameritsch, executive]

Price increase on the Pratt side has already been done in September. So there's no impacts on the plan.

[Operator]

Next question is from [ Marcus Smith ].

[Unknown Analyst]

I have just one question. I think the EUR 500 million bond is due in '25, which you need to refinance next year. And at the same time, you have the cash impact in '24 to '26 from GTF and compensation, as you just explained. So in order to manage the refinancing addressing the GTF impact, is it on your agenda to come to the bond market in '24 to address both users with a larger bond issue? I just try to understand how you think about the future cap and debt structure if this is already on your mind.

[Peter Kameritsch, executive]

No, I mean, it's not only -- I mean, we cannot focus only on the GTF inspection program. Yes, it's a cash flow burden over the next 3 years, but we have to have the full picture. I mean, we are currently working on our budget process. And end of the year, we're going to have a full picture how the cash flow over the next 3 years will evolve. And then we're going to decide on our refinancing needs coming up in 2024.

I mean, normally, I would say that you would start thinking about refinancing 2025 bonds in the second half of 2024. Maybe we supplement it with a second instrument or maybe not. But it's not yet -- it's not on our agenda, I would say. I think we're going to think about the situation at the beginning of 2024, how we're going to proceed on that one now.

[Operator]

Next question is from Zafar Khan.

[Zafar Khan, analyst]

I've got three questions, please, if I may. The first one is on the customer support cost that's estimated at $5.3 billion for the 100%. That looks like a pretty kind of fine-tuned estimate. Just wanted to know, please, what's the assumption on wing-to-wing turnaround on that?

Is it $250 million, $300 million in between? Because the range is quite wide, the $250 million to $300 million. And clearly, depending on whether it's $250 million or $300 million would have a major impact on what that number is. So are you able to help us on that? That's the first question.

[Lars Wagner, executive]

Let me dive right into that. It's the best estimate we have right now. And obviously, there's a lot to happen. And we -- Peter and I said this figure needs to be improved. But we only have visibility on the first heavy shop visits later this year. So then we know exactly how to improve. Supply chain needs to ramp up quickly. All this is currently baked in this $250 million, $300 million. And it's our objective to bring that further down again. [indiscernible] to work and turnaround smart work scopes need to be addressed.

[Zafar Khan, analyst]

I was just wondering though, is the estimate based more around the $300 million day or the $250 million day? Because it's quite a wide range. So whether it's $250 million or $300 million, I imagine, would have quite a big variability on the final number. Are you sort of going in the middle of this, the range, to get to that $5.3 billion. Can you give us any help on that? Because clearly, if it's $300 million, you can get to $250 million, then that will be a major benefit.

[Lars Wagner, executive]

It's probably somewhere in the middle. But the estimate in terms of cost, that has been fine-tuned throughout the latest days and weeks. And that's why now RTX confirmed the figures. We have confirmed our figures. And everything that we improve is bringing this figure down. So remember, don't stick to that one number, $275 million or so, it's somewhere in the middle. Every engine is a little bit different.

[Zafar Khan, analyst]

Yes. And then the additional MRO capacity that you're going to require, I think in the last call, you said that you were talking to RTX on maybe funding part of that. Are you still going down that route? Or will you fund it yourself? The reason I ask is because clearly RTX is funding that, then the extra work that you do may be on a smaller margin. If you're funding it, then maybe you can charge a commercial margin. So just trying to understand what the current thinking is on that.

[Lars Wagner, executive]

All avenues are open. When we say we talk about jigs and tools, we might talk about some hangar improvements. But we certainly do not talk about a new shop in the work, at least not short term. So the investments are rather, let's say, small. But we're talking all the avenues, whether they fund it and have an impact on the margin or vice versa, part of the discussion.

[Zafar Khan, analyst]

Okay. And just finally, please, if I may, can you give us any idea on what happens to working capital in the next couple of years, given this additional burden of these visits? Will there be major outflow on the working capital in the next couple of years? Or can you -- can that be controlled? What's the thinking on that?

[Peter Kameritsch, executive]

No, obviously, we try to limit the impact on working capital coming from the extra volume that will -- that is also one part of the negotiation. So the commercial terms for the additional work we do cannot come along with a significant working capital impact now.

[Zafar Khan, analyst]

Yes, because that is a risk [indiscernible]

[Peter Kameritsch, executive]

Yes.

[Operator]

Our final question comes from Olivier Brochet of Redburn Atlantic.

[Olivier Brochet, analyst]

I have a series of very small ones, if I may. The first one on military OEM. You mentioned in the past that supply chain was providing some constraints. Has it cleared? The second one is on the...

[Lars Wagner, executive]

Yes.

[Olivier Brochet, analyst]

Okay. The second one is on the suppliers and the fire that happened at the beginning of the year and end of last year. Is it having an impact on your, I would say, legacy programs?

[Lars Wagner, executive]

Well, first of all, we are way better and advanced in terms of recovery. So the company and the employees over there are working very hard to overcome the issue. And we are quite pleased with the progress. It does not have an impact currently on the legacy programs. But we're still in the middle of the recovery. So that goes on until the first -- Q1, Q2 next year once we are totally recovered. But a positive message, yet we don't see an impact in our deliveries.

[Olivier Brochet, analyst]

Then the PW1500 and 1900 are not included in the numbers that you first shared for the cost. That's correct?

[Peter Kameritsch, executive]

That's correct, yes. Because as RTX communicated, there won't be extra costs beyond already scheduled shop visit. So that's the reason why there is no need to put up a liability towards the extra cost.

[Olivier Brochet, analyst]

Yes. So we won't have anything coming in the future on that?

[Peter Kameritsch, executive]

From today's point of view, no.

[Olivier Brochet, analyst]

Okay. And then the last one on the -- just to clarify something, the impact of the PW1100, you've only booked it in the OEM division. And that is not going to have an impact on the MRO side?

[Peter Kameritsch, executive]

Right.

[Operator]

We don't have further questions. I will now turn the call back over to Mr. Thomas Franz for closing remarks.

[Thomas Franz, executive]

Yes. Thank you, Ria. And yes, this marks indeed the end of the call. Thank you for your participation. Thank you to MTU's management for answering all your questions. And yes, to all of you, have a good day, and goodbye.

[Operator]

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.